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Ukrainian gas market. Prospects of boosting (expert view)

 О. Chalyi, L. Unigovskyi

 

Dear colleagues,

Below you will find an expert view on the situation in Ukrainian gas market. It is certainly not an “ultimate truth”; however, we hope that many years of our experience in this area would allow us to make certain conclusions and proposals that might be of interest and use for the entire gas community.

 

Before going in-depth into the outcomes of our research, let us recall certain developments in the gas market during 2014. By the way, if you would object by saying that no market existed in 2014, we would like to draw your attention to the definition of this term: “Market is a certain combination of economic relations between households, companies, enterprises and the state in relation to procurement and sale of commodities and services”*.

 

Thus, one can claim that market existed in 2014, yet this was a monopolized market, in essence a one-seller market. Over 2014, 38.9 bln.m3 of gas was sold on this market. On the other side, 20.5 bln.m3 was produced in Ukraine, including 3.3 Bln.m3 produced by private companies, 19.5 bln.m3 were imported of which 14.4 bln.m3 or 74% were imported from Russia, by PJSC Gazprom. The war was going on at the eastern borders of Ukraine and Crimea was annexed. Natural gas consumption in 2014 compared to 2013 decreased by approximately 7.5 bln.m3 (including 3.4 bln.m3 at the expense of the occupied territories).

 

Impeding reliance on a single external supplier, discriminatory terms of the contract with Gazprom forced the country to look for the way out of the situation.

What is the case now? More than 10,000 industrial companies, 174,000 public utilities and organizations, 201 thermal energy generating companies are operating on the market. Natural gas is supplied to over 13 million household consumers. According to PJSC Ukrtransgaz information, 180 suppliers delivered gas to industrial consumers in Ukraine during 8 months of 2016 and ordered transportation services. If you would take into account deliveries to public utility companies, budget organizations, district heating companies and population the number of suppliers would reach 212. Overall, little more than 17 bln.m3 of gas was transported to consumers (over the period of 8 months of 2016).

 

Table 1 list companies that ordered transportation services and volumes of gas imported over the period of 9 months of 2016, based on Ukrtransgaz data.

 

Table 1 – Information about the volumes of gas imported in January – October 2016

Client of transportation services

9 months of 2016,

(in mln.m3)

PJSC ArcellorMittal

150,6

ASTROINVEST-UKRAINE Ltd.

45,7

Gazoilpetroleum Ltd.

30,3

Naftogazgroup Demetra Ltd

9,1

DTEK Trading

0,1

Ecotechnoinvest Ltd. 

0,1

Ukraine Energy Ltd.

8,1

Energy trade group Ltd.

61,9

ERU Trading PC

455,3

INKORGAS Ltd

44,3

KRAFT ENERGY Ltd

19,7

METIDA Ltd

602,5

NAFTOGAZ OF UKRAINE

4 651,2

OFFICE BUSINESS GROUP Ltd

38,6

POLTAVA PETROLEUM COMPANY JV

2,0

SKELA TERCIUM Ltd

54,2

"Sodrugestvo" Group of Companies

2,0

UKRGAZ SC JSC

115,3

UMVB Group

22,3

YUG-GAZ Ltd

14,8

Total

6 328,1

 

 

 

According to Table 1, Naftogaz of Ukraine accounted for 73.5% of total import.

In July 2016, the maximum effective price for Ukrainian consumers that were not subject to provisions of the Regulations on applying special obligations to the natural gas market participants with the view to insuring general pubic interests in the process of natural gas market functioning (excluding tariffs for transportation and distribution) was UAH 8,135.52 /1,000 m3 including VAT, which according to the average NBU exchange rate in July 2016 was about $328/1,000 m3 **.

In September 2016, 14 suppliers imported gas from abroad and the share of Naftogaz of Ukraine was 77.5%.

 

Number of importers at the points of entry:

Beregdaroc – 9, monthly nominations – 190 997.219 thousand m3;

Budince – 6, monthly nominations – 1 191 038.260 thousand m3;

Hermanowice – 5, monthly nominations – 115 477.461 thousand m3.

