Weekly analytical report: January 10 - 20, 2013

Weekly analytical report January 10 – 20, 2013

1. The projects to supply Caspian gas to Europe received a new impetus. Shareholders of the Nabucco project reached agreement with the Shah Deniz consortium members on financial aspects and received political support from stakeholders. The pipeline section in Bulgaria will be constructed from the middle of 2013. Switzerland expressed support for the TAP project, and the cost of the TANAP pipeline can increase by 3 bln USD. At the same time, Russia continues to promote competing projects. Serbia plans to give "national status" to the South Stream, while Ukraine calls the EU to refuse preferences for the project. The sale of Greek DEPA, which is claimed by Gazprom, could contribute to its development. Czech Republic has put into operation the GAZELLE pipeline – a continued link of the Nord Stream.

Together with the reduction in European gas demand, it affects the load of the Ukrainian gas transportation system. The Energy Minister E.Stavytskyi hopes to keep gas transit at the level of last year, although the media indicate a reduction in external transportation. According to UkrTransGas, transit decreased by 15% in 2012. Experts argue that Ukraine will lose 10-15% of the revenues, but also because of less demand for Russian gas in Europe.

2. Situation on European markets is favorable for reviewing gas prices, but Ukraine has not used such an opportunity. Competition of gas suppliers increases the pressure on Gazprom, allowing European companies to demand discounts on Russian gas. Against this background, despite the negotiations with Ukraine on new cooperation formats in gas sector, Gazprom sees no reason to review prices. At the same time, Ukraine reduces imports of Russian gas: according to various estimates, in 2012 the Naftogaz NJSC bought from 24.4 bcm (State Statistics Service) to 24.8 bcm (Dragon Capital) and 25.2 bcm (company’s quarterly data). According to Gazprom’s data, which includes supplies for Ostchem Holding, Ukraine imported 33 bcm of gas.

Projects to diversify supplies do not give the expected results. Last year, German RWE sold 56 mcm of gas to the Naftogaz NJSC, and the government is working on two additional routes for reverse gas supplies from Europe. Also, attempts are made to restart the national project "LNG-terminal". Despite expectations of experts, prosecutors did not investigate the situation, and the Head of the State Agency for Investment and National Projects V.Kaskiv has been reprimanded. At the same time, the agency rejected PR services to improve the image of the project and expects new provocations. According to the Energy Minister E.Stavytskyi, terms and participants of the LNG-terminal will be determined by the end of January, and the system of signing agreements should be improved.

DiXi Group, 2012 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

3. Countries encouraging own production weaken the position of Gazprom in Europe.

Norway signed the agreement with Iceland to explore hydrocarbons, promises new discoveries offshore and records high investors’ interest. It makes possible for the media to draw conclusions that Norwegian gas replaces Russian one in Europe, especially against the background of decreasing net profit of Gazprom. The Black Sea region countries also did not lag behind the trends: Bulgaria prepares a tender to develop resources offshore and plans to explore oil and gas; Turkey, which is concerned about dependence on gas imports and record consumption, negotiates with Qatar on a LNG-terminal construction and drills more wells than anyone in Europe.

In Ukraine instead, despite declarations of increasing domestic production, the industry is stagnant on the background of corruption scandals. According to media sources in the Ministry of Eenrgy and Coal Industry, gas production grew by 0.4% last year, although the State Statistics Service indicate a decline of 1.1%. Oil production in 2012 decreased by 1.4%.

Meanwhile, the second jack-up drilling rig, which is expected to start working on the Odeske gas field, arrived in Ukraine. Against this background, journalist investigations are revealing new details of the "Boyko rigs" purchase, including the relationship to international money laundering schemes and fake contracts with other Ukrainian companies.

4. Unconventional gas market develops not only in the U.S., but also in Europe where some countries demonstrate activity. Report of the New York State government confirmed that the development of shale gas is safe, and the State of Colorado implemented more strict regulation of extraction. The U.S. Energy Information Administration predicts a sharp reduction in crude oil imports already in the next 2 years due to active production of unconventional hydrocarbons. Analysis of the BP company shows that by 2030 shale oil and gas will play an important role in meeting the global demand. Experts believe that the EU should respond to changes in the global market. Meanwhile, Poland is preparing to adopt the shale gas law, and in Lithuania only Chevron applied for shale gas exploration.

In Ukraine, the new Energy Minister E.Stavytskyi met with the U.S. Ambassador J.Tefft and discussed the issue of concluding production sharing agreement with the investors. Next week, both Donetsk and Kharkiv regional councils approved the draft PSA with Shell and Nadra Yuzivska LLC. The All-Ukrainian Union "Svoboda" has promised to appeal the decision of the Kharkiv Regional Council and registered a draft resolution on parliamentary hearings concerning the environmental aspects of shale gas extraction. The new Head of the State Service for Geology and Mineral Resources V.Dudinov, which is believed to continue the strategy of attracting investors, will contribute to approaching the PSAs signing ceremony, as foreign media report. The Minister of Environment O.Proskuryakov said that the PSA on Yuzivska field will be signed by the end of this month, and Shell company will use Ukrainian pipes for drilling operations.

