Omitting "Naftogaz:" Why is it profitable for foreigners to sell gas in Ukraine?

Author : Olena Holubeva

Source : 112 Ukraine

More and more foreign and domestic traders are entering our natural gas market, which contributes to a rapid reduction in the share of Naftogaz in the gas supply segment
11:19, 8 November 2017

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In the middle of last month, Ukrtransgas, operator of the Ukrainian gas transporting system (GTS), which is part of Naftogaz of Ukraine, informed about signing of an agreement on gas transportation with PGNIG Polish oil and gas company. According to Serhiy Makogon, Director of Development of Ukrtransgas, the very first agreement with the Western gas supplier was signed more than a year ago in Paris (Engie France). To date, Ukrtransgaz has already concluded more than 500 contracts with companies for gas transportation (importers and traders working in Ukraine - ed.).

As for PGNiG, the company does not deliver gas directly to consumers in Ukraine, Makogon clarified. Last year, the company has supplied 1 billion cubic meters of gas into Ukraine, not directly, but through local traders (in particular, through the Energy Resources of Ukraine (ERU) company. Until recently, PGNiG delivered gas to Ukraine's border with Poland, and then it was transported to the final consumer.

Related: Paradise Papers: Ukraine’s gas top manager owned offshore company, which existed for 14 months

According to the development director of Ukrtransgas, many Western companies are interested in the Ukrainian gas market. Large international gas traders, MET Holding and DufEnergy, also came to the Ukrainian gas market. 54 private importers of natural gas are currently operating on the Ukrainian border. All of them have contracts for the transportation of natural gas with Ukrtransgas.

November 9, subsidiary company of the international energy trader AOT Energy might get a license to supply natural gas in Ukraine.

Not only Western companies enter the Ukrainian natural gas market. The negotiations on the signing of an agreement on the transportation of gas in the Ukrainian GTS with Ukrtransgaz are now being conducted by the large Ukrainian holding OKKO Group. The company clarified that they plan to carry out the first deliveries of natural gas to Ukraine in the fourth quarter of 2017.

In early October, group of companies "Factor" of the well-known Ukrainian businessman Serhiy Tyshchenko (managing the network of regional gas stations) applied for a license to supply natural gas to NKREKU, wrote Enkorr.

In addition to importers, private companies producing gas in Ukraine are also trading in the industrial gas market: Burisma, DTEK, Smart Energy, Geo-Alliance and many others. They cover about 4 billion cubic meters needs of industrial enterprises in natural gas - the remaining 7 billion cubic meters are imported.  

Related: Naftogaz claims to not hold monopoly position at gas market in Ukraine

Ukrainian natural gas market began to develop after the adoption of the Law "On the Natural Gas Market", which came into force from October 1, 2015. The document opened opportunities for free access to the gas transportation infrastructure to private companies, created conditions for free pricing, said Serhiy Makogon. The director for development of Ukrtransgaz specified that the development of the market was facilitated by the development of infrastructure that allows importing gas to Ukraine.

In the case of the implementation of the gas interconnector project with Poland, the possibilities to import gas to Ukraine can be significantly expanded. Now there is also an opportunity to supply natural gas from Poland to Ukraine.  

Ukrtransgaz told that the construction of a new interconnector with Poland has not begun yet. At the same time, his project has already been developed and the investments would be about $ 200 million. "The next step is to conduct the so-called open season procedure. We must offer market participants to chose the interconnect on obligatory terms," said the development director of Ukrtransgaz, specifying that the open season procedure is necessary to calculate the payback period of the project and transfer of the approval of the regulator.

The procedure can be announced within the next month. This will happen if the National Commission agrees with it, they say in Ukrtransgaz. "If there is a positive feedback from the market during the open season, this project will be realized until 2020. The project is really very interesting in the context of the development of the north-south gas corridor, when gas from the Polish LNG terminal will be supplied to Ukraine, possibly to the Balkan countries," Makogon noted.

Now, companies buy gas mainly on virtual trading floors in Slovakia and Poland to supply it to Ukraine, but there are certain opportunities to buy gas in Hungary. Part of the gas is issued for SWAP operations (exchange of volumes).

Related: Russian FSB sees gas pipelines damage in Crimea as diversions

The Ukrainian gas market attracts private operators with a large capacity. The whole market is estimated at 33-35 billion cubic meters. "Traders benefit from working in large markets, as they have more opportunities to sell gas," notes Unigovsky. "And this is the largest market in Eastern and Southern Europe, for comparison, in Hungary, the whole consumption amounts to 5.5 billion cubic meters, and in Bulgaria - 3.4 billion cubic meters. And we have 11 billion cubic meters – this is our gas consumption in the industrial sector," the director for development of Ukrtransgaz clarifies.

Due to the peculiarities of the situation that has developed in the Ukrainian gas market because of NJSC Naftogaz of Ukraine, traders are now economically motivated to work in the segment. "The margin they receive in the Ukrainian market, with all the attendant risks, is much higher than they get in the EU. The fact is that the price of gas for industry in Ukraine is quite high," says Unigovsky.

To a large extent, this contributes to high prices, which Naftogaz Ukraine sets for the industry. The state company has certain obligations: to supply gas to household consumers at a fixed unprofitable price for it. In addition, the state-owned company must form gas reserves in case of a sharp cooling or a natural, man-made disaster.

