Andriy Kobolyev HARDtalk

Ukraine is a country at war with itself, and not just

Corruption is endemic, especially in state industries,

and Andriy Kobolyev is trying to clean it up.

He wants to make gas more expensive, because massive subsidies discourage

But energy scams are a big source of income for some powerful people.

Are his efforts being sabotaged from the very top?

Andriy Kobolyev, welcome to HARDtalk.

Let's start with the relationship with Russia, which is hugely

important in terms of energy policy and gas supply, because you are the

transit point by which Russia flyers not just yourself -- supplies not

just yourselves but countries across Europe with gas. You stopped buying

gas last November in favour of Europe sources but Naftogaz says you

approached it to restart the arrangement. Why? We are always

trying to balance out wheel to make the most optimal price rise. That is

why we are welcoming any gas supplier who is prepared what is

most importantly to supply to Naftogaz, so we are to suppliers on

including Gazprom, if they will follow the rules, we are prepared to

buy. The man in charge of the company says Naftogaz sent a letter

and offered them the opportunity to resume gas supplies into next year.

It is a risky business for you given the nature of disputes with Russia

in the past Yes January 2006, March 2008, June 2014, circumstances in

which the same issues came up, allegations you haven't paid your

debts, counter allegations from you that they are interfering with

supply? It is difficult, on one hand, on the other hand it has

become much easier later. We are not dependent on Russian gas and in more

and that is a game changer for us. So our idea is simple, as Naftogaz

management we are responsible for being commercial minded and our task

was to create as efficient gas purchasing mechanism as possible.

For example, now approximately 14 European suppliers are selling gas

to Naftogaz. And we are totally fine with that. And, actually, the fact

that they are working with us, they are selling gas to ask, and they are

happy to operating with us shows that we can be a reliable

counterpart. The only trouble we have with this is Gazprom. You see,

you say that you are not dependent on gas from Russia any more and it

is certainly true the amount supplied directly by Russia has

diminished significantly, but isn't it also the case that a lot of this

supply you rely on is what is called reversal flows, in other words it is

gas that is exported from Russia to other countries, countries like

Salva Kiir, then it has come back to you, so ultimately it is Russian

gas. It is one of my favourite questions -- Slovakia. I will give

you another example, it is similar to electricity, any consumer doesn't

know whether the electricity they are consuming is coming from at a

meet generation, gas plough plant or whatever, it is the same with gas --

atomic -- gas power plant. There are points we used to prove this point,

firstly, if the supplier supplying to you is behaving under European

rules, not Russian rules, which means if you want we can switch it

off, that is a problem with Russian gas, and second, whether Gazprom can

stop the supply. They tried this two years ago and they lost $6 billion

trying to do so, and they failed. So my answer is no, it is not Russian

gas. Alexey Miller of Gazprom calls it a semi- fraudulent mechanism. He

says it should be understood it is the same Russian gas, it comes from

Ukraine wants against appellate if I was in his place I would have to say

something -- wants gas. You are not concerned that it might reduce the

flow, the amount might be diminished and suddenly they will say to you,

we are really sorry, we want to carry on supplying you but we

haven't got enough left over from supplying our own needs. The world

has changed a lot and that is exactly what I believe Mr Mellor is

missing. Europe has become much more independent from Russian gas and

when Gazprom as I mentioned tried these tactics two years ago they

failed. So I am pretty much sure they will fail again. But Gazprom

and Russia are very efficient in blackmailing their consumers. And we

should not underestimate them this winter as well. Interesting you want

to have a commercial relationship with a company using is a

blackmailer. We have to balance. We have to act in good faith. So if

there is any company who has or may be willing to act on good faith, we

are obliged to use them. So, Naftogaz is acting in good faith.

