Ukraine signs up to EU rules requiring split of energy giant

Sep 24, 2010, 12:00 GMT

Brussels - Ukraine on Friday signed up to a series of European Union energy rules which will oblige it to split up its oil and gas giant Naftogaz, officials in Brussels said.

Ukraine is the main transit route for Russian oil and gas to reach the EU, and its infrastructure needs major overhauls and hundreds of millions of euros in investment. But fears over perceived corruption in the energy sector have long hindered Western investment.

However, on Friday 'Ukraine signed the accession protocol to the European energy community,' a group of countries which apply EU rules to their energy markets, European Commission spokeswoman Marlene Holzner said.

Once Ukraine ratifies the agreement, 'the key legislation that we have here will also be in force in Ukraine,' she said.

That will give Ukrainian energy producers access to the EU's energy market, and should encourage investment.

But it will also oblige the country to split up Naftogaz, because EU law forbids companies to both run energy transmission networks and sell energy to consumers, in the interests of fair business.

Naftogaz both runs Ukraine's gas pipeline network and sells gas to consumers. At the very least, to meet EU rules, it will have to set up a special subsidiary to run its pipeline network and guarantee fair pipeline access to other gas suppliers, a process named 'unbundling.'

'Yes, we do expect Naftogaz to unbundle ... Ukraine has to split the two' functions of gas transmission and gas sale, Holzner said.

That could spark a political debate in Ukraine, as the gas network has long been a key pawn in power struggles between rival political clans.