 

And now, let’s recall how it all started. It was in 2014, that the new Law “On the natural gas market” (hereinafter the “Law”) was actively drafted. It should be noted that back in 2010, due to the committed position of the large group of Ukrainian MPs, the Law of Ukraine “On the basics of natural gas market functioning” was adopted taking into account amendments introduced in 2012 that contained certain elements of the so called gas market liberalization. However, they failed to fix gas market liberalization on a legislative level in full.

The new law builds on the draft prepared by the experts of the Energy Community. A big group of specialists drafted the law. Finally, in April 2015, the draft law was adopted. At the moment, following one year after this law came into force, we can talk about certain weaknesses and deficiencies of this Law (and we are going to discuss this during the Forum). However, the most important is that the Law created legal background for new competitive gas market in Ukraine.  

We would like to add the following. One of the authors of this paper attended the relevant Parliament committee meeting chaired by Mrs. O. Belkova that was held prior to adopting the Law. Major subject of a discussion during this meeting was the form in which this Law should be adopted: should we postpone the entry into force of the most provisions of this Law that required new terms of the new market for 2016 or should practically all of its provisions be introduced in October 2015? Unfortunately, the second opinion prevailed. This was followed by the meetings of the market participants in Ukrtransgaz. General impression of the discussion with gas producers and traders organized by Ukrtransgaz in December 2015 explicitly confirmed our concerns. There were more questions than answers during this meeting including from Ukrtransgaz employees as well. Again, the “Napoleon approach” triumphed again: “the most important is to rush into a battle and later we shall see”. We face negative consequences of this approach at present. Let’s talk about it later, though.

I should say that following an explosive, though somewhat chaotic, start in October 2015, the momentum for introduction of the new model was lost. There were natural external circumstances for that. In particular, replacement of Government that is always a painful process. Let’s hope that when the new Government would get into the swing of things it would ramp up its activities.

Thus, the Law entered into force in October 2015. A year passed. Let’s summarize what the bottom line is.

 

Positive developments.

1. Main features of the new model of the Ukrainian gas market has taken shape.

2. A large part of the regulations was developed. They are being implemented, updated and adjusted along the way.

3. Real competition was launched among industrial consumers.

4. Stable trend is observed towards decreasing the share of the monopolist – Naftogaz of Ukraine – in supplying gas to industrial consumers.

5. Share of overseas gas traders who supply (are willing to supply) natural gas to Ukrainian companies increased.

6. First subsidiaries of overseas gas traders-residents of Ukraine appeared on the market.

However, these are basically all positive developments.

This conclusion we made back on 21 September 2016. However, on 22 September came a breakthrough: Ukrainian Parliament adopted 2 important laws: “On the National Commission exercising governmental regulation in the areas of energy and municipal utilities” and on introducing changes to the Law of Ukraine “On the natural gas market” with regard to decrease of a cap on the reserve stock to 10% of the monthly planned volumes to be delivered.

 

Negative developments.

Not all required changes were introduced to a range of Ukrainian Laws.
Application of mechanisms new for the Ukrainian market (even 10% of reserve stock and financial guarantees) increases considerably financial burden on traders (suppliers).
Recently, drafting of required bylaws (regulations) has considerably slowed down; moreover, certain governmental decisions have largely disabled this process.

It should be emphasized that we do not consider Naftogaz of Ukraine responsible for all omissions and shortfalls in the course of implementation of the new gas market model. On the contrary, Naftogaz did and is still doing a lot of positive things in this field. And no one is fail-safe. The issue is that that introduction of the competitive gas market in the country is a governmental task and it should be done by a state authority. Unfortunately, so far the Ministry of Coal and Energy of Ukraine appeared professionally not ready to take over the leadership in this process.

 

Now, let’s get over to the expert evaluation of the Ukrainian gas market status.

