*** FOR PUBLIC USE ***
Ukrainian gas market
Discovering investment potential and opportunities
www.pwc.com/ua PwCJune | Advisory 2018 services | Ukraine *** FOR PUBLIC USE ***
PricewaterhouseCoopers Advisory LLC (“PwC”) 75 Zhylyanska Street, 01032 Kyiv, Ukraine Telephone: +38 (044) 354 0404; fax: +38 (044) 354 0790 http://www.pwc.com/ua
Dear Colleagues, CONTACTS: During the last years Ukraine has made tangible progress in its ambitious socio-economic reform program. In 2016-2017 the economy began to show the first signs of improvement after a sharp decrease in 2014-2015 and Olga Andrienko-Bentz Ukraine’s current trajectory provides reasons to be cautiously optimistic about the future. Director, Strategy & Operations In the gas sector, the Ukrainian government has introduced a number of very important regulatory changes [email protected] aimed to ensure market liberalisation and its harmonisation with the EU Third Energy Package. In April 2015 the Parliament has adopted a new Gas Market Law that created a legal framework for a gradual transition to a Pawel Dobrowolski competitive gas market in Ukraine. The new rules of the game have already given the first results, but a lot of Director, Oil & Gas work still lies ahead. [email protected] In recent years PwC Ukraine has gained an extensive experience working closely with policy makers, government agencies and oil & gas clients – both local and international. This report has been developed to Vladyslav Medvedev provide the most up-to-date information to all market stakeholders and create a basis for their familiarisation Project Manager, Strategy & Operations with the progress in one of the most important and most challenging reforms for Ukraine. [email protected] We believe that Ukrainian gas market has a great and still untapped potential for development and growth, as well as broad opportunities for institutional and private investors. Realisation of these opportunities will help to reach the goal of country’s energy independence, attract the best technological solutions for efficiency improvement and make Ukraine a reliable partner on the European energy market within the foreseeable future. We would also like to express our appreciation to DiXi Group, IMEPOWER and CMS Cameron McKenna Nabarro Olswang for their input and valuable ideas that are reflected in this report. Yours sincerely, PwC Team
Disclaimer This presentation has been prepared for information purposes only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. All informational sources used for particular analyses are listed in footnotes on respective slides. Various statistical agencies use different methods and approaches in their assessments. Therefore, numbers in different parts of this report may differ depending on the sources of information used for a particular analysis. PwC relied on information from the sources that, in our view, are the most relevant and reliable for the purposes of analysis.
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Ukraine’s natural gas potential is really high, and ongoing market liberalisation could benefit both society and business in the long run Executive summary
. Ukraine’s economy has stabilised after the 2014-2015 crisis and its current trajectory provides reasons to be cautiously optimistic about the future. . The pro-European government supported by the global community is moving forward with an ambitious reforms agenda to put Ukraine’s weak economy back on solid ground and create a welcoming business environment (+76 positions in Doing Business ranking during the last years). . Ukraine is actively pursuing energy supply diversification policies and has already made a great step forward in the Gas sector. . Gas market liberalisation: started from adoption of the Gas Law in 2015, has already produced some initial results, but a lot of work still lies ahead: Ukraine has enough natural gas reserves (№3 country in Europe) to materially substitute import and aims to increase domestic production from 20 to 28 bcm by 2020. This ambitious target requires a set of regulatory and fiscal enablers to be in place at the national level. During the last years Ukraine completely switched to natural gas imports from European direction; moreover, it has reduced imports by 50% between 2013-2017 – from 28 to 14 bcm. The segment has been opened for competition (67 importers at EU borders in 2017) and leading European companies have already launched their operations in Ukraine. Ukrainian gas transmission system is one of the most powerful in the world and being used for transit of the majority of Russian gas to the EU. With the risk of construction of pipelines bypassing Ukraine and the expiration of transit contract with Gazprom, preserving gas transit through Ukraine (which currently generates ~3% of Ukraine’s GDP) became a question of national security. Ukraine is looking for international partner to manage its GTS, bring technological know-how and secure transit flows after 2019. Capacity of Ukrainian underground gas storage facilities is the largest in Europe, equals to nearly a third of EU-28 capacity and is currently being underutilised. Taking into account the available infrastructure, Ukraine could be a natural candidate for an Eastern European Gas Hub. Total length of Ukrainian gas distribution system is 292 ths kilometers, connected to more than 12 million end consumers. There are 44 licensed DSOs in Ukraine - most of them are controlled by the private business group. Ukraine’s natural gas consumption shows a steady decline during the last decades and amounted to 32 bcm in 2017 (only 65% of demand was satisfied by local production). It consists of two nearly equally-sized segments – regulated and non-regulated. The regulated segment is being supplied at regulated prices and operates under public service obligations (that mandate procurement of domestic natural gas from UGV by Naftogaz and its subsequent sale to suppliers to households, religious organisations, and DHC). Pricing in non-regulated segment is determined by the market. . The Ukrainian gas market is at a stage of its transformation which creates opportunities for new market entrants. We believe that Ukraine is attractive for investors in the long run, but a thoughtful entry strategy is required for success.
Source: PwC analysis
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Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
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Ukraine is one of the largest countries in Europe with significant potential for economic development and growth Ukraine at a glance
Area – 603.6 ths km2 S (one of the largest countries in Europe)
Population – ~42.3 million1 (~70% is urban-based) Location
Convenient trade GDP per capita in 2017 – 8 710 USD hub to EU, Middle East and Asia (adjusted by purchasing power parity)
Average salary in April 2018 ~ 325 USD / month (one of the most cost-competitive manufacturing platforms in Europe)
Free Trade agreements (valid with EU, Canada, EFTA etc.; ongoing negotiations with Turkey and Israel)
1) Excluding temporary occupied territory of Crimea and Sevastopol Source: State Statistics Service of Ukraine, EIU “Ukraine: 5-year forecast table” as of 15 May 2018
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Ukraine’s economy has stabilised after recent crisis and its current trajectory provides reasons to be cautiously optimistic about the future Ukraine’s macroeconomic context
Dynamics of real GDP and consumer prices Net foreign direct investment (%, 2013–2022F) (USD bln, 2013–2022F) forecast forecast 5.6 43.3% 4.6 4.1 3.3 3.7 3.0 2.8 3.2 2.2
0.3 24.9% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
13.7% 1 12.4% 9.0% UAH / USD exchange rates 6.5% 6.0% 5.5% 5.0% (UAH / USD, 2013–2022F) 0.5% forecast 3.2% 4.0% 2.4% 2.5% 3.3% 3.5% 3.7% 0.0% 29.5 29.9 30.1 25.6 26.6 27.5 29.2 21.8 -6.6% -9.8% 8.0 11.9
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Change of real GDP, % Change of consumer prices (year-end), %
Source: IMF, EIU “Ukraine: 5-year forecast table” as of 15 May 2018
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The government is actively working on improving state regulation and making Ukraine more attractive to investors Doing Business in Ukraine
Ukraine's position in the ranking of “Doing Business” Key components of the ranking “Doing Business 2018” (2011–2020P) (Ukraine's position in the ranking)
According to the Strategy “Ukraine-2020” Protecting Starting a Minority TOP Business 52 Investors 81 17030
Dealing with Construction Paying Taxes Permits 35 43 76 81 80 96 Getting Trading across Electricity 128 Borders 119 112
137 Registering Enforcing Property 64 Contracts 82 149 152
Resolving Getting Credit 29 Insolvency 149 2011 2012 2013 2014 2015 2016 2017 2018 2020
Source: WB Group
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Recent reforms and anti-corruption campaign are signs of Ukraine’s continuing move towards Europe Ukraine and other post-Soviet states in political freedom and corruption perception ratings
Transparency International Corruption Index (0 = “highly corrupt”, 100 = “highly clean”) 0 10 20 30 40 50 60 70 80 1 . EU group of countries Lithuania Slovakia Czech Estonia characterised by higher republic Poland political freedom and Bulgaria 2 Latvia lower level of corruption Romania Ukraine 2017 Hungary . Ukraine differs from other post-Soviet countries – 3 Georgia Moldova already democratic, but still with a lot of areas for Ukraine 2012 improvement in anti- 4 corruption Armenia . During the last years (1 = free, 7 = = notfree) (17 = free, 5 Kyrgyzstan Ukraine has become closer to the European bloc in terms of political 6 Belarus freedom and corruption Russia perception Tajikistan Azerbaijan
Freedom House Political Rights and Civil Liberties Rating LibertiesRights House Freedom Civil and Political 7 Turkmenistan Uzbekistan
Source: Freedom House, Transparency International, Ukrainian Energy Forum 2018
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We believe that Ukraine is attractive for investors in the long run, but a thoughtful entry strategy is required for success Ukraine’s SWOT with regard to Oil & Gas
Strengths Weaknesses . Important oil & gas transit country linking producing and consuming . Highly dependent on foreign oil & gas supplies countries . Underutilised resource base and overcapacity . One of the most powerful oil & gas transmission and storage systems . Inefficient energy resource consumption in the world with multiple import / export options . Lack of historic investment, and subsequently – outdated . Pro-European and democratic vector of development equipment and technology (free trade zone with EU, association agreement) . Reputation of unstable political environment, corruption, . Large populous country – consumer market of 42.3 oligarch’s impact on political process and cronyism practice million people . High government debt and depreciating currency . Skilled and educated workforce at competitive cost . Weak economy / spending power per capita SWOT Opportunities Threats . Significant oil & gas resource base . Historically monopolized industry value chain with . Ukraine is actively pursuing energy supply diversification policies, misaligned interests which could considerably reduce its reliance on imports of energy . Highly variable regulatory environment . Local currency devaluation provided a competitive advantage for . Significant uncertainty constraining economic growth and both national exporters and foreign investors inward investment . Further integration with EU markets . Political instability and social unrest could have a negative effect . Strong support from international community in anti-corruption and on the business environment deregulation reforms . “Brain drain” trends caused by low average salaries in Ukraine . Stimulating tax rates for gas production on new onshore compared to European countries gas wells from 2018 Source: PwC analysis
