Ukraine’s Naftogaz seeks to expand regionally, internally – commercial director

LONDON (ICIS)–Ukraine’s incumbent Naftogaz could become an important regional market participant as it is already expanding its activities across multiple sectors domestically, the company’s director of commercial division told ICIS in an interview.

Willem Coppoolse said the company intends to expand its trading relations with central and eastern European neighbours as well as Austria.

Naftogaz has undergone important changes in recent months as its transmission operations were unbundled and consolidated into an independent grid operator, GTSO.

Following the divestment, Naftogaz has sought to establish a presence in different sectors.

For example, it signalled an interest in green energy projects, completing a 1MW pilot solar plant in Andriivka, eastern Ukraine, with a view for further possible expansion.

Since August, it has also taken a more active role in the retail sector after the gas market was further liberalised.

FURTHER LIBERALISATION

Under previous arrangements, Naftogaz had been required to sell volumes to distribution companies for further sales to households at regulated tariffs.

Since the beginning of the year, the formula used to calculate the tariff changed to include a link to European hub prices, and from August, Naftogaz can sell the volumes which had been earmarked for households on the free market.

This means that some 8 billion cubic metres of gas have been freed up annually, giving Naftogaz the choice to conclude its own contracts with consumers.

Naftogaz is now seeking to expand its position in the retail sector, which has been dominated by RGC, a local distribution and retail company, covering some 70% of market share.

MARKET ACTIVITY

Coppoolse said Naftogaz has been an active player on the open gas platform operated by the UEEX where it had been selling balance of month, front month and month+2 products.

More recently the company introduced a front quarter for transactions and aims to develop the product in the short term.

Coppoolse said another important focus for the industry was the launch of intra-day and day-ahead markets, which would allow liquidity to form not just on short-term products, but also on longer-term contracts.

A short-term platform has already been tested by UEEX and there are expectations that subject to law change the transmission system operator GTSO would perform balancing operations on this outfit.

However, he admitted that issues related to credit were slowing down developing liquidity on other products.

Financial risks linked to wider country risks have been a concern for established players who are interested in entering the Ukrainian gas market and developing a stronger position.

A new financial law which was adopted earlier this year and seeks to align Ukraine’s legal framework with that of the EU, including the Markets in Financial Instruments Directive II (MIFID II) as well as secondary regulations would be phased in next year, allowing market participants to hedge their positions and minimise risk.

BUILDING TRUST

In recent years, Ukrainian gas market stakeholders have worked intently on gaining foreign companies’ trust in institutions and change international perception regarding the country’s reliability as a transit route and as a market.

Coppoolse said Russia’s Gazprom decision to book more October capacity in addition to what it already holds under its long-term contract may indicate that Ukraine and Naftogaz, as the company organising the transit, have become trustworthy partners.

Data from regional booking platform RBP suggests that Gazprom may have booked an additional 4.5million cubic metres/day, with volumes being delivered to Moldova and Romania via Ukraine.

Nevertheless, when compared to the previous year, Ukraine has transited 39.5 billion cubic metres of Russian gas to central and eastern Europe in the first nine months of 2020, a 40% year-on-year decline.

STORAGE INJECTIONS

The drop in transit volumes is partially linked to the supply overhang in Europe, which meant much of the gas returned into Ukraine as companies injected it in local storage.

Coppoolse said 2020 as well as the previous two years have been exceptional for Ukraine because a record number of non-resident companies imported volumes and injected them in local facilities. As of October 2020, some 80 non-resident companies had signed transmission contracts, 30 of which have been actively importing and storing gas in local facilities.

Earlier this year Sergiy Oleksiyenko, former CEO of storage operator and Naftogaz subsidiary Ukrtransgaz, said some storage sites were inefficient and had to close down.

However, by the beginning of October there was 28bcm in Ukrainian storage, meaning most of the 30.95bcm capacity was in use.

GAZPROM SALES

A year ago while Naftogaz was involved in negotiations with Gazprom for the signing of a new contract, there were reports that Gazprom may sell volumes to Naftogaz directly.

But proposals failed to materialise and Coppoolse said Ukraine was already oversupplied and looking to develop its own production, rather than buy volumes from Gazprom for now.

Although bilateral contracts may not be politically acceptable from a Ukrainian government point of view, Gazprom could sell additional volumes to Ukraine via the open ESP platform.