I. The Law “On the regulator”

Following the insisting demands from the EC, the law on the regulator*** was finally adopted. Thus, a certain forced compromise took place; none the less, this is considered to be a step forward. No doubt this Law is a cornerstone of what we call “the natural gas market”. We need to have the regulator that would be at least somehow protected against impacts from both the legislative and executive authorities and influence from financial industrial groups.

There is an urgent need to draft the Law “On energy-sector ombudsmen” and to adopt it as a guarantee of consumers’ protection on energy markets.

 

II. Once again concerning Naftogaz of Ukraine monopoly

According to our estimates (based on data provided by Ukrtransgaz), Naftogaz share in supplying industrial consumers in the period of 8 months 2016 was 8.02%. According to approximate estimates based on the OJSC Ukrtransgaz information, the Herfindahl-Hirschman index for industry segment is at least 1051 which is indicative of the moderate concentration of natural gas market of Ukraine in this segment****.

Chances are that the share of Naftogaz during the winter months would increase. However, monopoly position of this company has some other aspects to it. Ukrainian Operator of Gas Transmission System (GTS) – Ukrtransgaz – is still directly administratively reporting to Naftogaz of Ukraine. This is an abnormal situation.

Government of Ukraine by its Decree No. 496 of 01.07.2016 has approved the plan for unbundling. However, practical implementation of this plan is contingent on the completion of arbitration proceedings in Stockholm. Therefore, the question arises: what shall be done before this happens? Market cannot normally operate without Ukrtransgaz being separated. Solution could be as follows: to introduce changes to the Charter of Ukrtransgaz by envisaging impossibility for Naftogaz to unilaterally:

be administratively (HR) involved into GTS operator’s activities;
monitor Ukrtransgaz financial flows;
introduce changes to the GTS operator’s charter.

Until the Stockholm process is over, i.e. before the real unbundling, these functions were supposed to be transferred to the Ministry of economic development and trade. In our opinion, this decision would not impact the Stockholm arbitration proceedings, and there will be a relatively independent GTS operator available on the market. This is doable since the new Naftogaz Charter will enter into force by the Cabinet of Ministers of Ukraine Decree No. 1002 of 05.12.2015 only from 01.04.2017. Authors support this idea because there is no 100% guarantee that Stockholm arbitration proceedings will be completed in 2017. And the market requires an independent GTS operator now.

Unfortunately, imperfect procedures of taking this decision by the Ministry of economic development and trade (lack of transparency, failure to inform our foreign partners including WB, EBRD, Energy Community Secretariat) discredited this idea. However, we still hope that the new compromise solution would be found.

 

III. Restructuring of Naftogaz (including unbundling)

Definitively, Naftogaz of Ukraine needs to be restructured as soon as possible. And the Cabinet of Ministers of Ukraine Decree No. 496 of 01.07.2016 “On approval of the NJSC Naftogaz of Ukraine restructuring plan” is probably desperately needed. However, creating two absolutely new companies – “Ukrainian main gas pipelines” and “Ukrainian underground storages” on the basis of the structure with the 20,000 strong staff would, in our opinion, delay this process for years. By the way, this Decree does not say what would happen with Ukrtransgaz. In our opinion, the option suggested by Ukrtransgaz management is more realistic. According to it a separated subdivision would be created on the basis of the subsidiary Lvivtransgaz to concentrate all the underground storage facilities. In the long run, this separated subdivision will be transformed into independent legal entity. This is evolutionary path instead of a revolutionary.

It should be mentioned that in the opinion of the authors of this report, it is quite complicated to search for the single investor (concessioner) for the entire Ukrainian GTS. Ukrainian GTS is currently operating at 25% of its capacity (considering internal transportation); only 7-9% of all gas-compressing units are operational, about 30% of industrial capacities are excessive. It seems very unrealistic that a “well-reputed European company” would take over this system. It is more probable that such investor or “managing company” (if it would be found) would make a condition to separate 2 - 4 transit gas pipelines and would further manage them only. However, this is not the entire GTS: such gas pipelines could be separated from Ukrtransgaz as well. But this is exactly what we were saying for quite some time: creating a JV and transferring to concession (leasing) of separate GTS sections. For example, JV on servicing Poland – Ukraine interconnector and a separate UGS; JV for supporting gas overflows from Slovak republic to the Balkans via Romania and Bulgaria and in the reverse direction, i.e. GTS “fragmentation”. We agree with the idea voiced by Naftogaz group: without exchanging assets with major European GTS operators, the transit faith of Ukrainian GTS could be very complicated.

