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How could gas price decrease in Ukraine?

Author : Oleksiy Kushch

Source : 112 Ukraine

There is a model of a gas hub, in which the price of gas in Ukraine would be 190 USD per thousand cubic meters
19:37, 19 March 2019

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In early March, Ukrainian officials, along with top managers of state-owned gas companies, fell into a state of group cognitive dissonance. On the one hand, in recent years, the population has been told tales about the market price of gas that killed corruption. On the other hand, the price of gas for the population and the enterprises of heating utilities, for some reason, was not determined by the market, but by the decisions of the Cabinet of Ministers, which are far from market mechanisms. Nevertheless, all the official documents, including obligations to the IMF, mentioned in the memorandum of cooperation with the fund, clearly stated the requirement to increase the price of gas for social groups of consumers by the beginning of 2020 to UAH 12,313 (USD 453)/thousand cubic meters. And during the current year, this price indicator should grow in May from the current UAH 8,500 (USD 312) to UAH 9,851 (USD 362) per thousand cubic meters. As planned by the creators of the program of cooperation with the fund, this schedule of gas price increases should “catch up and overtake” import parity in the next twelve months.

Everything could be fine, but in March of this year, the price of gas, and not in the text of the government’s resolution, but on the market suddenly “dived” beyond the mark of UAH 8,000 (USD 294) per thousand cubic meters. There were suggestions to remove the obligation to supply gas to social groups of consumers from Naftogaz, which are now carried out through the network of regional gas consumption according to consumption standards approved by the government. Like, let the population and enterprises find their gas suppliers themselves. And the company at this time will be able to find buyers. Presumably commercial ones.

Here we need to make a small “market survey” and note that, according to assurances from state-owned company officials, from 2014 to 2017, Naftogaz reduced its share in the commercial market (industrial consumers) from 84% to 12%. Today, about fifty traders cover the needs of industry through both import resources and private gas production (over 4 billion cubic meters per year). On the one hand, there are a lot of traders, only their real final beneficiaries can be counted on the fingers of one hand.

It would seem that here it is a window of opportunity, when Naftogaz can finally leave millions of households with their boilers and switch to a more “tasty” private market, at least partially.

Cancellation of obligations for the supply of natural gas to the population by a state-owned company will lead to the fact that all exchange rate and market risks of price hikes in natural gas will be transferred to the end user - the population and the state budget, which subsidizes the poor. Moreover, Ministry of Finance will not be able to plan in the draft budget the necessary amount to pay subsidies, because you will have to “guess” not only the gas price for the next year but also the dynamics of the hryvnia exchange rate. Well, those who do not receive a subsidy will have to look every winter morning on the website of the Ukrainian Energy Exchange and pray for the good price. And simultaneously follow the course of the hryvnia. Indeed, in the case of devaluation, you will have to immediately go to the store for soap and rope.

But what about the price? Reduce it or increase it? The choice must be made by May, when, in accordance with the IMF memorandum, it is necessary to raise the price of gas for the population, while it is declining in the market. In this case, the most perverse fantasies of “Euroromantics” will come true, who have long been telling the inhabitants some horror stories that the price of gas for Europe's population is higher than for industrial consumers. Here in Ukraine, in May, a “revolutionary gas situation” could arise, when a simple Ukrainian would pay for gas 2 000 -3 000 hryvnias more than the owner of a metallurgical combine. Of course, it comes out in a European way, but somehow with an Asian flavor.

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Since January 2019, the gas price on the German NCG hub was 22.8 EUR/Mwh. In February, this figure fell to 17.85 euros, and in March - to 15.81 euros. To translate these prices into thousands of cubic meters we are accustomed to, we need to multiply the figure of the German hub by 10.57. And to get the price at the border of Ukraine and the EU, you need to add about three euros for using the European gas transportation system, $ 6.28 for the entry point to our gas transport system, multiply the resulting figure by the hryvnia National Bank rate to euro and dollar and add taxes.

As a result, gas at the border of Ukraine and the EU should currently cost from 7 151 UAH (263 USD) / thousand cubic meters (from Dutch TTF) to UAH 7 492 (275 USD) (in German NCG).

EU market indicators affected the performance of the Ukrainian gas market. According to the data of the Ukrainian Energy Exchange, according to the results of electronic trading, the average quotes for commercial gas in Ukraine decreased from UAH 12 062 (443 USD) per thousand cubic meters in November 2018 to UAH 7 921 (291 USD) in March 2019.

If today the prerequisites for launching the initial phase of forming a new gas hub were created in Ukraine, then, taking into account its own gas production, the average universal price for natural gas could fall below 6,000 UAH (220.5 USD), and at a certain fiscal maneuver - below 5000 hryvnia (184 USD) per thousand cubes. Within the price range of 5-6 000 hryvnia, Ukraine already could build an adequate market segmentation of consumers, when the population would conditionally buy gas at 5-5,500 UAH per thousand cubic meters, and the industry as a wholesale buyer - below 5,000. In this case, the situation would have turned out in really European-style, but without the Asian flavor.

In practice, our current gas model is not only unable to convert the effect of own gas production in favor of the population but is also unable to provide at least a partial wave effect due to the current depreciation of import resources and the fall in gas prices on the European market. Partially this wave effect is caught only by industry, as a result of which chemical enterprises began to gradually resume operation. Well, traditionally people are offered cheese in a mousetrap in the form of a “cheap market”, forgetting to warn that it can be “expensive.” Indeed, in Ukraine, there are no market mechanisms for "mixing" the price parameters of "own" and imported gas into a single market cocktail. And such a model can only be a new East European gas hub geographically tied to our underground gas storage facilities. On the creation of which we do not have to speak out loud.

Read original article at 112.ua

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