RepottNo. 11646UA Ukraine EnergySector Review 1uly1, 1993 Public Disclosure Authorized CountryDepartnent IV Europeand Central Asia Region
FOROFFICIAL USE ONLY Public Disclosure Authorized
- Reort No: 11646 UA ~~~~~~~~~ye E
___ K
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~11 __ ~~~~~~~~~~~~~~~~~~~vJ~ ~ ~ ~~~~~~~fr~- T Public Disclosure Authorized Public Disclosure Authorized CURRENCYEQUIVALEN'S
Currencyunit = karbovanets,abbrev. Kv US$1 = 500 karbovanets(as of November1992)
WEGHS AND MEASURES atm amohere MJ Megajoule(10'J) bcm billioncubic meter MS man shift Gcu. Gigacalorie(109 ca) nt million metric toils GW Gigawatt mtoe million tons of oil equivalent kg kilogram MW Megawatt (1'W) km2 square kilometer MVA MegavoltAmpere koe kilogramsoil equivalent Pi Petajoute(10',J) kV kilovolt psi pounds per square inch kW kilowatt t metric ton kWh kilowatthour TWh Terawatl hour (l0'2Wh) mn3 cubic meter CALORIFIC VALUES
I Unit of Fuel ocal
Coal (ton) 5.0 Wood (ton) 2.0 Natural gas (O0mn) 8.5 Mazut (ton) 9.7 Diesel (ton) 10.2 Gasoline(ton) 10.5 Kerosene (ton) 10.3 LiquifiedPetroleum Gas (ton) 10.8 Crude oil (ton) 10.0
CONVERSIONFACITORS
1 Ocal = 4.1870G = 3.968 million Btu = 1,163 kWh 1 kWh of hydro and nuclear energyoutput convertedto primary thermalequivalnt at 250 grams of oil equivalent.
CFEFMICALCOMPOUNDS
NO. NitrogenOxides SOz Sulfbr Dioxide
ABBREVITIONS
ATC Acual ThermalCapacity CEC Commissionof the EuropeanCommunities CHP CombinedHeat and Power DWT Deadweightton EBRD EuropeanBank for Reonstuion and Development EC EuropeanCommunity GDP GrossDomestic Product ROB Heat-onlyBoiler LAEA Inernaional Atomic Energy Agency INPO Institutefor NuclearPower Operations LPG Liquid Petoleum Gas NMP Net Materia Product OSART OperationalSafety AssessmentReview Team SCADA SupervisoryControl and Data Acquisiion USAID U.S. Agencyfor IntmrnatonalDevelopment USNRC U.S. Nuclear RegulatoryCommission VAT Value-AddedTax WANO World Organiaion of Nuclear Operators
FISCAL YEAR Jamuy 1 - December31 FOR OFCIL US ONLY
MRNE
EMERGY SECTOR REVIEW
Table f Contmnts Page ExdectiveSummary ...... i
I.Lrkno ...... I...... I
H. En y and the Eoony ...... 4 A. MacroeconomicPerformance ...... 4 B. Role of the nyw Sector ...... 5
m. EneryDmnmand andCosrevadon ...... 7 A. Aggregate Demand ...... 7 B. EnergyEfficiencyandConservation ...... 9 C. EnergyDemandPorea ...... 12
IV. EergySupply andTrade .. 19 A. Oil, Gas andCoa1esources.19 B.DomdeicSupply .. 21 C. EneryWImport ad Exort. .22 D. ThelIs=eofSupplySewrity .25
V. iza no the EnergySe ...... 30 A. EnrprisesandAgencies ...... 0 B. Sector Managementand Coorinaion i...... 32 C. Demonopolizaio CmmcDlon, Privatizaon ...... 34
VL EueayPrIks, Twloun d Subsldles...... 41 A. The Systemof EneryPricig ...... 41 B. EnergyPricesin9IM...... 42 C. Effectsof thePricingSystem ...... 44 D. EnergyPrice Reform ...... 47
VIL S r _humJu...... 51 A. Oil...... 51 B. Natr Gas ...... 55 C. Coal ...... 60 D. Electicity ...... 67 E. District Heat ...... 79
VWI. nvestent Cost and F _nng Opdt_ ...... 82...... 82
Ml...... Acdox 90
Thbdoument has a restrictd dtibution and maybe uedby ripients onlyIn u iewfomam of their offci dutiea Its contentsmay ot othewisebe diclsed withoutWord Bankauthorzation. Annexe 1. Tablesand Figures 2. EnergyUtilization at Five nkrial Entrpri 3. Oil, Gasand Coal Resourcesof Ukraine 4. Oil and Gas Leslation Project:Terms of Referene S. Oil Refining,Transportation and Marketi IndustriesR c : Termsof Rderence 6. Reorganiztionof the ElectricityIndustry 7. Modernizationof Refineriesand the OdessaOl Terminal:Terms of Reference 8. GasD)istribution and PricingStudy: Terms of Referec 9. Donbass- Coal Resourcesand Operadons 10. Restuctring Programfor the DonbmsCoal Minig Operatios: Termsof fence 11. Electicity Supplyand Demand
Map A. DomesticEnergy Resources and Main roductionSites B. Oil and GasTra1 port and ProcessingNetwork C. MainPower Statons and TrasmissionLiaes ACKNOWLIDEMENMS
The Reviewis basedon the findingsof an ener missionwhich visited Ukline in July 1992. The missionconsisted of L. Lovei(mission leader), A. Adaan_tiades(power), N. Cornwal (power retructuing), H. Hendrk (coal),G. Hughes(energy demand), T. Joyce(gas), T. Kamny (sector resach), F. Martonhei (eolog), and T.S. Nayar(petroleum). B. Evansfrom Harvard Universityconributed to the workof the missionin the oil and gas subsectr. The Reviewalso refcts the find of a joint WorldBank - Iternationa ergyAgency ([EA) power sector mission wVAiN isited Ukraine in November192. Thepower sector mission was also led by L. Lovei,and consistedof A. Ad s (electricitysupply), I. Dobozi(electicity demand), H. F lkenberry (therm power),P. Jersin(district heat), R. Kar (indusl energyconsmption), and T. Keamey (sectorresearch) from the WorldBank, and S. Foster(IEA team leader/hydopower), A. Banard (dectricitytamission), and D. Rubin(demand/efficiency) from the VlRA.E. SkiareWnkand G. Voitsekhovskyaprovided valuable assistance for the work of the missionsin Kiev. G. Stuggs and J. Bsant-Joneswere the two WorklBank peer reviewers.R. Manninoprepared charts and tablesand wasresponsible for the proution of the report. V.M. Semenyouk,Deputy Minister of Power,was the maincoordinator of the missionson the Ukanian side. The Miistry of Powerand Electrification,Ministry of Economy,Ministy of Finance,Ministry of Industry,Nuclear Safety Commission, Academy of Sciences,Stae Committeof Coal Industry,State Committee of Geology,Ukrmeegoprom, Ukrgawrom,Ukrgaz, Ukrneftekhimand the staffof severalother energy and industrialenterprises actively participated in te workof the two missions.
Te first draft wasprepared in Februaty1993. A follow-upmission discussed the draft reportwith the countepartgovernment team in Ukraie in Marchand prepareda short and medium term actionplan. [A conferenceto discs the propoed ene strategywas held in Kievin June 1993with repton fromdomestic and foreigngovernmental and non-governental g s. Basedon t at the conferenceand commentsfrom the Govenmentof Ukrine, the reportwas finalizedin July 1993.] -i- UtRANE
ENERGYSECTOR REVIEW
Exe SwUa
i. The Ukainian economyis fcing a seriousand growingcrisis. The disintegrationof the frm SovietUnion had a dramaticImpact on the hmportsof raw mateals and ener goods nd on Ukrne's exportmarkets. The net materal product(NMP) declined 3 percentin 1990and 11 prce in 1991,dropping below its 1985level. The NMPexperienced a further15 percet decine in the first ninemonths of 1992and the declinefor the wholeyear is esdmatedat 15- 17 percent. It has becomeobvious that the country'sown resourcescould not possiblysupport the needsof an econoW whichwas so higly enegy intemive. Hi. The Goverment formedin October1992, in the midstof a crisisof gas and oil deliveriesfrom Russia, anonced that the two conestones of Ukraine'sener strategyshould be more relianceon domesticresources and the eliminationof wastefl energyuse. The Goverment also askedfor assistancefrom the intemationaldevelopment agencies in the formulationof the new enaey strategy. EnDg Dmad
iii. Energydemand in Ukraineis chractized by highenergy intensity in relationto industrialo;tpUt and the highshare of indusy in finalenergy consumption. This is due to the high sbareof heavyindustry (iron and steel,basic chemicals) and the lowthermal efficiency of energ consumptiontechnologies. Energy coumptin per capitawas about 4600 kilogram oil equialn (koe)in 1990,which is quitehigh even by WesternEuropean standards. Based on a coss-country analysisof the reationship between energy consumptionand Gro Domestic Product (GDP), Ukrine usedabout 60 percentmore energy in 1990th mightbe expected(using the averagepredicted value)on the basisof its estimatedper capitaGDP level. iv. Themajor fator ifluencing energydemand in Ukraineover the nen two decades willbe the profoundeconomic changes which are tnsformg incentives,instutional arrangements and the compositionof economicacdvity. Thetransition from central planning to marketsand a moreopen economy should not onlyimprove the county's economicperformance in the longertem but willcontrlbute to improvemes in energyefficiency by penalizingthe massivewaste of resources whichchatzed pro n in the past. Recognitionof the true opportunitycost of capitalwill shifttlv smphasisaway from large capitalinvestments, drawing upon the product of heavyindustry, towar betterutiization of existingcapital equipment and a contiuous processof inorporatingnew technotgy withcoequentl reductionsin averageenergy reqpirm per unit of output. v. At the end of lastyear, industrialenery pricesapproached one-half of economic cost bat the levelof householdenergy prices (with the exceptionof gasolineand dleseloil) wasa very efail fractionof botheconomic costs and indtia energyprices. Oneof the mostpainful but essenti featres of the marketreform in Ukaie is the requiementto raiseenergy prices to levels whichcover import and domesticproduction and distrbutioncosts and provideadequate revenues to financerehabiliation and invesmentexpndiu. Theresponse to higherenergy prees wfll promote nery conservation,so thatthe energyitensity of economicactivity will be significantly reducedover the nextdecade. vi. A detiled modelhas been developedto exmine the combinedimpact of stuctural and prcing changes on energy demand. The results of the analysis show that, even undera -il- ddayed/dowsreform scenario, primary ener demad declinesto about70 percentof dhe1990 leve1 towardsthe end of the decade. However,dtere are sin efictdihrenc in the evoluthionof enery demanddepending oan the speedand c heness of marketreforms. For example,under the acceeratedrefm scenario,primy energydemand drops to 43 percentof the 1990level in 2000, halvingthe energy ntsity of Ukaines GDP. vii. Thereare otly a feworganitons in the county capableof producinga thorough anysis of the enery consmptionof industrialand other enteqss and asisting entpis to use these eney awditsto develop energyconservaton strategies. To assist en consrvation efforts (in respone to futurerea enery price increases),the Govenmen shouldfoster the developmentof industrialorgaiations whose funto is to provide, on a consutig basi, detailed plt eneWr audits,to recommendconservatimn _msu to individualoperat plants,to assistin putt such measuresin placeand to rn energ conservationcourses at the plant level. In addition,efforts sbouldbe acceleratedto identifyand implementmehms by whichthe energyutitis, key insuments in promting energyefficiency in manycountries, can be offeredan incentivestuue to a ge cost-effectiveener efficiencymeaures amongcustomers.
