Weekly analytical report: September 30 - October 6, 2013

Weekly analytical report September 30 – October 6, 2013

1. While planning the launch of the Southern Gas Corridor, the EU does not stop to care about relevant cross-border pipelines. In particular, first supplies of Caspian gas to Europe are expected in early 2019. Azerbaijan is already talking about favorable prices of its gas, and Turkey calculates the potential revenues from transit. At the same time, according to media reports, the European Commission supports the development of pipelines in Central and Eastern Europe to freely trade the imported gas. The Greece-Bulgaria interconnector is to be commissioned in 2016 , and Romania wants to build the gas connection to Moldova as quickly as possible.

In Brussels, they continue the transition to low-carbon energy, despite the problems of individual member states. Members of two target committees of the European Parliament discussed the climate and energy policy targets by 2030, and the European Commission has allocated a grant to support "green" transportation. However, problems with the implementation of EU directives have Italy and Spain, and Poland received a warning of possible violation. Governments of Germany and Ireland have to deal with difficulties while developing renewable energy. Against this background, the projects to create "smart grids" risk to lose some major EU funding.

2. The EU has involved all legal means to influence the market policy of Gazprom. As the European Commissioner for Competition J.Almunia said, the Russian company abused its dominant position in gas pricing, and the EU is ready to charge it with anti-competitive practices, following the respective investigation. Brussels’ intentions are to strengthen the position of Lithuania which conducts own investigation and considers purchasing shares of Gazprom in its gas TSO, and Greece which may resort to international arbitration.

Instead, the Ukrainian government continues to search for solutions of the "Slovak question" in the area of gas supply. Imports of natural gas continue to decrease at the expense of Russia: year-to-date, Ukraine bought only 18.2 bcm of Russian gas. According to official figures, imports from Europe in September increased by 42%, and the total volume for the nine months reached 1.5 bcm. The Ministry of Energy and Coal Industry confirmed that reverse supply via Slovakia is not yet possible because of the need to coordinate it with Gazprom, and the media reported that the government expects to use the decision of the European Commission on Gazprom.

3. Decreased gas prices in the U.S. are pushing businesses to look for new projects in Europe and Asia. Experts predict that U.S. will overtake Russia in hydrocarbon production already this year, despite the fact that a significant decline in prices leads some companies to DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

leave the American market and focus on countries with more affordable resources. Meanwhile, companies and politicians in the EU are calling to complete the common energy market and follow the path towards unconventional gas production: the UK plans to drill exploratory wells despite higher (compared to the U.S.) cost of gas, and Polish experts say about the positive effects of advocacy campaigns on public opinion. China expects to produce 200 mcm of shale gas in 2013.

In Ukraine, the development of unconventional gas enters a new stage. The Lviv Regional Council endorsed the draft PSA with Chevron, but the decision takes effect after amendments to the Budget Code – in such a way, the mistake of the Ivano-Frankivsk Regional Council has been corrected. The U.S. Ambassador G.Pyatt and the Energy Minister E.Stavytskyi arrived in Lviv prior to the vote, trying to convince local MPs that Chevron has agreed to publish the list of chemicals for hydraulic fracturing. The updated draft PSA also provides for 10% of the state profits to be allocated for the needs of the region, preference to Ukrainian equipment, and the government has promised to annually provide 90 mln UAH for environmental issues. Against approval of the draft PSA was the local faction of Svoboda party, several village councils, and the LRC standing committee on environment which expressed doubts.

Meanwhile, gas reserves are confirmed in the area jointly developed by Shell and Ukrgazvydobuvannya. As part of geological exploration of the Yuzivska field, the company plans to drill four wells in Donetsk region. Shell also organized a study trip to one of its U.S. fields for the representatives of environmental organizations, and some of them positively commented on the American projects. Italian Eni also considers possible participation in the shale gas project in Ukraine.

4. Overcoming the imbalances of Ukrainian fuel market is not yet expected. Against the backdrop of a decline in global oil prices, wholesale petroleum prices are gradually decreasing in Ukraine. However, there is a growing deficit of low-octane fuels and even more expensive LPG. According to the Ministry of Energy and Coal Industry, in the first 8 months of 2013, imports of crude oil decreased 5 times which negatively affected the production of fuel – the Ministry of Income and Charges reported a significant shortfall in excise tax revenues. While major renovation began at the Lysychansk refinery, owners of the Odessa refinery develop their activity: the SYEPEK (VETEK) holding of S.Kurchenko started sales of petroleum and diesel, as well as registered in Switzerland two companies trading oil and gas. At the same time, the media reported that SYEPEK structures accumulated debts to Ostchem Holding and Naftogaz, and the latter even appealed to the Prosecutor General's Office on this issue.

Significant imbalances can be also created by the deficit of bioethanol: experts warn of such possibility despite the Ministry of Agriculture promised to establish internal production.

5. Despite the growth of renewable energy, Ukraine is still facing the issues of canceling the barriers to foreign investment. According to the government, Ukraine produced over 1 GWh of "green" electricity. As projected, the most potential for growth have projects in solar energy which attracts some private investors as well as bioenergy which received institutional funding. However, the local content requirement remains a major concern: the State Agency of Energy Efficiency and Energy Saving considers it beneficial as it facilitates the establishment DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org

of local production, but the EU expects Ukraine to cancel such rules as one of the economic preconditions for signing the Association Agreement.

6. The government demands to promptly start the heating season, but in practice puts the heating companies in conditions which make it impossible. Despite the costly preparation, reduction of debts, allocated budget funds, and signed agreements with Naftogaz, heat supply started not in all regions of Ukraine. The Vice Prime Minister O.Vilkul has ordered to connect to heating all public institutions by October 5, the Prime Minister M.Azarov called to save energy resources, and the President V.Yanukovych demanded to set universal tariffs for housing and utility services.

At the same time, only 6.3 bcm of gas are allocated for the needs of municipal heating enterprises, and consumption over this limit shall be paid by industrial tariffs. According to experts , these limits can be reached already in November, which would create the risk of heat supply disruptions and stimulate the growth of tariffs. There are already some problems: Kharkiv postponed the connection of residential buildings to heat, Lviv complains about the overvalued tariff, no gas limits were allocated for the Donetsk region. In Kyiv, half of the kindergartens, hospitals and schools, as well as most of residential buildings remain without heat. Kyivenergo explains this by lack of connection applications and limited gas pressure at the CHPs.

7. Crisis in housing and utilities sector creates even more favorable conditions for the initiatives to save resources. Energy efficiency projects in Ukraine could get a chance for state support – municipal heating enterprises and public sector institutions are competing for the announced 300 mln UAH. At the same time, international financial institutions also support such projects. NEFCO will provide a loan for energy-saving projects in Kyiv, and USAID will allocate funds for the construction of boiler plant in Myrgorod. Energy intensity of production in Ukraine is three times higher than in Europe or the United States, that’s why any initiatives will be definitely welcomed and implemented.

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