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Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
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Ukraine’s primary energy consumption (including ~3o% share of natural gas) reduced during the last years.. Energy consumption in Ukraine
Ukraine’s primary energy consumption 2016 breakdown by intended use and economic activity (Mtoe, 2013–20161) (Mtoe, 20161)
116 Others 3% 106 -21% Nuclear 19% 3% energy 90 92 92 22% 4% 4% 4% Loses 5% Energy sector Natural 26% 23% own consumption 34% gas Conversion to other 35% 32% types of fuel 52 Non-energy 28% use Crude oil 29% 6% 9% & Oil products 10% 48% Other 12% 12% End-use Coal 56% 36% consumption & Peat 34% 18% Transport 30% 32% 29% Industry
2013 2014 2015 2016 By intended End-use consumption use by economic activity
Source: State Statistics Service of Ukraine 1) The latest available data
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..and natural gas has downward trend in almost all end-user segments
Change in end-use consumption by segment >50% 20-50% 0-20% 6.7 / 4.7 - Mtoe 2013 + (Mtoe & %, 2013 VS 2016) VS 2016 − >50% 20-50% < 20% Segment share Crude oil & Oil Sector Segment Activity driver Coal & Peat Natural gas Other in a sector, % products
Metallurgy 55 ton produced 6.7 / 4.7 -30% 0.1 / 0.1 -59% 2.5 / 1.2 -52% 2.9 / 2.3 -18% Non-ferrous mineral 8 ton produced 0.7 / 0.6 -14% 0.1 / 0.0 -77% 0.5 / 0.4 -25% 0.3 / 0.3 -19% resources Industry Chemicals 7 ton produced < 0.1 -83% < 0.1 -92% 0.3 / 0.2 -30% 1.5 / 0.8 -45%
Others1 30 ton produced < 0.1 -10% 0.8 / 0.1 -87% 1.1 / 0.7 -36% 4.4 / 3.5 -20%
Automobile 77 km travelled n/a 8.0 / 7.0 -12% < 0.1 -33% < 0.1 -20%
Pipeline 15 toe transported n/a < 0.1 +20% 2.3 / 1.4 -39% 0.1 / 0.0 -55% Transport Railway 7 km travelled < 0.1 -56% 0.1 / 0.1 -24% n/a 0.6 / 0.5 -15%
Others 1 km travelled 0% < 0.1 +7% < 0.1 -50% < 0.1 -34%
Households 72 cm / sm heated 0.7 / 0.3 -57% 0.0 / 0.1 +283% 13.5 / 9.3 -31% 9.2 / 7.9 -14%
Trade & Services 20 cm / sm heated 0.1 / 0.2 +100% 0.1 / 0.1 +18% 0.6 / 0.6 +3% 5.0 / 4.0 -19% Other Agriculture 8 ton produced < 0.1 -33% 1.4 / 1.4 +3% 0.2 / 0.1 -31% 0.6 / 0.6 -10%
Others 0 cm / sm heated n/a < 0.1 +560% n/a < 0.1 -33%
Conversion sector 97 ton produced 0.4 / 0.5 +25% 0.5 / 0.5 +16% 4.0 / 1.8 -55% n/a Non-energy use Other sectors 3 ton produced n/a 0.1 / 0.1 +5% n/a n/a
Source: State Statistics Service of Ukraine 1) Others category includes non-ferrous metallurgy, mining, consumer goods, food, wood, and textile industries, construction and machine industry
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However, Ukraine is still one of the most energy inefficient countries in the world Overview of energy efficiency in selected countries
Energy intensity of GDP at constant purchasing power parities Ukraine’s energy intensity of GDP benchmarking (koe / $2005p, 20161) (koe / $2005p, 20161) Average 0.144 Below 0.1 0.1-0.12 0.12-0.15 0.15-0.3 Above 0.3 N/a, not included in research Germany 0.101
France 0.115
Romania 0.118
Turkey 0.119
Poland 0.124
Sweden 0.130
Czech Republic 0.143
Ukraine 0.318
Russian 0.326 Federation
Source: Enerdata Global Energy Statistical Yearbook 2017 1) The latest available data
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Ukrainian government aims to ensure the country’s energy security and efficiency… Ukraine’s strategic priorities in energy sector
2020 2025 2035
2 – 3 years 5 years 10 years
Main Phase 1: Reforming energy sector Phase 2: Optimisation and innovation Phase 3: Ensuring sustainable phases development development of the energy sector
Main • Final stage of the 3EP implementation • Ukraine’s ENTSO-E integration • Adaptation of GTS capacities to the priorities (operating mode) European level in a phase • Completion of Ukraine’s ENTSO-G integration • Execution of investment projects • Innovative development of energy • Reforming of the energy companies within the NERP sector (incl. high-efficiency cogeneration) • Increase in natural gas production • The formation of local heat supply • Increase in unconventional gas systems production as well as production of the • Formation of the coal products market • Development of distributed generation of gas extracted on the shelf • Gradual reduction of GDP energy smart grids • Establishment of specific and transparent intensity down to 0.2 toe/ $ ths • Investments attraction to the conditions for the coal sector • Alternative energy usage increase to alternative energy sector • CHP reconstruction for emissions 8% • Modernisation and improvement of reduction to 20% • Observance of high ecological accounting systems collecting own • Increase of RES share in PES (primary standards energy consumption data energy supply) to 25% • National emission reduction plan with • Implementation of the infrastructure for • Establishment of the standards for the target amounting to more than 5% electric transport improvement “passive house” construction
Source: Energy Strategy of Ukraine 2035 approved on Aug 18, 2017
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.. and has made a great step forward in the Gas sector
List of adopted regulations
Novenber 2, 2015 September 22, 2016 June 30, 2017 March 1, 2018 Rules on the security of natural Adoption of the Law of Ukraine “On Adoption of the new rules for the Adoption of the deregulation bill gas supply the National Commission for State extraction of oil and gas deposits №3096-d on simplification of the regulation of Energy and Utilities” permitting system for the gas National Action Plan in case of industry an emergency in supply
December 7, 2017 March 25, 2015 July 1, 2016 December 20, 2016 Introduction of taxation to Adoption of changes to the Budget Government approval of Adoption of Naftogaz stimulate gas production on new code of Ukraine on decentralization the Action Plan for Gas restructuring action plan onshore gas wells from 2018 of SST payments since Jan 2018 Sector Reform (incl. stabilization clause)
September 30, 2015 • General rules of supply April 9, 2015 Adoption of secondary legislation: • Criteria for determination of the August 18, 2017 access regime to the gas storages Adoption of the • Gas Storage Code • Methodology for tariff calculation Law of Ukraine • Gas Transmission System Code for transportation of natural gas for Approval of “On Natural • Gas Distribution System Code entry and exit points the Energy Gas Market” Strategy of • Order of creation of the natural • Standard natural gas storage Ukraine 2035 gas reserve stocks contract December 27, 2017 • Standard natural gas transmission • Standard supply contract for the contract supplier of last- resort Adoption of changes to the Gas • Standard natural gas distribution • Standard contract of supply to Transmission System Code in the contract household consumers part of the implementation of daily balancing Changes & Improvements
Source: Ukrainian legislation, PwC analysis
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Gas market liberalisation has already produced some initial results, but a lot of work still lies ahead Key milestones already reached and next steps
Diversification and Gas market Operating Transparency and security of supply reform efficiency accountability
. EU-UA Gas Network . 3EP-compliant Gas . Profitability of Naftogaz . Corporate governance Integration to diversify market law . Improved debt collection reform launched supply . Deregulation of and revenues . Detailed annual reports . Increasing the share of commercial market . Largest taxpayers in were published by private importers . Increasing the share of Ukraine Naftogaz for 2014-2016 . Stable gas supplies for private suppliers in the . Procurement system Ukraine and the EU non-regulated market reform segment Next steps
. To ensure effective access . To create conditions for an . To attract capital for . To attract a reputable of alternative suppliers independent regulator investments into energy western TSO as a partner to all end users . To improve secondary efficiency and gas to operate Ukrainian legislation and system of production GTS subsides
Source: Naftogaz Annual Reports, PwC analysis
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Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
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Ukraine was at the origins of the world’s gas industry and historically played one of the key roles on the European gas market.. History of the Ukrainian gas industry
1983 The Bilche-Volytske UGS, one of the world’s largest underground gas storage facilities, was put into operation
1950 Exploration of the Shebelinka gas field - the largest in Europe at that time
Source: Naftogaz of Ukraine, PwC analysis
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.. and despite all the difficulties, continues to play this important role today Ukraine’s position on the European gas market (2016)
№ 1 by transit volume of Russian gas to the EU
№ 1 by capacity of underground gas storages
№ 3 in proven natural gas reserves
№ 4 by gas production volume
№ 7 by gas consumption
№ 14 by gas imports
Source: Naftogaz of Ukraine
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Oil & Gas sector plays an essential role in Ukraine's socio-economic stability – its companies are among the largest taxpayers in Ukraine TOP-10 Ukrainian taxpayers in 2017
Taxes collected by the Office of large taxpayers Company Place Taxes payed, UAH bln (UAH bln, 2017) PJSC 1 50.4 5 out of TOP-10 taxpayers Ukrgasvydobuvannya in 2017 were Oil & Gas PrJSC V.A.T. Pryluky 2 companies (62% taxes Tobacco Company 14.1 payed by TOP-10) PrJSC Philip Morris Ukraine 3 13.5
PJSC Naftogaz of Ukraine 4 11.5
Total PJSC Ukrnafta 5 10.4 TOP-10 Others 60% 40% collected taxpayers PJSC JTI International 6 9.5 UAH 355 bln Ukraine PJSC Ukrtatnafta 7 8.7
SE NNEGC Energoatom 8 8.7
PJSC Ukrtransgaz 9 7.8
PrJSC Imperial Tobacco production Ukraine 10 7.5
Source: State Fiscal Service of Ukraine x Oil & Gas companies
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Ukrainian gas market could be structured into five key segments – from E&P to end consumption Ukraine’s natural gas flows and market structure (bcm1, 2017)
Natural gas transit 93.5 bcm
Consumers directly 4) Including: Gas production2 connected to GTS4 2.08 bcm for industry and others, 18.5 bcm 0.26 bcm for DHCs, and 2.3 bcm <0.001 bcm for public sector.
