Presentation by Sergiy Konovets

Ukraine’s gas market: opening for investments

March 2016 www.naftogaz-europe.com www.naftogaz.com @NaftogazUkraine

Ukraine: one of Europe’s top gas markets Notable position in each segment of gas business by gas volumes transmitted (100+ bcm)

#1

by Russian gas volumes transmitted to EU (67 bcm) by underground storage capacity (31 bcm) by gas volumes stored (17 bcm)

Top 3

by reserves-to-production ratio (30+) by proven conventional gas reserves (640 bcm)

Top 5

by gas production (~20 bcm) by gas consumption (~34 bcm) 2

Key achievements in 2015

Diversification and security of supply

• 2.4 times reduction of gas imports from Russia • Stable gas supplies for Ukraine and the EU

Gas market reform

• 3EP-compliant gas market law • Deregulation of commercial market • 7.5 times growth in private imports

Operating efficiency

Transparency and accountability

• Operating profitability – first in 6 years

• Corporate governance reform launched

• Improved debt collection and revenues

• First detailed annual report

• Largest taxpayer

• Procurement system reform

3

Cooperation with EU for security of supply Ukraine has effectively diversified its gas imports 2013

2014

Russia

92%

74%

2015 37%

Europe

7.5

times more gas imported by private companies in 2015 (1.1 bcm)

10+

private importers and direct buyers, incl.

ENGIE (GDF)/ERU, ArcelorMittal

4

Gas market reform Implementing newest EU legislation in Ukraine April 2015 June 2015

• Adoption of 3EP-compliant gas market law

4Q 2015

• Adoption of 3EP-compliant secondary legislation: network codes, rules of supply, tariffs, SoS rules, etc.

4Q 2015

• Market opening and adoption of public service obligations protecting vulnerable customers

December 2015

• Adoption of RAB-based entry/exit tariffs

• First standard European interconnection agreement signed by Ukrtransgaz with Hungary

Janez Kopač Energy Community Secretariat

The significance of this law is hardly explainable at this moment. Gas issues are at the centre of the Ukrainian society and politics. This law will substantially change both in a positive way

Operating efficiency New managerial approach and improving regulatory environment • Radical move to market prices for households (on average 4x increase) and direct subsidies • Transparent tendering and procurement procedures to eliminate corruption • Improved payment collection and debt recovery from major financial groups • Improved operating and legal framework

Operating profit* for the first time in 6 years 20

4,5

0

-7,3 -18,8

-20 -40

-25,1

-60

-63,5

-80

-100

2015

-90 2014

2013

Operating profit/loss, UAHbn Net loss, UAHbn *non-consolidated

6

Corporate governance reform: OECD standards Old structure

Approved structure

Government, ministries

Cabinet of Ministers (tbc) Independent supervisory board

Naftogaz executive board

Naftogaz executive board

• Political agenda vs. economic rationale

• Business-focused strategy in the interests of ultimate shareholders

• Vague segregation of authority

• Clear responsibility, improved control

• Nomination and remuneration issues

• Merit-based HR policy and market level remuneration

Transparency and accountability First annual report explaining strategy, market conditions and results

Transparency and accountability Improving efficiency and building trust through transparency

• Successful cooperation with EBRD, EIB, IFC; constant monitoring by IMF

• Eliminating opportunities for corruption in procurement by Prozorro and new tendering rules • Boosting transparency of operations and information quality (audits, revaluations, regular reporting)

Philip Bennett EBRD

By providing this loan to Naftogaz, we are not only helping to strengthen energy security in Ukraine but we also foster the reform agenda in the energy sector making it more open, transparent and efficient

Investment opportunities in Ukraine’s gas industry Transmission Co-manage Europe’s largest GTS Storage Benefit from Europe’s largest UGS



Trading and supply Sell directly in Europe’s top 5 market Upstream Develop Europe’s top 3 gas reserves Watch https://www.youtube.com/watch?v=DF6Sr2KTVuA 10

UGV intends to produce 20 bcm/y by 2020 Estimated US$3bn investment program till 2020 21

20.0

Planned gas production levels, bcm/y

18.4 18

16.5

15 14.5

14.8

12

0

2016

2017

Intensification Tight gas

2018

2019

Exploration on new fields Exploration on existing fields

2020 Other Base 11

Potential partners: up to 49% share in new companies Ukraine

EU/US

Cabinet of Ministers through Naftogaz or

Majority interest

Transmission SO

Minority interest

Partner

State Property Fund

Majority interest

Storage SO

Minority interest

Partner

Ownership EU and US companies invited as partners in transmission and storage business

Governance Prior condition: corporate governance reform based on OECD standards

TSO ownership unbundling in compliance with 3rd EP

Independent and fully empowered boards for the unbundled operators

State retains asset ownership

12

Wrap-up Ukraine progresses in reforming its gas market and Naftogaz: Security of supply and gas market reform

Operating efficiency

Transparency and accountability

Reform opens unseen investment opportunities in: Gas upstream (privatization)

Gas transmission (TSO unbundling and partial privatization)

Gas storage (partial/full privatization, individual strategy per asset)

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