There is another issue - Ukrgazvydobuvannya. It is true that the Third Energy Package does not require separation of trade from production. However, one should consider that Ukrgazvydobuvannya also includes Shebelinka GPP (gas processing plant) that started production of А-95 petroleum of Euro-5 standard (our congratulations to all involved!). This company is can operate on the market independently. Especially, given that the prices will be market ones. In the long run, it can also be separated and privatized with mandatory separation into different companies, as we see it. We do not need a new monopolist on the market. One company should not have more than 30% of sales on the market. This is for AMCU to monitor.

The last issue in this section is what shall be done with Naftogaz. In our opinion it should exist. The company has a team of young and promising and it would be wrong to lose all that.

It is worth mentioning that Naftogaz itself owns 6 licenses for exploration and production with the license area exceeding all licenses of Ukrgazvydobuvannya. Even now, about 100 mln. m3 of gas could be produced annually from these abandoned (due to absence of infrastructure) wells. Much more can be produced in the long run. Therefore, authors see Naftogaz perspective as follows: a trading company and two subsidiaries for production and storage of natural gas.

We would like to explain the last statement. It happened that the company is literally “wearing two hats”: on the one side, everyone is demanding Naftogaz operations to break even which is right from the business entity standpoint; on the other side, this company is used as an instrument of the state policy in the gas sector. Here is an example. We force Naftogaz to purchase excessive amounts of gas during the fall period which could be required to assure the Russian gas transit only; however, we do nothing when Naftogaz has to sell this expensive gas during the summer time or has to bear expenses for its storage. For example, company’s management considers that 14.5 bln.m3 of gas stored in the underground storages is sufficient for Ukraine to pass the 2016-2017 heating season. At the same time, the government decided to recommend injecting up to 17 bln.m3 to UGS. Injecting “extra” 1.0-2.5 bln.m3 would significantly worsen the company’s financial indicators. What is the solution to this situation? In our opinion, the solution might be like this. When we are talking about “excessive” volumes of gas to be stored, we essentially are talking about strategic reserves of natural gas for emergency situations. We need to draft and adopt corresponding legislation (similar to that one that is in force in Hungary or Italy, similar to Directive No.2009/119 on minimum stocks of oil and oil products) and implement this legislation. Then Naftogaz would not have any problems (and risks, primarily financial) related to procurement of this gas, its storage and renewal of stocks since funds for purchase of these reserves would be earmarked from other sources and not at the expense of the company’s operations or credit facilities. To store these strategic reserves, we do not need all but 1 -2 UGS located along the western borders. By the way, Naftogaz also supports this approach.

 

IV. Further market developments

As it was already mentioned in this report, latterly, the market development has slowed down. In our opinion, this is due to approval of the Cabinet of Ministers Decree No. 315 of 27.04.2016. And the reason is not that it was developed in a not professional manner and not that a single marginal price for natural gas was introduced. This approach has the right to life when there are no normal mechanisms for market pricing (exchange market, public auctions). The matter is in the formula stated in point 2 of this Decree used to calculate the gas price. This formula accounts for transportation and distribution tariffs which make it practically impossible to create entry-exit tariff system. The proposed formula does not include the fee for using gas distribution system. However, networks are to be maintained when gas supplies decrease or there are no gas supplies at all.

However, there is also a positive aspect. The National Energy and Utilities Regulatory Commission (NEURC) approved decision to reconsider this notorious formula, though postponed it until 01.04.2017.

In our opinion, it would be reasonable to set up a marginal wholesale price for natural gas.

