Weekly analytical report: September 23 - 29, 2013

Weekly analytical report September 23 – 29, 2013

1. The EU member states strengthen coordination of their actions to reform gas market and reduce the dependence on Gazprom. European countries continue to discuss the completion of single gas market – the issue was on the agenda of the informal meeting of the EU energy ministers. The Commissioner G.Oettinger has publicly promised to support Lithuania which is still negotiating a new contract with Gazprom. The EU member states implement projects to reduce dependence on Russia: Lithuania plans to complete construction of the LNG terminal by the end of 2014, Bulgaria – to reduce the share of Russian gas to 50% in the next 5 years. At the same time, there are ongoing Russian-European talks on the future of the OPAL pipeline which should transport Russian gas to the Czech Republic.

Meanwhile, high hopes are pinned on the Southern Gas Corridor project. Azerbaijan, which increases gas exports to Georgia, expects a further growth of gas production and increased supplies to Europe. Companies, which have signed agreements with the Shah Deniz consortium, began to disclose the volumes of contracts, and the European Commission has not removed the Nabucco West pipeline from the list of the EU priority projects.

2. Ukraine is re-formatting its gas talks with Russia and is looking for own role in the regional energy supply. According to the Vice Prime Minister Y.Boyko, Russia’s unwillingness to agree on the proposed cooperation options has forced Ukraine to decide on reducing the volume of Russian gas imports. Now Ukraine will not get a loan from Russia for injecting gas to underground storages, will purchase gas in Germany, and, according to Prime Minister M.Azarov, will refuse from Russian gas in a few years – however, such statement was refuted by the deputy head of Naftogaz V.Chuprun. Azarov’s statement on freezing the GTS in case the EU and Russia will not determine the volumes of gas transportation has also caused public debates – some experts supported this position, the others criticized. Another resonant issue is the mutual debts between Ukraine and Russia – according to some experts, Gazprom charge another bill for not taking the contracted gas, the others insisted on Gazprom debts to Ukraine for the transit. The government approved the project to modernize a part of the Urengoy-Pomary-Uzhgorod pipeline, and there is an ongoing discussion on the creation of the Eastern European Gas Hub in Ukraine.

The lack of transparency of the sector remains an obstacle. Naftogaz continues to accumulate debts and plans to place bonds. Transparency in the oil and gas industry of Ukraine may be brought by the global EITI standard. It is expected that on October 17 Ukraine could become a candidate country of this Initiative. For this reason, the EITI mission has consulted with the civil society and companies in Ukraine. At the same time, the government reports on implementing all the sign-up criteria for joining the EITI. DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

3. Ukraine increases gas imports from the EU. According to media reports, there is a growing number of companies importing gas from the EU countries. Also, there is information on the plans of PGNIG to supply up to 1.7 bcm of gas to Ukraine, although the company has not confirmed it. The public debate on the problems with gas imports from Slovakia continues – according to the Head of the EU Delegation J.Tombinski, the Slovak party have to agree the issue with Gazprom as it is bound with the transit contract. The issue has also become a subject of the Gas Coordination Group meeting in Brussels. Slovak experts say there is interest in reverse gas supply to Ukraine, and Ukrainian ones – that Gazprom cannot prohibit Slovakia to re-export gas. The head of Naftogaz Y.Bakulin expects the situation will be solved by the end of 2013. Last week, the LNG terminal project also showed some progress – U.S.based Excelerate Energy has promised to mount the FRSU in a year, and the President V.Yanukovych has secured the promise by his statement.

4. Increased economic competition is pushing European countries to look for new sources of gas. Trying to catch up with the industrial development of the United States, European countries are closely considering the possibility of unconventional gas production. In Poland, along with the discussion of the regulatory requirements, companies continue to explore for shale gas. In France, they expect a court decision on the constitutionality of the moratorium on hydraulic fracturing, and the government of Netherlands took more time to study the impact of this technology on the environment. Meanwhile, Turkey has started to conduct fracking, and the perspectives of shale gas are discussed in Japan. Against this background, Russian president V.Putin again claimed that shale gas creates environmental threats.

