LAW FIRM DIRECTORY

Industry Sectors | Energy

DENIS LYSENKO,
Managing partner at AEQUO

PAVEL BELOUSOV,
Counsel at AEQUO

The gas vector

The energy security of Ukraine is front and center among the reforms implemented in the country. Among the main objectives – to ensure access to the gas transportation system (GTS), its overhaul, demonopolization and reform of the natural gas market

Against the background of the fall in free market prices and the exacerbation of relations with the Russian Federation the main attention in Ukraine is focused on issues of energy security and on the process of natural gas market liberalization. The need to reform Ukraine’s gas sector is due to such factors as ensuring the functioning and development of the oil and gas sector and, what is important, its modernization, the satisfaction of the needs of industrial and domestic consumers for the fuel and power resources as well as the establishment of market prices and economically justified tariffs for such resources. The last factor will, in its turn, not only enable the development of the oil and gas industry but also introducing energy-saving technologies and a more effective approach to using the energy resources, which has been normal practice in economically developed countries for a long time now.

In accordance with statistical data, Ukraine has consumed more gas than developed European countries like France, Spain and Poland in 2014-2015. At the same time, most of the gas consumed domestically in Ukraine is used to satisfy the needs of the population. This is indicative of inefficient use of energy resources.

Further development of the Ukrainian natural gas market is not possible without the creation of transparent rules and conditions comprehensible for the consumers and investors that serve to increase the competitiveness of the market and provide additional incentives for attracting  foreign investors and gas producers to Ukraine.

 

«New» gas market

On October 1, 2015 the main provisions of the Law of Ukraine “On the Natural Gas Market” (the law on the gas market) came into effect. The main purpose of the law is the creation of an effective competitive environment on the natural gas market in Ukraine and its aggregation  with the natural gas markets of member states of the European Energy Community, including through creation of regional gas markets, affording public access to the gas market for all the entities and consumers.

The provisions contained in the Law have been developed in cooperation with the Energy Community Secretariat for implementation into the legislation of Ukraine of the so-called Third Energy Package of the EU which is an obligation undertaken by Ukraine as a member country of the Energy Community. Implementation of the provisions of the Third Energy Package and the integration of the Ukrainian gas market has provided the possibility to every Ukrainian or foreign company to purchase gas for their own use from an independent seller and obtain  access to the transit capacities of Ukrainian GTS.

However, in order for the Law on the gas market to become an effective mechanism, the Government and the National Commission carrying out state regulation in the field of energy and communal services (NKREKU) should take a number of measures for implementation of the rules for supply and transportation of gas, the functioning of the Ukrainian gas transportation system and methodology for the establishment and calculation of the tariff for transporting natural gas, as well as to complete the reform of pricing on the gas market, which will serve as an incentive to attract investment resources.

Part of the normative legal documents required for the implementation of the Law on the gas market was  adopted by NKREKU on September 29, 2015. These are, in particular, the decree “On approval of the Procedure for determination and calculation of tariffs for the services for transportation of natural gas for entry and exit points on the basis of a long-term incentive based regulation”, “On approval of the Code of the gas transportation system”, “On approval of the Code of the gas distribution system”, “On approval of the Rules for natural gas supply”, “On Approval of the Code of gas holders”, on approval of standard form contracts for the supply of natural gas by the supplier of “last resort” and the supply of natural gas to domestic customers, on approval of standard form contracts for the distribution, transportation and storage of natural gas.

In October 2015 the Cabinet of Ministers of Ukraine also introduced a number of draft laws aimed at implementing the Law on the gas market and, therefore, the adoption of laws and regulations on reforming the Ukrainian natural gas market is expected in 2016.

 

Reforming the National Joint Stock Company Naftogaz of Ukraine

A separate current issue for the Ukrainian gas market is reforming the National Joint Stock Company Naftogaz of Ukraine both in terms of corporate management and in terms of the separation of production/sales of gas and the transportation business.

And while certain success was achieved in solving the first issue: in October 2015 the Cabinet of Ministers approved a corporate management plan for the National Joint Stock Company Naftogaz of Ukraine which enabled the latter to receive an EBRD loan totalling 300 million Euros, the issue of “separation” of PJSC Ukrtransgaz 100% owned by Naftogaz remains open.

 

Further reforms

Domestic gas production, which had been rising steadily in previous years but fell in 2015, remains an important issue. Gas producers complain, among other things, about the high rental payments set in 2014.

In this regard Government Bill No.2352a should be mentioned. It suggests reducing the rental rates for gas production from 55% for the fields whose depth is less than 5,000 metres and 28% for those fields whose depth exceeds 5,000 metres to 29% and 14%, respectively, from October 2015. Moreover, the Ministry of Energy and Coal Mining proposes to continue reducing rental rates to the level of 20% and 10%, respectively, as well as introducing surtaxes at the rate of 15% as compensation. Under these conditions the volume of natural gas production in 2016 and in the future may increase substantially.

In addition, on October 15, 2015 Bill No.3325 on the introduction of a new natural gas market model prepared by the Cabinet of Ministers was registered. The document is aimed primarily at bringing a number of laws in the energy sector into agreement with the provisions of the Law on the gas market so as to eliminate any conflicts. Moreover, the Bill imposes the requirement for organizational and legal independence of the operator of the gas distribution system (GDS) from other activities not related to the distribution of natural gas, the establishment of transparent rules for access to GTS, GDS, gasholder or LNG and the rules for the proper maintenance and modernization of networks as well as liability for their violation (for example, denial of access to networks).

 

What we aim at

The result of implementing the Law on the gas market and the above-mentioned laws and regulations aimed at reforming the Ukrainian natural gas market will, first and foremost, be the energy security of Ukraine and the creation of competitive conditions on the energy market. Free access to GTS of Ukraine and European gas markets will enable the supply of gas from both the gas traders in Ukraine and the countries of the Energy Community (including on European hubs TTF, GASPOOL and NCG) to be ensured.

An improvement in the efficiency of the Ukrainian GTS is also expected. Today, it works mainly for the transportation of Russian gas to Ukraine and Europe as well as for the domestic market. In the long view, the unity of the European and Ukrainian natural gas markets can ensure the load of the Ukrainian GTS’s capacity for gas transportation within the EU (for example, from Romania to the Central and Western Europe), as well as to Moldova and Bulgaria.

Through the attraction of investment, including foreign investors interested in working on the Ukrainian market, the modernization of GTS and underground gas storage facilities must be carried out in Ukraine. And the integration of the Ukrainian market with the markets of  Energy Community members will enable the  capacity of Ukrainian underground storage facilities, which are among the largest in Europe, within the European gas storage system, to be used.