Weekly analytical report: July 8 - 14, 2013

Weekly analytical report July 8 – 14, 2013

1. Expanding gas supply from the EU, Ukraine has not yet adopted the approach of European companies to negotiations. In the first half of the year, Ukraine reduced gas imports from Russia by 35.2%, and more than doubled imports from Poland and Hungary in June. According to the Energy Minister E.Stavytskyi, the European Commission will make a legal examination of gas exports via Slovakia, while experts doubt the reliability of Slovakia on the possible reverse supply to Ukraine. Because of the decision of Gazprom to stop the advance payments for transit to Naftogaz, the Fitch agency assumes interruptions of the gas supply. At the same time, another round of talks in Sochi has not yield specific results, although the Prime Minister M.Azarov announced advancement in a number of issues.

Instead, following the decision of the arbitration, Gazprom will amend the contract with the German RWE which argued on the expected change in the gas pricing system.

2. In the matter of unconventional gas development, the state continues dialogue with investors but is not paying enough attention to informing the public. Members of the delegation of MPs and environmentalists reported about the impressions from shale gas production in the U.S. and the economic side of the process. However, the Kharkiv District Administrative Court received a lawsuit to cancel the decision of the Kharkiv Regional Council on the approval of the draft PSA with Shell, which is considered by the media as a risk. The company itself refutes the myths on the started development of the Yuzivska field, and during a meeting with the Prime Minister M.Azarov was invited to produce gas from conventional and depleted fields. Experts of the Kyiv Unconventional Gas Institute (project of the DiXi Group analytical center) indicated a low level of awareness raising on the part of the state, and also shared some international experience of responsible shale gas production.

At the same time, activization of extractive projects can decline due to the lack of transparency and non-market initiatives of the government. The Naftogaz NJSC has discovered a new oil field (Pivdenno-Runovschynske) in the Poltava region, and its minimum stocks are estimated at 12.8 mln tonnes. The JKX Oil&Gas company plans to invest 50 mln USD in the Ukrainian assets. Experts say that the most promising source of hydrocarbons is the Black Sea shelf. At the meeting with the representatives of ExxonMobil and the Energy Minister, the parties discussed cooperation in the development of the Skifska field and its potential. At the same time, representatives of extractive companies criticized the government's initiative for storing 50% of produced gas in the underground facilities. According to media reports, Kuwait Energy Company sells its oil and gas business in Ukraine, without giving any reasons. Against this background, the state companies are concealing the information on public procurement, and the results of the selection of exhanges for energy auctions are disputed in the court.

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

3. On the background of advancement of the Southern Gas Corridor, other pipeline projects are becoming active in the media space. It is expected that the share of the Shah Deniz consortium members in the TAP project will be distributed as follows: SOCAR and BP will get 20%, Total – 10%. Instead Gazprom, which increased exports in July, said that the new government in Bulgaria supports the South Stream project. Meanwhile, the TAPI project countries have established a consortium for the construction of the gas pipeline, and Turkmenistan and Afghanistan signed a gas supply contract. The U.S. State Department also supported the investment attractiveness of the project.

4. While global oil prices increase, part of the Ukrainian fuel market became outlawed – by the fault of the government. Last week, the price of oil on world markets mostly increased, and a little decreased later on. In particular, the important factors were the U.S. statistics and events in Egypt, where largest oil companies withdrew their staff, and a reduced production in Norway. The United States increased the price forecast for 2013, while the OPEC expects a growth of production in Russia which broke a 25-year record in June. In Ukraine, fuel prices were stable, although there were some sharp fluctuations in the value of liquefied gas in the Kyiv region.

Experts urge the government to immediately adopt a new technical regulation for fuel – in order to "legalize" petroleum and diesel fuel for 54% of vehicles in Ukraine. For example, the Shebelynka refinery, which had to stop operation because of the ban on selling these oil products, was conveted to minimal capacity. Consideration also require the import of motor oils and lubricants, which decreased due to the introduction of environmental duty, as well as the facts of undervaluating the oil products imported. Several MPs appealed to the Prosecutor General demanding to check the possible plot on fuel smuggling between the Minister of Income and Charges O.Klymenko and the businessman S.Kurchenko. Meanwhile, journalists caught the latter violating traffic rules.

5. Renewable energy will become closer and more understandable for the consumer.

The State Agency of Energy Efficiency and Energy Saving together with INOGATE will create an interactive map of "green" energy generation and the National Energy Regulatory Commission obliged the suppliers to inform consumers about the origin of electricity (the structure of primary sources). Noteworthy, that Ukraine significantly increased solar energy capacity (by 51.4%) year-to-date, which stimulates investment in the sector: Star Group (Slovakia) completed the first section of a 120 MW solar park, and the company Akvanova Gidroresurs received a license to produce electricity.

6. Another trade dispute is looming on the coal market – this time because of exports.

Ukraine increased coal imports by 2.9% (in value) year-to-date, while imports of coking coal decreased by 6%, resulting in coke production falling by 9.8%. Thus, the quota set by the government is exhausted more than by a third (34.43%). Against this background, Russia announced its intention to introduce special duties for the Ukrainian coal, among other goods.

The Ministry of Economic Development has promised not to let it happen. Meanwhile, the government started the procedure of liquidating 6 unprofitable state-owned mines and even created a council of social support to the employees of companies being liquidated.

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

7. The development of state and municipal energy efficiency projects can slow down because of several obstacles. The government considered the issue of specifying the funding of the State Energy Efficiency Target Program in 2013. The Cabinet of Ministers plans to buy 280 energy-saving trolleybuses (domestic production), and the Ministry of Regional Development, Construction and Housing expects to get 580 mln UAH for insulation programs in the residential sector. The Crimean Council of Ministers approved a target program to install LED lighting, Zhitomir will attract the NEFCO loan for modernization of public buildings, 38 boilers will be converted to biomass briquettes in the Kharkiv region, and a project to replace heating system was launched in Zelenodolsk (Dnipropetrovsk region) involving multiple donors. Along with this, the utility companies in Ternopil complain about the delay in receiving state guarantees for loans, and in Sumy the companies suspended works because of not received payments. Also, a draft law was registered in the Verkhovna Rada proposing to abolish tax and customs incentives for imports of energy-saving equipment.

8. It seems that the government is preparing the electricity market for new private players. The Cabinet of Ministers approved the tender conditions for selling 60.773% of Donbasenergo at a starting price of 641 mln UAH, which the State Property Fund management called "tough". However, the media believe that DTEK holding is the only possible buyer; however, it showed no interest in the asset. Instead, the company of R.Akhmetov focused on exports, purchaising 750 MW of export capacity in August and having registered a trading company in Switzerland. Against this background, the Ministry of Energy and Coal Industry established a working group to organize the information collection necessary for the analysis of energy companies in market conditions.

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