Riccardo Puliti: Inclusive Nord Stream II is Very Important for European Energy Security
January 20, 2016
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Ukrainian Naftogaz has recently concluded contracts with five European companies to supply 1.7 bcm of natural gas within the European Bank for Reconstruction and Development [1] (EBRD) loan framework strengthening its energy efficiency and energy security. However that is not the only loan provided by this bank to Kiev as the EBRD becomes one of the biggest investors in Ukraine (cumulative investment of €7.46 billion). Riccardo Puliti, Managing Director for Energy at the EBRD, admits in an exclusive interview with Slovak energy analyst Jozef Badida that “Ukraine is in a complex situation and that is reflected in the rating, but we think the country has a lot of willingness to reform”. And it seems that this financial aid bears fruits because Ukraine has been able to diversify its natural gas supply significantly.
Moreover, Mr. Puliti is less sceptical with regard to the expansion of Russian gas pipeline in the Baltic Sea saying that “if Nord Stream II is inclusive in terms of allowing the import via Ukraine or the Southern Gas Corridor then I believe it is a very important project for European energy security”. Certainly the interview cannot omit the climate issue: he points out that “access to energy and its affordability is very important and needs to be solved but I really don’t think it should be done at the expense of the environment”.
The EBRD is helping Ukraine finance its energy sector, especially gas. How much has the Bank invested?
We completed a sovereign loan to Naftogaz, Ukraine’s national energy company, for the amount of $300 million to finance the purchase of natural gas from any company on the European market in October 2015. The guarantor of this loan is the Ukrainian government.
Was there another €150 million loan approved to Ukraine in 2014?
Yes, you are right. Another loan was signed in December 2014 by the EBRD and the European Investment Bank (EIB) for €150 million each. This loan was not intended to purchase natural gas but to finance the modernisation of the Ukrainian transmission system enabling a reverse flow of gas. It was more capital expenditure for improving compression stations and upgrading infrastructure.
It seems the EBRD is one of the biggest investors in Ukraine. Hasn’t it been a risky step due to a low Ukrainian credit rating and the war in Donbass?
I would not put it that way. It is true Ukraine has a low credit rating but it is also true that the country has been taking a lot of steps forward and made many improvements in their macroeconomic picture – the renegotiation of the international debt in September, for example. There has also been a lot of work in reform of the bank and energy sectors. Certainly Ukraine is in a complex situation and that is reflected in the rating, but we think the country has a lot of willingness to reform. It will not be easy but there have already been some positive developments, so we continue to try to help the country as much as possible.
What are interest rates for Ukraine in this regard?
I cannot reveal this information but these are sovereign loans and the EBRD’s policy on sovereign lending is the same for every country. Believe me, these interest rates are not unbearable. It means that Ukraine is treated in the same manner as other countries.
These loans are conditional upon a programme of corporate restructuring at Naftogaz and additional reforms modernising Ukrainian energy system, aren’t they? Could you give our readers more details?
You are absolutely right. The EBRD is generally very much linked to reforms. A big part of our mandate is to move towards a transparent, efficient and open market economy in every sector, including energy. We have been working on reforms in Ukraine for a long time, together with the European Commission, the European Investment Bank, the International Monetary Fund, the World Bank, and the Energy Community Secretariat. With this particular loan, we are requesting the move of Naftogaz shares from the Ministry of Energy to the Cabinet of Ministers. The reason behind this is to ensure that the policy maker is not the same as the owner of the shares. Moreover, we have requested the creation of an independent Supervisory Board and Audit and Risk Committees within Naftogaz. These are the main conditions leading to the improvements in the corporate governance of NAK Naftogaz in order to make it more open and accountable.
Did you also ask Ukraine to privatise Naftogaz?
This is not our objective at all. Our goal is to make Naftogaz more efficient, transparent and open but its potential privatisation is an issue for the Ukrainian government, not for us.
All in all, you provide a positive impetus for the Ukrainian energy market. On the other hand, aren’t the Bank´s money and infrastructure (such as reverse flow) investments threatened by the Nord Stream II project?
We have to analyse what this project is about. If Nord Stream II is inclusive in terms of allowing the import via Ukraine or the Southern Gas Corridor then I believe it is a very important project for the European energy security. It cannot be exclusive in order to exclude any other transit route.
