Weekly analytical report: March 4 - 10, 2013

Weekly analytical report March 4 – 10, 2013

1. Among the competing projects of the Southern Gas Corridor, the advantage of Nabucco becomes noticeable. According to the former U.S. Ambassador to Azerbaijan M.Bryza, the EU is favouring the Nabucco West project to supply gas to Europe. The Nabucco consortium also signed a memorandum of understanding and cooperation with the TANAP project, which recently included a new shareholder - the State Oil Fund of Azerbaijan.

2. Negotiations with Russia on gas prices stay in limbo. During the visit of the President V.Yanukovych to Moscow, it was expected to discuss gas pricing and volumes of imports, namely to negotiate lower price as soon as possible. According to the Prime Minister M.Azarov, in that case the IMF could reconsider the preconditions for renewed financial assistance to Ukraine. As a result, the parties announced only the official statement, the Vice Prime Minister Y.Boyko expressed satisfaction with the talks, and the Ministry of Foreign Affairs said that the search for optimal price formula continues. Russian experts expressed doubts about the successful ratification of possible agreements on the bilateral consortium to manage the Ukrainian gas transportation system. According to Ukrainian experts, Russia will dictate its conditions while creating the consortium in order to get full control over the GTS.

3. Ukraine can benefit from its membership in the Energy Community when fulfills its obligations and refuses from political claims. According to the EU Commissioner for Energy G.Oettinger, Brussels is satisfied with Ukraine's progress in meeting the commitments.

At the same time, given the intentions of Kyiv to increase electricity exports, the Energy Community Secretariat requires to harmonize the capacity allocation auction rules with those of the Community. Also, the organization reported that Ukraine did not submit formal complaints regarding violation of the national interests by the South Stream project. According to media reports, the government argues it had repeatedly written to the Energy Community on this subject.

4. The government actively works to attract investment in gas production but does not pay attention to transparency issues. In 2013, the Ministry of Environment and Natural Resources will announce a new round of tenders for the development of gas fields. The Minister O.Proskuriakov, who is on visit to Canada for talks with investors, promised that a new edition of the Subsoil Code will be adopted in Q2. However, openness is demonstrated mainly by the companies: Shell in Ukraine which plans to drill 15 exploration wells for tight gas will launch a hotline to inform the public about unconventional gas. Meanwhile, the head of the Verkhovna Rada Committee for Environmental Policy I.Sekh announced that the government DiXi Group, 2013 Energy information â—? Analysis â—? Consulting www.ua-energy.org/en author@dixigroup.org

classified the production sharing agreement with Shell, and addressed with the respective application to the Prosecutor General.

Despite the expected liberalization of gas market, concentration of assets by big businesses continues. The Vice Prime Minister Y.Boyko said that the Naftogaz of Ukraine NJSC will be reformed in the nearest time. According to experts, demonopolization will promote the development of small operators, and traders are already seeking opportunities to enter foreign markets. However, in practice, large financial-industrial groups are buying up extractive and distribution assets in order to supply gas for their enterprises. Gaztek company, associated with the businessman D.Firtash, concentrated shares of Vinnytsiagaz, and SCM holding of R.Akhmetov purchased 25% of Naftogazvydobuvannya.

5. Oil consumption drifting towards Asian markets can be seen on the global scale.

Despite a slight increase due to suspended supply via the North Sea, world oil prices declined on the background of statistics from China and the U.S. Fuel got cheaper at American filling stations, while the Celestial Empire overtook the U.S. in oil imports. According to media reports, Chinese companies will invest billions in the U.S. shale oil in order to meet the growing demand. Against this background, Russia changed the procedure of monitoring Urals crude prices and cut supplies to Belarus which continues negotiations on the issue.

In Ukraine, there is a redistribution of oil refining and retail markets – in favour of one of the financial-industrial groups. Lukoil sold 99.6% of the Odessa refinery to East European Fuel and Energy Company – the group managed by a businessman S.Kurchenko. According to investigative journalists, his other company "Gas Ukraine 2020" is involved in large-scale tax evasion schemes. Despite official reports on the fight against illegal pipelines, other oil market players claim about fuel smuggling and monopolization. According to media reports, the scheme of duty-free imports will be changed in favour of the use of the Odessa refinery.

The situation of other oil refining assets is also problematic: the government tries to restart the Lysychansk refinery (still unsuccessfully), and the Kremenchug refinery was accused of tax fraud. Meanwhile, the State Inspection on Consumer Rights Protection fined the Ukrnafta PJSC 190 mln UAH for selling low-quality fuel. According to unofficial information, the company considers the fine unreasonable. At the same time, according to the media, several managers of oil direction have left the Naftogaz of Ukraine NJSC. Experts do not exclude the political background of the case and assume that Ukrnafta can move under control of Mr. Kurchenko’s holding.

6. Despite different global forecasts, renewable energy in Ukraine remains attractive for investment. According to Shell, by 2030 gas will be the leading energy source in the world and solar energy will prevail only by 2060. However, according to the report of the World Economic Forum, the structure of global energy consumption will not change at least by 2030.

Meanwhile, Ukraine experiences the rapid development of "green" projects. According to the Ukrainian Wind Energy Association, wind power accounted for 1.24% of the total energy supply in the last year, also due to the growth of small-scale installations. In 2013, up to 200250 MW of new wind energy capacity is expected. Ivano-Frankivsk Regional State Administration lifted its ban on the construction of small hydro power plants.

DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

Along with the promotion of "green" energy, the government should take measures to stabilize prices. According to experts, growth of RES installed capacity will increase the cost of electricity. The National Energy Regulatory Commission has raised tariffs for consumers of both voltage classes, although the feed-in tariffs did not change. One of the solutions is to encourage energy efficiency: the Kharkiv region plans to raise 250,000 EUR for energy efficiency projects, and the Lviv region will implement the local energy efficiency program.

7. Players of the electricity market are waiting for sale of state-owned assets. The Cabinet of Ministers has decided to sell all state shares of 6 regional electicity supply companies (oblenergos). According to media reports, review of the privatization strategy is the position of the President V.Yanukovych on market liberalization which will involve existing big players. One of them - VS Energy - will hold an extraordinary shareholders’ meeting of the AES Kyivoblenergo recently purchased from AES Corporation.

8. Government should find a balanced approach to the use of funds for strengthening nuclear safety if they will be allocated, taking into account the positions of other stakeholders. On March 12, the EBRD Board of Directors will decide on the allocation of the 300 mln EUR loan for the implementation of the Complex (Consolidated) NPPs Safety Upgrade Programme. In turn, the State Nuclear Regulatory Inspectorate presented an action plan to improve nuclear safety. At the same time, according to experts, Energoatom NNEGC will continue to purchase Westinghouse fuel despite some technical shortcomings. NGOs and experts criticize plans to build Khmelnytskyi NPP units 3 and 4, as well as point to other problematic issues of the industry.

DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org