Weekly analytical report October 27 – November 2, 2014
1. There is a continued trend in the EU of refusing from pro-Russian energy projects. By the end of the month, the EU evaluates the impact of imposed sanctions and is not going to review them, continuing this policy, while Western companies operating in Russia are still waiting for clarifications of the EU sanctions. The UK rejected the expansion of energy projects with Russia, despite threat of disruptions in gas supply, Romania refused to use the South Stream, consumers in Poland buy more German gas, and the Baltic states continue integration with the European energy market. The launch of the LNG terminal in Lithuania became a significant contribution to energy security of the region. Also, the European Commission again postponed a decision on the OPAL pipeline to the beginning of 2015. Meanwhile, Slovakia and Bulgaria held negotiations with Russia to resume gas supplies which have been unilaterally reduced before. On the level of individual countries, there is a continued lobby for the South Stream. Hungary expressed the willingness to start implementing the South Stream project, which coincided with Gazprom having injected additional gas volumes in the local storages. The President of Austria also joined the campaign for the South Stream construction.
2. In the search for alternatives to Russian supplies, Europe explores remote gas markets, while Russian energy companies strengthen the struggle for state support. The head of DG Energy of the European Commission D.Ristori said that Europe is interested in the supplies of Australian LNG. Meanwhile, the Australian "greens", in order to bring the country to the EU level, initiated amendments to the law on corporations, so that extractive companies have to disclose payments of over 100 thousand USD. Based on the forecast that North African countries, including Algeria and Libya, could provide Europe with half of the gas currently supplied by Russia, Enel has signed two contracts for exploration in Algeria. According to the IEA forecast, Mozambique, Nigeria, Angola and Tanzania also have a significant potential and by 2040 will produce more gas than Russia. Experts also predict that gas expors from Iran to the EU can start in 5 years. Meanwhile, the Russian company Rosneft reported a fall in net profit by 37% and put forward a number of proposals to the leadership of the country, among them - unprecedented concessions in the form of incentives, financial support and tenders. Meanwhile, Rosneft has denied the idea of 100% prepayment for gas in Europe, calling it a provocation. The EU long-term plans to develop renewable energy faced criticism due to the mismatch to the expected economic growth. Business associations have expressed dissatisfaction with the European Council decision to establish the EU-wide target of 27% RES in final consumption by 2030, as they believe it is too low and due to the lack of national goals. Meanwhile, the UK – which defended the freedom of strategy-building in the field of DiXi Group, 2014 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
renewables – was challenged with the threat of electricity supply disruption due to the lack of generating capacity, while British scientists are working to improve conventional power generation – a boiler which can generate additional electricity and an incandescent lamp which can light after switching off electricity. Meanwhile, the Bloomberg New Energy Finance report shows that 55 emerging markets develop "green" energy projects almost twice faster than the advanced countries. At the same time, according to the study of Ecofys, the cheapest energy source is coastal wind power with the cost of about 133 USD/MWh, while the cost of gas and coal reaches 208 and 295 USD/MWh respectively.
3. Acting in the conditions of mutual distrust during the trilateral negotiations, Ukraine, Russia and the EU seek for safeguards to prevent risks. The Commissioner G.Oettinger did not exclude that Ukraine could not fulfill its transit obligations, and the German Chancellor A.Merkel spoke on the possible disruption of reverse gas supply to Ukraine if the EU will need more gas in winter; some media interpreted this position as a pressure on the Ukrainian party. The latter was looking for safeguards to prevent Russia from changing the agreements: the European Commission has agreed to provide a guarantee of the negotiated gas price; according to media reports, the corresponding letter was sent to the President P.Poroshenko from the President of the European Commission J.M.Barroso. The last round of talks has involved highest officials of Ukraine and the West. Negotiations were held in two stages (with consent to the agreements from the governments) and on several levels – before the talks, PM A.Yatsenyuk discussed the gas issue with the Chancellor A.Merkel and the U.S. Vice President J.Biden; along with delegations meetings, there were phone calls between the President P.Poroshenko and the President of the European Commission J.M.Barroso. Results of the negotiations are rather fixing the situation than creating the conditions for further integration of Ukraine to the EU. Prior to another round of negotiations, both Russia and Ukraine expressed interest to sign a final document after the meeting. Following the talks, the addendum to the gas contract has been signed, with guaranteed security of gas supplies to the EU. Under the agreement, Ukraine will have to pay 3.1 bln USD in two tranches by the end of the year (1.45 bln USD - for supply in November-December 2013, 1.65 bln USD - for supply in April-June 2014, the cost is calculated at 268 USD/tcm). Also, the agreement allows Ukraine to purchase additional 4 bcm of gas for 378 USD/tcm by the end of the year and 365 USD/tcm in the first quarter of 2015, with the possibility to increase the volumes to 7 bcm. The new price is calculated according to the contract formula with the 100 USD discount by the decision of the Russian government. The "take or pay" clause shall not apply in this period. The financing of the agreement is 4.6 bln. USD which includes the already allocated funds and funds to receive from the IMF and the EU. According to the Russian minister A.Novak, the gas price in summer was not discussed during the negotiations. The "winter package" has no such provision as the opportunity to change the sale point of Russian gas to Ukraine’s eastern borders, which has been advocated by the Ukrainian party. All the parties confirm their readiness to implement the agreements. The Russian government issued the order on the 100 USD gas discount and promised to send a bill after receiving from Ukraine the first tranche of 1.4 bln USD. The Ukrainian government confirmed the readiness to proceed with the payment as soon as possible. Russia is ready to resume gas DiXi Group, 2014 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
supply within 48 hours, but Ukraine has to make a 760 mln USD prepayment in November, and make the same prepayment in December. The Minister Y.Prodan confirmed that the government plans to import 4 bcm of Russian gas by the end of the year; part of the funds can be allocated from grants and loans to be provided by the EU, and the next tranche of the stand-by loan can be provide by the IMF in 2015. Meanwhile, within 9 months of the year, Ukraine has reduced gas transit by almost 20%, to 50 bcm, losses of Ukrtransgaz in this period amounted to almost 800 mln UAH.