Supp &mrMy viii. Import Ukminehas to importabout half of the primaryenergy it conmes. The energysuy cris of October-November1992 dted evulnbili of Urine's economy to outsideenewy supplyshocks. Incrased energyself-sufficiency is onlyone (andnot the least cosdy)of the opns whih imrove the securityof Ukaine's energysupply. Ukraine'simport dependencyi not excessivein internationalcompaison. Thereare severalcountries which depend on importsto supplymore thanhalf of ther eney needs. Ukraine'sproblem is its relianceon only one country,Russa, for morethan 90 percentof its importedfuel needs. ix. SinceUkrine is locatedon the gas and oil exportcorridor from Russia to Eupe, the cost of supplyingUkraines needswill alwaysbe lower thandelivering oil and gas to the rest of Europe. If Russiacan prce its energyexports competitively in Europe,it shouldbe ableto do so evenmore in Ukraine. Therefore,strictly on the basisof supplycosts, Russia appeas to be the least cost soure of importedoil and gas for Ukraine.
3c. The analysisof the eventsin 1992shows that uncainty conCeringpayment mec_amsmsand efectiveprices cawed the insecurityof energysupply and not the physical availity of importedfues. Sincethe inftcture to importlarge volumes of fuelsfrom other counrie simplydoes not exist, Russiawill remain,at least in the mediumterm, the mainsoure of importedenergy for Ukraine. In order to avoidanother supply crisis, the "rulesof the game"must be clarified. xi. Manybelieve that the solutionis an agreementbetween Russia and Ukraineto trade at worldmarkt prioes. However,it iBclear that Ukrainewill notbe ableto pay in convertiblecurrency for importedener in the near future,therefore the pricingand compositionof Ukaaine'sexports to Russiawill hae to be taen into account. It is expectedthat, at least for 1993,the two countrieswill continueto sette paymentsin rubles,therefore the effectivecost of importedenergy will dependon (i) the price of importedfuels; (ii) the price of Ukaainianexport commodities; and (iii) the cost in domesticcurrency of producingthese commodities. In the mediumterm, there is litte doubtthat the cost of impoed energywill approachworld market levels. The unceinties are (i) how fast this is goin to happen; and (ii) what quaity constraintson fuel impons will be in effect in the period of transition xii. Ahug htur ptcei irase for importednatural gas are expcted to be largerthan fo crudeoil, the avaidbit of pa in the taition periodappears more certain, The reasonis that th mrinal va of crudeoil I muchhigh for Russiatan the marginalvale of natual gas. It b eay to sellmore de oil an dte word maket, whiledeveloping a marketfor additionalnatral gas sals tabs time.
Xi. Ukie s d attemptto negotiatelong term gimport aVgreent withRussia and Tmhn_ (foUowingthe signingof import a b for 1993). The ipance of the Ukaa gas marketfor Gaprm (Russia)in te longrun shouldnot be undestimated. Ukraineis Garoms lagest li customerin teWmsof volumesof gas sold and will probablyremain so even whentruade betwerwthe twocounes wil be caTriedout in converdblearrency. From that perpectve, a longterm providesadvantages to both countries.In addition,a longterm gas transitagreemnt coud also be negdod. It wouldprovide a frameworkfor neededtransit systemimprvement d ine the reliability f gas supplyfor Europeancustomes, which,in tun, wold ine the aue of exportgs. xiv. As ven in 1992provedte Inicative amountin the generaltrade a with Russia is not enoughto securethe importof crude oil. Therefore, parallel to negodatinga general trade Waeme for 1993,U ie shouldfocs its effortson signig directimport conracts between the Ukraian refineis nd te Rusian oil proding enterpies. In the longrun, assumngthat Ukrainehas the neceay hardcurnq, it canpurcha crudeoil in pracicallyunimited q'intity on the worldmaime. The problemis to ensurethat Ukrine hasthe infrtrucu to receivethe oil and forwardit to refineds. The cpacity of the Odessaoil tminal to receivecrude oil shipet is lmited to a fewmniio tons of oil per year. Ukrine may explorehow to utilizethis capacityin the short run, and also take the iocessy stepsto commissiona capacityexpansion project. In addition, adeqate crudeoil storge capacityis also required. An importcapacity of about 10 mt/yearin Odessaam: a dgnificat expanionof the country'stotal storage capacity from the present2 mt to about8 mt (dividedabout equally between crude oil and oil products)should be sufficientto put a checkon the priceof the Russiancrde and alleviatefuture short term supplyproblems. xv. Damde supl. In 1993,assming that domesticcoal, oil and gas production registerony a modeate drop whilenuclear power geneaton staysconstant (compared to 1992), Ulkaines leve of energyself-sutiec willstabilize or sighly increasedue to the expecteddecline of energydemand. In the lng trm, however,increased energ self-sufficiencywould require the exson of the udlzationof coa, nucle powerand remewableenergy resources. The options are brieflyconsdered below. xv. . Coal Is neiher a cleannor a convenientfuel. Similarlyto whathas alreadyhappened in all developedcountries, the use of coalby smallconsumers will inevitablydecrease in Ukraineas well. Froman pointof view,this is a verypositive trend and shouldbe encouraged. SinceUkraiDe is alreadyself-suffient in cokig coal, it appeasthat the onlyway to mainain the rdstive are of coal in Uklrines priay enery supplyis to use a largershare of domestcilly producedcoal in powe plns (whichcn be equppedfor polutioncontrol at a lowercost ttmansmall boilers). That Implie, however,that more coal shoiudbe producedin the formof bituminos therml coal ther hamcokig coal or asnhracite(the latt two coaltypes curey representa disprop e sbhaeof coalprduction in Ukraine). In addition,thermal coal shouldbe produced at a cost whichmakes it competitivew iported fiels, priarily naturalgas. In rn, that requir a metorestuct of coal miningwith a focuson low cost productionof thermalcoal utlizing resourceswith favouable geological condios. xvii. SinceUkrae has a numberof almostor half completed1,000 MW nuclear power unis, represent cosdera sunkinvestment costs, icreased relianceon domesticallygenered lv - nuclearpower is an actve opto froma pwely economi pointof view. However,If the existg moatorim an additoalnucldea poweris to be lifted,an itensified effortto demonsate in a tecnicly and pubLclyconvining waythat tbe plantsare opated withhigh safety standard would be needed. Also,both the operatingand the uncompletedunits would have to undergoa mmiberof safety to ensurecompliance with int ionallyaccepted norms. Finally,operation of existg and possiblefitue units would require a sound plan for the short and long term stonge of spent fhel, nluing firm a m to ship the fuel to RussiL(.s before) or to store it onsite or off- site in Ukrine.
xviii. The role of renewableene resources is currently limitedin Ukaaine. Furthermore, the techlogies whichmay become commercialy viable In the not verydbstant future cann produce the amountof energyneeded to makea significantconibution to domesticself-sufficency. The addiionil cost of investingheavily Im these technologies is subsantiay higer than pusuing energy savingopos withthe sameor lr impa on supp.ysecuity. Theefore, the Govemnentsboud givepriority to measres whichincrease ener conservationas one of the mosteffective ways of increasingthe securityof energysupply for the countryin the longrun.
Sector Regulatio and Ownrhp
xix. Duringmost of 1992,the oil and gas concerns(Ukmnefteim and Ukrazprom), the Ministryof Power(Mmenergo), the nuclearpower conern (Uk rgoom) and th Ste Coal Commite repre direcdyto the Cabinetof Ministers.This arrugementgave great power to these ubsectoracies whichoperated Ie nly fromeach otter withoutmuch aempt to produce coherentpolicies that involvechoices about the allocationof investmentand otherresources across the energysector as a whole. In responseto that problem,a Deputy-Prime Minister position with the tak of coordiati the sectorwas created at the end of 1992. Tlere are five agenciesin the energy sectorreporting to the DeputyPrme Ministernow: Minergo, the StateCommitte for the Utilizatonof NuclearEnergy, the StateCoal Ccumittee, the StateOil and GasCommittee and the SW-.Comme_e for Nucear and RadiationSafety. Xi. Webelieve that the Govermenthas threebasic functionsin the energysector: (i) policym g and coordiation,covering the majorstrategic decisions that affict the sectorand those areas wherethe Govenmentis seding a widernational interest tan impliedby the objectivesof the energyenprises alone;(ii) ownehip, i.e., ensig an adequatefinancial return on the nation's investmes in the sector;and (iii)regulation, whereby the goverment seeksto ensurethat the consumerhas approprat protectionin respectof pricesand qualityof supply. Thesethree functions are not withoutconflic0s; for example,the ownerand regulatorroles conflict over the questionwbat is the desirablelevel of conmer prices. For this reason,these roles should be givenseparate entitlesin the mediumterm, i.e., seprate entities/agenciesshould be responsiblefor policy, ownrhip and regulation. xxi. Generlly, economicactivities can be divided intotwo groups. The first group contis nat monopolies,i.e., activitieswhich, for technologicaland otherreasons, are most efficientycarried out by a singleorgaization. Withinthe energysector, oil t on (via pipelina) and the transmision/distibuionof gas, electicityand distict heat belongto thatgroup. The secondgroup contais activitieswhich can be carred out competitively.Within the energy sector,coal productionand distribution,oil production,refining and distbution, gas productionand dectricityand (to someextent) heat generationbelong to that group. Tht objectivesof the Goverment's regulatoryfunctio are best achievedby maintaininga competitivebusiness envirolmnt, i.e., competitionprovides the best protection for consumersin termsof both quality and price. For nual mopolies, wherecomptidon is not a feasibleoption, separation of the ownrhip and regulatoryfuncotins is probably the key step towards adequateconsumer protection. xxii. Assumingthat it is aivl uately staffed, the newly establishedoffice of the Deputy Prime Minister (with responsibilityfor the energy sector) will be well positionedto carry out the finction of sector coordination,policy developmentand preparationfor major strategic decisions at the Cabinet level. However, the Energy Prices Departmentof the Ministry of Economy, although it i independentfrom the energy agencies, does not meet all the requirementsfor a regulatory authority. Its focus is on only one aspect of regulation, prices, while other importantaspects, such as the qualityof service, are neglected. Its proceduressnd decisions are not transparent. Tberefore, in the mediumterm, there is a need to establish an open, independent,legally based energy regulatory system where the interests of the customers (both residentialand industrial), the central and local goverUnments,potential creditors and the reguated enterprisesare all taken into account.
xxiii. In 1992, the large scale assignmentof enterpriseassets to the -nadequatelystaffed State Property Fund weakenedthe accountabilityof enterprisemanagers and blurred the lines of decision making. The Government, therefore, needs to strengthen its ownershiprole temporarily even in those energy subsectors, which, in the long term, can be operated competitivelyand partly or wholly privatized. Governmentministries and committeesmay represent the owner more effectively in the short run than the State Property Fund, which shouldfocus its efforts on privatization. In order to create an arms' length 'elationshipbetween the ininistries\committeesand the energy enterprises (to separate the ownership functionfrom the coordinationand policy making role of these governmentagencies), there is a need for holding companiesto act as intermediateowners.