There is another issue directly related to creating level playing grounds for all gas traders. GTS entry tariff in case of a cross-border connection is $12.47/thousand m3. It “works” for all importers while domestic producers do not pay it. This is in direct violation of the rules of the “national regime for domestic taxation and regulation” set forth in Article III of the General Agreement on tariffs and trade which Ukraine acceded to in 2008.

The next issue is to exempt Naftogaz from input (in-bound) VAT when importing gas. When we are talking about gas supplies to protected consumers and district heating companies (DHE) for population, then, in our opinion, this makes sense. However, this does not make sense when selling gas to the industry.

 

V. Determining the market price for gas

Authors have repeatedly mentioned that the real market price is the equilibrium price determined by supply and demand which is not the case in Ukrainian realias. As an auxiliary method, a substitute for such price can be determined by estimation which was done by the Government. In our opinion, it would be better in the long run to apply Mr. Ermilov’s proposal: to legally bind importers and domestic producers to sell at least 30% of natural gas procured (produced) not for own consumption on the exchange. In our view, this worked quite well in Poland. (By the way, a representative of PGNiG, one of the biggest Polish traders, is scheduled to present the Polish experience).

Now let’s discuss the general issue, why do we need to switch to market gas prices. Media repeatedly initiated the discussion on increasing security of energy supplies at the expense of increase of domestic production. No doubt this issue is of ultimate importance for our country. However, the main objective for introduction of the market price, in our opinion, is after all different: to guarantee free energy overflows between regional gas markets. This is the only way to create competition between import and domestic production and to render cartel agreements impossible.

Special attention should be paid to applying the accelerated depreciation when determining entry-exit tariffs. The background of this issue is that following the statement from Gazprom saying that it would stop transit through Ukraine after 2019, Naftogaz team proposed to “force” Gazprom to pay for the entire depreciation of transit gas pipelines until the end of 2019. On demand by the Ministry of coal and energy, NEURC has implemented this idea.

If this accelerated depreciation “features” in the entrance cross-border price of $12.47/1,000 m3 on the western Ukrainian border, then the question pops up: why Ukrainian consumers have to pay for accelerated depreciation? In fact, they are going to use gas well after 2019.

 

VI. Benefits of monetization

Considering planned amounts of subsidies, it is indeed very complicated to “present” them in real money. However, the option considered by Ukrainian Government could, in our opinion, be very efficient. The idea is to pay out the “saved” subsidies in cash. This would force recipients of subsidies to save fuel resources. Unfortunately, we are not aware if the corresponding regulatory basis was developed (or is in the process of development) and whether the realistic specific plan to implement this idea already exists.

 

VII. Financial guarantees and the reserve stock  

Everyone operating on the Ukrainian gas market knows these issues.

Indeed, a differential approach should be taken to introduction of financial guarantees. One could propose to use experience of international traders in terms of measures they apply when approached by unknown customers. They all are proposed to apply KYC (know your customer) procedures, i.e. customer’s due diligence in terms of reliability and solvency. It could be proposed that based on a similar procedure, Ukrtransgaz would individually determine the scope of required financial guarantees for each shipper, however by applying the transparent procedure. It might be the case that such guarantees would not be required from suppliers. These processes have to be monitored by the regulator as opportunities for corruption would exist.

Requirement to keep the reserve stock has a long history to it. Initially, after approval of the Law “On the natural gas market”, 200% of the monthly amount was considered (Naftogaz proposal), then 50% was agreed. A reasonable proposal from Naftogaz was to request a reserve stock only in case of supplying gas to protected categories of consumers. This is understandable and logic. Finally, CMU drafted a Decree “On approval of procedures for creation of the natural gas reserve stock” to implement this idea. However, the Law of Ukraine on the marginal reserve stock level in the amount of 10% for all suppliers adopted by Verkhovna Rada of 22 September, offset this idea. In our view, it would be more reasonable to preserve the reserve stock only for supplying natural gas to protected consumers. However, if the legislation on the natural gas strategic reserves (stock) would be adopted, it would be possible to abandon this proposal altogether.