Transported to Supplied to consumers GTS Residential Import (excl. internal (excl. transit consumers transportation volumes) 14.1 bcm and ATO3 zone) Distributed to Supplied to consumers 11.2 bcm 39.2 bcm 27.5 bcm GDS from GTS (incl. distribution in ATO3 zone) Withdrawal from 25.2 bcm Non-residential UGSF 25.1 bcm consumers5 6.7 bcm 13.9 bcm
5) Including: - E&P 6.7 bcm for DHCs, 0.5 bcm for public sector, and - Import / trading 6.7 bcm for industry and others. - Transmission & storage Injection to UGSF GTS & UGSF Gas DSO operating 2 - Distribution and linepack operating needs production needs - Consumption / End-use 9.3 bcm 2.2 bcm 1.0 bcm 1.0 bcm
1) Totals may not add up due to rounding. NEURC’s data differs from Naftogaz’s data 2) Commercial gas, excl. operating needs of production companies Source: NEURC 3) Anti-Terrorist Operation Zone on the East of Ukraine
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In 2017 Ukraine consumed 31.9 bcm of natural gas – only 65% of demand was satisfied by domestic production Ukraine’s gas balance (bcm, 2017) 31.9 bcm
Gas supply Gas consumption 31.9 bcm 31.9 bcm
14.1 -2.7 31.9 31.9 5.4 Private 4.4 companies 27.5 1.1 Other (3%) Other 3 0.5 Non- Naftogaz 8.7 Public sector regulated 20.5 9.1 Industry segments Ukrnafta 1.1 (44%) Private 4.1 DHCs for industrial producers 1.0 and public sectors 4.6 DHCs for HHs Regulated segments UGV 15.3 Households (53%) 11.2 (HHs)
Production Import from EU Net changes Total Total Operating End in UGS1 needs2 consumption
1) Calculated as a difference between the volume of gas stored in 2) Includes fuel gas for TSO, DSOs and production Source: Naftogaz of Ukraine, UTG Live, PwC analysis UGSF as of 01.01.2017 (11.9 bcm) and as of 01.01.2018 (14.7 bcm) 3) Unsanctioned withdrawal, unallocated volumes, unbalance
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Historically, Ukraine’s gas market has been immature with only a few players, but recent changes could drastically change the situation Ukraine’s natural gas value chain summary
Gas Gas import / Gas Consumption / E&P transmission trading distribution End-use and storage
Domestic . Estimated gas . 14.1 bcm import in . Entry capacity – . 25.1 bcm supply to . 31.9 bcm in 2017: Market Size reserves: 906 bcm 2017: 304 bcm, exit capacity end-users - HHs (incl. heating): 15.8 bcm – 178.5 bcm . 2017 Production: - 14.1 bcm from Europe - Industry: 9.1 bcm 20.5 bcm (11.1 bcm in 2016) . 31 bcm of underground - Heating for industrial and gas storages public sectors: 1 bcm - No import from . 93.5 bcm transit and - Public sector: 0.5 bcm Russia in 2016-2017 29 bcm local transportation in 2017 - Operating needs: 4.4 bcm - Other1: 1.1 bcm Competitor Highly-concentrated Naftogaz position: Natural monopoly: Multiple entities, Consists of 2 segments – Landscape (based on 2017 highly concentrated regulated and non-regulated: production): . 62% share in gas . UTG manages all ownership: import in 2017 trunk high pressure . Naftogaz covers regulated . UGV: 75% (74% in 2016) pipelines and all . 44 local distributors segments (by UGV and major gas storage (oblgazes and imported gas) under PSO – . Ukrnafta: 5% . 2012-2017 major facilities, has 100% gorgazes), ca. 1 for as a designated wholesale importer . Other: 20% of the transit gas each region or city supplier to incumbent . till 2012 monopoly market regional suppliers and DHC importer . 5% share of Naftogaz in industrial segment in 2017 (22% in 2015)
Key ~70% of distributors Regional supply Domestic UGV Naftogaz UTG controlled by private companies / Naftogaz Players business group
Source: Naftogaz of Ukraine, Ministry of Energy and Coal of Ukraine, NEURC, companies’ data, press research 1) Unsanctioned withdrawal, unallocated volumes, unbalance
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Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
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During the last ten years Ukraine’s natural gas production has ranged from 20 to 21 bcm/year.. Ukraine’s annual gas production (bcm, 2008-2017)
Share of private producers in total production: DTEK Burisma 9% 9% 11% 12% 11% 13% 16% 20% 21% 20% 14% 4% UNB 21.3 21.4 4% Geo-Alliance 21.1 20.5 20.6 20.5 20.5 20.5 5% 19.9 20.2 4.1 Smart-Energy 1.9 1.9 2.7 6% 40% 2.2 2.5 2.3 bcm4.2 Kub-Gas 1.2 1.2 3.3 4.1 9% 1.1 1.1 1.2 1.7 3.9 4.3 Poltava O&G 3.0 0.3 3.2 2.4 2.1 2.0 1.9 1.7 18% 1.5 1.3 1.1 Other
Commercial gas (mandatory supply to HHs and DHCs through Naftogaz) 15.3 14.8 15.2 14.8 14.9 15.0 15.1 15.1 14.5 14.6 15.3 6% 91% 3% bcm Joint venture agreements Operating needs
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1) Located on temporary occupied territory of Crimea and 1 2 3 Private producers Chornomornaftogaz Ukrnafta UGV Sevastopol 2) 50%+1 owned by Naftogaz of Ukraine Source: Naftogaz of Ukraine, Ministry of Energy and Coal of Ukraine, Association of Gas Producers of Ukraine, press research 3) 100% owned by Naftogaz of Ukraine
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.. and benchmarking with other European countries shows that Ukraine’s reserves base is currently being underutilised Gas – Proven reserves & Production Ukraine’s proven reserves in (bcm, at the end of 2016) “BP Statistical Review of World Energy 2017” report could differ from the data of the SRPE 1 763 “Geoinform Ukraine”. BP report was used as the main source for benchmarking purposes
Proven 697 reserves 591 207 110 91 35 35
Norway Netherlands Ukraine UK Romania Poland Germany Italy
9 4 7 5 18 Annual 40 41 Production 1)
117
Extraction 7% 6% 3% 20% 8% 4% 19% 15% factor Years of 15 17 33 5 12 23 5 7 Production
Source: BP Statistical Review of World Energy 2017 1) Excludes gas flared or recycled. Includes natural gas produced for Gas-to-Liquids transformation.
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Ukraine has significant potential to materially substitute import..
Ukraine’s natural gas resource potential (2017)
Depth of Share of total Number of Unconventional: formation, km reserves, % fields, # Field size, bcm > 10 000 bcm 1 km Total Contingent Resources: 39% 4 > 30 2 km 4 6831 bcm 3 km Reserves: 9062 bcm 28% 15 30-10 4 km
2P Reserves: 22% 16 10-5 4003 bcm 5 km
11% 1) New fields (C3, D1 & D2 resources) 367 < 5 2) Based on State Register of Mineral Reserves 3) 2P reserves (SPE-PRMS classification) based on extrapolation of Naftogaz data (Ryder Scott Co report)
Source: The State Service of Geology and Mineral Resources of Ukraine, Geoinform of Ukraine SRPE, Association of Gas Producers of Ukraine, Naftogaz of Ukraine
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.. and Ukrainian government has announced ambitious plans to increase domestic natural gas production up to 28 bcm in 2020 Ukraine’s gas production targets 2020 (bcm / year1, forecast 2016-2020)
20.1 18.2 Ukraine’s total 16.5 2.8 14.5 15.2 1.7 0.1 1.0 Amount of necessary CapEX 1 726 0.4 250 (mln USD / year) 0.9 2.3 3.9 5.8 7.6
CAGR: 10%
UGV 13.5 12.5 11.6 10.7 9.7 27.6
25.2 + 5.0 22.5 3.5 2016F 2017F 2018F 2019F 2020F 20.3 18.7 2.3 0.1 0.9 1.9 4.0 6.2 9.0 11.3 2 7.0 7.4 5.0 6.0 1.8 2.2 4.3 0.0 0.5 1.3 16.8 1.0 15.3 14.0 1.7 2.3 3.2 3.7 12.7 11.2 companies 3.3 2.8 2.4 2.0 1.5
Other 2016F 2017F 2018F 2019F 2020F 2016F 2017F 2018F 2019F 2020F
1) Totals may not add up due to rounding New fields Existing fields Baseline production 2) Excluding Ukrnafta’s production – 1.4 bcm in 2016
Source: Concept of Ukrainian gas sector development 2020, Association of Gas Producers of Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 27 1 2 3 E&P 4 *** FOR PUBLIC USE ***
Successful implementation of the plan requires a set of enablers to be in place at the national level High-level roadmap for increase of domestic natural gas production
Related production initiatives Key enablers Status
Operating wells Prolongation of current licenses for bona fide holders ! optimization & intensification: Resolving JV issues 3 30.5 - Well workovers bcm New licenses granting by local authorities - Hydrofracturing ! Existing - Modernization and Incentive-based fiscal policy in upstream fields construction of boosting 3 compressor stations etc. Availability and affordability of supporting services 3 Abolishment of requirement for reserves re- Drilling new wells Ukraine’s estimation every 5 years 3 gas production in existing acreage 28 bcm 11.8 Deregulation of land issues 3 in 2020 bcm Geological & seismic exploration New Rules of Development of Oil and Gas Fields 3 New fields New Subsoil code Exploration and ∞ exploitation drilling International standards of classification and categorization of reserves and resources ∞ X - Estimated cumulative effect on Ukraine’s bcm natural gas production for 2017-2020 Improvement of geological info sharing procedure ∞
Source: Concept of Ukrainian gas sector development 2020, 3 - Done 3 - Partially / LT task ∞ - In progress ! - At risk Association of Gas Producers of Ukraine, PwC analysis
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 28 1 2 3 E&P 4 *** FOR PUBLIC USE ***
Kharkiv and Poltava are the key gas production regions in Ukraine.. Ukrainian gas production and resources by region (bcm, 2016 and as of 01 Jan 2017)1 East (244 fields, 727 bcm) West (116 fields, 111 bcm) (Dnipro and Donetsk oil and (Volyn and Podillia, Precarpathian, Carpathian 4% gas province) and Transcarpathian oil and gas provinces) 2%
