OREANDA-NEWS. DTEK’s CEO Maxim Timchenko speaks about participation in privatization, energy export and the plans of the company to become a gas trader.

In 2012 and early 2013 DTEK was widely engaged in purchasing energy companies to deliver on its goal - become the biggest player in the national energy market. Energy holding of Rinat Akhmetov’s SCM Group bought the shares of Krymenergo, Zapadenergo and Dneproenergo and gained almost one third of the national energy-generating market. The company is also interested in alternative energy: the first line of Botievo wind farm launched last year has become one of the major wind projects in Ukraine. In addition, the company has entered a new business area - hydrocarbon extraction. In addition to energy generating companies and mines, DTEK owns a shareholding in Vanco Ukraine and is about to complete the purchase of Neftegazdobycha. In his interview to InvestGazeta DTEK’s CEO Maksim Timchenko talked about the company’s investments in the projects, the potential of the national energy sector and gas import.

Last week the Cabinet of Ministers announced the terms and conditions for privatization of Donbassenergo. Is DTEK going to buy the company considering that last year it purchased several energy generating companies?

DTEK will not buy this company and there are several reasons for that.

First of all it is true we were active participants of privatization tenders and increased our portfolio of energy generating assets. But the companies and stations were in poor condition and western investors would have thought twice before buying such assets. The power units are about 30-40 years old, the infrastructure requires dramatic restructuring. When we bought Dneprenergo and Zapadenergo we realized how much funds we need to invest in the plants and what we should do to meet our commitments. But it is not reasonable to buy additional facilities which are in the same poor condition.

Second, we have a coal mining/combustion balance and see no reasons to change it.

Finally, today DTEK’s energy generating share is about 30%. We can increase our share by 5% only otherwise we will be accused of violating the limits imposed by the Antimonopoly Committee. If we increase the share we would like to do it at the expense of wind and hydro-energy.

Does it mean you will not be interested in Centrenergo in the future either?

I don’t think so. So far we have made the decision not to participate in privatization of the company.

How much is the company going to spend on modernization of the assets?

Our investment budget exceeds UAH 10 billion, which is the largest number among national private companies. We spend about 40% of the funds on thermal energy, which is about \\$400-500 million every year within the next five years.

How can the company compensate these expenditures considering strict regulation of the tariffs on the internal market?

Unfortunately, our energy market is stuck in the past. In the beginning of the century we led in terms of market reforms and outperformed our neighbours with introduction of the wholesale rules. But we have lost all our advantages over the past decade. To a much extent it depends whether the Law on the Functioning of the Energy Marker is adopted. As far as I know the government is expected to finalize the law and submit it to the second reading by the annual meeting of the council of investors under the President’s Office which is to take place in November. Adoption of the law will open the road to market development.

The key factors of energy market development include liberalization of the energy market, clear game rules and sources of financing for large projects. It is wrong to believe that higher tariffs will allow us to build new power units. First, it requires money for the next 15-20 years with an interest of 3-4% and second, the tariffs for industry are at the average European level as they are, and nobody will dare change the residential tariffs now, even for well-to-do population. It became clear long time ago that subsidies shall be provided to those in need and well-to-do people shall pay the full price. In other words, revenues from energy generation are limited and there are such problems as inflation, expenditures, etc. In this context reduction of production cost is our main reserve and the focus of the company.

Does it mean that now the company can gain profit from export deliveries only?

This source of revenue is no more available as we buy energy at EUR49-50 per MW/h and sell it at EUR42 per MW/h. If anyone can secure our export volumes and guarantee capacity utilisation, we are ready to give the place away. Export brings no profit now; it is only a social burden for the sake of coal combustion.

The national surplus is 5 million tonnes today. If we had failed to sell 10 billion KWh last year we would have saved another 5 million tonnes of coal, and thus 20-30% of mines, both private and public, would have had to stop operation and thousands of people would have been made redundant.

However, you are speaking about the plans to increase export operations. Why?

We produce 50% of the country’s coal and it should be burnt. In addition, after the accident at Uglegorsk Thermal Power Plant we agreed with the government that we will annually buy 3.5 million tonnes of coal. We can’t stop export operations as this would ruin the whole production chain.

What are you export directions for expansion?

