Weekly analytical report August 26 – September 1, 2013
1. The EU energy policy forces Gazprom to seek compromises in order to maintain the volumes of gas supply. The EU supervisory authorities are preparing a formal complaint against Gazprom because of violation of antitrust laws. The court again confirmed the arbitration decision on non-use of the "take or pay" principle in favor of RWE Transgas. Moldova has started construction of the Ungheni-Iaşi pipeline which aims to reduce imports of Russian gas. Lithuania plans to build an LNG-terminal by the end of 2014, pushing Gazprom to negotiations. Ukraine’s orientation on the European energy sources has already brought Gazprom substantial financial loss. In the last six months, Ukraine has reduced purchases of Russian gas by 39.2%, while the reverse supply from Hungary in August increased 1.5 times. In September and October, the government plans to agree the supply from Slovakia and Romania. According to the Minister E.Stavytskyi, in September RWE will start gas injection into underground storage facilities under contract with Naftogaz. According to unofficial information, 19 bcm of gas in the storages will inject both Naftogaz and independent importers. Indicating the positive effect from the Europeans using Ukrainian storage facilities, experts are expecting the very contract with RWE. Meanwhile, in the first half of 2013, net profit of Gazprom has decreased by 35%, largely due to lower imports by Ukraine. The Russian party further insists on gas transsportation consortium – according to the Ambassador M.Zurabov, in such conditions the gas price could decrease to 268 USD/tcm, while in July the average cost of imports amounted 406.56 USD/tcm. However, the President V.Yanukovych has repeatedly criticized the current contract with Gazprom and described as "humiliating" the conditions to revise the gas price offered by Russians. At the same time, the government is ready to take another 2 bln USD Russian loan – interest-free – to guarantee stable transit in winter. Negotiations on injecting the Russian gas into underground storage facilities and on the winter transit continue, but their outcomes are still unknown.
2. European countries are actively promoting unconventional gas production in their territory. The UK Prime Minister D.Cameron urged to approve the use of hydraulic fracturing, and some local residents have signed letters of support. The conclusions of the government report in the Netherlands indicate that environmental risks associate with production can be prevented. In Poland, companies managed to achieve stable shale gas flow, allowing analysts to declare future Polish gas independence from Russia. In Ukraine, the PSAs approval process faced resistance from local communities. Polish advances have pushed the Ukrainian opposition politicians to support unconventional gas production in Ukraine. However, in the Ivano-Frankivsk Regional Council the opposition forces DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
did not support the draft PSA with Chevron – the "Batkivschyna" ("Fatherland") faction voted negatively because of "disregard of the law". Similar criticism was expressed by the MP of the "Svoboda" ("Liberty") party I.Sekh who analyzed the conclusions of the Lviv Regional Council working group. The decision of the Ivano-Frankivsk Regional Council was commented by the Prime Minister M.Azarov as an ignorance of national interests, by the U.S. Ambassador G.Pyatt – as a sign of democracy, and by experts – as an evidence of non-confidence to the central government. The necessary changes to the draft PSA were submitted to the Cabinet of Ministers, and the Minister E.Stavytskyi has promised to consider them within two weeks. The official expects approval of the amended document in September, and if the local councils will insist on rejection, he plans that the PSA will be adopted by parliamentary vote. The Head of the IvanoFrankivsk Regional Council V.Skrypnychuk confirmed plans for repeated consideration of the project and announced that future shale gas production in the region is inevitable. Meanwhile, gas production in July increased by 3% compared to July 2012. JKX company announced the successful completion of hydraulic fracturing in the Poltava region, and Shell is looking for a contractor to run seismic study of the Yuzivska field and launched a hotline to help improving public awareness about the unconventional gas exploration in Ukraine. The Ministry of Energy and Coal Industry became the authorized body for the implementation of the PSA with Shell.
3. Instead of addressing the issue of heat supply, the government could complicate the sector’s functioning. The Deputy Prime Minister O.Vilkul announced readiness to the heating season, and the authorized ministry scheduled the date of its start. The State Statistics Service reported on debt reduction for utility services in July and the Minister of Housing G.Temnyk spoke about the possibility to attract 800 mln EUR to modernize the sector. Meanwhile, Naftogaz has warned of possible problems because of the debts of municipal heating companies. The Cabinet of Ministers allowed to limit gas supply to the technological level if they will not pay, and the Ministry of Energy and Coal Industry proposes to introduce payments with promissory notes. The heat producers want to reduce gas consumption by 5%. Both the media and experts warn about the possibility of problems with heating and hot water supply. However, the Cabinet of Ministers offers to limit the conversion to individual systems. At this time, the Ministry of Energy and Coal Industry wants – as an experiment – to create a single supplier of heat energy which can give the state company much of control over the payments from final consumers; however, it will not solve the problem of gas debts. The media are focusing attention on the fact that such a move contradicts the government's plans to liberalize the gas market and the commitments to the EU.