That is not what the arbitration institute Stockholm Chamber of

Commerce said in 2010 we found Naftogaz did what Russia alleged it

had done, it diverted gas that was Russian property and said the ruling

confirmed that the gas was taken by Naftogaz in breach of the storage

contract. I appreciate that was before you became CEO but

nonetheless your company has a not entirely enviable record in this

regard. This is a very famous arbitration case. It caused a lot of

damage to Naftogaz. You must understand that the whole decision

of this court was based on the statement made by Naftogaz

management at that time, which was closely related to the company who

got the gas, a huge amount of gas. And, if you combine these two facts,

then this decision from the arbitration becomes a bit different.

It is not about Naftogaz taking something against the law, I am not

trying to judge if it is the case or not, but the whole failure of

Naftogaz was based on that particular statement. There is

another case pending due in 2017 from the arbitration institute in

Stockholm. It has been estimated if you lose that it could cost 30

billion dollars US. The total claim from Gazprom is 38. The total from

our side is to be seven, however the estimated value for Ukraine is $50

billion US. So it is a big risk. It is a huge risk. It is a very big

case. But statistics is in favour of Naftogaz, because Gazprom lost

almost all cases of similar times in the past, against other gas

consumers. And we believe that Gazprom is a company which has a

long history of discriminating different companies in Europe and

will lose this time against a what you accuse Gazprom of acting like

the Russian army. Last year when speaking at Nato in Brussels you

talked about a hybrid war in energy being raged and you have pointed the

finger very directly at President Putin. What do you think he is up to

- why has he got it in for energy companies like yours? Gas is a

powerful weapon and Mr Putin is a dangerous, experienced opponent. You

must respect all of this. -- he is a powerful weapon. He has a track

record of using gas against Ukraine. The contract which was signed in

2009 actually lead to very discriminative position of Naftogaz,

and the whole country. So, Mr Putin is using this weapon very

efficiently. And our task as Naftogaz management is to try to

resist in this war and to win this war. Let me ask about the company

itself, one of the tasks as CEO, the reason you were brought in was to

clean it up, it was described as a Ukrainian MP as having been a

hornets nest of corruption. Do you believe Russia was involved in any

of that corruption? Gas corruption, when you buy gas from Russian side,

is not possible without Russian involvement. If you want to put an

intermediary between Russian company and Ukrainian company, definitely

some people from Russia should be involved. So, there were

intermediaries behaving in a way that was not in Ukraine's interest?

Definitely. What has happened? The latest one successfully managed to

get more than 12 billion cubic metres of gas from Naftogaz in that

decision. Then it was dissolved. Now there is no single intermediary

between Naftogaz purchasers and gas supplies from both sides. You have

eliminated that problem but you also acknowledge that there are serious

problems in the company. You said at the beginning of last year and

employee for monitoring the high-pressure pipeline can make $50

if he left through part of the gas without passing it through the

metre. How much is happening, do you think? Firstly, our team started

this with a quick approach. We started with gas supply

intermediaries and we are slowly moving lower and lower. I must say

that we have decreased gas or losses by more than 30% already as a whole

system, which is quite a big change. So, I can assure you 100% this does

not happen somewhere in some village in the middle of Ukraine -- so I

can't assure you. The size in the degrees of gas losses in huge and we

believe we are making good progress. Is government interference affecting

your ability to clean up Naftogaz? No. Not at all? We have been

strongly supported by the government of Ukraine. We have arguments with

some members of the government. We are currently in the middle of a big

argument with a minister of energy. That happens. However, this base of

reform is slowed mostly not by the government at rather by the

parliament - that is where the problem is a. Lemmy bore you do this

-- let me put this to you, the Economy Minister, I apologise for

mispronouncing his name, he was the Economy Minister until February when

he resigned, and he said he resigned because officials were trying to

gain influence over state-owned companies including yours and this

is what he said, systemic reform is decisively blocked, concrete action

is trying to paralyse efforts, the pressure to appoint questionable

positions to my team or state enterprises, I can only interpret

these actions as the attempt to exert control over the flow of

mother money gathered by state-owned enterprises, especially Naftogaz, in

other words in really see it was the case that you are being undermined

by very senior figures in the government -- money. He is a big

friend of mine and I very much respect what he did. Firstly.

