Gas price for the Ukrainian population: Will it grow or not?

Author : Leonid Unihovsky

Source : 112 Ukraine

The IMF is annoyed with the fact that Ukraine began to change the agreed gas formula
10:56, 24 January 2018

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January 15, the draft resolution "On approval of the Regulations on the assignment of special obligations to natural gas market entities to ensure public interest in the process of natural gas market functioning," which caused a resonance in the media and discussion at the Cabinet meeting, was published on the Ministry of Energy website. Paragraph 16 of the document contains a new formula for calculating the parity price, according to which the price for the sale of natural gas to the population, religious organizations, and heat and power utility companies (PUC); the category of supplies falls under special obligations (SO).

Now the price is calculated according to the formula provided by the current resolution No. 187. According to the formula laid down in this document, even at the beginning of the heating season, the price for natural gas for the SO categories should have been raised by 17-19%. Fearing the explosion of social discontent, the government refused to raise the price, which caused serious disagreements with Naftogaz Ukraine and led the IMF discontent.

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The IMF is annoyed that Ukraine began to change the agreed rules of the game. As far as I know, the IMF's claims are as follows: the formula is agreed, so it should not be changed along the way. We have agreed on the rules of the game, now you have got the money, and now you change the rules of the game. Ukraine’s government and the Ministry of Energy were searching for different options to create the grounds preserving the price for the SO categories at the current level. In particular, they were considering a possibility of changing the pricing methodology by shifting the time period for calculating the import parity, based on which the gas price for the population is established.

This approach is used in the price calculation formula, prescribed in the draft resolution. According to paragraph 16, the price for 6 months is used for calculation of the download period (not for 12 calendar months prior to the settlement month, as provided in the current resolution No. 187). Thus, the new methodology takes into account the price covering the summer period, when the average values are usually smaller than the average price for the year. Furthermore, it reflects the expectations regarding the possible price reduction at the moment of entry into the Ukrainian gas-transport system (GTS), which may occur after the decision of the Stockholm Arbitration (which is expected in February). Now it amounts to 12.47 dollars per 1 thousand cubic meters. This is also a price reduction factor. I am convinced that such a high input and output tariffs are a mistake.

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Yaroslav Dykovytsky, former head of the department for economy, planning and pricing policy of Naftogaz, estimated that, according to the new calculation methodology, the price of gas for the SO categories should increase by 15% (to $ 28 per 1,000 cu m). According to the current decree no. 187, it should have been increased by as much as 37% (up to $ 341 per 1,000 cu m). He published these calculations on his Facebook page. This contradicts the figures, which have been previously voiced by Naftogaz, and which are set by the government. According to the government's expectations, the new formula will increase the gas price by only 8%, while under the current resolution it would increase by 14-19%.

In this situation, I would take a mix of prices with an acceptable (for Ukrgazdobuv) margin and the import price, and then I would make an averaged mix. Thus we could achieve the significant reduction. That is, deliveries of Ukrainian gas would have one price, and imports would have another one. An average parity would be based on these compared values . It could no longer be called imported, but, in my opinion, it would be justified parity. These options were already discussed, but they were not approved. Apparently, this could cause even greater conflict with the IMF and other international donors.

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The experts and the government actively discuss the mechanism, proposed under the new decree. I believe that soon the IMF and our other donors would express their opinion on this matter. I think the government would still insist on the proposed changes.

The draft resolution also provides for changes in the systems of selling gas to the population and religious organizations: they will be implemented not via Naftogaz, but directly through Ukrgazdobuv (gas produced in Ukraine). This will allow avoiding the 1,917% margin in the gas price. According to the new document, Naftogaz (which imports gas) would preserve its obligation to supply gas only to PUC companies.

Regional enterprises would remain the key enterprises in the distribution of gas to SO categories, but the document provides an opportunity to bring other suppliers to the market. Of course, under the current conditions, they are not interested in supplying gas to the population at below-market prices. At the same time, the document provides for the 10% increase in the marginal trade mark-up for suppliers. This is a good margin. In addition, as far as I know, the Ministry of Finance has already approved a mechanism for compensating funds for the supply of gas to the population by private suppliers, and a few days ago it began acting. Thus, we can say about creating theoretical conditions for attracting new players.

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In the near future, none of the private suppliers will dare to enter the SO projects gas supply segment. Only regional enterprises will benefit so far from the increase in the maximum trade margin.

It should also be noted that under this draft resolution, Naftogaz is obliged to supply gas only to PUC. This is only about 5 billion cubic meters per year. We remember that Naftogaz was forced to pump 15-17 billion cubic meters into the underground gas storage. In my opinion, this should be resolved with the adoption of a new law on strategic reserves of natural gas. In this case, the financial risks for Naftogaz should significantly decrease.

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All opinions published on 112.International website reflect the views of the author. 112.International editors may not agree with the opinion of the author.

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