Weekly analytical report: May 20 - 26, 2013

Weekly analytical report May 20 – 26, 2013

1. Recognizing the absence of a single response to the threats in energy sector, the EU leaders have identified a number of priority directions which the industry should follow.

Before the summit, the EU member states and sectoral associations directed the European Commission to a number of problems: energy subsidies, "destruction" of the sector and the need for policy reassessment, the need to create a "New Era Energy Community" and so on.

Renewable energy was also actively discussed prior to the summit: Germany and the UK have expressed their opposition to the introduction of punitive duties on solar panels from China, and the U.S. announced on their involvement to resolve the dispute. Against this background, there was a discussion of new renewable energy targets by 2030 – the European Commissioner for Energy G.Oettinger urged not to copy the principle of setting goals which existed before, as well as work to achieve already set indicators, and the European Parliament urged the European Commission to propose the 2030 target which shall be mandatory. After the summit, the French president called to develop a joint approach to support renewable energy.

The European Council paid much attention to the discussion of existing problems and threats both to the welfare of the EU citizens and to the industrial competitiveness. The European Commission President J.M.Barroso said there is no single solution of the energy challenges and presented a number of priorities: increasing energy efficiency, completion of the internal energy market, infrastructure development, efficient use of renewable energy and attracting new suppliers from outside. Within each of the priorities, immediate objectives were outlined.

The President of the European Parliament M.Shulz urged to unite efforts and work together to achieve the planned.

2. Despite the approaching deadline to announce the route for transporting Caspian gas to Europe, there is no evident leader in the competition of two projects yet. Last week, the TAP project received most of what his rival Nabucco got in the past: e.g., the European Commission has also made for it an exemption from the legislation on third-party access, and the Azerbaijan's president met with the Prime Minister of Greece. At the same time, supporters of Nabucco project used the European Council summit as an opportunity – 5 EU member states signed a declaration on the potential of the pipeline, and the leaders of some signatory countries supported the project in a speech. Meanwhile, Russia still does not know the final cost of the South Stream offshore part, but started construction of the onshore pipeline infrastructure. The Russians are also not ready for the Gazprom unbundling according to European regulations, so they want to get an exemption.

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

3. Gas producing countries are seeking to expand sales markets and diversify their export risks. On the initiative of Turkmenistan, which seeks to diversify its gas supplies, the UN General Assembly adopted a resolution on stable transit of energy resources. According to Turkmen officials, the country is ready to export gas to Europe and China, and the supergiant Galkynysh field will serve as a resource base. However, the access of Central Asian gas to Europe is difficult, also due to the position of Transneft which recommended the Russian government to refuse from participation in drafting the CIS agreement on free access to the Russian gas and oil transportation systems. In Azerbaijan, the state company SOCAR will borrow more than 20 bln USD for the projects to export gas to Europe. Even Cyprus – despite Turkey's threats – seeks to use its reserves to supply gas to the EU. The new source of energy supply may become the U.S., where the new head of the Department of Energy started review of the analyzes on gas exports, and where another exporting LNG-terminal has been approved. Lithuania is also negotiating supply of American gas, while neighboring Estonia and Finland continue talks on the LNG-terminal.

Meanwhile, Russia has recorded an increase of gas reserves on the background of stable production. Aiming to expand the pool of potential buyers, the Russian government has promised to liberalize the export of liquefied natural gas, but also to control the markets and the volumes of such exports. In addition, the media reported that Gazprom can return to the LNG production project in the Baltic Sea.

4. The payment crisis in heat supply undermines the financial condition of Naftogaz, which adversely affects the macroeconomic indicators. According to experts, heat producers cannot cover their costs because of the low tariff. One of the solutions could be an integrated modernization of municipal heating systems: e.g., in Donetsk region, the Ministry of Regional Development and the EBRD prepare a modernization project worth 31 mln EUR. Another solution – the elimination of cross-subsidies – shall not be in place before the 2015 election, according to industry representatives. Meanwhile, according to unofficial data, the IMF demands to raise the gas tariffs for households by 40%. Against this background, the media report on the draft financial plan of Naftogaz which provides for increased debt.