xxiv. The State Coal Committeeacts as the de-factoowner of the coal associations,while it also carries out the functionsof coordinationand policy developmentin the coal subsector. The number of enterprises and associationsis too large for effectivecoordination and control. There are too many non-miningactivities. Admiistration of mine operations, safety regulationsand trade unionsare too closely linked. Successfulprivatizadon of the coal industrymay ultimatelybe the best v-hicle to address these problems, but it is not likely to be a realistic option in the near future. Modernization,restructuring and institutionalreform in the coal miningindustry is expected to take at least ten years. In the first phase, the Governmentmay transformpart of the State Coal Committee into a holding company. This will separatethe ownershipfunction from the policy development finction of the State Coal Committee. xxv. The new holding company would exercise control over the coal miningassociations, which would be organizedinto seven to nine larger, commerciallyoperated mining companies. The holding company's managementwould be appointedby and responsibleto its board of directors. The board would be appointedby the Government,which later may delegate that task to the State Property Fund. The members of the board would represent a broad scope of interests, in particular from the Ministry of Finance, Minenergo,Ministry of Industry and credit agencies. A labor representativemay also be a board member. In the transitionperiod to the second, competitive phase, the role of the holding company would graduallydecrease and the coal companieswould be given increasingautonomy not only in their operations,but also in making investmentdecisions. In preparationfor the second phase, the Governmentshould start the developmentof a new legal and reguiatoryframework for the coal mining activities. The new mining legislationshould promote competitionand private investment. xxvi. The main steps of the institutionalreform of the Ukrainianpower industry shouldbe (i) the separationof the Goverment's policy making, ownership and regulatoryfunctions; (ii) the commercializationof electricitysupply; and (iii) the introductionof competitionand promotionof private sector participation. Minenergo,which acts both as a governmentagency and the headquartersof a large, integratedutility, should transform itself into a streamlinedgovernment ministry. It should focus on policy developmentand the preparationof strategic decisionsfor the I vi I wholepower Industry. It shod deelop an anmfslength rdationship with dhe neration. trnsmisio and dstbuton compaes. xxvii. The Itroductionof comption In powersupply requ the brig up of the cu verticallyintegrated strmture into eprat compnies responsiblefor geradon, tasmission and distibution. An genros (includingcogenrtors In the indual secor) wouldbe alowed openaccess to the transmissionnetwork and havethe right to sel bulkpower to distributorsand large users at uegulaed prices. Also,generators and other i4d producerswould be allowedto bid for the right to developnew genang capcity. Pricescharged by the transmissionand dibution companieswould continue to be regIated. xxviii. Thesechanges wll requirethe establishmentof a licesig regimewith rules govering proceduesfor obtaninggeneration liceces and opation of the transmissionand distrb*tionsystems. In the shortterm, regulationcan be caried om in coopeatio beweeh the Ministryof Economyand Mnego. Initially,the Ministryof Economywould contime to focuson prices,while Miero wouldissue Lcnces, safegard and enur coa m cool obligationsto supplyand connectand detemine the qudity of service. In the mediumtm, boththe Ministryof Economyand Minego sud giveup thdr retry ftions and ser it to the new en regulaty authority(see above). xxix. In 1992,Mno activelystdied the ee of a munberof idustialized countriesand de-velopeda blueprint for reoa. Theprposed reognizatio wi bring very significantbenefits. Decisionsabout genertidon capacity deveopment wil be moresl eonomicallyand finacially. Therewil be clearincentives and pressuresto reduceoperation cost. Transparentprices, which better reflect costs and reducethe extensivecrass-subsidiation, will send the rightsignas to electricityconsms . The needsof the csomer willbe in the focusof service improvementsefforts. Mostof thesebenefits will come from a new, compettiveset-up for the operadionof the industryand willnot dependon privataton, whichmay or may not be the ultimate objectiveof the Govenment. xxx. Nuclea generton tology has operati and safetyreqiemen whichare very diffeent fromconvendonal generaon. Thereare significantadvan_ta in the presentarrangement wherebyall nuclearplants belong to the StateNuclear Energy Comtte. However,the Committee shouldfocus on its policyrelat activitiesand maypreserve part of Uatomenroprom to operate as a holdig companyfor the nuclearpower plants. The holdingcompany would carry out a nmrber of cenalized functions,such as procement of fuel and spareparts, diosition of spentfuel, fuel cycle(loading) cdoalations, traing, appliedresearch and development,etc. xxxi. Ukrine needsan effectivenuclear regulatory agency in orderto ensurethe funmtioningof nuclearinlions accordingto the requirementsof publichealth and safety. However,the presentstatus of the StateCommittee for Nuclearand RadiationSafety is inaduate to the task set by the Government.Owing to the heretoforeprevailing structre of responsibilWiesand dearthof localUkainin peroel rined in nuclearscience, it is not suprising that the existng arranement are tentativeand incomplete.In the near futre, the authorityand responsibilityof the Comitee shouldbe establishedby law, a strongorgnizatioal strucre shouldbe put in place,and the Committe:!should be providedwith a budget nua withits responsibilities. Faergy Prces xxxii. In 1992,the Govermentapplied a varietyof hinent to contol eergy prices. Pricesof adlenery cosumed in homes- elecrcity, heat, cod, heatingoil, kerosne, naturalgas, liquifiedpetroleum gas (LPG)- wereset by the Cabinet. Becuse the Cabinetal se the average - ,ii-* price of electrcityand heat, it effectivelydetemined the pricespaid by nonhouseholdconsuers for tee services. Pricesfor domesticallyproduced crnde oil and nautu gas and 70 percentof steam coal and 90 percen of cokingcoal were also fixedby the Govenmen. Maxhmmprices for oil productsand naturalgas (for non-householdconsm) weredetermind idity, by conolling wofitmargins for the refineriesand transmission/distributioncompaies. Dif_fere between averae costsand householdenery priceswere finacd fromthe budget. Electricitywas an eweption- householdelectricity price subsidieswere finaced ftom a surchargeon industrial consumers.District heat and solidfuel subsidieswere distributed through the localgovernments, whileother subsidieswere given direcwy to the energydistnbution entses. Householdenergy subsidiesamounted to aboutfive percentof totalgoverent expendituresin 1992. udii. Thecurrent system of energyprice controlin Ukraineis inefficient,since it does not permitcompetion amongenergy suppliers, discoues energyconservation and misallocates resources.It is also unsusainable,since it requiressubsidies at a rapidlyincreasing scale which undemi effortsto containthe budgetdeficit. The Govermentshoud find more efficientways, such as targetedsocial progms, to protectlow-income groups without the distontioaryeffects of energyprice subsidies. A comprehensiveenergy price reformis neededwhich should be closely coordinatedwith the institutionalrestructuring of the energysector.
xxiv. The Governmentshould develop a medium-erm(three to fiveyears) program to graduallyeliminate household energy subsidies. Theprogm shoud be linkedto a nationwide programof installinggas and heat consumptionmetering and controldevices for individualhouses or block of Vaprens. In order to assistthe populationto makethe right decisionswhen purchasing new energyconag devicesor improvingtheir homes,the scheduleof energyprice ices shouldbe anmouncedin advance. xxxv. The liberalizatonof Oetroleumproduct prices (including the eliminationof margin cotols on refineris and distributors)should proceed parallel with (i) the corporatizationof the refinmies;(ii) abolishingthe systemof state orders;(iii) allowingopen access to oil transportation pieines; (iv) libelUation of exportand importof petroleumproducts; (v) demonopolzationof domesticdistribution/trade; and (vi) privadzationof gas stations. xxxvi. Pricesor domesticallyproduced crude oil and naturalgas shouldt raisedto the level of importprices. Thedifference between import prices and domesticproduction costs couldbe capturedby the budgetvia a systemof royaltiesand pofit taxes, whichshould be an integralpart of a new licencinglcruessionregime designed to attractforign investmentin oil and gas exploration and production. xxxvii. PFl coalprice liberalizationin the near futurewoud bear a highrisk thatproducers wouldset theirprices significantly above import prices, due to the highproduction costs of several mines,their inabilityto adjustproduction patterns rapidly and the non-existenceof the necessary maexetinfrstr and experienceof tradersand consumers.The first stepsshould include measureswhich hberalize coal import,commercialize and demonopolizedomestic trade and develop iutions and transportand storageinfiastructure needed for competitivetrading of coal. Meanwhile,coal prices should be graduallyadjusted until ful importpariy is reached. Prices should reachat least75 percentof importparity by the end of 1993and fuil importparity in 1994. Thegap betweenhousehold and industrialcoal prices should be reducedin 1993and completelyeliminated in 1994. Thereafter,coal prices for smallindustria consumers and householdsshould be decontrolled togetier withthe liberalizatonof exports.
xmviii. It may provenecessary to fix coalprices for largeand sategic consaner (i.e., powerand steel industies)at importparity level for an extendedtime period as part of a - viii - comprehensivegoverment programfor the structuraladjustent of the coal industry. Sucha programwould aim at transferinglabor fromuneconmic coal miningto other activitiesin a socially acceptableway. Its key featureswould be temporaryand decreasingbudget subsidies for an agreed minimumcoal production plan, whichprovides a seure sharefor localcoal in the powerand steel markets. Thus,the grantingof subsidieswould be trsparent and condidonal,while the competitivenessof consumerswould be maintned. xxxix. Pricesfor electricitygenerators followed fuel cost increaseswith a considerablelag in 1992. Also,because capital assets were undervalued in 1992,contibution from amortizaton funds was iadequate to cover rerng equipmentreplacement costs and rehabilitationworks needed to maintainthe capacityof the electricitygeneration, transmission and distributionsystem. Finally,the pricingformula applied by the Ministryof Economycontrolled profit marginson the basis of opeatng and depreciationcosts and did not explicitlyconsider financing needs or a rate of returnon capitalinvestments. In the short term,the Govemmentshould adopt a policyof more fiequent(at least quarterly)price adjusmet to keeppace with increasing fuel costs and to reflectinternal cash generatonreq iementsat the enterpriselevel derived from the financingneeds of an adequawe rehabilitationand investmentprogram. As soonas the separationof electricitygeneration from transmissionand distributionis implementedand a systemfor competitivesupply of electricityis established,pnces for electricitygenerators can be liberalized. X)XX. Pricesshould become the orinary instrumentfor energydemand management in Ukraine. The Govenmmentshould encoue Uklraiianpower and gas utilitiesto developtime-of- day, seasonaland inteuruptibletariffs. At a laterstage, after the trackingand reportingof various cost elementsis drasticalyimproved, the regulatoryauthority may designincentives for the electricity,gas and districtheat distribution companies to supportefficiency improvements at the consume's level. xxxxi. In summary,the proposedenergy price reformwould ensure that bothimport and domesticcosts of energysupply (including capital costs) are fullypassed on to consumers.These objectiveswould be achievedby the gradualelimination of subsidiesto energyproducers and consumersand the introductionof competitionand price liberalizationin thosesubsectors, which are not naturalmonopolies. The price reformitself would have no additionalinflationary effect, since the altemative(ow energyprices coupled with budgetary subsidies and paymentschanneled through the bankdngsystem in orderto financelosses and capitalexpenditures in the energysector) is equally iflationay. In fact, competitionwill increase the efficiencyof energysupply industry and thereby resultin lowerenergy costs in the mediumterm. Thepositive effects of the energyprice reformare contingenon the adoptionof a strictmacroenomic stabilizadonprogram which would effectively hardenthe budgetconsmzaint of both the energyproducing and energyconsuming entetprises.