 

VIII. Codes of GTS and GDN

Though the Law “On the natural gas market” was enforced on 1 October, 2015, both codes were enforced in January 2016 only. Until today, they have been considerably modified, and they turned to be more advanced. In our view, absolute absence of novels concerning guarantees of free third party access to transportation (distribution) facilities appears to be the major deficiency of these codes. Given that domestic systems are working at 20-25% of their capacity, this is different in relation to trans-border facilities. Both on Slovak (40 mln. m3/day) and on Polish (4 mln. m3/day) directions free capacities were absent during certain times. Only the Hungarian direction was relatively free (16 mln. m3/day).

Naftogaz purchased considerable amounts of capacities in Slovak-bound direction (38 mln. m3/day) by Open Season procedure for 5 years. Sometimes, these capacities were not used. Sometimes, Naftogaz re-sold them to other companies. Eustream, Slovak GTS operator, made use of incomplete load of these capacities. According to European legislation, 10% of non-used capacities could be loaded, even though it was bought-out by Naftogaz. It should be noted that Naftogaz purchased the carrying capacity of the Slovak-bound direction in 2014 when the Law “On the natural gas market” was not in force. In our view, considering special obligations imposed upon Naftogaz with regard to supplies to protected consumers (obligations of the so-called “last hope supplier”) as well as its obligations to provide for the transit security, these capacities have to remain with Naftogaz, however under provision that they would be fully used. In case they become free (not used), they are to be sold at open auctions and Naftogaz have to be reimbursed the costs of reserving these capacities.

 

IX. Commercial balancing

A bottleneck issue in the natural gas transportation and distribution system is the technical impossibility of daily commercial balancing (this is the reason of negative disbalance that occurs from time to time). Ukrtransgaz announced tender for development of such system (software and  information support), held this tender; however it cancelled the results of competitive bidding. We do not want to investigate why it happened; however, given that development and introduction of such system takes 5-7 months, it becomes obvious that even optimistic forecast of its commissioning would be the second half of 2017.

Moreover, there is another important aspect. If the Cabinet of Ministers of Ukraine Decree No. 496 would implemented and Ukrainian Main Gas pipelines, a new GTS operator, chances are that this platform would be created by new company?

 

X. Population. Would the market be competitive?

Indeed, the Law “On the natural gas market” creates a theoretical possibility of having several proposals on the market for supplying natural gas to population. However, this is unfortunately just a theory. There are two essential reasons standing in the way of practical implementation of this option. The first one is uncertainty of suppliers that they will be paid for gas; second reason is poor information of people on possibilities to procure gas from suppliers other than regional/city gas sellers. In addition, there are fears that “gazzbuty” (gas suppliers) being closely related to regional/city gas authorities would oppose such attempts. In our view, this is unlikely, and in case this would happen, the regulator has enough leverage to resolve the situation.

 

XI. Production

We will not touch upon this very important aspect of our energy safety. We would like to refer to the Concept for development of gas production industry elaborated by the Ministry of energy and coal by involving independent experts and the roadmap for implementation of the Ukrainian Government plan concerning increase of gas production in Ukraine that was developed by the Association of Ukrainian gas producers with the support from American Chamber of Commerce in Ukraine.

 

XII. Licensing

Upon adoption of the Law of Ukraine “On regulator”, collision disappeared concerning non-conformities between the Laws “On the natural gas market” and “On licensing of types of economic activities”. Now, Regulator may approve licensing conditions and issue licenses. Regulator already published the draft Decision “On approval of Licensing conditions for economic activities in the natural gas market”. This would allow bigger number of suppliers to take part in competitive biddings to supply natural gas to budget organizations.

 

XIII. Gas distribution

Over 75,000 persons are working in this field. Gas distribution system operators maintain over 409,000 km of gas pipelines, 63,000 gas distribution stations designed to reduce gas pressure, 271,000 cut-off devices. In 2015, 29 bln.m3 of natural gas was distributed for domestic consumption. Gas distribution system operators service 9.5 mln. domestic gas meters and almost 28 mln. domestic gas devices. Almost 38% of these devices have exceeded their lifetime.