4. Meanwhile, the financial condition of the NJSC "Naftogaz of Ukraine" is becoming worse. In particular, the company finished Q2 with 2.2 bln UAH losses, and the Cabinet of Ministers has allowed it to refinance 4.8 bln UAH of debts, planning also to allocate 10.7 bln UAH from the state budget to cover the deficit. In addition, one of the companies contested a nearly 2 bln UAH penalty in favor of Naftogaz. The media indicate the critical state of the company and its inability to service debts in the future. At the same time, personnel changes DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
have taken place in the supervisory board and the board of directors of Naftogaz – according to the media, a sign of the increasing influence of the President's closest people.
5. Ukraine is trying to mitigate the expected price growth for oil products. According to the experts, this autumn a significant increase in fuel prices is unlikely. At the same time, on the background of a new record of the OPEC Reference Basket, wholesale prices for diesel and retail prices for LPG did increase in Ukraine. Other negative factors may also become military actions in Syria as well as the expected increase of excise duties in Belarus – after Russia adjusted the plan of crude oil supply and threatened to sue the officials involved in the 2011-2012 "solvent schemes". Operating proactively, the Ministry of Energy and Coal Industry held a meeting with traders, and the Expert-Analytical Group assured there will be no price hikes due to sufficient stocks of oil products. Against this background, the market balance was slightly corrected: Ukraine decreased oil imports five times and reduced imports of oil products by 21%, while domestic production in July increased by 24%. The government expects a full-scale launch of the Odessa refinery, plans to regulate the trade of biodiesel, and threatens to inspect the Lysychansk refinery on the compliance with obligations. However, say experts, government officials should reconsider the program on alternative fuels production.
6. Investments in renewable energy and energy efficiency are already yielding positive effects. According to the experts, green energy attracts investors by constantly decreasing cost and environmental factors. The German Ministry of Environment and French companies expressed interest to invest in bioenergy, the EBRD supported the project to produce electricity from waste, and the Development Bank of Austria is ready to invest in energy efficiency. With private funds, renewable energy is booming: solar parks will be launched in the Crimea and Dnipropetrovsk region, similar facilities are planned to be built in the Odesa region. Feed-in tariffs were approved for wind farms "Kerchenskyi" and "Krasnodonskyi" and PV-plants "Star Pivden Energo", "Rengy Bershad" and "Rengy Tomashpil". The savings from green solutions are already caculated in the Crimea, Donetsk and Lugansk regions.
7. Despite the intentions to reform the coal industry, the government does not seem to refuse subsidy-oriented policy. In the last 7 months, coal production reached 48 mt, which gave the President V.Yanukovych reason to declare achievement of the pre-crisis figures. According to him, Ukraine plans to annually produce 105 mt of coal, and the privatization and reforms of the sector should be completed by the end of 2014. However, not unprofitable but commercially viable property is being put for sale: the State Property Fund will sell 16% in the Zasyadko mine and the ISD corporation is interested in the Menzhinsky mine. According to media reports, the Ministry of Energy and Coal Industry initiates an increase in subsidies to support coal production. Meanwhile, two officials were sentenced in Donetsk for misappropriation of public funds, and the local prosecutor's office identified over 180 active illegal mines.
DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
8. The government continues large-scale privatization of electricity assets. The Cabinet of Ministers approved corporatisation of the NEC Ukrenergo and the National Energy Regulatory Commission has introduced incentive-based regulation in the sector of local electricity transmission. The Energoinvest Holding has acquired 60.8% of Donbasenergo for 719 mln UAH, having received permit from the Antimonopoly Committee. At the same time, the sale of Mykolaivoblenergo shares was suspended and Odesaoblenergo was fined 100 mln UAH for monopoly abuse. The media indicate that by 2030 only nuclear and hydropower should remain in the state property. Against this background, several major infrastructure projects are implemented. Ukrenergo commissioned the transmission line "Dniester PSP - Bar" and agreed on the construction of the transmission line "Zaporizhzhia NPP - Kakhovska". The government plans to implement jointly with the World Bank another project to upgrade power lines, amounting 500 mln UAH, and also construct additional high-voltage connectors for exports to Europe. In the generation segment, the Ministry of Energy and Coal Industry wants to sign a loan agreement with the EIB and the EBRD for the construction of the Kanivska PSP, and in order to repay loans for the Dniester PSP, it is recommended to include the investment component in the Ukrgidroenergo tariff.
DiXi Group, 2013 Energy information â—? Analysis â—? Consulting www.ua-energy.org/en author@dixigroup.org