Weekly analytical report: November 11 - 17, 2013

Weekly analytical report November 11 – 17, 2013

1. Reduced competitiveness and demand turn into crisis for European energy companies. German E.ON and French GDF Suez reported a decrease in earnings due to closure of power stations and asset writedowns, and RWE – according to unofficial data – is planning to cut over 6,000 jobs. Experts indicate that it is unprofitable to build new coal- and gas-fired generation in Europe. The IEA notes that the problems with industrial competitiveness are caused by high energy prices in some regions, which may lead to the revision of pricing model in gas contracts. Meanwhile, the EU was urged to decide on energy and climate targets by 2030.

2. Russia's reluctance to renegotiate the gas contracts, which need to be changed since a long time, results in permanent conflicts. Meetings of the presidents V.Yanukovych and V.Putin as well as of Naftogaz and Gazprom CEOs have not yielded concrete results. As the Minister of Energy E.Stavytskyi said, Naftogaz has paid for the October supplies and suspended imports of Russian gas since November as it has already taken 18 bcm of gas, provided by the 2013 balance. At the same time, the government confirmed the adequacy of gas pumped into underground storage facilities for securing stable gas transit to Europe. The Russian party confirmed the suspension of imports, but predicted it would not be long.

Gazprom has indicated the poor dynamics of Ukraine paying the debt, which make it to consider new deferrals of payments, and also the threat of supply disruption. However, in the end of last week Gazprom’s CEO A.Miller announced that Naftogaz has stopped gas withdrawal from underground storage facilities and restored its imports from Russia, and the Russian Prime Minister D.Medvedev – during a telephone conversation with Ukrainian counterpart M.Azarov – drew attention to the fulfilment of contractual obligations on injecting gas into underground storage facilities.

Ukraine’s actions have undermined the position of Gazprom on the European markets.

The first sign was the fall of Gazprom shares on Russian stock exchanges on Monday. The company reported on increased by 15% profits in the first half of 2013, but this was mainly a result of stable consumption in Western Europe. Instead, sales of Russian gas in the postSoviet neighbourhood have fallen by 47% in 2013 Q2. In particular, in the first 9 months of the year, the profits of Gazprom on these markets, predominantly in Ukraine, decreased by 26%.

According to experts, the result of containing the Russian oil&gas expansion will be financial problems of Gazprom which will force it to look for other buyers of gas.

The NJSC "Naftogaz of Ukraine" continues to balance on the verge of its financial opportunities. According to media reports, the company held an exchange transaction on 3.2 bcm of gas in storages with Ostchem, which allowed it to acknowledge only 1.4 bcm imported in October. Also, according to its subsidiary Ukrgazvydobuvannya, the parent holding owes to DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

the company 2.3 bln UAH for the gas for households. Against this backdrop, Naftogaz’s revenues from transit decreased by 1.5%, and the court wrote off its stake in UkrGaz-Energo.

As a result, the losses of Naftogaz – which increased to 10.5 bln UAH in 2013 Q1-3, were covered by the state: the government increased the authorized capital of the company by 10.7 bln UAH.

3. At the same time, there has been an increased activity in getting gas from alternative sources as well as their search. Ukraine doubled gas purchases from Poland, in particular by fulfilment of the DTEK contract. In general, gas imports from the EU tripled in the last week.

Meanwhile, the Prime Minister M.Azarov complained about blockade of the CIS agreement on free access to pipelines, and the Minister of Foreign Affairs K.Gryshchenko emphasized the revitalization of energy cooperation with Azerbaijan, with the EU also hoping for its gas supplies.

The country reduces gas consumption by means of renewable energy and energy efficient technologies. Attempts to reduce the share of gas in energy mix are forcing Ukraine to look for alternative energy resources. Using this approach, in the last three years heating companies managed to reduce gas consumption by 15%. Projects using biomass, energy utilization of which – according to companies – will become mandatory, can attract billion-size investment from the United States. However, society is still not ready to switch to energyefficient technologies, so the experts and civic activists discuss opportunities of their popularization.

4. The intention to reduce air pollution pushes European countries to "shale scenario".

According to Polish Minister of Environment M.Korolec, new technologies for coal-fired plants and production of shale gas will help the country in reducing carbon emissions. The same issue was discussed at the conference during the UN climate talks in Warsaw, where the European officials urged to continue research on shale gas and to make companies reporting on methane emissions at the drilling sites. The issue of dialogue between stakeholders remains urgent – in Poland, Chevron sued the citizens which prevented the company to reach the exploration site.

In Ukraine, companies inform of their activities in the development of shale gas. Shell’s Advisor O.Krykavskyi said the company has not yet conducted a hydraulic fracturing in Ukraine, and Cadogan’s COO A.Schenato promises an ideal model of shale gas production.

Meanwhile, conventional gas production continues to increase – in October, it grew by 6.1% compared with October 2012, and in the first 10 months of 2013 – by 3.4% compared to the same period last year. Production of Chornomornaftogaz in October increased by 4.6% compared to September to 5.2 mcm per day. Private companies also increase production. The government has resolved one of the conflicts by cancelling its order on mandatory injection in the underground storages of 50% gas produced, but there are still conflicts among the companies themselves.

5. Whereas the global oil supply could expand, the Ukrainian government hopes to restore refining industry. Against the background of increasing world oil prices, the market DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

may be entered by new players. In particular, in the U.S., which is predicted to take leadership in oil production by 2015, domestic production exceeded imports. In spring 2014, restoration of oil supplies from the Kashagan field in Kazakhstan is expected. Meanwhile, in Ukraine both oil imports (4.6 times) and processing (by 29%) have fallen. However, the Ministry of Energy and Coal Industry expects that the Lysychansk refinery will resume operation in the first half of 2014. According to media reports, with the launch of the Odessa and Lysychansk refineries the government hopes for additional import of over 10 mt of oil.

6. While electricity market players are preparing for the start of its reform, leading exporters continue to strengthen their positions. In particular, after the liberalization of the market, changes will face both energy generating and supplying companies, and the latter will be subject to incentive-based regulation. Against this background, the Ministry of Energy and Coal Industry will hold negotiations with EdF to increase electricity exports to the EU countries.

DTEK company, which continues to book all the export capacity, predicts the emergence of new players in this market. However, in order to expand export opportunities, it plans to modernize the Dobrotvir TPP and attract loans for reconstruction of the Burshtyn TPP.

7. Cooperation with Russia in the nuclear energy sector became more dynamic. From the Russian side, it was announced that cooperation, including creation of a closed nuclear fuel cycle, will be strengthened in exchange for refusal from the Association Agreement with the EU. Afterwards, Russian corporation TVEL paid its part of the funds to the joint (with Ukraine) nuclear fuel production plant, which has been confirmed. The government of Ukraine has amended the respective program, which enables to start construction of the facility. From his side, the President V.Yanukovych has approved the ratification of the agreement on nuclear materials transportation between Russia and Hungary via Ukrainian territory.

The issue of nuclear safety continues to be a part of the industry development in Ukraine. To increase security, Energoatom NNEGC plans to raise 3.1 bln UAH loans. At the same time, the cost of prolongation of the Rivne NPP Unit 3 operation, where the construction of a power line to utilize full capacity is also important, will amount app. 2 bln UAH. The Cabinet of Ministers pays more attention to the issue, having adopted a resolution on the state supervision over compliance with the nuclear and radiation safety requirements. Against this background, the State Environmental Inspectorate accused the South Ukraine NPP of unauthorized water use and subsequent losses.

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