906 Sumy region bcm 9% 37% 3% 47% Total balance of gas 35% reserves in Ukraine Lvivskiy region Poltava region 41% Kharkiv region
4% 20 Житомирская обл. (7) 1% 2% 3% 1% bcm <1% 1% Ivano-Frankivsk 3% region Other regions Luhansk region Gas production Dnipro volumes in 2016 region
Legend: South (42 fields, 68 bcm) (Predobrudja, Black Sea and Crimean, X% – share of total reserves, % Azov and Berezan, Indolo-Kuban, and Black Sea Prospective provinces) 4% X% – share of total production, % 2% Shelf of the black sea Crimea 1) The latest available data
Source: Geoinform of Ukraine SRPE
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 29 1 2 3 E&P 4 *** FOR PUBLIC USE ***
.. and the largest natural gas fields are located in the East
The key natural gas fields of Ukraine (bcm, as of 01 Jan 2017)1
Oil & Gas Start of Initial gas Current gas No. Field name Company region development reserves, bcm reserves, bcm
East (Kharkiv 1 Shebelynske UGV 1956 734 111 region)
Zakhidno- East (Kharkiv 2 UGV 1970 345 51 Krestyshchenske region) . TOP-6 fields account for East (Poltava 3 Yablunivske UGV 1980 116 60 region) ~ 32% of Ukraine’s East (Kharkiv 4 Yefremivske UGV 1967 110 37 current region) reserves
East (Kharkiv 5 Melykhivske UGV 1973 81 23 region)
East (Poltava 6 Mashivske UGV 1968 39 4 region)
1) The latest available data
Source: Geoinform of Ukraine SRPE
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 30 1 2 3 E&P 4 *** FOR PUBLIC USE ***
In 2016 geological exploration led to an increase in balance reserves of natural gas by ~9 bcm Increase in balance natural gas reserves (20161, mcm)
Increase in balance Share in 2016 Company name Field name natural gas reserves, mcm total increase, % Total Incl. new fields Skhidno-Poltavske 1 773 0 Zahidno-Sosnivske 1 319 0 UGV 80% Yablunivske 806 0 . 45 objects Other 3 108 139 covered by Systemoilengineering 5% Vodyanivske 461 461 reserves Kub-gaz 5% Makiivske 402 0 assessment2 Rudkivske-Chervonozavodivske 277 109 . 8 805 mcm of Ukrnafta 4% Andriyashivske 38 0 total increase Kachanivske 6 0 Nordik 4% Kolodnytske 311 311 Ukrnaftoburinnia ~1% Sakhalinske 112 0 Ukr-Az-Oil LLC SAUP ~1% Velykomostivske 104 104 Nadra-Geoinvest LLC ~1% Skorobahatkivske 88 0
1) The latest available data Source: Geoinform of Ukraine SRPE 2) In 2016 the State Commission of Ukraine on Mineral Resources approved natural gas reserves for 25 deposits. PwC | Advisory services | Ukraine Ukrainian gas market June 2018 31 1 2 3 E&P 4 *** FOR PUBLIC USE ***
During 2016, for the purposes of geological exploration, R&D, and O&G extraction, 535 special permits were valid in Ukraine Effective special permits issued by years (2008-20161)
301 for commercial 55 38 development of deposits 17 3 32 119 for geological exploration and R&D
2 108 for extraction 2009 2011 2013 2015 535 special purposes … // permits effective in 2008 2010 2012 2014 2016 2016 3 for performance via PSA 7 28 21 4 for other purposes 49
1) The latest available data 2) The data does not include 6 permissions suspended back in 2015 and as of November 7, 2017 recognized by Geoinform of Ukraine SRPE as invalid Source: Geoinform of Ukraine SRPE
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 32 1 2 3 E&P 4 *** FOR PUBLIC USE ***
UGV as the main holder of Ukraine’s natural gas reserves will play a key role in the ambitious government plan for production increase Key players in Ukraine’s natural gas upstream (April 20171)
Company Special permits, Licensed area, Wells in operation, Natural gas balance name quantity sqm quantity reserves, bcm
UGV 174 12 200 2 738 672
DTEK Naftogaz 3 209 23 25
Burisma Group 29 3 891 64 120
Geo Alliance Group 16 1 169 13 35
Smart Energy 4 370 20 37
Kub-Gaz 6 823 15 5
Poltava Oil&Gas Company 6 405 47 4
Source: Association of Gas Producers of Ukraine 1) The latest available data
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 33 *** FOR PUBLIC USE ***
Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 34 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
Since gaining its independence in 1991, Ukraine has significantly decreased its gas consumption and consequently import volumes Natural gas consumption and import in Ukraine (bcm, 1991-2017)
Gas consumption, bcm Gas import, bcm X% Import share, %
Decrease in natural gas imports between
1991-2017 118.2
113.4 -85%
102.8
92.4
91.6
89.1
86.0
85.4
81.3
79.6
76.3 76.4
75.7 75.8
75.6
73.9
73.4
71.2
70.5
69.8 69.8
69.0
66.3 66.3
62.4
61.7
60.0
59.3 59.3
59.2
58.7 58.8
57.7
57.6
56.9 57.0
54.8
53.6
52.6
51.9
50.4
44.8
42.6
36.6
33.8
33.2
32.9
31.9
28.0
27.0
19.5
16.4
14.1
11.1
2009 2012 2013 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2014 2015 2016 2017
78% 79% 77% 75% 78% 83% 77% 71% 79% 81% 81% 83% 77% 78% 81% 77% 84% 79% 52% 64% 81% 60% 56% 46% 49% 33% 44%
Source: Naftogaz of Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 35 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
At the same time, over the last years Ukraine has completely switched to European natural gas suppliers Import of natural gas to Ukraine (bcm1, 2014-2017) Import to consumption ratio: 46% 49% 33% 44%
19.5
-28% 16.4
14.1 14.1 6.1 Hungary From 14.5 (37%) 2.8 (Beregdaroc) Russia (74%) 11.1 1.3 Poland (Germanovichi) Hungary 14.1 (Beregdaroc) 11.1 (100%) 5.0 10.3 Slovakia Poland 0.6 (63%) (100%) 9.9 (Budince) 0.9 From (Germanovichi) 5.0 Europe Slovakia 3.6 (26%) (Budince)
2014 Europe 2014 2015 2016 2017 2017 Europe
Source: Naftogaz of Ukraine 1) Totals may not add up due to rounding
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 36 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
Today Budince (Slovakia) is the key interconnection point for natural gas imports from the EU (~70% of imports in 2017) Utilisation of entry points at EU borders and respective shares of main importers (Jan-Dec 2017)
Slovakia Hungary Poland (Budince) (Beregdaroc) (Germanovichi)
42.5 mcm / day 16.8 mcm / day 6.4 mcm / day
- Utilized capacity, mcm 4.3 mcm / day - Available capacity, mcm
Jan-Dec 2017 Jan-Dec 2017 Jan-Dec 2017
4% 0% 13% Naftogaz 9.9 Naftogaz 2.8 Naftogaz 1.3 Others bcm Others bcm Others bcm
87% 96% 100%
Source: Naftogaz of Ukraine, UTG Live
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 37 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
Naftogaz continues to be the major natural gas importer, but the share of private players is gradually increasing Key suppliers of imported natural gas to Ukraine (bcm, 2017) Naftogaz of Ukraine Other traders X No. of importers at EU borders
2015 18 94% / 6% 2016 34 74% / 26% 2017 67 0% 62% / 38% 100% PGNIG,Trailstone, AOT, RWE 2.0 Eru Trading 1.0 Axpo, ERU Management Axpo Trading 1.7 Promenergo 0.6 ~ ~ ~ Nafta-Gaz DufEnergy 1.0 ~ ~ ~ ~ ~ ~ Resource AOT, Axpo, MET Gas, Trafigura, Socar Ukraine ~ ~ ~ ~ ENGIE 1.0 ~ ~ ~ ~ ~ ~ 0.5 Polski Koncern Naftowy ORLEN Uniper Global 0.9 ~ ~ ~ ~ ~ ~ Trafigura ~ ~ ~ ~ ~ Trafigura Ukraine 0.4 Met Gas 0.5 ~ ~ ~ ~ ~ ~ DufEnergy, Gunvor, MET, Trafigura, and Energy Skela Tertsium 0.2 ~ ~ ~ ~ ~ ~ Worldenergy, Uniper, TRAILSTONE Trailstone 0.4 Naftogaz ~ ~ ~ Energy Trade 0.2 ~ ~ Natural ALSTKONIX Shell Energy Group 0.2 ~ ~ ~ ~ ~ Natural gas gas Engie EM ~ ~ ~ ~ ~ ~ ENGIE CEZ 0.2 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Ukraine 0.2 Naftogaz Trading 0.2 Nafta-Gaz Europe ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Metida 0.2 ~ ~ ~ ~ ~ ~ ENI 0.1 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Systems World Petroleum Group Polska, JAS 0.2 ~ ~ ~ ~ ~ ~ Energy,MET Gas, Nitrofer AOT 0.0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Active Gunvor, World Petroleum Ukrgaz 0.1 ~ ~ ~ ~ ~ ~ Trafigura 0.0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Group Polska, Nitrofer, Onico
Source: Naftogaz of Ukraine, presentation of UTG Executive director @ Ukrainian Energy Forum 2017, press research
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 37 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
Leading European companies have already entered the market and launched their operations in Ukraine European players in the Ukrainian market
European gas companies that signed agreements with UTG and operate in Ukrainian gas market
ENGIE SA TRAFIGURA AOT ENERGY PGNiG
France Netherlands Poland Poland
DUFENERGY TRAILSTONE Axpo Trading MET TRADING SA GMBH HOLDING AG
Switzerland Germany Switzerland Switzerland
Source: press research, UTG
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 39 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
In 2017 total value of Ukraine’s natural gas imports amounted to more than USD 3 bln – prices were characterised by seasonal fluctuations Natural gas import monthly volumes1 and prices for Ukraine (2017)
252.9 Average 248.1 246.9 239.5 import 229.5 232.2 price, 224.9 213.7 214.5 212.9 USD/tcm 208.4 210.1 2.07
1.61 1.50
1.17 1.14 1.20 1.06 1.01 0.91 0.97 Import 0.80 volumes, bcm 0.49
Jan’17 Feb’17 Mar’17 Apr’17 May’17 Jun’17 Jul’17 Aug’17 Sep’17 Oct’17 Nov’17 Dec’17
Cost of import, 394.0 230.9 351.6 102.1 248.8 210.8 237.9 223.0 266.5 238.7 501.4 222.1 mln USD