Pipelines are natural monopolies and competition between their operators is not economically reasonable. If Nord Stream II is built, there will be too much transit capacity available in Europe. Additional competition to the Ukrainian route could lead to a lower income of its operator or even reduction of the pipeline capacity. Don’t you think so?
Firstly, all numbers should be checked because we don’t really know what data is linked to Nord Stream II. Secondly, it is important to foresee the gas consumption of Europe. Currently this figure is quite low due to an economic crisis but I hope it will not be always this way. I think we should be calmer and see all numbers, not only for Nord Stream II but also for Ukraine, Southern Corridor, etcetera, as to what the situation with regard to LNG is. After analysing all numbers we can find a reasonable solution for all.
Usually each winter all eyes are focused on the Russian-Ukrainian gas relations. In this respect, the European Commission mediating the gas winter package plays a very important role. How would you describe the Commission´s work?
The European Commission was extremely useful in this issue. They made a good job in helping us to be more comfortable in lending money to Ukraine. They really played a substantial role in negotiating a reasonable solution that has been achieved. So I think that all of us should be grateful for the work done by the Commission. They have been very patient in difficult times and assertive in the moments when everything was stalling. They played a major role to ensure that we had the gas winter package in time for winter 2014-15.
So you are not afraid of any gas disruption this season?
At the moment, I am not afraid but the situation is fluid. Certainly there is a solid agreement and a willingness from all three parties to make it work.
The EBRD has not only been promoting energy security but the climate change agenda as well. Could you tell us more about the EBRD’s sustainable energy projects?
There are two strategic lines that lead our activities in the energy sector: the first is climate agenda and energy efficiency and the second is energy security. We always try to go along these lines and integrate them as much as we can when we finance projects or invest our equity. The Bank’s Sustainable Energy Initiative currently represents 33 per cent of all our investments and our target is to reach 40 per cent by 2020. These projects contribute to CO₂ reduction by improving energy efficiency of power stations, oil and gas assets, and any other infrastructure like public buildings, and railways. Furthermore, we are proud that this year our investment portfolio with regard to renewables is higher than those linked to conventional generation.
Could you compare climate initiatives and approaches in different parts of the world?
There is a common understanding that climate change is an issue we have to deal with now. There is no time to wait and decisions must be adopted as soon as possible. We cannot reach a solution individually. A country by country approach is important but in the end it is a global problem. I have noticed that there is a more coherent approach from the world biggest economies and a deeper understanding that climate change can have a serious impact on our way of living and economy.
What challenges do you expect we will face in the post COP21 period?
The biggest challenge is always a debate between affordability and competitiveness of fuels and the need to invest more in climate change. This is the issue at the heart of the matter. Surely, access to energy and its affordability is very important and needs to be solved but I really don’t think it should be done at the expense of the environment. I believe that richer countries should help the countries with less financial resources to make the transition towards low-carbon and less energy-intensive economies. It is very important to move financial resources and technology to these countries.
Are you saying we should not compromise the climate agenda and be more result-oriented?
No, it should not be either/or. We should find a way which allows solving both problems at the same time. Obviously, it will not happen in one year. However, what I’ve noticed is an increased sensibility to climate change but also the conviction that we cannot lose a public consensus with a very expensive solution. This is good news! The answer is technology. If we can help develop cheaper renewables and implement energy efficiency savings, I believe that public consensus will grow because it won’t be exclusive.
1. The EBRD is owned by 65 countries, the European Union and the European Investment Bank. It was established to help build a new, post-Cold War era in Central and Eastern Europe. The EBRD has since played a historic role and gained unique expertise in fostering change in the region - and beyond. It is committed to furthering progress towards ‘market-oriented economies and the promotion of private and entrepreneurial initiative’.
Riccardo Puliti is the Managing Director in charge of the Power and Energy and Natural Resources sectors at the European Bank for Reconstruction and Development. Mr Puliti joined the EBRD in 1996. In 2000, he was appointed Deputy Director of Municipal and Environmental Infrastructure and in 2002 Director of Transport Infrastructure. He started his career at Istituto Mobiliare Italiano (IMI) Group in 1987, he then moved to Banque Indosuez in Paris where he worked in M&A and equity capital markets. He then joined NM Rothschild and Sons in London where he held several positions in M&A and equity capital markets. Mr Puliti is a MBA alumnus of Instituto de Estudios Superiores de la Empresa (IESE) and a postgraduate alumnus of the Kennedy School of Government (Harvard University) and Imperial College.