Investments and FUidng Opaons xxxxii. Due to the expectedcontinuing decrease of energydemand, investments in the energy sectorshould primarily focus on the rehabilitatonof existingcapital stock. In contrastwith past practices,the highestpriority should be givento safetyand efficiencyimprovements rater than capacityexpansion. Annual investment needs are estimatedto totalabout two billion dollars per year (includinglocal costs) in the 1993-2005period. Assming that the instutional re uringof the energysector is implementedand pricesare set properly,most of theseexpenses can be financed withoutdirect budgetauy support. The Government'srole shouldbe restrictedto arrangingthe financingfor certainnon-commercl investments,such as the safetyupgrades of mnclearplants and the improvementof oil supply secuity. - ix - xxxiii. Oil. Basedon the expectedcontining decreaseof demlandfor oil products,the two largest refinies (Lysychaskand Kremencluk)have enoh distillationapacity to supplythe domestic market. In otherwords, the longerterm vbility of the Kherson,Nadvia, Odessaand Drohobych refineriesis in doubt. However,the closureof the Xhersonand Nadvina refieries would significantlyincrease product distibution costs due to the geopc locaionof the3etwo refineries, In addition,the badlyneeded modernition projectscould be carriedout in a waywhich allows for somecapacity decrease. xxxxiv. If the domesticand foreig tradeof crudeoil and petroleumproducts is liberalized and oil productprices are completelydecontrolled, the refieries whichUkraine needs win be able to attractcommercl loamsand equityinvestors and willsurvive the "hakeout". Thereis no need for Governmentto step in withinvestment subsidies. However,the Govermentshould take an active role in arrang for the requiredfeasibility studies (and other technical assistance) and the pmion of joint venturesand eventualprivatization. xxxxv. The commercialviabflity of investe aimedat a higherlevel of supplysecnty - the Odessaoil terinal, the relatedcrude oW product pipeline and the additionalpetroleum storage capacity- is uncertin. Therefore,the Governmentshould take an activerole in decidingon the tming of theseinvestm s and ptovidingsupplemety fundsfor their implemenation.The source of the supplementaryfunds will ultimately be the budget,however, borrowing from multilateral developmentagencies or bilateralsources to coverforeign exchnge coswis a an optionwhich the Govermnentmay wantto consider. xxxxvi. Investmentsin oil and gas productionare expectedto be highlyprofitable. However, the currentregulatory and institional aangements makeit verydifficult to attractforeign capital and modemtechnology. The most important steps the Governmentshould take are (i) establishinga stateowned exploration company by sepran the explorationfunction of the StateGeology Committeefrom its smurveyand regulatoryfunctions; (ii) dfting a new mininglaw whichestablishes a licensing/concessionregime; and, as proposedabove, (iii) raisingthe price of domesticallyproduced gas and oil to the levelof the importcost. xxxxvii. Gas. Transitfees fromRussia and Turkmemstanshould be the ultimatesource of fundsfor mostof the nanal gas transmissionsystem investrments. Assuming that (i) the Govrnment negodateslong term transitaeemenb withRussia and Turkmenistan;and (ii) the transitfee is graduallyincreased to coverat leastthe longrun marginalcost of the servicesprovided by Ukraine, Utrprom will be ableto borrow(and repay) the foreignexchange component for these investnents. Initially,mutilateral development agencies such as the WorldBank and EBRDare the mostlikely lenders, however, Ukrgprom is expectedto be able to borrowmoney on fuly commercialterms and attrat privateinvestors in the longrun. Xxxviui. Financingof investmentin gas distributionwill dependon the pricingand cost recoverypolicy followed by the Governmen. If the price of gas for householdconsumers cotinues to be heavilysubsidized, these investments costs willultimately have to be borneby the budget. Gas is a convenient,clean and efficientfuel for householdconsumpton. Thisis reflectedin the wilingnessof householdsin other countris to pay the full cost of gas services(including distribution and metering). The Governmentmay authorizeUkrgaz to solicitsignificant contributions towards the cost of the expansionof the distributionsystem from new ctomers, arguingthat thesecosts are not reflectedin the price. Eventually,assuming tat priceswill inease to a levelwhich covers system expansioncosts, cutomers' prepaymentscan be deductedfrom their monthly biUs. Thisapproach has been tried in other countriesand provedto be very successf in alleviaingthe shortageof funds for system pasion. xxxxix. Coal. lnvestme to maintainor increasecoal production levels should be postponed until the viabilityand non-viabilityof coal entepris becomestransparent through improved cost control,the abolHsmentof the profitequaizaion system,and Pn agreementon the initialphases of the restuctuWg program. If the Governmentincreases domestic coal pnces to mport paritylevels and dismanlesthe profit equalizationsystem, the viablemining enterprises are expectedto be able to accumuatesubstandal fuids to financepart of the necessaryinvesmet themselvesand rely on commercialborwig for the rest of thdir capitalneeds. Aftercoal prices reah importpiy, budgetarysubsidies should be restrcted to the financingof programsto phaseout uneconomicmines and to employor retrainsurplus labor. If a comprehensiverestructring program is adoptedby the Government,multilateral lending agencies (such as the WorldBank) may be wlling to support projectsaimed at developingor maiaining the supplyof steamcoal to domesticpower plants fir exisdngor new low costmines (e.g., in the Oleksandriaand Pavlohradassociations) and improving coal washing. L. Eerldty. Thereis no immediateneed to investin newpower generation capacity to replacethe Chernobylplant (scheduledto be shutdown at the end of 1993). The needfor investmentin newtemal generationcapacity depends on the evolutionof electricitydemand, which, in turn, dependson economicgrowth and on pricesand otherincentives for the efficientuse of electricity.Rapid adjustment of electricityprices in the contextof a comprehensiveprogram of economicreform (which would eliminate or restructre inefficientproducers and hardenthe budget consraintsof the remning enprises) will significantlyreduce both investmentcosts and fuel and otheroperation costs in the powerindut.
Li. In the short term,priority should be givento the reabiltion of exist non-nulear unitsand the safetyupgrades of nuclearplants to improvethe efficiencyand safetyof electricity generation.The implementationof the thermalrehabilitation program of the Ministryof Power wouldstabilize coal use in the powerindustry at about40 mt/year. However,the rehailitation programshould be reexaminedbased on tie applicationof cost-benefitcriteria and onlythe program componentswith proven economic viability should be implemented. Lii. If pricesare set at levelswhich are inadequate'tocover costs, the powerindustry will be unableto generateinvestment funds intenaly. As a resut, neitherdomestic bans nor foreign lendingagenies willconsider the industrycreditworthy. Neither will investors be inested in talkngequity positions. Sinceforeign grants, even under the mostoptimistic scenario, will cover onlya smallfraction of the investenatcosts, the Govermmentwill be forcedto returnto the old practiceof financinghin directy fromthe budget. Due to lowprices, consumers will be less interestedin energ conservation.Demand will grow morerapidly, necessitating even more investments.Budget subsdies at such a large scalewill seriouslyendanger the successof the macroeconomicstabilization program. Also, financingof the hard currencyrequrements without accessto foreignborrowing will lead to severehard currency shortages in othersectors of the economy. Liii. In addiion to decreasinginvestment requrems, higherelectricity prices will pernit the profitableoperation of the poweridustry, leadingto the accumulaionof signficantinternally generted funds. In tmn, that willensure access for the industryto bothdomestic and foreignlending insttutions. Assumingthat the necessaryinsitutional changes are implemented,private investors may be willingto commt someof their fundsas equityto supportthe investmentprogrm. Due to the transferof moderntechnology and knowhow,ths processwill resultin a more efficientlyopating powerindustry. -xi- Acton Plan
Lw. The cornertn of the proposed medim term energy state are (i) the adjustment of energyprices to reflectfully the cost of importedand domescally producedenergy includig ependitureson higbpriorit reablitation and invetmet projects;(ii) the developmentof a domesticcapabilty to provideenergy efficiency improvement services and new inceives for energy utilitiesto promoteenergy saving mea amongcutomers; (iii) the sepaion of the Government's policymaking, ownerip, and reglatory functions;(iv) the promotionof compeitionin oil and gas productin, oil refiningand aketing, coal miningand coal distributionand electricitygeneration; and (v) the ivement of the securityof energysupply by diversifyingenergy imports, mtag the use of domesticcoal in powergeneraton and Improvingthe operadonaland technicalsaety of the supplyof electricityfom nmclearplants. The actionplan in Capter IX of the reportsuvmmizes the mostimportant measures needed for the implemeationof the proposedmedium term enegy strategy. The plan, whichiS presented in a tabularformat, indicates for each actionthe responsible agency,whetier there is a needfor tedmicalassisance and a schedulefor implementation. I. MNTRODUCTiON
1. Ukaine, withan area of 603.7thousand Ikn, is the secondlargest county in Europe(after the RussianFederation). Sittd on the southwesternpart of the Ea Europen Plain Ukamineis borderedby Russiain the east, Bearus in the north, Poland,Slovakda, Hungary, Romania and Moldovain the west and the BlackSea in the south. 2. Ukrine is a middleincome couty witha populationof 52 millionand an estimatedper capitaGDP of US$2,500in 1990.' In 1989,72.7 percn of the populationwas of Ukrainianorigin and 22.1 percentRussian. 67 percentof the populationwas urba, comparedto 46 percentin 1959. Kiev,the capitalcity had a populationof 2.6 millionin 1989. Otherlarge citiesare Kharkiv (1,610,000),Dnipropetovsk (1,178,000), Odessa (1,115,000), Donetsk (1,113,000), Zaporizhzhia (881,0C)),Lviv (791,000) and KryvyiRih (713,000). 3. On August24, 1991,Ukraine declared its iqndp e fromthe poliical and ecomic systemof the formerSoviet Union. Thisdeclaration was radfied by a Decembe 1, 1991 referendum.On December21, 1991,Ukmaine became a meiber of the Commonwealthof IndependentStates. 4. Ukrainehas the mostvaluable agrcutural landresce in Europeand has oftenbeen referredto as the SovietUnion's "breadbasket'. On average,from 1986to 1990,it produced 24.1 percentof grain, 22.3 percen of meat,43.8 percentof sunflowerand over halfof granulated sugarin the formerSoviet Union. Basedon the Republic'scoal and iron ore reserves,several heavy industrialenterises weresited in Ukrainein the 1930sand rebuiltand furtherdeveloped ater the SecondWorld War. In 1989,Ukraine produced 40 percentof the SovietUnion's steel, 50 percentof iron and 25 pacent of coal. 5. Ukaminewas a net exporterof coal, ferrousmetals, metal products, tractors and agricultural equipment,militauy equpme suga, vegetableoils, meatand dairyproducts and a net importerof crudeoil, gas, cars, wood,paper and lightindutri products. In recentyears, exportsand imports to/fromother repulics wereequivalent to 33 and 38 percentof Net Materi Productand 84 and 72 percentof totaltrade flows,respectively. 2 Russiahas beenUkraine's largest traing partner, followedby Belarus.
6. The economyhas been insulatedfrm Intrnatonal competi Massiveprice distortions and statecontrol over resourceallocations charcterzed tne coonomicsystem. Systematicunder- pricingof energyand raw materialsled to usageper unit of output btntilly higherthan in market economies.Prevailing technologies, often out-of-date and inappropriate,produced high volumes of waste.
