UKRAINE’S GAS SECTOR Simon Pirani June 2007 [email protected] The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members. Copyright © 2007 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgement of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 1-901795-63-2 978-1-901795-63-9 ii CONTENTS Foreword vii Acknowledgements viii 1. Introduction......................................................................................................................................1 2. The wider context.............................................................................................................................3 2.1 Independence and slump (1991–1994) 4 2.2 Early attempts at reform (1994–1999) 6 2.3 The economic recovery under Kuchma (1999–2004) 7 2.4 The Orange revolution and its results (2004–2006) 8 2.5 Ukraine’s energy balance and energy strategy 11 2.6 Energy saving issues 15 3. Gas in Ukraine ...............................................................................................................................17 3.1 Gas in Soviet Ukraine 17 3.2 Cheap gas, expensive debts (1991–1994) 18 3.3 Russia seeks control; Ukrainian traders seek rents (1994–1999) 20 3.4 Russia recentralizes, Ukraine reforms (a little) (1999–2004) 21 3.5 Breaking up and making up (2004–06) 23 3.6 Gas prices and subsidies 25 4. Gas supply 2006–2007...................................................................................................................28 4.1 Gas imports 29 4.2 Commercial and trading arrangements for imports of Russian and central Asian gas 2003– 2005 31 4.3 Commercial and trading arrangements for imports 2006–2007: (i) Gazprom and Rosukrenergo 34 4.4 Commercial and trading arrangements for imports 2006-07: (ii) Central Asian supply and prices 35 4.5 Corporate governance controversies in Russo–Turkmen–Ukrainian gas relations 38 4.6 Ukraine’s relationship with central Asian producers 42 4.7 Domestic gas exploration and production 46 4.8 Issues of taxation and upstream terms of access 50 4.9 Possibilities of diversifying supply 52 5. Gas consumption and the domestic gas market .............................................................................54 5.1 The domestic market in 2003–2005 54 iii 5.2 The domestic market from 2006 55 5.3 Regulation of prices, tariffs and trading 58 5.4 Price trends 60 5.5 Wholesale and industrial market developments 61 5.6 Regulated market developments and regional gas companies 64 5.7 Payment issues 67 5.8 Changes in structure of the industry 2006–2007 69 5.9 Gas exports 71 6. The transport network ....................................................................................................................73 6.1 Overview 75 6.2 Storage 78 6.3 Modernization and maintenance 80 6.4 Energy efficiency and wastage 81 6.5 Payment for transit and storage 84 6.6. Discussions on management and control of transit and storage 86 7. Impact of higher gas prices on the Ukrainian economy.................................................................91 8. Conclusions....................................................................................................................................99 8.1 Ukraine’s relationship with Russia: causes and outcomes of January 2006 crisis 99 8.2 Ukraine’s relationship with Russia in future 102 8.3 Future international relations in the gas sphere 104 8.4 Energy strategy and the impact of import price increases 106 8.5 Domestic market reform 107 Appendix 1. Statistical information about natural gas imports and exports ....................................109 Appendix 2. Gaz Ukrainy’s predominant position in the domestic wholesale market until 2005 ..111 Bibliography.....................................................................................................................................112 Newspapers, journals and web sites 115 iv TABLES, MAPS & FIGURES Table 2.1. GDP energy content, compared to the world average ......................................................11 Table 2.2. Energy consumption per capita, 2005...............................................................................11 Table 2.3. Shares of total primary energy supply, by fuel.................................................................12 Table 2.4. Share of total final energy consumption, by sector...........................................................13 Table 2.5. Structure of electricity production by fuel, 1993 and 2004 ..............................................14 Table 2.6. Projections of Ukraine’s energy strategy of consumption of domestic and imported energy resources (millions of tonnes of oil equivalent, MTOE) ...................................................................15 Table 3.1. Soviet gas production by region, 1960–1980 (bcm/year).................................................17 Table 3.2. Prices for natural gas delivered to European consumers, 2006 (including VAT) ............26 Table 3.3. Import prices of gas sold by Gazprom, 2006–2007 ($/mcm) ...........................................27 Table 4.1. Ukraine’s gas balance, 2003–2006 ...................................................................................28 Table 4.2. Average prices for Russian gas exports ($/mcm). ............................................................29 Table 4.3. Prices paid by Naftogaz Ukrainy, Rosukrenergo and Ukrgazenergo (price in $/mcm) ..30 Table 4.4. Ukrainian natural gas production (selected years)............................................................46 Table 4.5. Ukrainian natural gas production in 2005–2006 (bcm) ....................................................47 Table 4.6. Average gas extraction costs, $/mcm................................................................................50 Table 5.1. Consumption of gas during 2003–2006............................................................................54 Table 5.2. Breakdown of gas price paid by industrial customers (prices current in November 2006)59 Table 5.3. Breakdown of gas price paid by residential customers, January 2007 .............................59 Table 5.4. Market prices for industrial customers (net of VAT) 2003–2006 ($)...............................60 Table 5.5. Natural gas tariffs (uah/mcm) set by the NERC ...............................................................60 Table 5.6. Major holders of supply licences, 2006 ............................................................................63 Table 5.7. Business groups that own stakes in regional gas companies ............................................67 Table 5.8. Debts to Naftogaz Ukrainy at 1.10.2006 ..........................................................................68 Table 6.1. Gas transported through Ukraine, bcm (total amounts, and amounts transported pursuant to Naftogaz’s contracts with Gazprom) .................................................................................................77 Table 6.2. Features and capacity of Ukrainian gas storage facilities, 2005.......................................79 Table 6.3. Production and technical use and losses of fuel/energy resources by Naftogaz in 2004 (tonnes of coal equivalent, TCE) ....................................................................................................................82 Table 6.4. Potential energy savings in the Naftogaz group (m TCE) ................................................82 Table 6.5. Estimates of Naftogaz Ukrainy income from gas transit..................................................84 Table 6.6. European gas transit tariffs (euro/cu m/hours/year)..........................................................85 v Table 7.1 Gas balance for the year, selected items ............................................................................92 Table 7.2. Selected companies’ vulnerability to gas price increases.................................................94 Table 7.3. Users of gas within the Metinvest group ..........................................................................95 Table 7.4. Share of gas in fuel mix of thermal generating companies (%)........................................97 Table A1.1. Imports and exports of natural gas, selected figures (bcm/year) .................................109 Table A2.1. Gas consumption in 2005: Gaz Ukrainy’s share of the total .......................................111 Map 1. The Ukrainian Gas Transport Network .................................................................................75 Figure 1. The Ukrainian Domestic Gas Market.................................................................................57 vi Foreword Roughly 20% of Europe’s gas passes through Ukraine and the country has the third largest gas production and the fourth largest gas market in Europe. Yet until January 2006, when the brief curtailment of Russian gas supplies created shock waves across Europe, little attention was paid to the importance of Ukraine and there is still remarkably little easily accessible information about the development of its gas market. This study therefore fills an important gap in the literature