Arrangements with international energy companies will improve the investment image of Ukraine. The government extended the term of signing PSAs on Oleska and Skifska fields to November 24. The government hopes that the Lviv Regional Council will approve the draft PSA with Chevron on October 1, but only public discussion is planned for October 2, and the Council representatives criticize the latest PSA amendments. Meanwhile, in New York, the government has signed an agreement on signing the PSA on Skifska field with Exxon Mobil, Royal Dutch Shell, and OMV Petrom. Experts called it a timely move but, according to media reports, the document is rather declarative. The U.S. Ambassador G.Pyatt insists on fair business of American companies in Ukraine, while the government expects the cost of produced shale gas will amount 160-200 USD, and the volume – up to 30 bcm by 2017. At the same time, some NGOs in Donetsk region protested against production and blocked the Rostov-Kharkiv highway.

The production of conventional hydrocarbons remains a priority, which encourages the interest of investors. Naftogaz expects to start developing new fields in Egypt, Chornomornaftogaz repeated its production plans for 2015. The growth of gas production by 2020 was also declared by Ukrgazvydobuvannya. Against this background, the structures of Russian Alfa Group Consortium concentrated 24.4% of Regal Petroleum with oil and gas assets in Ukraine. Smart Holding, which has a controlling interest, considers the entry of new partners as normal market event.

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

5. Ukraine is way ahead of the strategic plans for the development of renewable energy.

In the first 8 months of the year, 1 TWh of "green" electricity has been produced. At the same time, the government believes the share of renewables can actually increase to 15%. Second phase of the Botievo wind farm is being constructed, while the first phase of the Krasnodonska WPP is on its final stage. At the same time, the EBRD will finance the construction of solar power plant in Odessa region. Increased activity is expected in the biomass energy sector.

According to experts, Ukraine could get 13 million toe from the free agricultural land.

6. Start of the heating season can be significantly complicated because of government restrictions and debts of public utilities for gas and electricity. As the Prime Minister M.Azarov said, Ukraine should be ready for heating by October 1, when Naftogaz will start gas supply. In some cities, they have already begun to heat schools and hospitals, in others it is only planned. According to the Vice Prime Minister O.Vilkul, utility companies have to cut gas consumption by 5%, and the Ministry of Economy proposes to limit the profitability of heat transportation. The Cabinet of Ministers approved a resolution which allows to pay for heat in promissory notes. The initiative to create a single heat supplier has also no single perception: experts believe that it will organize the payments, and the media write about the potential superprofits of the authorized intermediary bank. The government also warned the heads of some regions on their responsibility for the debts to Naftogaz as the issue is important for Kharkiv, Zaporizhzhia, Sevastopol, as well as Kirovograd, Dnipropetrovsk and Kyiv regions.

This causes many public institutions to convert from gas to alternative fuels.

7. Having become its first NPP, Iran has expressed readiness to meet the international community on the issues of its nuclear program. Russia has turned over the first unit of the Bushehr NPP to Iran, providing two-year warranty. Against this backdrop, the president H.Rouhani expressed the wish to sign an agreement with the international community on nuclear program as soon as possible. In response, the U.S. stressed on concrete steps of Tehran before lifting of the sanctions can be considered.

Russian companies plan further expansion on the Ukrainian market, but in matters of nuclear safety Kyiv relies on Western partners. Atomenergomash company is aiming 50% of the Ukrainian market of TPPs equipment, while the parent corporation Rosatom – according to unofficial sources – is interested in entering E4 engineering group, which is involved the construction of the Chernobyl NPP "Shelter". Fuel company TVEL promised to continue cooperation with Ukraine. At the same time, the Minister of Environment O.Proskuryakov signed an agreement with NATO on the safe re disposal of radioactive waste and the nuclear operator Energoatom holds negotiations on the centralized repository of nuclear waste with U.S.-based Holtec.

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