1) Data on natural gas import volumes from the State Statistics Service of Ukraine (13.9 bcm in 2017) differs from data of Naftogaz (14.1 bcm in 2017) Source: Ministry of Economic Development and Trade, State Statistics Service of Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 40 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
Taking into account the available infrastructure, Ukraine could be a natural candidate for an Eastern European Gas Hub Required preconditions and potential advantages of Gas Hub set-up in Ukraine
Preconditions Advantages
Fully liberalised gas market and the high level of Long-term energy security incl. diversification transparency in gas trading of gas supply
Sufficient level of liquidity in the market and a large Guarantee of adequate gas supply number of suppliers and buyers in the hub for domestic consumption
Non-discriminatory entry to the gas hub and Possible gas price reduction (as a result of the Third Party Access (TPA), incl. attractive competition) tariff system
Unbundled gas grid (commercially and politically Further integration of Ukraine into the European independent TSO) Energy Community
Online-trading platform based on a bidding system Increased transparency in the energy sector and a clearing house processing matching bids
Source: DiXi group, PwC analysis
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 41 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
As a result of regulatory reforms, Ukraine was, for the first time, included in EFET Gas Hub Development Study with a score of 3.5 Scores according to the EFET Gas Hub Development Study 2017
Gas Hub / Country 2014 2015 2016 2017 NBP 20 20 20 20 EFET Gas Hub TTF 19 19.5 19.5 19 Development Study 2017 ZTP 16 17.5 18 19 NCG 15.5 19 19 17.5 France 16 16.5 18.5 17.5 GASPOOL 16 19 19 17 Zee Beach 17 17 17 16.5 PSV 10.5 15 15 16 VTP 13 13 13.5 16 PVB 7 7 13.5 16 GTF 9 11 14 15.5 CZ 8 8.5 9.5 13 Hungary 5 6.5 9 12.5 Poland 4.5 5.5 9.5 10 SK 3.5 7 8 8.5 Greece 4.5 5.5 5.5 6.5 Turkey 5.5 5 4 5.5 Ukraine N/A N/A N/A 3.5 Romania 2.5 1.5 2 3 Bulgaria 1.5 1 1.5 1
Source: EFET Gas Hub Development Study 2017
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 42 Import / *** FOR PUBLIC USE *** 1 2 3 trading 4
Progress towards the set up of a gas hub in Ukraine requires a number of steps to be taken at the national level Further actions needed for Ukraine to progress towards creating a gas hub
Assuring potential partners Start raising awareness among other CEE countries (especially Slovakia, Hungary, Poland and Czech Republic) about the benefits of a gas hub and its associated trading and gas storage services.
Detailed gas hub study Negotiations with EU A detailed study on the design of the authorities gas hub from a technical point of view Make EU public aware of the business should be conducted by the benefits linked to gas hub trading and to government as well as a report on convince officials that modernising the cost of construction of additional Ukrainian Gas Transmission System is infrastructure and pipelines with bi- far less costly than investing in a whole directional flow. new pipeline system.
A Gas Hub Network Code GAS HUB Promotion of energy A Gas Hub Network Code, aligned efficiency with laws mentioned in the report and IN UKRAINE Promote energy efficiency in order to curb the Third Energy Package, should be domestic gas consumption by raising developed. An Authority responsible public awareness on energy waste. At the for the gas hub management should same time, Ukraine should strive to be established, and its duties and attract the necessary foreign investment responsibilities described in the to increase domestic production in order Network Code. to achieve a level of self-sufficiency. Cooperation with energy exchange Start negotiations with an energy exchange on gas trading, establishment of a Clearing House for the gas hub and the potential cooperation between exchange and the hub for balancing.
Source: DiXi group, PwC analysis
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 43 *** FOR PUBLIC USE ***
Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 44 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
Ukrainian gas transmission and storage system is one of the most powerful in the world Characteristics of Ukraine’s GTS and UGS facilities
Parameter Units Value incl. TOT, TUT1
Total length of gas pipelines ths km 38 2.5 Capacity:
- Entry bcm per year 304 (incl. from Europe) bcm per year 23 - Exit bcm per year 178.5 (incl. to Europe and Turkey direction) bcm per year 146
Gas compressing stations number 73 3
Gas compressing yards number 111 3
Gas compressing units number 705 35
Capacity of compressing stations MW 5 496 175
Underground gas storages number 12 1
Capacity of underground gas storages bcm 31 0.4
Gas distribution stations number 1 475 83
UTG headcount ths employees 20
1) Incl. located in temporarily occupied territories and temporarily uncontrolled territories of Ukraine Source: Naftogaz of Ukraine, UTG, Presentation of UTG Executive director @ Ukrainian Energy Forum 2018
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 45 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
It is a fully developed and operating infrastructure connecting European consumers and Russia Map of Ukrainian gas pipelines with entry / exit points
Entry / exit Entry, Exit, 364 transmission 344 storage Entry / exit Entry, Exit, point bcm bcm services customers services customers point bcm bcm in 2017 in 2017 0.0 0.0 1 Kobryn 28.9 n/a 8 Mozyr 6.0 n/a
1 66.1 Drozdo- 1.3 4.7 9 Sudzha 107.5 n/a 2 8 vychi 1.5 5.0 9
10 12 6.6 11 n/a 2 10 Valuiky 25.5 9.9 53.4 13 3 Uzhgorod 15.5 98.4 Sere- 0.0 3 11 13.0 n/a 2.9 11.6 4 6 brianka 4 Berehove 6.1 23.5 5 14 15 19.2 12 Pysarivka 48.5 n/a
0.7 n/a 5 Tekove 4.5 Sokhra- 13 1.6 n/a nivka 46.0
2.7 7 6 Oleksiivka n/a 3.5 Prokho- 0.0 0.0 14 3.3 32.5 Legend: rivka Gas metering station Gas pipelines X 20.2 located close to the border 0.0 7 Orlivka n/a 26.8 15 Platove 6.0 n/a Gas volume transmitted on Gas volume transmitted GTS entry in 2017, bcm X.X X.X on GTS exit in 2017, bcm Designed GTS entry X.X X.X Designed GTS exit capacity, bcma capacity, bcma
Source: UTG Live (may differ from Naftogaz’s and NEURC’s data)
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 46 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
Ukrainian gas transmission system is a reliable route for transit of the majority of Russian gas to the EU Overview of UA GTS operations
Transmission work of Ukrainian GTS (bcm / year, 2005-2017) Share of Ukraine’s transit in EU demand for Russian gas (bcm / year, 2014-2017) 194 178 159 201 147 100 22% 96 177 Transit 85 92 94 13% bcm 57% 157 94 5% 62 67 82 3%
136 123 Moldova Romania 100 2014 2015 2016 2017 120 Poland Slovakia Through other routes Through Ukraine 104 Hungary 94 62 Volumes of gas transported to UA consumers (bcm / year, 2014-2017)
65 -26% 57 53 38 28 38 Domestic 3 31 29 28 3 To direct consumers 2005 2008 2011 2014 2017 2 2 35 To GDS 28 27 Transit to the EU, other European countries, 26 Turkey direction Transportation to Ukrainian consumers 2014 2015 2016 2017
Source: Naftogaz of Ukraine, presentation of UTG Vice-President @ Ukrainian Energy Forum 2018, NEURC
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 47 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
Today, Ukraine’s gas transmission and storage system is being managed by UTG that performs a wide range of functions – above and beyond what is found in many other European TSOs Business areas of major European TSOs
UkrTrans Energinet. Gaz- Snam German Fluxys Enagas TIGF DESFA GRTgaz Eustream NET4GAS FGSZ Gaz dk System Rete Gas operators
Ukraine Belgium Spain Denmark France Greece Poland France Italy Slovakia Czechia Hungary Germany Gas transmission LNG operations Natural gas storage Services for pumping and compressors ~75% Construction and engineering of EU TSOs Other business services engaged in Research, transmission design and only consulting Energy transmission
Source: PwC analysis
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 48 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
Capacity of Ukrainian underground gas storage facilities is the largest in Europe and equals to nearly a third of EU-28 capacity… Technical working gas volume of underground gas storage facilities per country (TWh, as of April 20161) Planned 351 Under construction 275 270 5 Operational 10 60 351 23 151 139 146 260 4 95 67 94 44 45 188 151 135 95 1 2 67 51 37 5 36 9
Ukraine2 Germany Italy Netherlands France Austria Hungary UK CzRep Slovakia
UGSF utilisation – by countries (heating season 2017-2018)
Czech Ukraine Germany Italy Netherlands France Austria Hungary UK Slovakia Republic
55% 92% 98% 96% 75% 88% 73% 91% 98% 92%
25% 15% 44% 6% 3% 14% 20% 13% 21% 5%
- Start of heating season - End of heating season 1) The latest available data Source: Gas Infrastructure Europe, AGSI+ 2) Including Hlibovske underground gas storage of PJSC Chornomornaftogaz (Crimea)
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 49 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
.. and it is currently being underutilised (1/2)
Gas volumes in Ukraine’s UGSF (bcm, Jan 2015 – May 2018)
35 252 Maximum injection / withdrawal 263 mcm / day capacity to / from UGSs mcm / day ~ 31 bcm – total UGS capacity 30
25 ? ? ?