7. The focusof-the past energystrategy was the filfillmet of productiontargets in orderto meetthe ever-increasingdemand for electricity,coking coal, naural gas and petroleumproducts in
1 Soure: Mesuringthe Inomes of Eonomicsof the FonnerSoviet Union", Policy Research Working Pape No. 1057,World Bank, December 1992. 2 Source:Wodd Bak ReportNo. 11029-UA,Ukraine - CountryEconomic Memoradum, 1992. the productivesectors.3 The practicallyunlimited availabiity of chea crudeoil and naturatgas from Russia sustainedan industrialsector dominatedby heavyindusty whh ried lessand less on domesticenergy ad raw material. The tripling of electicity consumpIon between 1965and 1985 was considereda positivedevelopment and the yeatbwksannounced tXa Ukrae wa on levelwith the world'smost developed countries in terms of per capitaelectricity production and cosumption.
8. The Cewbyl accidentin 1986gave the first signalthat a changeof directionwas needed. The aftermathof the accidentresulted in widespreadresentmen of nuclearpower and led to public demonstroatiosagainst a number of operatingand planned nuclear power stations. These demonstrationsculminated in the cancellingof severalnew nuclar projectsand a moratoriumon the completionand c i of three almostfinished nuclear blocks. However,the Governem's onlyreaction at thattime was to modifyexps, unplans by replacingnuclear blocks with thema power plants using natural gas importedfrom ,ssia and Turkmenist. 9. e disitegraion of the formerSoviet Union had a dramaticimpact on the enery systemof Ukraine. It becameobvious that the country'sown resources could not possiblysupport the needsof a,neconomy which was so highlyenergy intensive. The unreliabiityand increasingcost of imported energymade it clearthat a new energystrategy was urgently needed. In Janmy 1992,the Cabinet of Ministersrequestd the Ministryof Economyand the sectoratministri to p.eparethree longterm programs,two in the energysector and one for the conversionof the militay industry. The fi energyprogram addressed the developmentof the coal industry,the secondthe developmentof the powersbsector. Bothprograms were submitted to the Cabinetin the middleof 1992. Although,in manyaspects, the two programsreflected a wayof thinldngdifferent from the past, they lacked consistencyand did not providean adequatebasis for decisions.4 10. A new govremmentwas formedin October,in the midstof a crisisof gas and oil deliveries fromRussia. TheGovment anounced that the two cornewstonesof the new energ strategy shouldbe more reLianceon domesticresowces and the eliminationof wastefu energyuse.5 The Governmentalso askedfor assistancefom the internationaldevelopment agencies in the formulation of the new enery strategy. It. Thisreport, a productof severalmonth of cooperationbetween World Bank staff and Ukanian speciaistsin goverment agenciesand energysector entrpris, is inded to providethe basisfor a comprehensiveenergy strategy which takes into account the newpolitca and economic realitiesin Ukaine. The reportutilizes many eommendationsof the two recenly developedlong term programsmentioned above and also reflectsseveral ideas expressed by Ukrainianexperts workingin the energysector. The reportpresents an actionplan, consistngof measuresin the area of instiutonal development,reguhtory policy, pricing, trade, investments, and tecnical assistance, whichis aimd at developinga modernenewy sectorwell-sitd to operatein a marke envionmet. Thereport recognizes that an energystrateg shouddbe basedon the priorittion of options,shud be withinthe limitsof financial,technical and institutionalcapabilities, and shouldbe acceptableto the publicin termsof its eavironmentalconsequences.
3 TIe latestfive-year devdopment plan for the power sector (prepmd in 1989,the lastyear of econmic growt) projectedthat lectricitydemand would incrase 20 per bween 1988and 1995. Based on whatis kw today,a 20 percentdecrese seems more lkly. 4 Forexample, the coalprga offered33-37 million tons of coal(measured in cod equivalent)for powergeeation in theyear 2000, while the powerprogrm plmed to uie aoly30 milon tons. 5 Source:"The Energy Crisis can be Overcome",an article by Mr. Youkhnovdky(Fir DeputyPrie Ministr)m the September26 Issueof the newspar Vokeof -3- 12. Chapt erof dh rport descri theroe of tdh ry secr wihinthe ecomy of Ukr. Capr m pres a foecast ofagg gatewr dmand ad a se of non-picg missusto iwpmpoev nrgy ci . Th sply of erV fromdomesc sowrcsand Inpot b rviwed in hapterIV. Chbp V aayse .a ar sor. chapter VI decribes th pricgs of ee. Capter V p dead descriptionof ubsetor km=ein thecod, oi, ural gVs,deecit anddisrict hea sbecor. ChapterVm pest cost etmat for do rqured hwvstet in the ener sctor togete wit th discsn of finci op A. OM c Performance 13. The Ukranian economy is facing a serious and rpidly growing crisis. The net matera prduct (N1M) declined 3 percen in 1990 and 11 percent in 1991, dropping below its 1985 level. The NMP experienceda furtier 15 percent decline in the first nine month of 1992 and it is estimated that the decline for the whole year was 15-17percent. Foreign trade volumes have decased even more since the beginningof 1992. Bilateral agreements,outlining specific quantities of goods that are to be traded, have been signedwith thirte republicsof the former Soviet Union. However, despite being set significantlybelow previous trade levels, most of the quotas in these agreementshave not been fulfilled. Investmentdeclined by 46 percent between 1989 and 1991. Consumptiongrew 2.5 percent growth 1990, and then declned 6.7 percent in 1991. 14. Retail prices rose by 84 percent in 1991, immediatelyfollowed by a 240 percent increase in January 1992. Inflation continmedat a monthlyrate of 15-25 percent during the first half of 1992, rising to a monthlyrate of about 30 percent by the end of 1992 and is estimated to have exceeded 1,000 percent for the year as a whoic. Wholesaleprices registereda 2,200 percent increaseby the end of the third qater. Subsequentto the partal price hberalizationin Januaty 1992, the Govemnmentintroduced extensive and sector specific limitson profit margins in an attempt to control larger then expectedprice increases. As a result, a small proportion of consumerpurchases are subject to fixed prices, but virtally all transactionsare subject to margin controls. The state order system, although it has been reduced in scope, is still interferingwith the operationof the market. Export quotas are in place for over 200 categoriesof goods, and, together with the licensing rumnents for inter-republictrade, greatly inhibit the ability of Uknan enterprisesto trade with the outside world. The taxation system, in particular the extremely high export taxes, is also acting as a disincenive to efficient operations of enterprises. 15. The state budget deficit was equivalentto 14 percent of GDP in 1991. The 1992 budget targeted a substantialreduction in the deficit to 7 percent of GDP. However, the planned improvementwas based on optimisticassumptions regarding revenue performance,which did not materialize.7 In addition, increasingextrabudgety transfers and reliance on the banking system to finance enterpriselosses further undemined macroeconomicstability. The excessivelyexpansionary monetary and credit policieshave been facilitatedby the introductionof the karbovane couponsas an additionalmeans of cash payment in Jamnary1992. Initially at about 0.2-0.3 couponper rubles, the exchangerate of cash rubles against coupons has appreciatedsteadily to a rate of about 1.5 couponper ruble in October. The kabovanets coupon - US$ exchangerate moved fiom 100 at the end of the first quarter to about 500 by the end of the third quarter. On November12, Ukraine announcedthat it was leavig the ruble zone and the krbovanets coupon would be the sole leg tender in the country. During the next two days, th ruble holdings of Ukrainiancitizens were converted at a 1:1 rate and subsequentlyan exchangerate of 1.45 karbovanetsper ruble was set by the National Bank. 6 Thissection is basedon WorldBank Report No. 11029-UA,Ukraine - CountryEconomic Memorandum,1992. 7 Accordingto a tatementmade in the Pariamentby the newlyappointed Prime Minister, the budgt was runmninga deficit at the levelof 44 per of the GDP in October. 8 Karh vanat is the UtLainian ennivalent of the Rusdan word ruble. -5- 16. Ukrine needsto adopta comprehensivereform Pae for the economy. MacOeonomic stabilizationleaing to the estblismet of non-inflationaryepectations and the eliminationof excess demandis the top priorityin the short-run. Removingthe root causesof the budgetdeficit and tightening of the monetay and creditpolicies will not ondystabilize the macroeconomy,but will also hardenthe budgetconsaints of ste enterprisesand increasetheir responsivenessto marketsignals. In addition,a refrm packageshould include further measu to liberalizeprices and trade and to implementa demonopolizationand privadzatlonprogrm. B. The Role of the Ergy Sector 17. industry(including constuction) produced 51 percentof the NMPin 1990. Agriculture produced30 percentof the NW and services(trwsport, communications,trade and other materal sevices) 19 petcent. In internional comparison,the shareof the servicesector is very low. Since the servicesare generaly less energyintensive, their low sharein the valueadded partly explains the highenergy itensity of the Ukrainianeconomy. Within the industdalsector (excluding constuction), 71 percent of the gross industrialoutput originatedfrom heavy industry in 1990. Mbachinebuilding (30 percent)and metallurgy(12 percent)represented the two subsectorswith the hight shares. 18. Time seriesare availablefor the shareof three groupsof energyenteprises (powerindustry, fuelproduction and chemical/petrochemicalindustry) within the total industrialoutput. Between1980 and 1990.the shareof the powersubsector increased from 2.7 to 3.1 percent,and the shareof chemical/petrochemicalindustry stabilized around 6 percent. The shareof fuelproduction (coal, gas and crudeoil) grew fromthe inital 5.7 percentin 1980to 6.9 percentin 1985,however, it dropped to 5.6 percentby 1990. The increasingshare of the powerindustry signals that the economywas becomig moreelectricity inteive, whilethe shrinkngshare of fuel productionsuggests the depletionof domesdcenergy sources. The three energ subsectorsplus the chemicalindustry tether produced14.5 percent of gross industrialoutput in 1990. 19. Industryemployed 31 percentof the total laborforce, and 42 peret of the peopleworking in materialproduction in 1990. Employmentin the powerindustry was 137thousand people (1.9 percentof industrialemployment), in fuelproduction 656 thousand(9.2 percen) and in the chemical/petrochemicalindustries 325 thousand(4.6 percent).'0 Despitethe rapidlydecreasing share of fuelproduction within gross industrial output between 1985 and 1990(see above),the shareof induial employmentengaged in fuelproduction recorded a 0.6 percentincrease in the sameperiod. Basedon these figures,the three energysubsectors and the chemicalindustry employed 15.7 percent of the indust laborforce in 1990. Whilethe levelof salariesin the chemical/powchenical industrywere closeto the industrialaverage, the powerand fuel subsecorspaid 15 and 46 percent highersalaries, respectively. 20. In 1990,13.4 percent of net industrialassets were in the powersubsector, 13.6 percentin fuelproduction and 9.3 percentin the chemical/petochemicalindustry, indicating that the energy sectoremployed more than one third of industrialcapital. About40 percentof industrialinvestmens weredirected to the three subsectorsin the 1981-90period (41 percent in 1981-85and 39 percentin 1986-9O). 9 Tbissection is basedon datafrom the UkrinianMinsty of Stadsdcs. 