Weekly analytical report November 25 – December 1, 2013
1. Situation on the European markets is unfavorable for Gazprom and pushes the company to intensify its projects. After Naftogaz suspended some imports in November, as well as due to reduced demand in Russia, Gazprom recoded a decline in production. Unfavorable for Russians are the trends in development of the gas market in Europe, including promotion of the Southern Gas Corridor, support of the construction of electricity and gas interconnectors, revision of contract oil-indexed pricing. At the same time, Gazprom announced an increase in gas supplies to Europe and export earnings. The efforts to promote the South Stream project, estimated by experts at 65 bln USD, have intensified: construction works started in Serbia, the start of operations in Hungary in April 2015 was announced, as well as the intentions to resume negotiations with Austria. Such actions even made the President V.Yanukovych to resent the EU violating its commitments to Ukraine and to raise the issue on possible withdrawal from the Energy Community. In parallel, Gazprom is closely working with some of its European counterparts: in Germany, they offer a 2-year exception for OPAL pipeline (extension of Nord Stream) in the Third Energy Package implementation, a similar compromise are put forward by the experts for South Stream, and the French Total may become a partner of Gazprom in the Baltic LNG-project.
2. Ukrainian-Russian negotiations on the revision of gas contracts have not moved a single step forward. According to the Prime Minister M.Azarov, Russia has promised to review the contract and some Russian politicians talked about lowering gas prices to 169 USD/tcm if Ukraine joins the Customs Union. However, later both Gazprom and the Russian president V.Putin clearly stated they do not consider the possibility to review the gas contract, because Russia received 10 bln USD of losses due to discounts offered by the "Kharkiv agreements". However, according to the Energy Minister E.Stavytskyi, Ukraine continues talks on gas consortium, and the fair price is 300 USD/tcm. The President V.Yanukovych confirmed the intention to continue reduction of Russian gas imports, and the Prime Minister M.Azarov acknowledged – there is no clear agreement on revision of gas contracts, and has planned another round of negotiations. Meanwhile, the media reported that the Ukrainian party did not provide enough arguments in the discussions but experts doubt the revision of contracts and expect increased Russian pressure.
3. Despite the refusal of the President V.Yanukovych to sign the Association Agreement, Brussels will continue to support the energy sector. Justifying the decision to suspend signing the AA with the EU, the President V.Yanukovych said he expects the EU to DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
participate in modernization of the Ukrainian gas transportation system, and the Ukrainian scientists indicated the need for 68 bln EUR investment in energy. Despite such "compensators" are considered unacceptable, the EU is going to continue its support of the Ukrainian GTS and reverse gas supplies. According to the Energy Minister E.Stavytskyi – who is satisfied with cooperation with the EU – the deal on reverse supply will be signed with Slovakia next week and it will enable annual supply of 10 bcm, while foreign experts estimate the real volume of imports at 2-3 bcm. Meanwhile, the Vice Prime Minister Y.Boyko accused the Energy Minister in delaying some of the reforms, and the representatives of the EU reminded on the need to increase gas prices as a precondition to receive the IMF loan.
4. In the world, there is a continued exploration and production of new gas resources. In the EU, according to the research, natural gas price by 2050 could be reduced by 14 % due to shale gas resources. Despite the pressure to reject from hydraulic fracturing, the people of the United States support the development of unconventional gas. Meanwhile, Poland is planning to develop a new draft law on shale gas, and the French government is considering alternative technologies of its production. Ukraine is also working on exploration of new deposits: namely, Shell reported positive results of drilling its first well in the Kharkiv region. The government also signed the PSA with a number of companies, including Eni and EDF, on the development of offshore hydrocarbons which will bring 25 % of the production and bonuses to the state. The largest shares in this project belong to Eni and "Waters of Ukraine".
5. On the Ukrainian oil market, there is a decrease of Russian presence in favor of "domestic" business groups. Due to the "Iranian factor", global oil prices declined to 110.9 USD. In Ukraine, there is an increase of wholesale prices for diesel and petroleum, while retail prices are more or less stable. Among the negative factors which could affect the market are the reduction of oil products’ exports from Belarus and the government's intention to lift the ban on oil exports from Ukraine which is criticized by refiners. Meanwhile, experts indicate the growth of smuggling and counterfeiting of petroleum. Against this backdrop, the President V.Yanukovych said that the Ukrainian party will purchase 50-100 % stake in the Lysychanskyi refinery from Rosneft. According to media reports, the negotiations are held by the SYEPEK group of S.Kurchenko which has previously purchased the Odessa refinery from Lukoil.
6. The adequacy of gas reserves for the heating season does not cancel payment problems in the housing and utilities’ sector. 17.6 bcm of gas are accumulated in the Ukrainian underground storages, app. 5.2 bcm of them belong to Ostchem. However, Ukrtransgas failed to buy 3 bm of gas for technological purposes. A key problem is still the growth of indebtness, forcing the municipal heating companies to threaten consumers with disconnection of gas up to the deprivation of property, and Naftogaz cuts "limits" on gas supply. At the same time, the Cabinet of Ministers has manually reallocated funds which should be spent for housing subsidies in Kyiv, and the Minister G.Temnyk demanded to secure the appropriate level of payments for gas. In turn, the Energy Minister E.Stavytskyi said that the debt to Gazprom will be paid by means of heating enterprises.
DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
7. Countries of the world are still concerned about nuclear safety but continue to actively operate NPPs. Last week it was agreed to contain Iran's nuclear program in exchange for lifting up some sanctions. Ukraine supports these changes, while the IEA says that the agreement will not allow Iran to quickly restore its positions on the global market. However, the facts demonstrate the opposite – international oil and gas companies want to return to the Iranian market. Meanwhile, Bulgaria has to decide on a new NPP unit, and Ukraine plans to start construction of the Khmelnytskyi NPP units 3 and 4 already in 2015. The lifetime of the South Ukrainian NPP unit 1 was prolonged to another 10 years, but environmentalists criticize the decision. 8. Ukraine’s renewable energy enjoys a growing confidence of international investors. The market has great potential, particularly the solar energy sector was recognized as the most attractive in Eurasia. The EBRD is considering support for "green" projects in Ukraine, and plans to allocate 20 mln EUR for energy efficiency in Dnipropetrovsk. "Wind Parks of Ukraine" also hope for the new IFIs’ loans, while industrial plants in Zaporizhzhia rely on the "local content" requirement which will allow them to secure their production. Experts say that energy-efficient construction in Ukraine is hampered by the lack of incentives, and the government, meanwhile, plans to introduce energy-saving technologies in the university campuses.
9. Ukrainian electricity exports decreased due to surplus of generation in Europe, but the assets remain attractive for investment. According to the ENTSO-E, this winter the EU could use 100 GW of reserve capacity. Although the dominant player of the export market DTEK - announced an increase of 4.3% in the first 9 months of the year, in October exports fell by 14% compared to the same period last year. Meanwhile, the competition to privatize 75% of Volynoblenergo will be held in late December. It is reported that at least 4 companies will compete for the asset, and their interest is supported by measures to introduce the incentivebased regulation.
DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org