Safe supply of gas and also sometimes our lives depend on diligent attitude of these people.  It’s time to stop transferring assessment of activities of some DSOs owners on activities of operators themselves.

The gas distribution sub-branch requires urgent introduction of stimulating tariff-setting, new technologies, revision of regulatory basis and, which is very important, enhancing the prestige of this work.

 

XIV. Gas accounting

Experts, including authors hereof, repeatedly emphasized the need to switch to gas accounting based on energy indicators. 

At cross-border stations, gas is accounted both by volume and by energy indicators. However, inside the country situation remains as it used to be many years ago. It is hard to understand because according to information available to us Ukrtransgaz has quite serious experience in this field. According to Naftogaz of Ukraine press service, the company elaborated and forwarded to the Ministry of energy and coal of Ukraine and to the Ministry of economic development and trade of Ukraine the draft “Action plan on introduction in Ukraine of the natural gas accounting system in units of energy” and the corresponding draft Decree of the Government. These developments can only be welcomed.

Accounting gas based on energy indications is closely related to “acceptance” of gas to Ukrainian GTS from domestic gas producers. We have to have regulations that govern this process. For instance, we need to know financial mechanisms (surcharges, penalties) that are used in case of supplying to GTS the natural gas of high (low) calorific value. (By the way, this relates to other gas parameters as well.)

It should also be mentioned that authors treat negatively the idea of installing house gas meters. This would not solve the problem, rather transfer it to another level.

 

XV. Methodological and information support

Developed and competitive market cannot operate effectively without the developed support infrastructure that along with exchanges, clearing companies include price agencies such as ICIS, Platt’s, Argus, Bloomberg.

At this point, we do not have such kind of market; however, we are confident to have such market in future. Therefore, we believe now is time to pay more attention to this particular aspect.

Important tasks in this field include the development of methodology for calculating the price index, forecasting gas consumption dynamics depending on temperature indicators and gas prices, monitoring (not just monitoring, rather expert analysis) of the market situation, balance of supply and demand, maximum and minimum price, etc.

There is no doubt that international agencies would “gladly” come to Ukraine as soon as corresponding conditions are created. However, we consider that it is imperative that domestic segment is also present on this market.

 

GENERAL CONCLUSIONS AND RECOMMENDATIONS

As present, an entirely competitive (liberalized) natural gas market is not available in Ukraine. Moreover, movement towards a modern European model of gas market has slowed down.
There is no systemic approach to introduction of the new market model coordinated in all required aspects. There is no approved action plan which implementation could be monitored by expert community and probably by civil society. It is expedient to develop a comprehensive Plan to introduce a competitive gas market in Ukraine that would cover all aspects of this process. Progress reports on implementation of this Plan have to be issued and published in press and on the Internet on a quarterly basis.
With all due respect to Naftogaz team, it is unreal to charge it with the task to provide for complete implementation of the new market model. Naftogaz of Ukraine is in a dual position. On the one hand, it is just an business entity, on the other hand, it is a tool for the state policy in the gas sector. Combination of these two functions is not always successful and probably not even possible. At the same time, professional staff of the Ministry of energy and coal industry of Ukraine, in our opinion, still does not allow it to take over this process.

In our view, it is reasonable to set up an individual group of highly qualified experts as a part of the National Council for Reforms and to charge this group with effective powers.

Government has to have not just a single channel (ministers, top managers of companies), though with several channels of communication on this issue (expert surveys, monitoring of Internet sources, publications, etc.).
Roundtables on this issue are to be held regularly, including mandatory managerial decisions based on discussion results.
Personal responsibility for achieving considerable results of these activities shall be laid on a top official selected for this purpose and having adequate powers.

____________________

Dictionary of terms and definitions (Economic definitions).

** The National Energy and Utilities Regulatory Commission (NEURC).

*** Which still has to be signed by the President.

**** When calculating an index, the ownership structure of private gas producers has not been analyzed. Considering that several companies have the same owners, index is actually going to be higher than calculated.


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