? ? ? 20 17.0 ? 16.9 (55%) (55%) 14.5 15 (47%) 8.3 8.5 8.0 7.7 (27%) 10 (28%) (26%) (25%) ~ 5 bcm – cushion gas 5
0
17 15 16 18
15 15 16 16 17 17
15 16 17
15 15 16 16 17 17 18 18
- - - -
------
------
Jul Jul Jul
Jan Jan Jan Jan
Mar Mar Mar Mar
Sep Nov Sep Nov Sep Nov
May May May May
Source: UTG live, Naftogaz of Ukraine, NEURC
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 50 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
.. and it is currently being underutilised (2/2)
Underground gas storages capacity and utilisation Legend: (yearly-average, 2017 ) Olyshivske Solokhivske X – UGS capacity, bcm 31% 28% – % of UGSF utilisation Uherske – under-utilisation of UGSF (XIV-XV) 39% 24% 15% 0.3 1.3 Major underground gas 57% 47% 44% storages located within 1.9 1.9 17.1 100 km from Poland’s 58% border 1.5 1.0 0.4 Oparske 35% 45% 66% Verhunske Bilche- 2.2 Chervonopar- Proletarske tyzanske Житомирская обл. (7) 0.4 Volytsko- 0.7 Uherske 2.3 Dashavske Krasnopopivske Kehychivske
Bohorodchanske UTG’s operating needs for UGSF (mcm, 2016-2017) 90 81 0%
1.0
Hlibovske 2016 2017
Source: Naftogaz of Ukraine, UTG live, AGSI+, NEURC
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 51 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
Ukraine has recently introduced a customs warehousing service that allows it to retain gas in UGSF w/o paying taxes and customs duties Customs warehouse service of UTG
Ukraine’s UGS capacity can be used by foreign traders, including residents of the Customs Warehousing countries which lack storage capacities UKRTRANSGAS PJSC (TSO) and other authorities (e.g. Romania, Slovakia, Hungary, have fulfilled all necessary organisational and legal Poland, Slovakia) conditions for functioning of customs regime “customs warehouse” on the basis of 10 gas storage facilities (Chervonopartyzanske, Solokhivske, Bogorodchanske, Bilche-Volytsko-Uherske, Uherske, Dashavske, Oparske, Kehychivske, Proletarske, Krasnopopivske). The specified customs regime allows customers to >14 bcm store natural gas in the underground gas storage 10 capacity storages facilities of Ukraine in the customs regime - "customs available 1 095 days warehouse" within 1095 days without paying taxes with no customs and customs duties. clearance
Prerequisites 112 UAH / tcm To receive the services of storage of natural gas in the for storage cycle customs regime "customs warehouse" it is necessary to conclude with the TSO following agreements: . contract for natural gas storage; . agreement on rendering services of customs declaring procedure for the gas transferred across the customs boarder of Ukraine.
Source: NEURC, UTG web-site
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 52 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
In order to meet the challenges and improve the state and competitive position of Ukrainian gas market, TSO unbundling is required Incentives for TSO unbundling in the Ukraine
Remaining More transparency Possible engagement National and Natural gas market competitive and efficiency of business partners European regulations liberalisation
Unbundling should Successful unbundling Unbundling should Both national and TSO unbundling is a positively affect the and establishing of an improve the European regulations first step towards competitive position of independent, transparency, efficiency insist on the formation natural gas market the Ukrainian gas transparent and and eliminate corruption of independent gas liberalisation and its market, especially after efficient TSO should within the natural gas transmission system compliance with Nord Stream 2 attract potential sector operator European standards completion business partners
Source: PwC analysis
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 53 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
Ukraine has adopted an unbundling plan in 2016, but the recent arbitration ruling in Stockholm necessitates plan review/update Overview of Ukraine’s unbundling plan adopted in July 20161 Current structure After unbundling1
The Cabinet of The Cabinet of Ministers of Ministers of Ukraine Ukraine
Assigned Assigned Ministry of Energy state state and Coal Industry institution institution of Ukraine
Supervisory Supervisory Supervisory Supervisory Board, Executive Board, Executive Board, Executive Board, Executive Board Board Board Board
TSO SSO MGU PGU Naftogaz Naftogaz (Gas Transmission (Natural Gas of Ukraine of Ukraine System) Storage)
UTG UTG
TSO SSO Gas Stockholm’s Tribunal did not support NAK’s request to reassign the transit contract with Natural Gas Transmission Storage Gazprom to a designated TSO, saying it is beyond the powers of the Tribunal and being a System task for UA regulatory authorities. In this matter, transit contract remained unchanged.
Source: Naftogaz of Ukraine, The Cabinet of Ministers of Ukraine, press research 1) CMU resolution #496 dated 1 July 2016 2) According to the ownership unbundling (OU) model
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 54 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
EU experience shows that OU & ITO are the most common unbundling models, while only OU & ISO are possible from UA legal perspective Unbundling models of the major European TSOs (>2 ths km of pipelines)
ITO / ISO / Headcount1, ths Length of Country TSO Type of GTS ownership UGSF OU FTE pipelines1, ths km
UA UkrTransGaz n/a state-owned 3 19.7 38.02 IT SNAM RETE GAS OU owned by TSO 7 2.9 32.5 FR GRTgaz ITO owned by TSO 7 2.9 32.4 RO Transgaz ISO co-owned by TSO and state 7 4.6 13.3 DE Open Grid Europe ITO owned by TSO / co-ownership of some pipelines 7 1.5 12.0 ES Enagas OU owned by TSO 3 1.3 12.0 NL Gasunie T.S. OU owned by TSO 7 0.2 12.0 PL Gaz-System OU owned by TSO 7 2.8 11.0 DE Ontras ITO owned by TSO / co-ownership of some pipelines 7 0.3 7.2 HU FGSZ ITO owned by TSO 7 0.8 5.8 FR TIGF OU owned by TSO 3 0.6 5.1 DE Thyssengas ITO owned by TSO / co-ownership of some pipelines 7 0.3 4.2 BE FLUXYS OU owned by TSO 3 0.9 4.0 CZ NET4GAS ITO owned by TSO 7 0.5 3.8 DE Gasunie Deutschland OU co-ownership 7 0.2 3.8 DE GASCADE ITO owned by TSO / co-ownership of some pipelines 7 0.4 2.5 SK Eustream ITO owned by TSO 7 0.6 2.3 LT AB Amber Grid OU owned by TSO 7 0.3 2.1 2) Incl. located in temporarily occupied territories Source: European Commission, companies' data, press research, smida.gov.ua, PwC analysis 1) The latest available data and temporarily uncontrolled territories of Ukraine PwC | Advisory services | Ukraine Ukrainian gas market June 2018 55 Transmission *** FOR PUBLIC USE *** 1 2 3 / storage 4
Securing gas transit for Ukraine after 2019 requires concrete actions to be taken in a number of directions Key actions to be undertaken
Challenges Directions Next steps
Construction of Nord Stream 2 and other . Engage reputable international GTS partner in order to ensure bypassing pipelines transit volumes after 2019 and attract investments / experience Preserving gas transit for further development of GTS through Ukraine . Finalise TSO unbundling process in accordance with EU and Transit contract Ukrainian regulatory requirements (taking into account results of expiration in 2019 Stockholm arbitration between Naftogaz and Gazprom)
. Finalise transposition and implementation of EU energy regulations and standards Moderate pace of Reaching a point of no return for . Ensure transparent and non-discriminatory TPA to all infrastructure market reforms Ukraine’s gas market reform . Open all market segments for competition . Develop as a gas hub
. Resolve debt and legacy issues TSO preparation to UTG business . Extend scope of services and pool of clients on the market the work in the new market environment transformation . Transmission system upgrading and modernisation . Optimise TSO operations and business processes
Source: PwC analysis
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 56 *** FOR PUBLIC USE ***
Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 57 1 2 3 Distribution 4 *** FOR PUBLIC USE ***
Adopted Gas Law envisages that distribution and gas supply functions must be separated DSO reform summary
DSO becomes legally and organisationally independent from other activities on the gas market not related to distribution of gas (i.e. production, transmission and supply).
Implementation of simple and non- burdensome conditions for access to gas distribution systems for new users (including wholesale sellers and suppliers).
General rules of operation and access to a gas distribution system are set by the Gas distribution system code approved by the NEURC.
Access of consumers to gas distribution systems is a subject to Standard agreement (designed and approved by NEURC) signed between consumer and DSO.