10 It is mport to notethat dese figures do notinclude persone employedin svice establishnts diriwtIv acwhed to the enev enterpris. -6- 21. n 1990,tb!. nse_ up ony 3 prcen of iterpblic eports compaedto a 2 peen dse of lAds in IntpArec pou. Ih q;posit wa te for radeoutside de fom Soviet Unlon:ful nd edctit epot rprentd 24 perce we el hMt only2 pet of a extend nude. Howevr.It hpotn to notethat dh volm of xerndltre wasonly about ore- fifth of nmqpblk trad, whichwas donlated by the l Imbalanceof hd Imports. In mue, fols impoed fom oder republicsme It possiblefbr Ukre to sellput of Itsdomedtly produced elty, coa andpetroleum product for converle curren abroad. 22. Ineiy, dhesame poten cotined in 1991and 1992. Enr exportswere a sourceof balce of pm nsuppo in convetiblecurrencies, while ener importswee thepmay mson behindUkrbwes larg deficitin rubledenminate trade(see Chapter IV). I fuedshad been Impord for convertiblecurrency at wrd maet pricesin 1992,the enaergy sector would have produceda tradedeficit of aboutUS$10 blio. Moregely, if al fomer Sovierepublics ded to mveto _ aona pdresin theirtade withUraine, Ukine wouldsufe a 27 per terma"f-trde ics." 11 b.27?porauM Ifireart- _lt b ea nd I basedon l990trade ics. Sou. Mm Mving to Wor Pic Afht do Tem of Trade in Countie of th PawneSvit UnioePoicy Rambd Wakng perNo. 1074,Wodd Baxk, auty 1993. -7- III ENERGYDEMAND A. AgregDe Desmd2 23. Energydemand in Ukrine is chareid by higheegy intensityin relationto industdal outw and the highabare of industryin finalenergy consumption. Tis is due to the high shareof heavyinuty (iron and steel,basic chemicas) and the low thermaleffiency of energyconsumption techologies. Energyconsumption per capitawas about4600 kilogramoil equivalent(koe) in 1990, whichis quitehigh even by WesternEuropean standards. The energy intensity of GDP is estimatd at 1.84koe/US$, which is severaltmes higherthan in the mostdeveloped c-untries. However, energyconsumption per unit of GDP usuallydecreases at a higherlevel of developmnt. In order to compareUkrainian enery consumpon to ene consumptionin otier countries,it is necessry to quantiy that relatonship. Nineteencounties (see Table 1) were selectedon the basis of Table 1: Intena Comparison I7 F E CoW GOP Popuon GDP/cep/SJ En. Cons/GOP COtamY eap. Ikoe.) MI"I) (thousand.) (/10OO Aretina 1801 93260 32300 2887 624 Bulada 4945 19910 8800 2263 2186 POWlad 3416 63590 38200 1665 2052 Ctusb 887 27790 13200 2105 421 Hunary 3211 32920 10600 3106 1034 YuGOstavIa 2409 82310 23800 3648 697 .chadovbva 5081 44450 15700 2831 1796 South Kora 1898 236400 42800 5523 344 Ireland 2653 42500 3600 12143 218 New Zealand 4971 42760 3400 12576 395 Unked Knpdomn 3646 975150 57400 16989 215 Nehmrands 5123 279150 14900 18735 273 Bewgum 4862 192390 10000 19239 262 Austia 3603 157380 7700 20439 171 Frane 3845 1190780 56400 21113 182 Dbnnmuk 3618 130960 6100 25678 141 W. Germany 3491 1488210 62000 24003 145 Sweden 6347 228110 8600 2S524 239 Finand 5650 137250 5000 27450 206 Ukrane 4600 130000 52000 2500 1840 SouRe: uk Statt m for Ukrane, WoddDevelopment Report (1992) for other countries 12 Officialstastical dataon energyconsumption is vety limied in Ukraine. Staical yearbooksconAi litle absolute numbersand he level of aggrgaon is high. Slightly more detailed imformationan eaer _nsumpdnandpdodon is preparedat the endof each fiveyear period. Detailedenergy balances,which falitate oss-cecks, have notbeen regularlyprepaed untilnow. Theanalysis belowrelies on ergybanes (seeTables 1 and 2 in Annex1) preparedby WorldBank stf which suld be treatedprdrminaty and are subjectto cnge whenmore Inrmation becomesavailbe (A hasrecenty smae a pogm of tcanicalassice to Ukre and othercouies of the fonner Soviet Union in the area of ener.y statisrt). -8- cimaticcotons not drastically eNERY OONUMTO VS*DP different fom that Imo Fi_re - Ukraine i % C*otres of Ukraine and, o ,s using data from Mhe Bank's 1992World " *ws 8n. Developmto Report, a cross- county dysis of oieW ZdI ii4 the relationship between energ consumdon and Conmr GDP was caied out. The results suggestthat Ukraine * ltSnd used about a* SouthKaea 60 percentmore eergy in 1990than might be epetd (usingthe average predictd value)on o to to so e basis of its 0DPw _ , t estaed pe capita ,, Wotod ontOpUtt Rfptt two twtat 7Ubtw a afll6): Sfi EtUttImOta for Ukrhtin. GDP level (see I Figure 1). F%m 1 24. Despite a 10 percent growth of NM? between 1985 and 1990, total primary energy Compositio of Fna Enery Demand consumptiondeceased by one percent in the 1990 -1732 Me same period (see Tables I and 2 in Annex 1). As a result, the energy intity of the . I Ukrha economy declined by 11 peret. aml °9) The final consumptionof energy decreased more rapidly tan primary energy consump/on due to a shift from coal towards gas in the residenti and commercialsectors and a small 02% relative growth in the shae of electricityin final energy demand in all sectors (see Figure 2 for the coposition of final demand in 1990). ____ Final demand for coal and coke dropped by 31 perent while total primary energy demand for coal deeased by anly 18 percent. At the same time, final and primy gas consumptin increasedby 12 and 20 per , respectively. For both fuels the share of electricity generationin primary consumptionincresed (from 25 percent to 30 percent for coal and from 29 percent to 35 percent for gas). These shifts were complementedby a decline of 38 percent in the use of fuel oil for electricityproduction. 25. The sectoralcomposition of final enerwydemand changed very little between 1985 and 1990. The indutrial sector represented59 percent of final energy demand in 1990, which is a very high share in internationalcomparison (see Fre 3). Perrous mnallurgy alone accountedfor oquarer of final energy demand, more than the residenal and commercialsectors together. Other idustrial -9- sectorswhich absorb almXot10 percent ; FinalEnergy Demand by Sector final ergy dewSd (% shares) each are the cheilecaland i 70 . machilne-buildinig industries. eo ...... 60 t S...... 26. In response to an11 percent 40 . . . I ...... declineof NMPin 19t91,primnaory3o.. energy conumUption 20 ...... declinedby 4.4 pmerent. Due to 0 contraction of the industry Tranmport aommerbe/8ervioesHouseholds economyand Sector h,ardnn energy suppiy contains E Ukraine 1890 am Bulgaria 1990 Go W. Germany1987 the pnlary energy spain l98? 03 Hungary 1086 Ea Yugoslavia1987 conumton dec;line 3 acceleratedtom 3 8.2 percent in 1992. However, the extent of the eng consumption decline, in relaive terms, was only about balf of the drop of the NMP in 1991-92, signling an increase in the ener inteity of the economy. The section below suggests that this may be due to both technological factors amd the Governm 's ener pricng policy. B. ergw Effidacy and Coimeaon 27. Energy-intensive industry represents a large share of totl industral production. In particular, the massive Urainian steel industry, fourth largest in the world, is responsible for almost one-quarter of total energy consumption in the country. At the same time, energy hitensity in the steel industry is an unacceptable 22-25 GJ/ton of steel produced, some 2040 percent higher than in the countries of the European Community (EC). An estmae 60 percent of steel ps duction in Ukraine is by open hearth and tandem firnaces; in EC comtries, these funamcs have disppeared because they are energy inefficient and highly pollutng. Use of dectric arc furnaces and scrap iron is very low (4 percent), compared with 34 percent in Western coutries. Contins csting is limited to about 10 peet of crude steel output, compared with almost 90 percent in the EC. Modern computr controlled systems, needed to ensure quality, ae almos entirely absent. The contimed survival of many of these enterprises under maret conditions is unclear, as statistics indicate significant reductions in otqu for the most eneW intensive brances. Energy intensities have actually increased during this period, as 'flxed" energy requirments, i.e., those which do not vary as a function of output, assume a larger share of total energy conmption. 28. Notwitstaning the increases in nomal energy prices within the past year, real nrices remain well below world levels for oil and natural gas, and signifcantly understate the appropriate cost-based price levels for electricity (see Chapter VI). As a result, energ often represents no more than 5 pet of production costs in most industries, leaving Lile interest on the part of plant maes to alocate limted capital to energy savig investments. Moreover, previously guateed - 10- marketsfor productsinsdlled an atuatdeamong managers that higher production costs could merely be "markedup" oughhigher pries to a captive market. Even among those who recognizethe needto manageco In order to ense commercialsuccess, unstable price rvgimesfor all product iputs makeit difficultto estmate the cost-ffectvenessof enegy efficiencymeasures and justifythe associatedinvestments. 29. Plantmanagers' activities are centeredon protectingallotted energy suplies, Insteadof using thesesupplies efficienty. Planing and economicsdepartm developforecasts of energy requieme to meetproduction goals based on existig energyintensity, and energydepartmen have as their maineffort the maintnce of utflitiesand equipmntusing energ so as to stay within the domainof alloments. No attentionis paid to breakingthis patternand examiningenergy cons tion. Thereis generallysome level of awa-.nessthat energyis beingwasted; however, incentivesto eliminatethe wasteare lacking(see Annex2 for plant specificexamples). 30. Significantsavings can be realizedin the industrialsector through no-cost or low-cost measures,such as tuning off equpmentwhen not neededor main ng equipme ring repair. Theresidenial and commercialsectors presently represent relatively insignificant shares of total energyconsmtion, althoughevidence suggests that this energyis beingused inefficiently.These sectorsare likelyto experienceimpressive growth in energyuse overthe next 15 years, drivenby the satisfactionof demandfor appliancesand increasedcomfort in homes,and the transitionof commcial acti fromthe industial to the commercialsector. 31. ergy consumptionstatistics are requestedquarterly by the Ministryof Statistics,which maintainsa presencein each of the eight industrialsectors in the county. In additon, the Minisay of Powerand Electricity,though its StateInspection staff, visitsenterprises and collectsselective data. Thedata appearsto be used simplyfor statiical purposesand to assistin the planningof new energysupplies to meetnational production goals. It doesnot seemto be usedby enterpisesto improvethe energyefficiency of their operations,nor does it seem to be used by the Governmentto questionenergy usage, exceptwhen an eterpwiseexceeds its energyallotment. Moreover, the esimates of the energyIntensity associated with the productionof manufacuredgoods appear to be distorted,in somecases, by the inclusionof non-productiveenterprise activities that consumeenergy, such as residentialheadng and rwreaional facilfties. 32. Regionalpower authorities are allowedto imposefines on enterpriseswhose energ usage exceedalotments. Thesefines are first imposedon the entetpriseand thenon the individua responsiblefor the excessuse. The maxinmufines imp on the enterpriseincrease the price by a factorof 10 for the powerwhich was used in excessof allotments.Individual fmes can reach one month'ssalary. The finescreate incentives to improveenergy efficiency only to the extentthat enterrises wantto stay withinthe boundsof allocatedenergy resources, and thereforecannot tap into the fullpotential for eneW efficiencyimprovements. 