Secondly, what he is referring to is more pressure from the government on

Naftogaz but rather on the government from people outside the

government who would like to regain control over different state

entities including Naftogaz. Including according to him a close

ally of the president. I can't comment on this particular bit. I

know there is an investigation under way and we hope the results of its

own. So I prefer not to comment on that. Are you sure that President

Poroshenko wants Naftogaz to be free from state control? Um... The simple

and quick answer to this, which I believe, is that any president of

any country would like to be able to exert influence over state-owned

entities. And he is no different from any other? That is natural so

what is it? I believe, yes, because people in charge of the country

would like to have controlled, and usually that is human nature for

many processes to bite OK, do you feel that pressure? Sometimes, yes.

In what way? We are often discussing many important elements of Naftogaz

reform and gas sector reform with participation of the President. He

always has his opinion and sometimes we argue, sometimes we have defined

compromise, but I view this as a natural process. OK, then, what is

his opinion? Is he committed to reform, the end of Naftogaz, is he

committed to competition, to reducing the subsidy is a lot of

people have relied on and have come to take for granted? That is exactly

the reason why many people, high standard politicians, would like to

see Naftogaz transparent, and would like to be involved, at least, in

discussing our matters. If you look at Naftogaz, in 2014 the number of,

or the amount of money transacted, was $10 billion US. This year it is

zero. Naftogaz has achieved some progress. People who are now looking

at Naftogaz, and I allow this question, which was mentioned by Mr

Joe Biden at one meeting, it has become a shiny thing, so everyone in

Ukraine would like to see how Naftogaz would be given this money.