Source: Law of Ukraine “On Natural Gas Market”, NEURC, Naftogaz of Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 58 1 2 3 Distribution 4 *** FOR PUBLIC USE ***
Total length of Ukrainian gas distribution system is 292 ths kilometers, connected to more than 12 millions of end consumers Characteristics of Ukrainian GDS (2017)
High-pressure 1 46 Medium-pressure Low-pressure licensed DSOs 42% 7% 8% 16% 25.1 bcm distributed to Ukrainian consumers 17% 292 ths km of distribution 12.4 m pipelines consumers connected to 68% GDS, including: . 12.3 mln residential . 0.1 mln non-residential consumers State property 41% Municipal property DSO-owned Other owners
Source: NEURC 1) Including PrJSC “Makiivkagaz” and PJSC “Donetskmiskgaz” located in the temporary uncontrolled territories (TUT)
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 59 1 2 3 Distribution 4 *** FOR PUBLIC USE ***
There are 441 DSOs in Ukraine whose tariffs vary by region
Tariffs on natural gas distribution by region (UAH / tcm excl. VAT, 2017)
Tariffs on gas 5 713.5 distribution are 30 725.5 regulated by Weighted average distribution 43 627.5 31 540.6 NEURC tariff in 2017 and its structure 12 328.8 23 151.1 39 459.6 26 541.6 21 708.1 11 634.9 44 211.9 5% 32 724.1 28 699.2 36 269.1 5% 22 720 18 567.2 29 20 722.1 33 631.9 38 595.2 2 724 674.4 1% 35 721.1 13 711.5 713.1 27 220.2 16 34 355.8 1 685.1 41 316.5 40 558.5 8 466.2 17 710.5 3 726.9 46% 9 580.6 513.7 4 679.9 42 723.7 19 613.3 6 522.6 UAH/tcm 10 295.8 39% 7 571.6 NEURC on 23 Jun 2017 established 14 430.2 tariffs for the services of natural gas distribution based on capacity (new 24 730.5 methodology). 25 369.1 15 669.2 4% Taking into account consumer 37 600.2 appeals to the Prime Minister and the President of Ukraine, NEURC on 10 Apr 2017 cancelled the decision. Operating needs Depreciation Thus, during 2017 the previous tariff Materials Profit margin based on physical volumes of distribution as of 1 Jan 2017 was Payroll Other (incl. applicable (old methodology). 3% for individual meters) Source: NEURC 1) Excluding PrJSC “Makiivkagaz” and PJSC “Donetskmiskgaz” located in the temporary uncontrolled territories (TUT)
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 60 1 2 3 Distribution 4 *** FOR PUBLIC USE ***
Almost all DSOs are characterised by a prevalent private share in their ownership structure (1/2) Characteristics of DSOs (2017) Length of Private share in DSO # Licensed territory / DSO Region Supplier under PSO pipelines, ths km ownership structure, % 1 PJSC Vinnytsiagaz Vinnytsia Region 14.3 75 LLC Vinnytsiagaz Zbut 2 DE Montazhnyk LLC TD Valinor Vinnytsia Region 0.2 100 DE Montazhnyk LLC Krystal 3 LLC Gazovyk Vinnytsia Region 0.3 n/a LLC Gazovyk 4 LLC Gazpostachservis Vinnytsia Region 0.1 n/a LLC Gazpostachservis 5 PJSC Volyngaz Volyn Region 7.3 100 LLC Volyngaz Zbut 6 PJSC Donetskoblgaz Donetsk Region 11.4 62 PJSC Donetskoblgaz 7 PJSC Mariupolgaz Donetsk Region 1.7 100 LLC Azovgaz 8 PJSC Dniprogaz Dnipropetrovsk Region 2.9 100 LLC Dniproptrovskgaz Zbut 9 PJSC Dnipropetrovskgaz Dnipropetrovsk Region 14.1 75 LLC Dniproptrovskgaz Zbut 10 PJSC Kryvorizhgaz Dnipropetrovsk Region 2.3 100 LLC Dniproptrovskgaz Zbut 11 PJSC Zhytomyrgaz Zhytomyr Region 9.8 100 LLC Zhytomyrgaz Zbut 12 PJSC Korostyshivgaz Zhytomyr Region 0.2 77 LLC Polissyagaz 13 PJSC Zakarpatgaz Zakapattya Region 7.5 100 LLC Zakarpatgaz Zbut 14 PJSC Zaporizhgaz Zaporizhzhya Region 7.8 75 LLC Zaporizhgaz Zbut 15 PJSC Melitopolgaz Zaporizhzhya Region 1.4 75 DE Gaz Melitopolya PJSC Melitopolgaz 16 PJSC Ivano-Frankivskgaz I.-Frankivsk Region 15.2 75 LLC Ivano-Frankivskgaz Zbut 17 PJSC Tysmenytsiagaz I.-Frankivsk Region 0.9 75 LLC Ivano-Frankivskgaz Zbut 18 PJSC Kyivoblgaz Kyiv Region 23.4 75 LLC Kyivoblgaz Zbut 19 OJSC Kirovogradgaz Kirovograd Region 4.8 49 DE Tsentrgaz OJSC Kirovogradgaz 20 PJSC Luhanskgaz Luhansk Region 7.2 75 PJSC Luhanskgaz 21 PJSC Lvivgaz Lviv Region 18.3 75 LLC Lvivgaz Zbut 22 SE Novorozdilske DGHP Sirka Lviv Region 0.01 0 n/a Source: NEURC
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Almost all DSOs are characterised by a prevalent private share in their ownership structure (2/2) Characteristics of DSOs (continue) (2017) Length of Private share in DSO # Licensed territory / DSO Region Supplier under PSO pipelines, ths km ownership structure, % 23 LLC Spektrgaz Lviv Region 0.01 n/a n/a 24 PJSC Mykolaivgaz Mykolaiv Region 6.3 75 LLC Mykolaivgaz Zbut 25 PJSC Odesagaz Odesa Region 10.4 100 LLC Odesagaz-postachannya 26 PJSC Hadiachgaz Poltava Region 1.3 75 LLC Kremenchukgaz-postachannya 27 PJSC Kremenchukgaz Poltava Region 2.9 75 LLC Kremenchukgaz-postachannya 28 PJSC Lubnygaz Poltava Region 2.6 n/a LLC TD Lubnygaz 29 PJSC Poltavagaz Poltava Region 12.7 75 LLC Poltavagaz Zbut 30 PJSC Rivnegaz Rivne Region 8.4 75 LLC Rivnegaz Zbut 31 PJSC Sumygaz Sumy Region 9.7 75 LLC Sumygaz Zbut 32 SE Kremenetske UPRG Ternopil Region 0.7 0 SE Kremenetske UPRG 33 PJSC Ternopilgaz Ternopil Region 10.2 75 LLC TernopiloblgaZ 34 PJSC Ternopilmiskgaz Ternopil Region 0.9 75 DE Gazpostach PJSC Ternopilmiskgaz 35 PJSC Kharkivgaz Kharkiv Region 12.3 100 LLC Kharkivgaz Zbut 36 PJSC Kharkivmiskgaz Kharkiv Region 5.3 100 LLC Kharkivgaz Zbut 37 PJSC Khersongaz Kherson Region 5.4 100 LLC Khersonregiongaz 38 PJSC Khmelnytskgaz Khmelnytsky Region 17.8 75 LLC Khmelnytskgaz Zbut 39 PJSC Shepetivkagaz Khmelnytsky Region 0.6 75 DE Shepetivkagaz PJSC Shepetivkagaz 40 PJSC Umangaz Cherkasy Region 1.8 75 LLC Umangaz Zbut 41 PJSC Cherkasygaz Cherkasy Region 11.1 100 LLC Cherkasygaz Zbut 42 PJSC Chernivtsigaz Chernivtsi Region 7.2 100 LLC Chernivtsigaz Zbut 43 PJSC Chernihivgaz Chernihiv Region 10.9 75 LLC Chernihivgaz Zbut 44 PJSC Kyivgaz Kyiv City 2.1 72 DE KyivgazEnergy PJSC Kyivgaz Source: NEURC
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 62 *** FOR PUBLIC USE ***
Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 63 Consumption/ *** FOR PUBLIC USE *** 1 2 3 End-use 4
Ukraine’s natural gas consumption shows a steady decline during the last decades – from 76 bcm in 1998 to 32 bcm in 2017 Ukraine’s natural gas consumption (bcm, 1998-2017)
-58% 76 76 76 76 76 73 74 71 8 8 70 8 9 9 70 8 8 66 8 8 7 7 58 59 CAGR 5 55 1998-2017 52 5 30 4 50 by segments: 33 28 34 33 34 30 34 30 6 4 43 32 30 0.4 34 28 4 33 32 29 28 0.4 -3% 0.01 1 29 27 3 4 4 24 19 -3% 37 38 20 35 33 34 34 34 33 17 30 32 30 23 26 23 19 17 14 -7% 11 10 9
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Unauthorised withdrawal Operating needs Households, DHC and public sector Industry
Source: Naftogaz of Ukraine
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Today Ukraine’s gas market consists of two nearly equally-sized segments – regulated and non-regulated Ukraine’s natural gas consumption (bcm, 2014-2017)
Share of Naftogaz n/a 29% 20% 22% X% in retail segment
42.6 0.4 Unauthorised withdrawal and unallocated volumes 3.6 -25% 0.7 Operating needs 33.8 33.2 Public sector 0.4 0.0 31.9 14.2 3.3 3.8 1.1 Industry -19% 0.5 0.5 DHC for industrial & 4.4 Non- public sectors4 0.5 regulated 11.2 -6% 9.7 -3% 47% 1.5 segments1 DHCs for households 9.1 Households 7.1 1.2 1.6 1.0 5.7 5.9 4.6 1) After the introduction of the Regulated 53% new Law on the Natural Gas 15.1 -23% +2% -5% segments2 Market in Ukraine starting from 11.3 11.9 11.2 October 1, 2015 2) Incl. religious organisations and DHCs for religious organisations (~0.02 bcm/year) 3) This segment became 2014 2015 2016 2017 regulated in 2017
Source: Naftogaz of Ukraine, NEURC
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Regulated segment of the gas market is functioning in the framework of public service obligations The framework of public service obligations (PSO) in Ukrainian gas market
Upstream Wholesale . PSO framework set by the of Law of Ukraine On natural gas market (article 11) and Cabinet of Ministers • Obligation for state • Obligation of of Ukraine resolution No 187 as from gas producers Naftogaz to sell March 22, 2017 (previously - Ukrgasvydobuvannya gas to district resolution of CMU No 758 as from (UGV) and heating companies October 1, 2015) Chornomornaftogaz PSO (and for the latter (ChNG) to sell gas to to buy it) for all . The deadline for PSO was officially Naftogaz (and for the needs at a extended until Aug 1, 2018 latter to buy it) for regulated price . Gas prices on the residential residential market market (households, religious needs at a regulated organisations and heat producers) price are regulated by PSOs to ensure • If this production is the public interest in the functioning not enough, Naftogaz Retail of the natural gas market buys the necessary additional supply from • Obligation of Naftogaz to sell gas . It means that there is an obligation other wholesalers, to suppliers under PSO (and for for parties under PSO to sell / buy including overseas the latter to buy it) for residential natural gas at a regulated price set market needs at a regulated price by CMU
Source: NEURC, Law of Ukraine On natural gas market, CMU resolution No 187 as from 22.03.2017, National Investment Council
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 66 Consumption/ *** FOR PUBLIC USE *** 1 2 3 End-use 4
Ukrainian consumers received ~16.8 bcm3 of natural gas within fulfilment of public service obligations in 2017 Public service obligations (PSO) fulfillment in 2017
Wholesale Retail
For residential needs Residential P 4 942 UAH1 P 6 917 UAH2 consumers P 4 849 UAH1 Q 11.23 bcm Q 11.23 bcm Ukrgaz- 37 (households) Q 13.89 bcm vydobuvannya suppliers (UGV) (under PSO) For religious organisations needs P 2 469 UAH1 P 3 915 UAH2 Religious Q 18.9 mcm Q 18.9 mcm organisations Naftogaz of Ukraine Weighted average 1 DHC Chornomor- P 4 849 UAH suppliers’ mark-up: naftogaz Q 5.9 mcm • 89.92 UAH / tcm (for residential consumers) (ChNG) P 4 942 UAH1 • 69.96 UAH / tcm (for For residential Q 4.61 bcm religious organisations)
1 Other (non-PSO) P 2 471 UAH For religious P market organisations suppliers – if Q 1.7 mcm Q ~ 2.9 bcm3 required P 6 611 UAH1 For others + electricity Q 0.96 bcm production