At the same time, the fate of the controversial draft law on Naftogaz reform remains uncertain. Initially, it was planned for discussion, but later consideration of the draft law was postponed. According to the opposition, the reason was the low support in the parliamentary majority. Meanwhile, the criticism was expressed by the Scientific-Expert Department of the Verkhovna Rada. The experts also stress the need for Naftogaz unbundling according to European regulations, and that the privatization of the gas transportation system can result in its full control by Gazprom. In turn, the EU officials emphasize that Ukraine is not obliged to purchase the gas transmission assets. Against this background, the Permanent Representative of Russia to the EU V.Chizhov said that the GTS modernization requires substantial investment.

5. Ukraine continues to implement a number of projects designed to reduce its dependence on Russian gas, which has impact on the gas balance. In May, it is planned to buy only 760 mcm of gas from Russia as the German one is cheaper – 390 USD/tcm. The DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

Slovak system operator confirmed the test reverse supply to Ukraine. The Minister of Environment and Natural Resources O.Proskuryakov discussed with the head of Turkmengaz restoration of direct supplies to Ukraine, and the President V.Yanukovych instructed to establish a work group on gas-to-coal conversion. Meanwhile, the first facility to produce synthesis gas was put into operation, and experts from the U.S.-based Excelerate Energy started exploration of the Pivdennyi port area in terms of locating the FSRU-platform for unloading liquefied gas tankers. Against this background, the Cabinet of Ministers approved the gas balance for 2013, which provides for supply from Gazprom, RWE and Ostchem, which has alsready bought 3.9 bcm of gas from Gazprom. Because of a sharp decrease of sales in Ukraine, Russian experts do not exclude the possibility of price concessions.

6. Europe continues to search for a niche which the production of hydrocarbons from unconventional sources should take. During the European Council summit it was stated that shale gas could become part of the energy balance for some EU countries, and the Commissioner G.Oettinger said the EU will consider environmental concerns of hydraulic fracturing in the current year. In Poland, where there is an ongoing debate about the taxation level of unconventional gas exploration and production, it was decided to introduce the tax regime after 2020 in order to attract investors. In Germany, members of the ruling coalition agreed on permission for shale gas production, and the Czech Republic postponed consideration of the issue. In Ukraine, Shell is working to obtain all necessary permits and assessments to launch the Yuzivska field project. The Committee on Environmental Policy of the Verkhovna Rada hosted a hearings on the risks of production, where the participants argued for increased transparency and disclosure of companies’ obligations in the production sharing agreements.

The issues of transparency of natural resources’ extraction are relevant for both developed economies and those that are catching up. The European Parliament approved new rules for offshore drilling which require detailed reporting from companies, and the U.S. advocate for implementing the rules for sustainable use of resources on the global level. The Extractive Industries Transparency Initiative (EITI) has also found its development: the UK and France have officially joined it, and Ukraine applied for a candidate status. According to media reports, one of the means to improve the investment image of domestic mining companies is to create an exchange, but the Ministry of Enengy and Coal Industry has extended the deadline for applications to the relevant competition.

7. On the background of changes on the global oil market, in Ukraine grows one of the financial-industrial groups in the refining industry. World oil prices initially increased, but later took a course to decrease as well as the cost of the OPEC Reference Basket. Less expensive oil is also predicted by market participants, and the media expect oil traders to gradually shift towards processing. Against this background, the European Commission sent requests to leading oil traders in the context of prices investigation, and Iran wants to increase exports of oil products by 30% and to create a global cartel of the exporters of petrochemical products.

In Ukraine, the fuel prices has not changed, however, they may grow soon: the State Agency of Automobile Roads (Ukravtodor) called for raising excise duties twice while the Ministry of DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

Finance offers a 50% increase in excise duties on petroleum and diesel. Meanwhile, the Antimonopoly Committee authorized the Cyprus-based Empson Limited to get property rights for the Odesa refinery, which is perceived by the media as redistribution among new owners.

SEPEK holding of the businessman S.Kurchenko also negotiates on the purchase of the Lysychansk refinery from Rosneft which has no plans to restart production yet.

8. Biofuels can become a driving force of the Ukrainian "green" energy. According to experts, the industry is rapidly developing projects and new capacities: e.g., in Kryvyi Rig it is planned to launch a factory for the production of pellets. As predicts the Ministry of Agriculture, Ukraine can produce 40 mln daL of bioethanol annually, and the respective parliamentary committee reported on the preparation of legislative framework to attract investment in the production of biofuels. However, the Civic Council at the State Agency of Energy Efficiency and Energy Saving appealed to the President V.Yanukovych and called him to help with improvement of the draft updated Energy Strategy by 2030.

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