33. The resultsof industrialaudits performed through the EC Thermieprogram confirm the oppormuies for low-cost/no-costmeasures that canproduce savmgs of 10 percentand 25 percentfor moderateinvestments within the afdcted facilities.Moreover, meaes withauractive payback periodscan furtherincrease the potentialreduction in usagewithout compromising production of goodsand services. Fuel savingsopporuities includeboiler ins ntion and controls,air preater in fule firedequiment (boilersand furnaces),waste heat recoverysysms, increased steamcondensate return, insulation on stem and hot waterlines, replacementof steamboilers with hot waterboilers (closer to the heat demand,where appropriate), repair and replacementof defective steamtraps, and i_n ion of seam tubine/generatosto step-downhigh pressue steamto acul processrequrements. Electricsavings include shting off equpmentwhe not in use, replacement of singlespeedmotors with adjustable speed drives, the introductionof efficientappliances in - 11- households,repairing leaky comprsed air lines,replacemt of compressedair systemswith individualelectric motors (n somecases), replacement of fficientregion systems,improved operatngpro.'edures such as load levelingin electricityintesive processes,and Iing micr-electronic process controb. 34. Governent agenciesand the Academyof Sciencesprepaed a draftlaw on rationalenergy developmentand use, enidtled"Law of Ukaine on Ener Conservation".Tis draft law discusses the impotnce of energyefficiency in stimlat economicgrowth, reducing the state's dependency on importedenergy supplies, and improvingthe natual environmentin Ukraine. It proposes:a) insitutionalchanges which will facilitate the developmentof ener efficiencymarkets; b) the creationof standardsfor energyconsumption in industralprocesses and coumer products;c) the applicationof penaltiesfor inefficientuse of energyin mancng activities;d) the availabilityof financialincentives and tax benefitsto directconsumers toward more efficientenergy cc iwning devices;e) educationand informationcampaigns on energyefficient use; f) researchon energy efficienttecinology; g) incentives,including tax benefits,to fostera domesticindustry to providethe necessaryauditing expertise and developthe neededbardware to meetthe expecteddemand for energyefficient equm . Theoverall responsibility for this progrm wouldreside within a proposedState Committee for EnergyConsevation, reporting diety to the Cabiet of Misters. 35. Severalprovisions in the draftlaw are questionabe.Tax benefitsduring a periodwhen the Govenmnt has to copewith a sigmficantbudget deficit should be discoured, eventhough the goal of fosteringa domestc industryfocused on energyeffien is laIable. Theuse of idusi energyefficiency targets in settingpenalties will likelybe inefectiveor couneiproductive,due in largepart to differencesin products,mater inputs,accounting, etc, as wellas the significant dministratvecosts associated with policing this effort. Normsand penaltiesare a poor substitutefor ecomic cost basedenergy prices. Furtmore, if pricesreflect economic cost, there is no reason t palize excessenergy consumption.' 3 Finally,the consoIdaionof responsbies for energy fckncy for allfaels withn one agency(in order to ensurecoordinton of efr) can be aieWd wito the creaionof a new commineewich woudkfurter Ircreasethe nwnberof agences reporangdirecty to the Cabinetof Miusters. Thepreferable soluon wouldbe to grantdat authofltyto the DeputyPrime Minsterfor Energyand set up an EnergyEffidency Unit in his office. 36. Ratherthan wakingfor the newlaw to be passed,the Govermemntmay act on manyof its provisions.As a first step, effortsshould be focusedon providingmeters and contols in all sectors, togehr witha more differentiatedpricing scheme which reflects the varfyigtemporal and spatial natureof costs. Otewise, energyusers have no incentiveor abilityto respondto pricesand modify thdr egy use. Beyondthis initialcritical step, detailedauit willhelp energ usersidenify cost- effecive opporwutiefor reducng enery use. Thereare smallpilot proects alreadyunderway, includingthe industril auditsorganized by EC Theme that idenaifyand dmonstratethe potential thermaland electricsavings in representativefacilities. Althoughsimple mance activitiesthat haveno cost/lowcost or requiresmall capital investment can produce meaningl energyreduction benefitsit appearsthat even moreimprovement can be realizedby reorganizingand restructuringthe larget energyconsuming manu ri enterprises.By prqing estiaes of poteial energy saings and the costs of energy effcincy investms, the energyaudits could provide nfon on for the retuctung effortregarding the futre vibilty of dtrial enterptises. 37. One of the most importantactions the Governmentcan take is to pass at least part of the burdenof energyconservation from govenment contol to the enteprie level. Successin energy 13 Thenegave envionmentalextenity of bumrngfossdl fuels argues for the introction of polluon taxes,not paies. Theenvionmental hmpas occureven whe factoiesstay whinthe nom"m. - 12 - conservationprogram are mostoften determinedat the plat levelusing the judgmentand economic dictes of specificoperations, not by govemmentselection. Enterprisesshould be rqired and given assisace to performmeaningfd audits of their energyusage (measured, not estimated)for Internal use, to set realistictargets for energyreduction in their operationsand then alowed to achievetheir energyreduction goals as theysee best guidedby costsof fuelsand the needto keepproduct prices compeitve. 38. Therepresently appea to be fewavailable organizations in the countrycapable of producing auditsand assistingenterprises to use theseaudits to developenergy conservation strategies. Enterprisesseem to believethat they canrely on past associationswith technical institutes to solve their energyproblems, including some in Russia,but this maynot be tenable. To assistenerg conservationefforts (in responseto futurereal energyprice increases),the Govenmentshouldfoster the developmentof industriaorganizaions whose function as to provide,on a consultngbasis, detaiedpkltt energyaudits, to recomnd conservationnaures to indviual operatngplants, to assistin puuingsuch measure in placeand to run enery conservationcolt ses at thelat level. 39. The proposedefficiency standards on energyconsuming equipe and processesshould be carefullydeveloped with assistance from industry. The creationof a domesticcapability to meetthe softwareand hardwarerequiremts of an expandedenergy efficiency market in Ukrainemay prove to be necessaryin orderto m e the foreignexchange burden associated with imported equipment.Finally, efforts should be acceleratedto iduenfyand plementmensms by whichthe nergy utlities, oftenkey instrwents in promotingenergy efficiency the OECDcontries, can be offeredan Inentive struncte to encouragecost-effectve energy efficiency among cutomers. Curently, the profitsof theseutilities are tied to increasinglevels of sales;as such,no incentive existsfor the utilitiesto applytheir specifickmowledge of energyusing systems to identifyways in whichcustomers can make cost-effective investments in energysavings measures. C. Ena Demad Forecas 40. The majorinfluence on energydemand in Ukraineover the nexttwo decadeswill be the profoundeconomic changes which are transformingincentives, institutional arrangements and the compositionof economicactivity. The transitionfrom central planning to marketsand a more open economyshould not onlyimprove the country'seconomic perfonnance in the longerterm but will contributeto improvementsin energyefficiency by penalizingthe massivewaste of resourceswhich characteriedproduction in the past. Recognitionof the true opportity cost of capitalwill shiftthe emphasisaway from large capitalinvestments, drawing upon the productsof heavyindustry, towards betterutilization of existingcapital equipment and a continuousprocess of incorporatingnew technologywith coneqenti reductionsin averageenergy requirements per unit of output. These structuralchanges will taketime, but they willhave a large impacton energydemand over the next 10-15years. 41. EconomIctransfo aonad energydemand. Attemptingto forecastthe impactof economictransformation in Ukraineon energydemand is fraughtwith difficulty. Evenshort term predictionsabout the macroeconomicconsequences of stabilizationprograms or aboutthe responsesof enterprisesto the new circumstancesin whichthey operatehave proved notably hard to get right. On the other hand,simple extrapolation of past trendsclealy provideslitde guide to the futureof these economies.Without some idea of the natureof the changesthat are likelyto occurover the next decade,resources could be wastedon a largescale by makinginvestments in the energysector which subsequenlyprove to be redundant. 42. The scenaroswhich have been prepared for this reportare basedon an analysisof a large numberof structural,institutional and micwe c changesin Ukraine'seconomy that are - 13 - expectedto occur overthe nexttwo decades. The mostimportant structural influences on the prospectsfor energydemand in the short and mediumterm are: Oi The sharesof nationalime devotedto investmentusually decline dramatically duringmacroeconomic stabflizadon. Even as the economyrecovers, investnent shareswill be muchlower than in the past becauseinvestment resources were used so inefficiendy.This implies a permanendrop in the demandfor the outputof heavy industryrelative to nationalincome. (ii) The copsition of privateand publicconsumton willgradually change. Overall,a smallerfraction of incomewill be spenton industrialgoods but the sharesof expendituredevoted to processedfoods, paper and chemicalproducts, and transport equipmentwill increase. Spendingon serviceswill growrapidly as thesehave always beenundetprovided in cenral plannedeconomies. The implicationof thesechanges is that growthin industrialoutput will lag far behindaggregate economic growth, while,witbin the industrialsector, there willbe a shifttowards less energy-intensive activities. (mii) The focuson meetingoutput targets meant that manyindustries were notoriously wastefudin theiruse of materialinputs, labor and capital. Sinmplechanges in the organizationof productionwill allowenterpris to reducesuch waste,to eliminate over-manningand to get more outputout of the samestock of capital. In this way the economieswill be able to producemore finaloutput for the samevolume of resource and other inputs, thereby reducing the indirect use of energy embodiedin material nputs. (iv) Despitehigh levels of investmentthe averageage of capitalequipnt in the regionis significantyhigher than that typicalof marketeconomies because old plant and equiment wasrarely scrapped. A few industriesand plantsare at the forefrontof their technology,but mostare technologicallybackward, especially in the heavy industrialsectors. Muchof the oldestcapital equipment will be scrappedas a result of the declinein industrialoutput and the processof industrialrestuduring. New investment,once economic recovery gets underway,will embody modem, more energyefficient technologies. Even if old capitalequipment were simply scrapped at ratestypical of marketeconomies, less than one-halfof the existingstock would still be operaing in its presentmanner after 10 years. 