"Therefore, the state company sometimes buys gas at high, unfavorable prices, and also has to sell it at prices higher than other traders, in particular importers and private gas producers," Naftogazbudinformatika CEO said.

Related: Who will pay for cheap gas for unrecognized Donbas republics?

Odessa Port Plant has some experience of buying natural gas from a private trader. The chairman of the board of the enterprise Serhiy Nazarenko said that the OPP will buy natural gas from a private trader - the company "Energy Resources of Ukraine". Moreover, at a price lower than the proposed to industrial consumers Naftogaz of Ukraine - 292 USD per 1 thousand cubic meters with VAT. For comparison, we note that for November Naftogaz set prices for industrial consumers consuming up to 50 thousand cubic meters of gas monthly (372 USD per 1,000 cubic meters with VAT) for consuming more than 50 thousand cubic meters of gas – 338 USD per 1 thousand cubic meters with VAT.

Private suppliers offer consumers not only a more flexible pricing policy, but also convenient terms of delivery, Unigovsky notes. In particular, we are talking about the terms of the calculation, which can be more convenient if you buy gas from private traders.

"In this regard, we now see that Naftogaz is losing its segment of industrial consumers, and if nothing changes, the company may finally lose its position in the segment of industrial gas consumption in 2018," Leonid Unigovsky said.

The situation is different in the segment of domestic consumers gas supplies (it accounts for more than 20 billion cubic meters of volume). The government keeps the price of gas for the population artificially, the segment is not attractive for the private companies. Since May 1, 2016, the price of gas for the population is set at 0,26 USD per thousand cubic meters and remains unchanged. In this regard, private companies have no incentive to sell gas to household consumers. "To date, Naftogaz has almost a 100% share in gas supplies to thermal utility companies and in wholesale sales to regional gas distribution companies," the press service of the state-owned company recently reported.

"Ukrtransgaz sees no technical barriers to the establishment of market relations in the segment of household gas consumers (JI category)," said Serhiy Makogon.

Managing Director of ENGIE in Ukraine Willem Koppuls said that Ukraine is not ready to open a market in the segment of gas supplies to domestic consumers, since the current regulated price of gas is below market’s one. In addition, he said, there are shortcomings in the regulatory environment, gas suppliers are technically not ready to work with the population. Koppuls noted that working with household consumers requires the availability of measuring equipment for each consumer, reliable customer bases, data exchange between suppliers and operators of gas distribution networks.

Related: Stock of liquefied petroleum gas in Ukraine increased by 10.7%

Еhe world energy community insists on opening the gas market for domestic consumers and it seems that the government has found a way how to please it.

Director for Development of Ukrtransgaz Makogon said that there is obvious benefit in the development of the direction of private gas trading.

He noted that it was not about the fact that Ukrtransgaz began to earn more (from exploitation of the GTS), but about "diversifying sources of income." "Earlier, the main income of the company was gas transportation for the only company - Russian Gazprom and local transportation, but now we have an additional source of income associated with the transportation of gas from the Western border to the consumer," said the director for development of Ukrtransgaz.

Experts pointed out that diversification of sources of revenue from gas transportation and an increase in the attractiveness of the GTS exacerbate the discussion around the preparing anbandling - transferring the function of gas transportation from Naftogaz to an independent operator. According to the Resolution of the Cabinet of Ministers No. 496, the assets used for the transportation of natural gas in the framework of anbangling should be transferred to an independent company within 30 days after the final decisions on two cases that are considered in the Stockholm Arbitration. The final decision on the transit agreement with Gazprom is scheduled for November 30.

Related: Cabinet says Ukraine will not purchase Russian gas from in current format

The Ministry of Energy and Coal insists on transferring the GTS to the management of the company "Trunk gas pipelines of Ukraine", which is subordinated to the Ministry. At the same time, Naftogaz agreed to conduct an internal reorganization of Ukrtransgaz with the aim of creating a branch of the GTS operator in its structure. Deputy Prime Minister of Ukraine Volodymyr Kistion called it "sabotage." Earlier, as wrote, Igor Prokopiv, Deputy Minister of Energy and Coal Industry, stated that the creation of a new branch in the Ukrtransgaz structure "Operator of the GTS of Ukraine" could delay the annandling process for 2-2.5 years.

Ukrtransgaz explained that a new structure is necessary to work out all business processes and ensure uninterrupted gas transportation to customers after the separation of the transportation direction. "Obviously, you cannot simply transfer assets, but you also need to transfer the necessary personnel, well-developed business processes and IT systems, otherwise the new operator will not be functional. The creation of an internal unit for testing autonomous work is a very correct step," Makogon assured.


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Meanwhile, the battles between the government and Naftogaz for control levers continue, foreign operators are attracting much attention to the Ukrainian gas transportation system.

In April, the famous Italian company Snam S.p.A. and Slovak operator Eustream, signed a memorandum with Ukrtransgaz on joint assessment of cooperation opportunities in the use and development of the gas transportation system. Head of Naftogaz of Ukraine Andriy Kobolev recently clarified that a foreign company, or possibly a consortium of companies that will be involved in the management of the Ukrainian GTS, will have a controlling stake and monitor the entire operation of the gas transportation system.

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