Image: Riccardo Puliti
Moreover, Mr. Puliti is less sceptical with regard to the expansion of Russian gas pipeline in the Baltic Sea saying that “if Nord Stream II is inclusive in terms of allowing the import via Ukraine or the Southern Gas Corridor then I believe it is a very important project for European energy security”. Certainly the interview cannot omit the climate issue: he points out that “access to energy and its affordability is very important and needs to be solved but I really don’t think it should be done at the expense of the environment”.
The EBRD is helping Ukraine finance its energy sector, especially gas. How much has the Bank invested?
We completed a sovereign loan to Naftogaz, Ukraine’s national energy company, for the amount of $300 million to finance the purchase of natural gas from any company on the European market in October 2015. The guarantor of this loan is the Ukrainian government.
Was there another €150 million loan approved to Ukraine in 2014?
Yes, you are right. Another loan was signed in December 2014 by the EBRD and the European Investment Bank (EIB) for €150 million each. This loan was not intended to purchase natural gas but to finance the modernisation of the Ukrainian transmission system enabling a reverse flow of gas. It was more capital expenditure for improving compression stations and upgrading infrastructure.
It seems the EBRD is one of the biggest investors in Ukraine. Hasn’t it been a risky step due to a low Ukrainian credit rating and the war in Donbass?
I would not put it that way. It is true Ukraine has a low credit rating but it is also true that the country has been taking a lot of steps forward and made many improvements in their macroeconomic picture – the renegotiation of the international debt in September, for example. There has also been a lot of work in reform of the bank and energy sectors. Certainly Ukraine is in a complex situation and that is reflected in the rating, but we think the country has a lot of willingness to reform. It will not be easy but there have already been some positive developments, so we continue to try to help the country as much as possible.
What are interest rates for Ukraine in this regard?
I cannot reveal this information but these are sovereign loans and the EBRD’s policy on sovereign lending is the same for every country. Believe me, these interest rates are not unbearable. It means that Ukraine is treated in the same manner as other countries.
These loans are conditional upon a programme of corporate restructuring at Naftogaz and additional reforms modernising Ukrainian energy system, aren’t they? Could you give our readers more details?
You are absolutely right. The EBRD is generally very much linked to reforms. A big part of our mandate is to move towards a transparent, efficient and open market economy in every sector, including energy. We have been working on reforms in Ukraine for a long time, together with the European Commission, the European Investment Bank, the International Monetary Fund, the World Bank, and the Energy Community Secretariat. With this particular loan, we are requesting the move of Naftogaz shares from the Ministry of Energy to the Cabinet of Ministers. The reason behind this is to ensure that the policy maker is not the same as the owner of the shares. Moreover, we have requested the creation of an independent Supervisory Board and Audit and Risk Committees within Naftogaz. These are the main conditions leading to the improvements in the corporate governance of NAK Naftogaz in order to make it more open and accountable.
Did you also ask Ukraine to privatise Naftogaz?
This is not our objective at all. Our goal is to make Naftogaz more efficient, transparent and open but its potential privatisation is an issue for the Ukrainian government, not for us.
All in all, you provide a positive impetus for the Ukrainian energy market. On the other hand, aren’t the Bank´s money and infrastructure (such as reverse flow) investments threatened by the Nord Stream II project?
We have to analyse what this project is about. If Nord Stream II is inclusive in terms of allowing the import via Ukraine or the Southern Gas Corridor then I believe it is a very important project for the European energy security. It cannot be exclusive in order to exclude any other transit route.
Pipelines are natural monopolies and competition between their operators is not economically reasonable. If Nord Stream II is built, there will be too much transit capacity available in Europe. Additional competition to the Ukrainian route could lead to a lower income of its operator or even reduction of the pipeline capacity. Don’t you think so?
