The paradox of Ukrainian coal

State-owned mines are reducing their coal production and the miners working there have been waiting for months to receive their salaries. At the same time, expenditures on the imports of the „black gold” are growing each year. These imports are dominated by coal purchased from Russia. Every once in a while, the Ukrainian energy sector warns that the stocks of this fuel have reached „critically low” levels.

The catastrophic condition of the Ukrainian coal industry

Coal imports currently account for 5.3 per cent of Ukraine’s total imports. In2018, the country spent USD3bn on the purchases of coal, of which USD1.82bn was spent in Russia, USD907m in the United States, and USD162m in Canada. In the H1’19, coal imports amounted to more than 10.5 million tons and cost a total of USD1.5bn. Meanwhile, in the first five months of this year Ukrainian mines extracted 1.1 million tons less coal than in the same period last year. The production of thermal coal declined by 4.4 per cent, while the production of coking coal was 21.8 per cent lower than in the period from January to the end of May 2018.

In 2018, Ukrainian state-owned mines generated losses of UAH2.69bn (USD529.7m), and the state-owned coal trade intermediary „Derzhvuglepostach” (State Coal Supply Service) recorded a profit of only UAH373,000, despite revenues reaching UAH5.2bn.

Constant protests

The size of the debt in respect of miners’ unpaid wages is growing each month. According to the Independent Trade Union of Miners of Ukraine, state-owned mining holdings, such as „Lvivvugillya”, „Volynvugillya”, „Selidivvugillya” and „Lysychanskvugillya” all have debt in respect of unpaid wages. In addition, in some of the mines wages were not paid in full even for 2015. At the end of June, miners from the „Pivdennodonbaska No. 1” mine in the Donetsk Oblast announced a strike over unpaid wages. They also demanded the state-owned intermediary, Derzhvuglepostach to settle the overdue payments of UAH200m for coal extracted and sold by the mine.

Funds for the overdue wages of miners from the Lviv Oblast were only made available after the President of Ukraine Volodymyr Zelensky visited the site of an accident that took place in one of the local mines, and after the miners blocked the international route Lviv-Rava Ruska-Lublin (in Poland). Before that the Ukrainian Ministry of Energy attempted to downplay the significance of the issue. „I don’t believe that a monthly delay in the payment of wages is a worthy subject for conversation,” commented the Minister of Energy and Coal Mining Ihor Nasalik.

The unpaid wages are by far not the only problem. „State-owned mines were on the brink of halting production and being brought to a complete standstill because of power outages. This situation constitutes a threat to the energy security of Ukraine and could lead to unpredictable socio-economic and environmental consequences,” warned Mykhailo Volynets, the Head of the Independent Trade Union of Miners of Ukraine.

In early July, miners from the „Girskaya” mine in the Luhansk Oblast in the eastern part of the country announced a sit-down strike. They were protesting against plans to cut off electricity supplies to the mine, as a result of which it would be flooded. To save the mine, twenty miners refused to return to the surface and organized a protest 700 meters underground. The strike lasted a week. As a result, electricity is currently supplied to the mine for four hours a day in an amount necessary to pump out the water from the coal seams. However, there is no talk of resuming normal mining operations.

The source of the problems

The reasons for the gap between the potential of the Ukrainian mining sector and its current condition are perfectly illustrated by the results of the audit done by the State Audit Service of Ukraine at the state-owned mining enterprise „Selidivvugillya”. According to the auditors, in the years 2016-2018 „Selidivvugillya” generated artificial losses of UAH380m by selling coal below the market price to private intermediaries. The deficit in the company’s budget had further consequences for financial results — the enterprise could not afford to prepare new coal deposits for extraction, as a result of which its total losses reached UAH1.6bn.