4. Discussions continue on the necessary reforms to be performed by the new coalition and government. The coalition talks between the parties-winners of the recent elections are not focusing on certain positions, although the media report on the change of the Ministry of Energy and Coal Industry management, naming specific nominees; instead, PM A.Yatsenyuk called for public debates on the candidates for ministerial positions. The draft coalition agreement, proposed by the Petro Poroshenko Bloc, refers to a series of reforms: in particular, transition to direct coal sales contracts with the liquidation of the SOE "Coal of Ukraine", cancellation of cross-subsidies on gas and electricity markets, establishment of a single wholesale gas price for all consumers. Meanwhile, A.Yatsenyuk instructed the Ministry of Energy and Coal Industry and Naftogaz to finalize terms of the tender to attract investors to the gas transmission system and gas storages within the next week. Experts emphasize that the key principles of reform should be increased transparency, priority of market tools, and cooperation with the stakeholders – business, civil society. Ukraine seeks opportunities for expanding the potential sources of gas, while simultaneously reducing its consumption. Ukraine reduces gas consumption both within 9 months of the year (by 16.6%) and in September (by 31.3%). Against this background, the government is looking for opportunities to diversify supplies, particularly considers LNG from the U.S. At the same time, Ukrainian companies point to significant reserves of unconventional gas in Ukraine. Politicians can make the diversification to an obligation, securing in the coalition agreement a target to limit gas imports from one source to 30% and reducing the subsoil fee for private extractive companies to the same percent.
5. With the start of the heating season, its level of problems has not decreased. After the beginning of heat supply, gas reserves started to decline, as reflected by the European gas storage operators (GSE) data. Despite the fact that in Kyiv almost all the residential buildings have been connected to heat supply, the Kyiv City State Administration urged Kyivenergo to quickly fix all network failures, and the residents of Kyiv – not to use a large number of household appliances at the same time. Kyivenergo plans to substitute 0.4 bcm of gas for CHPs with fuel oil, where – the media report – some players of the oil market can make a fortune. Meanwhile, the Ministry of Regional Development will send mobile task forces to the regions, in order to check the actual status of heating. In general, public debt for housing and utility services slightly increased in September – up to 11.209 bln UAH.
6. The favorable situation on the oil market is not yet reflected on the public finances. Brent crude oil is trading around 86 USD/bbl; the key price factors are the dynamics of the OPEC production and the U.S. statistical indicators. Also, Iran announced its intention to DiXi Group, 2014 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
increase oil production 1.5 times. Meanwhile, in Ukraine, experts observe a slowdown in reduction of retail fuel prices. Also, Ukrnafta, with 764 mln UAH net profits in the first 9 months of the year, has a 1.4 bln UAH debt of rent payments, which forces fiscal authorities to act.
7. Events in the eastern Ukraine continue to complicate the situation in the coal industry. According to the Minister of Energy Y.Prodan, 83 of total 150 Ukrainian mines are controlled by the terrorists, who demand from the miners to reach break-even levels. Against this background, coal production fell in September by a half, and coal reserves at the TPPs decreased by 100 thousand tones just in a week. Partly, this problem will be sold by coal imports from South Africa, with the third shipment expected on November 8. Due to the crisis, energy companies of the businessman R.Akhmetov announced a tender to attract loans totaling 1.3 bln UAH for payments to Energorynok (wholesale market operator). In general, the coal deficit has led not only to disruptions of power supply, but also to reduction of electricity exports by 6% over the last 9 months.
8. Ukraine negotiates with the European partners on construction and supply of equipment for NPPs. Energoatom, which reported net loss in Q1-Q3 at almost 4 bln UAH, and Czech-based Skoda JS signed a memorandum on construction of new reactor units in Ukraine, and an agreement for supplying equipment for the Zaporizhzhia NPP. However, environmental NGOs argue that it will be actually Russia to complete the Khmelnytskyi NPP units 3 and 4, as Skoda JS is the subsidiary of Russian corporation OMZ.
DiXi Group, 2014 Energy information â—? Analysis â—? Consulting www.ua-energy.org/en author@dixigroup.org