5. Despite some decrease in world prices, oil demand remains stable and will even increase. Earlier this year, oil prices mainly decreased against data from the Eurozone and the U.S. as well as the OPEC statements, but have slightly risen under the influence of Chinese statistics. The OPEC, trying to keep the prices on a high level, is not going to cut DiXi Group, 2012 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

investments and expects growth in demand. Increasing world consumption is predicted by both the U.S. Department of Energy and the IEA. In the Customs Union, the schedule of transition to higher quality of fuel standards was established. Russia reached agreement with Belarus and will increase export duty.

Ukrainian oil industry entered the new year with old problems. The Antimonopoly Committee has provided market operators with binding recommendations concerning prices, which resulted in fuel price reduction, which continues further. Meanwhile, according to media reports, the Deputy Prime Minister Y.Boyko initiated the introduction of import duties on oil products. The former head of the State Customs Service I.Kaletnik denied any unlawful delays in customs processing of oil products – 8.8 bln USD of total value imported in 2012. Given the 47% reduction of oil refining last year, the Prime Minister M.Azarov wants to revive the industry. However, reality shows that Ukrainian companies are more profitable while investing in refineries abroad. Fuel quality at filling stations, including the "arctic" diesel, remains unsatisfactory. The Verkhovna Rada will reconsider the draft law on oil products labeling, aimed at regulating the situation.

6. In the issue of tariffs for housing and utility services, the position of the Ukrainian government is inconsistent and contrary to its actions. According to media reports, utility tariffs can increase by a third. This information was denied by the National Commission for the Regulation of Utility Services, the National Energy Regulatory Commission and the Cabinet of Ministers itself. Meanwhile, the procedure of forming tariffs for heat and hot water supply was modified, and further changes provide for governmental approval of the tariffs and calculation of the tariff difference every quarter. The final confirmation was the statement of the Prime Minister M.Azarov on differentiated increase of utility tariffs to reach a compromise with the IMF.

7. Government policy has led to oversupply on the coal market. The Energy Minister E.Stavytskyi said that coal production in 2012 has increased by 10-11%, although the media with reference to statistical data show the growth of only 4.8%. Also, the government plans to begin construction of a coal gasification plant in June this year. But, despite the reduction of reserves at thermal power plants, total coal reserves increased by 30%. Problems with sales forced miners of the Lviv Coal Company to picket the Presidential Administration and require generation companies to purchase their coal, and they can also lead the Zhdanivska mine to a standstill. This applies to both public and private companies: Coal of Ukraine LLC was declared bankrupt, Makiivvugillia cut production by 23%, and Sadova Group sales decreased 2.2 times. Mass media point to possible difficulties in the privatization of 13 coal mines, which is scheduled for March.

An example of solving social problems by means of force became the confrontation between the Trade Union of Sverdlovsk and the leadership of Chervonyi Partyzan mine, which belongs to DTEK. On January 10, trade union members occupied the director’s office and put forward a number of requirements to prevent mass layoffs. Actions of the miners were criticized by DTEK, the official trade union of the mine and the Independent Trade Union of Miners. Some political forces joined the protesters, and after the meeting with the head of Lugansk Regional State Administration, it was announced solutions were found for about a DiXi Group, 2012 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

third of the requirements. DTEK confirmed the commitment of providing high social standards, and the protesters themselves believe they prevented mass layoffs.

8. Improving NPP safety is among the priorities of the global nuclear industry. In the U.S., systems to control the automation systems of two large NPPs were infected with software viruses. Lithuanian politicians pay attention to financing of the advertising campaign of the Visaginas NPP project. Safety is one of the main factors of choosing the technology for second NPP in Turkey, which is subject of interest for French companies. In Ukraine, the President V.Yanukovych instructed to create a governmental delegation for negotisations with the EBRD and Euratom on the project to improve NPP safety. The State Nuclear Regulatory Inspectorate is preparing a new edition of the nuclear safety requirements taking into account consequences of the Fukushima disaster. The key indicator of implementing safety requirements will be the prolongation of the suspended reactor unit at the South Ukrainian NPP, as well as consideration of all the standards while constructing units at the Khmelnytskyi NPP, which has already raised doubts among the public, as well as the Interim Spent Nuclear Fuel Storage Facility.

DiXi Group, 2012 Energy information â—? Analysis â—? Consulting www.ua-energy.org/en author@dixigroup.org