I am sure the President's decision is different, isn't it, so I will

ask you once more, are you sure that President Poroshenko wants Naftogaz

to be free from state control? I believe President Poroshenko would

like to see a fitting control over Naftogaz will make him confident it

will not become a black hole any more -- efficient. The change is

irreversible. Do you think the authorities, especially the justice

authorities, are taking the problem of corruption in state-owned

industries, including the gas industry, seriously enough? I

believe yes. Because last December you told Energy Magazine that the

prosecutors were not doing enough, with things in plain view but not

pursued. We have made significant regress with new law enforcement

authorities, which have taken much more focus on gas matters, and we

hope this progress will lead to significant improvement around

corruption with Naftogaz. Do you need prosecutions? Will that make

people more frightened about taking the risk? Definitely. There has not

been enough yet? That has not been the case so far, but we see pressure

on these people mounting, and we hope the pressure will result in

prosecuting the right people who are truly at fault. Naftogaz was

described at the end of 2014, a year of great difficulty with Russia over

gas supply, as a state-controlled ass giant with a bigger budget

deficit in Ukraine. Part of the deal with the IMF to help Ukraine with

financial support was that Ukraine would achieve a subsidy energy

sector risk and reduce, but can a timetable still be met? That

timetable has been met. You have already eliminate the deficit? That

is an impressive achievement. It is, and it is something the government

has made a decision on, to equalise all prices for all consumer

categories from April this year to make it clear this is not a final

gas market yet. There is still a way to go. We still need to push through

a law in Parliament which will allow us to finally implement the gas

market reform to make all prices market-based, but we hope this can

be done within a short period of time. How important do you think

shale gas deposits could be for Ukraine as a potential source of

gas? I don't have a well grounded and factual -based evidence this is

for Ukraine. Naftogaz is not looking at shadows. Part of the difficulty

is that two important international partners pulled out, Chevron was

going to do testing in the West of Ukraine, and then Shall pulled out

apparently because it would operate in is, which is difficult at the

moment, citing heightened geopolitical risk -- Shell. Whether

or not shale gas would have been a shining opportunity for Ukraine, we

may have to find out in the future, but this war is costing your country

dear. It is. And it is difficult not only for the humanitarian side, but

also the economic side. The Naftogaz company has suffered a big loss in

Crimea, we have suffered a bit lost in the eastern part of Ukraine. That

cannot be compared with the human loss in Ukraine. Are the politicians

in Ukraine truly committed to a liberalised energy market, in which

Naftogaz is competing with other companies, trying to drive down

prices accordingly, and are prepared to see new players coming in? I

believe yes. There is big evidence that they are committed to this. The

previous government has allowed all companies from the European side to

trade freely with Ukraine. The government has made all prices

equal. We as Naftogaz are trying to be as market oriented as possible,

trying to play by the rules, and actually we are strange and unusual,

in allowing European companies to compete with us in our market. When

you increase prices, something which consumers don't like on one hand,

but if on the other hand, you have to show them the benefit of the

free-market, and the benefits is the same as competition. For Naftogaz to

make change irreversible, we understand we have to accept painful

things and help bring good things. That is what we are trained to do.

Let me tell you what a private firm said recently, the government has

already pushed independent businesses out of the gas market by

introducing Naftogaz to large industrial consumers, to ensure

financial support for Naftogaz, forcefully redirecting in favour of

Naftogaz as a small-minded and shortsighted remedy. There was a

specialist government agreement adopted during the war where the

company and the whole country were struggling for cash. Naftogaz except

the decision of the government was not market-based -- accent. We made

a clear statement about this. However, as a company, it was

leading state support, and the state was not able to give support in any

other form. That is the problem, they can talk the talk, when it

comes to walking the walk, they can't do it or they don't really

want to. I would say that was an emergency one-time measure that has

never happened before, and since then, but the government and

Naftogaz made it clear that the new mass-market or which was adopted in

2013 would be followed, and the government is following this law.

Let me ask you about one of the other big developments that will be

crucial to your future and the future of energy suppliers across

Europe, and that is what Russia does. This development in the Baltic

Sea, which will effectively meaning it will have reduced sharply after

2020 to one tenth of what it is now the gas transited through your pipes

and on to other customers. You worried by that? It sounds like a

very big loss of business potentially. We are very worried,

definitely. It will negatively affect Naftogaz, and also cost

Ukraine approximately US $2 billion, huge amount for our country. But on

the other hand, we are trying to show it to our European counterparts

that it will not only negatively affect us, but also create a

negative effect on the whole central and eastern Europe. You called it a

Trojan horse. Yes, I did. Why? Because that would allow Russians to

exercise tactics of divide and conquer. Personally to divide

European countries by offering them different gas prices, and then the

approach of trying to exchange geopolitical concessions for gas

pricing. They are all tactics and Russia has or is being efficient at

this, and Europeans, Ukraine will be affected. Can you trust Europe to do

the right thing? We do trust Europe, and so far, Europe has been

reliable. We still have some unresolved issues such as the flow

from the European Union to Ukraine. We are working on this. I was going

to say, you may trust subject what happens next, but the Prime Minister

of Slovakia certainly did not trust Europe this time last year. He said

for months they have had talks at the European Council about the need

to help Ukraine stay a gas transit company and help them do the

difficult winter months, and then the announcement from Gazprom that

are designing a contract with Western European member states about

building another not sure. They are going against political discussions

with Ukraine. They don't sound a very trustworthy bunch at brussels.

There are different interests in European countries, and there are

many people who are trying to present it as a commercial exercise,

which is not the case. It is not a commercial project, and does not

have commercial sense. Unfortunately, the site is big. You

can't not take into account -- Gazprom. Such statement from these

companies are result of actions of them. I respect what they did for

Ukraine, they did help in 2013, and opened the gas flow for us. But

again, we still want also in Slovakia to fully implement the rule

of European law, and make Gazprom lay by the rules. Such cases where

Gazprom have avoided playing by the rules in many countries, sometimes

is like that. Andriy Kobolev, Chief Executive Officer of Naftogaz in

Ukraine, thank you. Yesterday it took a while for

the sunshine to come through, but once it did, given the humid

air, temperatures really shot up.