Firstly, all numbers should be checked because we don’t really know what data is linked to Nord Stream II. Secondly, it is important to foresee the gas consumption of Europe. Currently this figure is quite low due to an economic crisis but I hope it will not be always this way. I think we should be calmer and see all numbers, not only for Nord Stream II but also for Ukraine, Southern Corridor, etcetera, as to what the situation with regard to LNG is. After analysing all numbers we can find a reasonable solution for all.
Usually each winter all eyes are focused on the Russian-Ukrainian gas relations. In this respect, the European Commission mediating the gas winter package plays a very important role. How would you describe the Commission´s work?
The European Commission was extremely useful in this issue. They made a good job in helping us to be more comfortable in lending money to Ukraine. They really played a substantial role in negotiating a reasonable solution that has been achieved. So I think that all of us should be grateful for the work done by the Commission. They have been very patient in difficult times and assertive in the moments when everything was stalling. They played a major role to ensure that we had the gas winter package in time for winter 2014-15.
So you are not afraid of any gas disruption this season?
At the moment, I am not afraid but the situation is fluid. Certainly there is a solid agreement and a willingness from all three parties to make it work.
The EBRD has not only been promoting energy security but the climate change agenda as well. Could you tell us more about the EBRD’s sustainable energy projects?
There are two strategic lines that lead our activities in the energy sector: the first is climate agenda and energy efficiency and the second is energy security. We always try to go along these lines and integrate them as much as we can when we finance projects or invest our equity. The Bank’s Sustainable Energy Initiative currently represents 33 per cent of all our investments and our target is to reach 40 per cent by 2020. These projects contribute to CO₂ reduction by improving energy efficiency of power stations, oil and gas assets, and any other infrastructure like public buildings, and railways. Furthermore, we are proud that this year our investment portfolio with regard to renewables is higher than those linked to conventional generation.
Could you compare climate initiatives and approaches in different parts of the world?
There is a common understanding that climate change is an issue we have to deal with now. There is no time to wait and decisions must be adopted as soon as possible. We cannot reach a solution individually. A country by country approach is important but in the end it is a global problem. I have noticed that there is a more coherent approach from the world biggest economies and a deeper understanding that climate change can have a serious impact on our way of living and economy.
What challenges do you expect we will face in the post COP21 period?
The biggest challenge is always a debate between affordability and competitiveness of fuels and the need to invest more in climate change. This is the issue at the heart of the matter. Surely, access to energy and its affordability is very important and needs to be solved but I really don’t think it should be done at the expense of the environment. I believe that richer countries should help the countries with less financial resources to make the transition towards low-carbon and less energy-intensive economies. It is very important to move financial resources and technology to these countries.
Are you saying we should not compromise the climate agenda and be more result-oriented?
No, it should not be either/or. We should find a way which allows solving both problems at the same time. Obviously, it will not happen in one year. However, what I’ve noticed is an increased sensibility to climate change but also the conviction that we cannot lose a public consensus with a very expensive solution. This is good news! The answer is technology. If we can help develop cheaper renewables and implement energy efficiency savings, I believe that public consensus will grow because it won’t be exclusive.
1. The EBRD is owned by 65 countries, the European Union and the European Investment Bank. It was established to help build a new, post-Cold War era in Central and Eastern Europe. The EBRD has since played a historic role and gained unique expertise in fostering change in the region - and beyond. It is committed to furthering progress towards ‘market-oriented economies and the promotion of private and entrepreneurial initiative’.
Riccardo Puliti is the Managing Director in charge of the Power and Energy and Natural Resources sectors at the European Bank for Reconstruction and Development. Mr Puliti joined the EBRD in 1996. In 2000, he was appointed Deputy Director of Municipal and Environmental Infrastructure and in 2002 Director of Transport Infrastructure. He started his career at Istituto Mobiliare Italiano (IMI) Group in 1987, he then moved to Banque Indosuez in Paris where he worked in M&A and equity capital markets. He then joined NM Rothschild and Sons in London where he held several positions in M&A and equity capital markets. Mr Puliti is a MBA alumnus of Instituto de Estudios Superiores de la Empresa (IESE) and a postgraduate alumnus of the Kennedy School of Government (Harvard University) and Imperial College.
Image: Riccardo Puliti
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