In western direction we are limited by the Burshtyn Island capacities. If we had a direct current link to synchronize the frequencies of the two grids, we could increase the volumes. We’ve been talking about it for the third year in a row and we are ready to invest. Still, we haven’t done anything so far because of red tape. “We need to think, consider, arrange a technical board meeting...” The link could give additional 600 MW of power output, for the export of which we would burn over a million tonne of coal. As for Moldova we account for 30% of the country’s energy consumption and we plan to increase export as there are no technical restrictions. As for Belarus and Russia we do not have any technical restrictions either but there is a question of price. But we are holding negotiations and hope we will start supplying energy to Russia in the near future.

Does it mean you enter the new markets with a view to a price hike?

Yes. I’m an optimist. The average European prices used to be €80 per MW. I think the prices will recover. We want to operate in overseas markets.

You’re telling me about a coal surplus, yet, last year you bought some coal mines both in Ukraine and Russia. Why?

We had a deficit in anthracite coal and needed to cover the needs of our generation. We bought Obukhovskaya mine because of the quality of coal with a sulphur content less than 1%. We mix coal from Rovenki and Sverdlovsk with Russian coal to enter export markets.

Besides, we could hardly expect such a drop in consumption. In 2008, energy consumption fell by 10% when GDP went down by 15%. Today there’s no crisis, yet the consumption dropped by 5% during the last six months... Moreover, last year prices sank by 20-30% in overseas markets, and coal production in Ukraine grew by 1.5 million. That’s how this imbalance emerged.

How much coal do you export?

This year we’ll produce 42 million and export 4 million tonnes.

Last week you announced that DTEK started importing gas. What’s your goal - to provide yourself with fuel or become a gas trader?

The main thing is to cover own needs. The imports will be delivered to SCM’s businesses, which need over 5 billion cubic meters of gas a year. So far, we’ll import 100 million cubic meters a month looking to increase the volume up to 200 million. However, here we have some technical restrictions on gas pumping from Hungary.

At the same time, Neftegazdobycha will be covering our needs, and we’ll try to finalize the buying deal in the near future. This year the company will produce 500 million cubic meters, and next year we hope to break through a billion. As a consequence, we still have a shortage of 2-3 billion cubic meters, but we shouldn’t be complacent about European deliveries, we should have a dialogue with Gazprom. We’re a private player and, thank Gold, are not bound with a political contract, so we’ll be looking for an opportunity to provide ourselves with gas at reasonable prices. We may trade in the future when we’ve gained enough experience.

Aren’t you scared that Neftegaz wants to make all private players of the gas market pump 50% of fuel to the underground gas storage facility?

It’s an amazing example of how government officials “care” about improving the investment climate in Ukraine. On 1 July they obliged to pump gas to the storage capacity and at the same time quadrupled the storage and pumping charge. They could have done it with a several months interval at least. Thank God, we have Shell in the market whose opinion is considered, and now this decision seems to have been cancelled. I mean, it’s the same as if we just expropriate 50% of gas. We are absolutely not ready to pay any additional expenses, and DTEK has a lot of arguments. We’re not traders; we’re gas consumers and won’t follow such non-market rules.

Last year you settled the issue with Vanco easily by reaching an amicable agreement with the government. Is this a part of the gas project or do you want to produce oil?

Our priority is gas production. We have no idea how much gas or oil we have there. This is a big project and we won’t be able to run it alone, we need financial assistance and expertise. The shelf is 2,000 meters deep and needs more than \\$150 million per well with a 25-30% change to get the product. Thus, we’ll be looking for partners. Vanco is a challenging project. If politics hadn’t intervened, we’d have had a product by now.

If coal and gas development makes sense, why do you need wind industry, which makes profit only with a green tariff?

That’s a sound question. Indeed, today this project is profitable because of the green tariff. It would be thoughtless not to use this option. These are innovative projects that give us a chance to work with new technologies, which is fully in line with the way we address environmental issues. A power plant operating on Ukrainian coal with 2-3% sulphur content generates multiple emissions. We can make up for them not only with power units upgrades but also with green energy. These were just starting points for us to decide on this project. I believe that wind industry will compete with traditional power industry without a green tariff in 3-4 years. This is in line with our strategy, too.

In the beginning you talked about hydroelectric projects. Are you going to build a hydroelectric plant?

Not from scratch. We looked at small hydropower plants with capacity of up to 20 MW and realized that they’re not attractive projects, while a large-scale power industry is a different matter. If the government plans concession to complete the construction of suspended projects, or if they decide to privatize one of the existing hydroelectric power plants, we will bid.