Ukraine plans European natural gas sector integration

Ukraine is planning to open access to its end customers to European suppliers as part of efforts to eliminate dependence on Russian gas following an halt of Russian supplies on 16 June, Andriy Kobolyev, CEO of state-controlled oil and gas incumbent Naftogaz said on Wednesday.

Naftogaz has made proposals to the Ukrainian government that are currently under discussion, which call for bringing the Ukrainian gas sector in line with the EU’s third energy package. According to Kobolyov, Ukraine will work with European grid operators in order to adopt best practice for creating a transparent and competitive gas market.

The reforms include separation of the gas transmission and storage systems into two independent legal entities. Transmission and storage assets will still be owned by the government but leased to private companies to operate ( see ESGM 8 July 2014 ).

The reforms will also call for improving the finances of the loss-making Naftogaz at least to a level where it will be able to cover its costs.

Kobolyov said that the main risks Ukraine is facing are a gas supply shortage and a gradual loss of the Russian transit business.

To counter these risks Ukraine is planning to increase profitability of local independent gas producers through creating a unified wholesale gas price, Kobolyov said. He added that the goal will be to reduce the share of any single gas supplier to no more than 30% of total demand.

European imports

Ukraine has been importing gas from Europe via Hungary and Poland and plans to start imports via Slovakia in autumn.

German supplier RWE and Paris-based utility GDF SUEZ confirmed earlier selling gas to Ukraine in reverse flow via Hungary and Poland. A source said E.ON is also participating, but the German utility or Naftogaz did not confirm this ( see ESGM 4 July 2014 ). Companies have told ICIS that selling gas to Ukraine presents a commercial opportunity for them in the current oversupplied market in Europe, where prompt prices have reached four-year lows.

Following the escalation of Russia-Ukraine political tensions in April, Russia rescinded the two gas price discounts for Ukraine, bringing the price to more than $480 per thousand cubic metres. Ukraine rejects the new price and intense trilateral talks also including EU officials have been ongoing throughout. Ukraine’s negotiating position is weakened by its non-payment problem and outstanding debt of $4.5bn (€3.3bn) for gas supplied at the end of 2013 and the beginning of this year. Both Russia and Ukraine have escalated their price dispute to the Stockholm court of arbitration.

Russia is increasingly dissatisfied with its dependency on Ukrainian transit, which still accounts for more than 50% of total Russian exports to Europe. But Russia is planning to reduce those volumes using other routes and is going ahead with plans to build the 63bcm/year South Stream pipeline. Gazprom predicts transit through Ukraine to be around 70bcm in 2014.

As for Ukraine’s own demand, the country will not be able to replace Russian volumes easily. Ukraine’s consumption was 48.8bcm in 2013. The country has domestic production of 20bcm. Russian imports last year reached 25.84bcm and 2.13bcm was imported from Europe in reverse flow.

If reverse flow to Ukraine becomes possible via the Slovak border through the Vojany pipeline the total capacity in reverse flow to Ukraine will be as following:

• Poland 4-5mcm/day (1.4-1.8bcm/year)

• Hungary 9.6mcm/day (3.5bcm/year)

• Slovakia 22mcm/day (8bcm/year)

The combined capacity will not be sufficient to replace the over 25bcm coming from Russia.

The current oversupply of gas in Europe resulted in European suppliers showing interest in selling gas to Ukraine. The large difference between the current low spot prices and the high price of Russian gas for Ukraine presented a commercial opportunity to offload some of the volumes to Ukraine. This could change in the winter if demand increases. Katya Zapletnyuk