In addition, the state-owned company also suffered as a result of bureaucracy. The auditors have determined that the boundaries of the mining concessions for the new coal were set out in such a way that the „Selidivvugillya”-owned mines have neither the legal nor the physical ability to launch and conduct mining activities without using the plots of land owned by competing private companies. The private companies did not conduct coal mining works themselves and were merely blocking the expansion of state-owned mines, so there was a good reason to revoke the concessions. However, this did not happen. To the contrary, the deadline for these companies to commence mining works was extended. They ultimately failed to launch these works anyway. The auditors determined that the private mines, which blocked the growth of the state-owned mines, initially belonged to Alexander Yanukovych, the son of former president Viktor Yanukovych. In 2018, they were taken over by an influential politician — the MP Maxim Efimov from the Petro Poroshenko Bloc.

According to government estimates, increasing coal production by one million tons requires investment expenditures of up to UAH500m. This means that only in the case of this one company, „Selidivvugillya”, Ukraine lost the opportunity to extract an additional 3 million tons of coal per year.

The main reasons why Ukrainian mines are experiencing huge financial problems despite the enormous internal demand for coal are also clearly visible in the case of coal trade activities conducted by the state-owned „Krasnolimanska” mine, which were disclosed by the National Anti-Corruption Bureau of Ukraine (NABU). The mine sold 650 thousand tons of coal to a private intermediary at a price about one-third lower than the market one. Meanwhile, the private intermediary sold the coal to the state-owned energy company Centernergo. The existence of a private intermediary in the system of supplies between two state-owned enterprises was illegal and cost the Ukrainian state UAH310m — determined the NABU.

It is necessary to remove the „smotryashchii”

Last year, then the Ukrainian Prime Minister, Volodymyr Groysman demanded that the Ministry of Energy „remove the smotryashchii” from the coal mines. This term is used to refer to people who oversee corrupt business activities in a given region or a given industry on behalf of politicians.

„In private mines everything is working fine. But the same is not true in the state-owned mines. Why is that? Because the smotryashchii are acting like parasites. No matter how much we put into the bowl, if it is leaky, some of the funds will always disappear,” commented Mr. Groysman. He admitted that billions of the UAH allocated for the development of the mining industry were being lost in private pockets.

Another interesting story from the Ukrainian coal sector is the one of directors of the state-owned „Surgaya” mine in the Donetsk Oblast. According to reports in the Ukrainian media, in late June he was dismissed from his position by the Ukrainian Minister of Energy and the Coal Industry, just few hours after he signed a contract for the coal supply directly with the final customer, and not with a private intermediary, as it has been the case previously.

The situation is similar in mines located in the western part of Ukraine. According to media reports, „Lvivvugillya” is unable to sell the coal because the privately-owned coal preparation plants are refusing to accept it. The mine has signed contracts for the sale of coal with customers but is unable to pay for the transport of coal to the preparation plants and for the preparation process itself. Moreover, the supply of electricity to the mine may also be cut off.

The so-called „Rotterdam+” formula, which was introduced in the Ukrainian energy sector in 2016 and remained in force until June 2019, has also contributed to the catastrophic condition of the Ukrainian coal industry. According to this formula, domestic electric energy prices were calculated on the basis of prices of anthracite at the port of Rotterdam, increased by the costs of delivery to Ukrainian power plants. According to the Kiev-based weekly Delovaya Stolitsa, the introduction of the „Rotterdam+” formula was supposed to encourage Ukrainian coal-fired power plants to conclude contracts for the supply of anthracite with foreign suppliers and to simultaneously adapt to using coal extracted by Ukrainian state-owned mines. Coal from state-owned mines was to be sold at the same price as imported coal, which was supposed to provide an injection of cash necessary for the modernization of that sector.

In reality, however, the sector of coal-based power generation was buying cheap coal from mines controlled by the separatists in the Donbas region or from Russia, at a price two to three times lower than the one assumed in the official tariffs. Meanwhile, Ukrainian state-owned mines only lost on the introduction of the „Rotterdam+” formula. They were never able to sell coal at the assumed price but were forced to purchase the electricity necessary for their operation at an inflated price resulting from the formula — reports „Delovaya Stolitsa”.