Weekly analytical report: October 21 - 27, 2013

Weekly analytical report October 21 – 27, 2013

1. There is a growing competition between Turkmenistan and Russia over gas supply markets. Turkmenistan is developing the eastern direction – discusses gas supplies to Europe with Turkey, the EU and Azerbaijan which also wants to develop gas exports. Georgia is also ready to join the corridor. Meanwhile, Russia does not stop the western-oriented projects and more actively develops negotiations in the eastern direction – it agreed with India to establish a working group to study pipeline gas supplies. Also, Gazprom has agreed with China on price formula, and can start gas supply in 2018-2020 it the contract will be signed this year.

2. Most of the countries of the world return to the use of nuclear energy. Even Japan, despite new leakages of water and record radiation levels at the Fukushima-Daiichi NPP, plans to restart almost all NPPs after 2016. UK is about to sign an agreement for NPP construction, and the government support will be checked by the European Commission.

Hungary hopes for an increased role of nuclear energy, having signed an agreement to import equipment from South Korea. Turkey is going to build its first NPP by 2020. Experts claim that the speed of global NPPs construction will remain on the pre-Fukushima level.

3. Despite the decrease in commercial attractiveness of reverse gas supplies, Ukraine continues the policy of diversification. In August, the price of gas from the EU was just 2 USD lower than the cost of gas from Russia. Naftogaz acknowledged that the alignment of prices was the reason to suspend imports from Poland, and experts do not exclude the pause on Hungarian direction. However, diversification of supply routes will be a priority of Ukraine’s presidency in the Energy Community in 2014. Following the talks with the EU Commissioner G.Oettinger, the Minister E.Stavytskyi announced 100% confidence in opening the Slovak direction of reverse gas supply by the end of the year. Slovak company Eustream stated that it does not need any coordination with Gazprom, and the Slovak media write about the price discount offered by Russians.

Meanwhile, the Energy Community has approved the list of "projects of common interest", including 2 Ukrainian projects: modernization of the Urengoy-Pomary-Uzhgorod gas pipeline, which is already partly funded by the state, and construction of the Brody-Adamowo oil pipeline. Ukraine could also become a part of the new gas corridor, having coordinated the supply route from Croatia through Hungary.

4. In the Ukrainian-Russian relations, negotiations continue on the highest level, while the exchange of claims – on the executive one. Following the visit of the President V.Yanukovych to Belarus, where meetings of the CIS Heads of State Council and the DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

Supreme Eurasian Economic Council were held, only an unclear statement on energy cooperation was made. Before this, the Russian National Energy Security Fund has estimated that Ukraine could face a 10 bln USD bill for not taking the contracted gas. In response, the Prime Minister M.Azarov said that Ukraine overpaid for gas 20 bln USD in the last three years, but promised to restore good relations.

5. The EU countries have to reproduce the U.S. "shale" success to remain competitive.

The U.S. continues to receive financial and environmental benefits from shale gas, and New York can join the states which allowed fracking. In Europe, the companies predict troubles for the EU in attracting investment because of the reluctance to use the "shale gas revolution" and try to work in those EU member states where fracking is allowed. European countries continue to pay great attention to safety of shale gas production – the UK parliament will consider evidence of environmental organizations, and the European Commission is preparing a legislative package to control development. In Romania, despite protests against shale gas production by Chevron, the information on Gazprom to start exploration appeared.

International politicians and Ukrainian experts predict Ukraine a success in unconventional gas production. However, this issue still requires further legislative regulation and transparency.

Also, the topic of shale gas continues to be used for political purposes – namely, by Svoboda political party and by the government which, as experts predict, could include the issue to "negotiation package" with the IMF. Along with unconventional gas, development of the Black Sea shelf is promising for Ukraine. Despite forecasts of lower offshore production perspectives, Chornomornaftogaz plans to produce 3 bcm of gas already in 2015, which will save more than 1 bln USD annually, and promises to supply enough gas for the whole Crimea in the next year. Naftogaz, which has completed 3D-seismic study of the Pallas field, expects production to reach up to 24 bcm in 2017. In November, it is planned to sign a PSA with Eni and EDF to develop several fields of the Black Sea. Production growth requires clear rules and regulations: the government approved a draft Subsoil Code which, according to media reports, will allow trading of licenses.

6. The growth of fuel prices along with reduced imports pushes the government to focus again on the revival of own production. Last week, global oil prices declined from almost 110 USD to 107.2 USD. Meanwhile, in Ukraine the wholesale petroleum prices slightly increased, which even allowed to overtake Russia in this indicator. Despite this fact, in Russia they expect a price increase of 8% in 2014, which could potentially hinder its innovative development. In Ukraine, the import of oil products in the first 9 months of 2013 decreased by 19.4%, while consumption – only by 4.9%, which may indicate a growing shadow market. In parallel, the government is trying to launch major enterprises of the sector: in particular, a "roadmap" for Karpatnaftokhim is being developed, and the old state standard for diesel was extended. Negotiations about launch of the Lysychansk refinery are ongoing, and the media reported on the search for pipeline oil supplies for the Odessa refinery.

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

7. Rather than settle the issue of debts in the housing and utilities sector, the government procrastinates the problem and shifts the investment burden on consumers. According to Naftogaz, the gas debts of municipal heating companies reached 17.4 bln UAH. Against this backdrop, the President V.Yanukovych demands from the government to introduce a two-year moratorium on the growth of state monopolies’ tariffs, and the Verkhovna Rada adopted a draft law on restructuring the budget debt to heat suppliers by means of issuing promissory notes.

According to media reports, such procedure of payments will deteriorate the financial condition of Naftogaz, the authorized capital of which have to be increased by 14.9 bln UAH next year by means of issuing bonds. Analyzing the new requirements to commercial accounting, the media came to the conclusion that consumers shall fully pay for the heat meters.

8. Ukraine is not yet capable to increase effectiveness of state investments in energy efficiency projects. According to experts, in the next decades Ukraine will enjoy a boom in energy efficiency. Particularly, in Kharkiv a project to transfer boilers to biofuel briquettes will be launched with support of Japanese JIKA. According to experts, some funds for the modernization of heating systems (up to 5 bln USD) can provide international financial institutions. Meanwhile, the Cabinet of Ministers approved the procedure for state financing of environmental modernization projects as well as the state program for modernization of heating systems which provides for reduction of gas consumption by 25.4%. The Vice Prime Minister O.Vilkul already reported that the use of natural gas for heat production decreased by 8%. However, it is unclear how the heat suppliers achieved such a goal: due to low "limits" of gas, hot water supply was limited in Ivano-Frankivsk, and heating was suspended in Lviv.

9. Meanwhile, Ukraine has made the first step to reform electricity market. Despite the criticism of experts, the Verkhovna Rada adopted the draft law "On the principles of electricity market operation". At the same time, the media claimed that the transformation takes place in favour of DTEK, although the company declares support of liberalization, particularly in the area of electricity exports.

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