1) Excl. tariffs and VAT 2) Incl. transmission & distribution tariffs, suppliers’ mark-up and VAT P xx UAH - Weighted average selling price, UAH / tcm 3) PwC estimate as a diff between sold and procured gas under PSO Q xx bcm - Sales volume, bcm Source: NEURC
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 67 Consumption/ *** FOR PUBLIC USE *** 1 2 3 End-use 4
In 2017 Ukraine’s natural gas prices paid to UGV were capped below import parity Ukraine’s natural gas prices and volumes – supply side (kUAH / tcm excl. VAT, 2017)
Weighted average price for Weighted average 8 imported gas on UA border market wholesale price
tcm Selling price to / / Naftogaz 6.52,3 6.12 6 kUAH -25% 4.81
4
Other UGV 3 Import from EU
2 producers Commodity Commodity of pricegas,
0 5 10 15 20 25 30 35 Natural gas supply in 2017, bcm 1) Regulated price 2) Weighted average wholesale price for local gas producers 3) Incl. transportation costs to UA border and UA GTS entry-tariff
Source: The Cabinet of Ministers of Ukraine, Naftogaz of Ukraine, Ministry of Economic Development and Trade, NEURC
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 68 Consumption/ *** FOR PUBLIC USE *** 1 2 3 End-use 4
It is estimated that ~ 400 economic agents (buyers and sellers) were involved in wholesale natural gas market operations in 2017 Natural gas wholesale market (2017) Weighted average / fixed prices (UAH / tcm, excl. VAT) ~ 400 players on Ukraine’s natural gas wholesale market Regulated UGV&CNG selling
segment price to Naftogaz
4 4 937 4 937 4 937 4 937
4 4 849 4 849 4 849 Naftogaz selling 4 849 Weighted average natural gas price to suppliers wholesale prices (UAH / tcm, excl. VAT) Q1’17 Q2’17 Q3’17 Q4’17
5 607 Weighted average prices (UAH / tcm, excl. VAT) Price of local 6 139 gas producers
Wholesale price
5 5 909
5 5 611 5 5 458
5 5 280 6 682
(free market-pricing)
6 6 892
6 6 355
5 5 708 5 5 429 Q1’17 Q2’17 Q3’17 Q4’17 Non- regulated Q1’17 Q2’17 Q3’17 Q4’17
segment
7 7 270
7 7 102 6 6 104 5 5 873 Imported gas 6 469 price on UA border1 Weighted average X XXX
yearly price, UAH / tcm Q1’17 Q2’17 Q3’17 Q4’17
7 7 123
6 6 847
5 5 885 5 854
1) Includes transportation costs to Source: NEURC UA border and GTS entry-tariff Q1’17 Q2’17 Q3’17 Q4’17
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 69 Consumption/ *** FOR PUBLIC USE *** 1 2 3 End-use 4
Ukrainian natural gas retail market covers more than 12 mln consumers, most of which are domestic Natural gas retail market (2017) Weighted average prices (UAH / tcm, excl. VAT, transmission and distribution tariffs) • 225 suppliers, incl. 37 under PSO • 12.4 mln consumers, 12.3 mln of which are Religious
domestic and 0.1 mln are non-domestic organisations
5 5 052 5 063 5 066
Domestic 5 000
2 2 532 2 533 2 533 Regulated consumers 2 528 Weighted average natural gas retail prices segment Q1’17 Q2’17 Q3’17 Q4’17 (UAH / tcm, excl. VAT, transmission DHC-religion and distribution tariffs) DHC -
households
7 7 907 7 907 7 907
DHC-budget
4 4 942 4 942 4 942 4 942
6 227 4 942
2 2 471 2 471 2 471 5 031 & others 2 471 Q1’17 Q2’17 Q3’17 Q4’17
Weighted average prices
(UAH / tcm, excl. VAT, transmission and distribution tariffs)
6 6 559
6 6 094
6 6 056
5 5 945
5 5 052 5 063 5 066 5 5 000
Budget
Q1’17 Q2’17 Q3’17 Q4’17 organisations
8 8 222
7 7 841
7 7 523
7 7 347 7 335
Non- 7 174 6 6 190 Industry 6 098 regulated & others Domestic Non-domestic consumers consumers segment Q1’17 Q2’17 Q3’17 Q4’17
Weighted average Others X XXX
(non-PSO) 7 7 798
yearly price, UAH / tcm 7 592
6 6 983 6 6 941
Source: NEURC Q1’17 Q2’17 Q3’17 Q4’17
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On average, natural gas prices for Ukrainian households were below European level Average half-yearly natural gas prices for households and industrial end-users (USD / tcm, incl. taxes and levies S1 2017) Households Industry (0.53 tcm/year < Consumption < 5.28 tcm/year) (0.26 mcm/year < Consumption < 2.62 mcm/year)
Slovenia 632 Slovenia 432
Czech 629 Czech 328 Republic Republic Slovakia 481 Slovakia 388
Estonia 479 Estonia 381
Poland 477 Poland 384
Latvia 432 Latvia 373
Lithuania 417 Assumptions: Lithuania 388 EUR 1 = USD 1.083 Croatia 410 10.557 MWh = 1 tcm Croatia 351
Hungary 402 Hungary 378
Bulgaria 377 Bulgaria 300
Moldova 352 Moldova 325
Ukraine: ~ 264 USD/tcm Ukraine: ~ 359 USD/tcm
Source: Eurostat, European Central Bank
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In order to ensure proper accountability, Ukraine is increasing the number of households equipped with natural gas meters Gas meters equipping level (2017, 2018) Group Share of households
1% 1%
With metering Jan 1, Jan 1, 2017 2018 Without metering (disconnected, Households using natural gas in terminated contracts etc.) complex, incl. for home heating 99% 99%
11% 7% With metering Jan 1, Jan 1, 2017 2018 Without metering (disconnected, Households using natural gas terminated contracts etc.) for water heating and cooking 89% 93%
32% 35% With individual metering Jan 1, 38% Jan 1, 49% With building-level metering 2017 2018 Households using natural gas Without metering for cooking 19% 27%
Source: NEURC
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According to Naftogaz estimates, ~12 bcm of gas can be saved by energy efficiency programs Energy efficiency – potential gas savings & required investments
Gas savings, Investment, Where What bcm/year USD bln . Energy Efficiency Upgrading of individual heating systems ~3.0 ~4 Programs can ensure savings in household bills up to USD 2.5 billion and Upgrading of heating systems for heat ~1.1 ~2 accelerate market producers transformations . The current status is Modernization of gas pipelines ~0.7 ~2 characterized by insufficient updates of energy efficiency problems Metering and thermoregulation in ~0.8 ~2 apartment buildings in Ukraine . Examples of Energy Efficiency Programs in Thermo-modernization of family houses ~5.5 ~10 Ukraine: Warm Credits, IQ Energy, installation of Thermo-modernization of apartment meters, Energy Efficiency ~3.4 ~16 buildings Fund etc.
Total ~12 bcm / year ~USD 36 bln
Source: Naftogaz of Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 73 *** FOR PUBLIC USE ***
Contents
1.1 Macroeconomic fundamentals
2.2 Ukraine’s energy sector summary
3.3 Overview of Ukrainian gas market
. Exploration & Production . Import / trading . Transmission and storage . Distribution . Consumption / End-use
4. PwC in Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 74 1 2 3 4 *** FOR PUBLIC USE ***
We use our global and local knowledge to work with our Clients in solving their most complex problems – from strategy through execution
Functional competences of PwC advisory practice in the Oil & Gas sector since 3 offices in Kyiv, Strategy Organisation 1993 Dnipro and Lviv in Ukraine . Corporate & functional . Transformation programs strategies . Organisation structures . New market entry . Corporate governance & PMO 350+ . Balanced scorecard . Headcount sizing professionals, incl. more . Business model change . Corporate social responsibility . Post-merger integration than 60 in advisory Capital expenditure Operational efficiency
PwC Ukraine . (Pre-)Feasibility studies . Efficiency improvement . Modelling . Restructuring PwC has been operating in Ukraine since 1993 and provides a full . Financing . Warehousing & logistics range of professional services including consulting, assurance and . Investment process support . Process streamlining tax & legal services. . Asset management . Procurement PwC Ukraine draws on the talents of more than 60 consultants in . Controlling systems management consulting, investments, corporate finance and Innovation Sales & marketing valuation, 200 auditors, 110 tax & legal advisors. The high & technology professionalism of all PwC people is a key driver to our market leadership and excellence. . Innovation strategy . Segmentation . Operational model of . Value proposition design Engagements are generally staffed by a combination of Ukrainian innovations specialists, with knowledge of local conditions and regulations, and . Customer excellence . Smart grids & Big data international consultants, who have expertise in tackling issues . New product launch . IT & OT integration faced by international organisations and experience in dealing in the . Pricing . Open innovation Ukrainian environment. . Digital
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We have an experienced team, covering full value chain and functional scope for Clients
Experienced expert team Sector competences Functional competences
Experienced partner & managerial Complete Oil & Gas value chain coverage Hands-on experience in functional topics team with hands-on experience in from primary fuels, through generation – strategy, capital expenditure, international business advisory for and grids down to trading and retail operational efficiency, organisation, sales the Oil & Gas sector & marketing, innovation & technology driven business change
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PwC | Advisory services | Ukraine Ukrainian gas market June 2018 76 Thank you!
Disclaimer
This presentation has been prepared for information purposes only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. All informational sources used for particular analyses are listed in footnotes on respective slides. Various statistical agencies use different methods and approaches in their assessments. Therefore, numbers in different parts of this report may differ depending on the sources of information used for a particular analysis. PwC relied on information from the sources that, in our view, are the most relevant and reliable for the purposes of analysis.
© 2018 PricewaterhouseCoopers Advisory LLC. All rights reserved. PwC | Advisory services | Ukraine In this document, “PwC” refers to PricewaterhouseCoopers LLC which is a member firm of PwC PricewaterhouseCoopers International Limited, each of which is a separate legal entity.