Ukraine could become gas hub, but turning into black hole

Author : Oleksiy Kushch

Source : 112 Ukraine

Ukraine wants to become a gas hub, but all announced gas market reforms so far have not led to the emergence of an effective market mechanism and the opening of the market for hundreds of independent traders
23:15, 13 March 2018

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112 Agency

Along with railways network Ukraine had inherited another nice thing from USSR - namely, the gas transportation system, which is a unique set of logistical engineering and includes not only the main gas pipelines and compressor stations, but also the largest in Europe storage of natural gas with a capacity of 34.5 billion cubic meters, which potential with appropriate investments can be increased by 50% to 50 billion cubic meters.

But not only the capital-intensive engineering communications forms today's potential of Ukraine. The Lord granted us a unique transit position at the junction of a resource-deficient but economically highly developed Europe and a resource-deficient and, for the same reason, economically backward Asia. And in our time, with the help of these crossroads, some of the countries earn well. And some do it so effectively that you do not need to work particularly hard.

Instead, Ukraine now is a country that not only does not earn on its unique gas transportation potential, but under such a state policy, it risks losing the advantages associated with such a profitable asset in the coming years. How did it happen that the gas transmission system has evolved from chicken dropping golden eggs to an unnecessary thing? And who is the enemy who took all our profits away?

Let's consider the ideal model of the past, and see how Ukraine could dispose of its basic asset - the gas transportation system. More recently, there was no alternative to the Ukrainian pipe, which is why it was filled up to the eyeballs.

It was then that our country had a unique chance to become Europe's largest gas hub and not only to ensure its energy independence, but also to receive billions of dollars for transit and storage of natural gas. Naturally, we were not able to solve such a problem independently: neither economically, nor technologically. To create the hub it was necessary to conduct several conceptual reforms and attract reliable European partners, perhaps even a pool of countries - the largest consumers, primarily Germany.

What needed to be done to implement the gas hub project?

The first - to divide the gas transportation system into several components, including the extraction, transportation, sale and storage of natural gas. To do this, we should not consolidate gas assets in the Naftogaz, but on the contrary to restructure them. That is, to begin with the procedure of unbundling, which currently cannot be done by Naftogaz in any way.

The second. It was necessary to give Europeans the right to purchase from Russians the entire volume of natural gas on the eastern border of Ukraine. And we already have to buy gas from the operator of the Ukrainian global gas hub. The total investment in the creation of a gas hub could amount to 5 billion Euros. Plus, the annual flow of capital into the virtual trading system.

To use such a scheme, it was necessary to completely refuse of intermediary structures, which, through gas supplies, were integrated into metallurgy and chemical production. Cheap Russian gas has become a factor of competitive advantage, in which, as mushrooms after the rain, Ukrainian financial and industrial groups have grown. According to the law of communicating vessels, everything in this world had to be paid for: by unintelligible foreign policy, cheap transit, and gradual washing out of the country's transit potential. Group of gas intermediaries has evolved into the great industrialists - the oligarchs, and the overall economy has missed dozens of billions of dollars and almost lost its transit potential.

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The third direction of the reforms is the opening of equal access to the gas infrastructure of all gas traders, which can provide balancing of gas reserves in the hub and its selection, as well as the conclusion of bilateral transactions, which are symmetrical agreements for pumping natural gas into the hub and delivering a similar volume to customers. In addition to free access to the hub, all wholesalers  should be clearly separated from retail gas sales.

Thanks to the above reforms, the entire trading system becomes transparent, market and competitive. That is, it can offer the most favorable market price to the end user. With this development of the market it becomes impossible, when all companies are concentrated in the hands of one oligarch, who also has access to large wholesale supplies of energy, thanks to quasi-offshore trading gaskets in the West.

By the way, the lack of free access of market participants to the nation-wide infrastructure is one of the key problems that hamper the development of a quality entrepreneurial environment in our country. The articles about the oligarchs have already become nauseous in society, and few people are talking about the problem of infrastructure access. And we are not talking only about the gas transportation system. According to the accessibility of the connection to the power networks, Ukraine occupies an "honorable" place in the second hundred of countries in the competitiveness ranking. Today, no consumer can safely connect to the energy networks without a huge number of legal and illegal bribes. The first means the so-called technical conditions, when a small plant will be obliged to build a substation for ten million hryvnia. Some energy supply companies put this procedure on stream: they will also receive the loan in their bank. The same situation is with the connection to water supply networks, drainage, gas distribution systems.

Europeans, luckily for them, do not get sick of this cunning and create types of infrastructure objects that are convenient for the economy and society. Take, for example, the Central European gas hub (CEGH), which is a gas distribution center in Baumgarten with a trading volume of 7-10 billion cubic meters. CEGH itself arose precisely because the largest Austrian oil company OMV (shareholder of the hub) in 1968 signed a long-term contract for the supply of natural gas from the USSR.

The very philosophy of the gas hub, which shareholders are the largest European operators, is also beneficial to Ukraine by completely cutting off our country from contractual cooperation with Gazprom. And here we are constantly accompanied by some excesses. In the case of the functioning of the hub, Ukrainian consumers could acquire gas in it without depending on the Kremlin's favor. And given the possibilities of storing gas in our underground storage facilities, our hub could also make good money on re-exporting energy resources, because the Ukrainian gas transportation system has a significant difference from all kinds of "flows", northern and southern: unlike them, we can always download surpluses of cheap gas to their storage and sell them at good price during peak loads on the power grid in winter.

Unfortunately, nothing like this is happening now. Our politicians have long turned into anti-robin hoods: they take from the poor and give to the rich. And the Ukrainian gas hub turned into a kind of anti-hub. This is particularly evident in the example of the sale of gas own production primarily to the population. As the investigations of the Antimonopoly Committee have shown, the current pricing methodology does not distinguish between imported gas and Ukrainian - all this volatile substance is mixed in a common pipe. At the same time, the "total" price is determined based on the price parameters on the NCG hub (Germany), plus transportation costs and entrance / exit tariffs on the western border of Ukraine. Needless to say, the gas of Ukrainian extraction comes to us not from Germany and it is not necessary to pay for entry and exit on the western border for it. And we will tell directly - it is absurd. According to Antimonopoly Committee, the peg to imported parity led to an artificial increase in the price of Ukrainian gas from UAH 1,590 per 1,000 cubic meters to 4,8 thousand, that is 3,2 times more!

Instead of accumulating natural gas and re-exporting it to the EU, earning superprofits on winter sales, we are forced, on the contrary, to urgently buy super-expensive natural gas in the gas hubs in Europe, receiving superlosses, because the price there in winter often exceeds 1-1.2 thousand dollars per cubic meter. And all announced gas market reforms so far have not led to the emergence of an effective market mechanism and the opening of the market for hundreds of independent traders. Not to mention the infrastructure, which has remained in the management of the monopoly oligarch.

We could become a country-hub, but gradually we are turning into a country-black hole, in which all our potential opportunities for further development are irretrievably disappearing.

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