43. Emergyprices. One of the mostpainful but essentalfeatres of the marketreforms in Ukraineis to raise energyprices to worldmarket levels at the very leastand probablyto West Europeanlevels in orderto generatethe revenuefrom energytaxes that is requiredto reduceor dimnate fiscaldeficits (see Chapter VI below). The responseto higherenergy prices will have two princpal effectson enagy demand. It willpromote energy conservation, so that it is reasonableto expec that the energyintensity of economicactvity willfail significantlyover the next decade. It will also bringabout a shiftin the compositionof fuel use. 44. Sceario analysis. A detailedmodel has beendeveloped to examinethe combinedimpact of these strucuraland pricingchanges on energydemand. It is basedon an input-outptframework usingthe UkrainianinpUt-output table for 1987aggrgated to 48 sectors. However,a distinctionis drawnbetween the input-outputcoefficients for plant and equipmentresulting from new investnent and the capita stock iMheritedfrm the past. The technicalcoeficients for new capital are asumed to be the sameas thoseprevailing in Wetern Europein the mid-1980sexcept in the caseof the slow reformscenario. On the otherhand, the techical coefficientsfor old capitalchane in responseto - 14- exogenousreductions in ovemamng and the use of materiliputs (x-efficiencygains) and to chiges in reladveprices according to a standardcost function.There is no singleenergy price elasticitysince substbition beween energy,labor and materialsand betweenfiels dependsupon the initialshares of the factorand fuelsin totalcosts.14 45. Electricityand hea are trated specialyin the modelbecause there has been a trend increase of 2.5 percentper year in the shareof electricityin industrialenergy use in the marketeconomies overthe past two decades. A similartrend s appliedto the use of electricityfor new capital equipment,while old capitalequipent is assumedto experiencea slowershift towards electricity witha trendincrease of 1 percentper year. On the otherband, Western European industries do not relyupon heat purchasedfrom ternl suppliersbut they meettheir requfiements for processheat by operatngtheir own steamplants and purchasg the necessaryprinary fuels. Relianceupon district heatig for householdsand the servicesector is also muchless common in WesternEurope. Thus, it has beenassumed that (a) newplants will not utlize externalheat supplies and (b) old plants, householdsand serviceswill gradually reduce their dependenceupon externally supplied heat to one- halfof 1990levels. ITe net effectof thesetwo adjustms is to increasethe overallshare of electricityand heat in totalfinal ner use but at a muchslower rate than wouldbe impliedby the trendin electricityuse alone. 46. Threescenarios have been exmined: (i) The 'mainscenario' whme key assmptionsare outlinedbelow. Thisis regardedas the mostplausible outcome over the next20 yearson the basicpremise that a reasonablycomprehenive reform program will be pursuedin Ukraineover the next 5 years. (ii) The 'slow/delayedreform scenario' which assumes that pricing and othermarket reformsare delayeduntil 1995/96and that the reformprocess proceeds rather slowly so that incentivesto reduceenergy consmption and to investin new, more efficient cptal are muchweaker and operateover a longertime period. Thisscenario implies that the economicrecovery ater 1995will be muchweaker and that growthin the decade 2000-2010will also be lower. (iii) The 'acceleratedreform scenario' assumes that the governmentpresses ahead with radicaleconomic reforms and strict enforcementof hard budgetconsraints for enterpris. Thesepressures, combined with an activepolicy to encourageforeign investment,will shorten the periodof adjustmet to new incentivesand higherprices. The immediatedecine in employmentand outputwill be greaterbecase moreof the old capitalstock Is scrappedbut the subsequentrecovery will more rapid withfister economicgrowth through the decade2000-2010. 47. The lky assumptionscharacterizing the diffirentscenarios are: (i) Thepaths for GDPare shownin Figure4. Underthe main scenario,GDP bottoms out by 1995at abot 65% of its 1990level and then increasesat 6.5 percentper capitaper yearover 1995-2000and at 4 percentper capitaper yearover 2000-2010. Thesegrowth rates are highbut historicalexperience suggests that they canbe achievedif the necessaryrefims are implemented.The acceleratedgrowth scenario 14 Still,it is possibleto e an aggragaepde elasticityfor energy use in production and this is used in dismina the different senarios which have been inves_iated. - 15- followsan East Asianpatten, while the slow/delayedreform is based on j- tummff growth rate post 1995 that are (bsoOP8 similar to thoseachieved by the ___ formerSoviet Union. (ii) Theshare of investmentin GDP .o .. failssharply to 1995and recovers thereafterbut onlyto 20 pementin 200Oand 25 percentin 2010 - well belowpast levels. Sloweror faster growthimplies conngly loweror higherinvestment shares.s . (iii) The compositionof privateand publicconsumdon graduallyshifts _ by 2010 towardsthe pattemtypical of middleincome counries with _ f + A m similarincomes measured in terms of purchasingpower parity. I (iv) Improvementsin x-efflciencyand the adjustmentof energyand other inputsper unit of outputproduced using old capitalare phasedover a periodof 10 yearsin the mainscenario. Thisadjustment periodis 20 years for the slow/delayedreform scenario and 5 yearsfor the acceler- ated reformscenario. Underthe latterit is asmed that 20 percentof the iitial capitl stockis scrappedby 1995as entetprisesconta or closedown. Underthe slow/delayedreform scenario it is assumedthat new investmenthas input-output coefficientsbased on typicalSoviet technology rather than Westerntechnology. (v) The longrun aggregaeprice elasticityof enery use in industryis approximately-0.5 for the mainand acceleratedreform scenarios. This is typicalof the longrun responsesof West Europeaneconomies to the two oil shocks. Underthe slow/delayedreform scenario it is only-0.075 which is moretypical of the response of centrallyplanned economies to price changesin the past. Notethat the short run price elastiities are muchlower because the adjustme to higherprices is phased over5, 10 or 20 yearsas appropriate. (vi) Lagshave been built intothe adjustmentprocess to reflectthe slowinitial response of indust energyconsumption to changesin output Theselags assumethat energy use respondsto a weightedaverage of past and presentoutput levels and that a propordonof total energyuse (40percent in the case of electricity)is overheaduse whichcan onlybe reducedgradually over the standardadjustment period. 48. The demandforecasts for the variousscenarios are as follows: () Toeldpriay eneg demand. Thepaths for totalprimary energy demand are shownin Figure5. Underthe main scenario,primaiy energy demand decremes at 5 percentper year between1990 and 2000and less than one percentper yearbetween 2000 and 2005 botoming out at about47 percentof its 1990level. Primay energydemand then increses slowlyat aroxImately 1.8 percentper year from2005 onwards. Underthe acceleratedreform scenario,prmay enery demanddecreases by approximatey6 percentper year in - 16- PrjOW"iWMta pulmw dessa omapoUAwOf PIIIWY f DmnG*MW la* ...... ot eo~~ ~ ~~~~~~~~~~~~~~s ...... 4o ...... so so~~~~~~~~~~~~~~~~~4...... so ...... ~~~~~~~~~~~~~o 6. ae. rs 6Ut. ...... 1 *... +i.. FIgure5 Fue 6 1990-2000,bottoms out at 43 percentof 1990deanad, and then icas s annuallyat 2.8 percet in 2000-2010.The slow/delayedreform scenario reflects a lesssteep drop of 3.2 percentper yearduring 1990-2000,leveling out in 2000 at approximately68 percentof the 1990level. Primaryenergy demand increases after 2000 at a rate of 1.4percent per year. Thecomoition of primaryenergy demand under the mainscenario is shownin Figure6. Between1990 and 2000,coal, oil and gas demnd all decreaseby about50 percent. HIowever,primary electricity demand (defied as electricityproduced in hydropowerand n-uclearplans minuselectricity export) exhbits a slight increase,mostly due to decreasing -demand for electricityexports. (ii) PrImry enerom outa4prtyof GDP. The at.hen P weasanuall at 2.8 paths for primaryenergy Intensity of GDP '" are shownin Figure7. Underthe main so sceaerio,the primaryenergy intensity of GDP increasesslightly in 1990r995 at 1.4 ,oo r percentper Year and then rapidly decreasesnd.uderthemam.ce.no.s.shwn..Fi\\\ inB995200 atan anmal rateof 6%. The 8oa.l. period2005-2010 shows a primaryenergy intensity holdingof GDPsteady at approxiaely 45 percentof the 1990level. Theacceleae reform scenlario traceos the fU ,,,,,,,,,,,.,,,, ,,, , path of the mnainscenario with a few importantdiFferene. Underthe soi acceleratedreform scenro, projected primary energyintensity declines at .3o percentper year beateen 1990and 2000. Thedecline lees offanaate o.6...nd_T - teneryintensity stands at appronate.y 42 percentof the 1990level in 2000-2010. Underthe slow/delayedreform proece7scenario, - 17- primaryenergy intensity rises at a 1.3 percentamnual rate between1990 and 1995and then declinesat 5.3 peren per year in 1995-2000.This curve levels off in 2000, and showsonly a smalldecline in 2000-2010.In 2010,primary energy intensity stands at 77 percentof the 1990level. (iii, U l eneg demand. Under the main scenario, ProJected Fi nalEnergy Demand todalfinal energy demand Man scenabrio decreasesrapidly bIetwveen" (Mn 1990and 2000, at a rate of so 4.8 percentper year (see Figure8). MuchOf this contractioncan be attributed 1wE ...... to the decreasingfinal energy demand in the heavy auB lilab mdusty scaokr.s, 1eD|...... J^JJ M.SOFrhew whose combinedshares in m e i_ final dem_i decmrse by 7 6noom percentagepointsin 1990- 6o . . . .yu LI@ 2000. Transpotnand gm HNwyndutry householdshaes remain m DIdsuttur. fairly stable durng the same 0 g a o am period,with the shae of servicesshowing a small e 8 increase. Duringthe period 2000-2010,total finalenerg demandincreases at a rate of 1.2 percentper year, withmost sectoral shars mainng constant(with theea eption of agriculture,which shrnks to 3 percent of total final energy demand by 2010). Table 2 illustrates changes in sectoral compositionunder al three scearios. - 18- Table 2: ProjectedFil EMe D _ndby Seto (lutoe) sector 1990 1995 2000 2005 2010 MadnReform Case Agriculture 14.03 8.16 4.89 3.06 3.21 HeavyIndustry 73.54 43.37 33.71 33.95 41.67 Ught Industry 25.99 14.51 9.96 9.08 11.78 Transport 15.11 10.89 7.19 5.19 5.78 Services 22.40 16.10 11.94 10.85 12.79 Households 25.28 21.37 18.54 19.66 23.02 Total 176.36 114.41 86.23 81.77 98.26 Aeerated ReformCase Agriculture 14.03 7.61 3.03 3.14 3.81 HeavyIndustry 73.54 39.64 31.69 40.84 54.58 Ught Industry 25.99 12.98 7.80 11.02 16.33 Transport 15.11 10.37 4.89 5.54 7.26 services 22.40 15.31 9.61 12.05 16.18 Households 25.28 20.40 17.10 21.85 28.05 Total 176.36 106.31 74.13 94.44 126.21 SlowReform Cm Agriculture 14.03 9.15 8.33 8.05 7.86 HeavyIndustry 73.54 47.54 44.9 52.13 64.72 Ught Industry 25.99 16.22 14.81 15.53 17.77 Transport 15.11 11.87 10.84 10.63 10.53 Services 22.40 17.58 16.38 17.13 18.23 Households 25.28 22.23 20.40 20.51 21.11 Total 176.36 124.59 115.72 123.97 140.21 - 19- IV. ENERGYSUPPLY AND TRADE A. Oil, Gas and Coal R_oUYBs' 49. Ukrainehas rge coal and sgnifi natwur gasnd oil reserves.16The first use of mineraloil (fromhand-dug pits in the 16 Cenuy), the first drilledoil well (Dolyna,1912) and the first idtial use of nau gas (Kalush,1912) in Ukrainehad beenreported from the Capathian region. WesternUkraine, specificaly the Volyn-PodolianBasin and the Cpathian Basin,is stil an importantpetroleum province producing 18 and 6 percentof totaloil and gas production, respetvely. The Duieper-DonetsDepreson is Ukaine's mainbydrocarbon provice withmore than80 percentof gas, oil and coalproduction. Oil and gas explorationin the Dnieper-Donetsarea startedin the 1930's,when a smalloil poolwas foundsurrounding a salt diapir. It continuedafter the SecondWorld War in the 1950'sand by 1964over 20 gas fieldswere discovered. Further developmentwas rapid, due to the strategiclocation of the Dnieper-Donetsarea betweenUkrinian and Russia industralcenters. The thirdpetroleum province, the BlackSea region,produces twopercent of oil and naturalgas in the Ukaine. The first well onthe Ulkiian side of th Black Sea regionwas drilled in 1886but commercialproduction did not start until 1953. Subsequentygas was discoveredin norther Crhmeain 1960and underthe Sea of Azov(drilled from land) in the seventies.The largeGolitsin Gasfield was the first discoveryunder the BlackSea in 1975. 50. Oil and condesate productionpeaked in 1972at 14 milliontons, whilegas producdonpeaked in 1975at 69 bem. Cumulativeproduction until the end of 1991amounted to 280 milliontons of oil and 1,590bcm of naturalgas. Remaningproven and probablereserves are 190milUion tons of oil and 1,400bcm of naturalgas. Totalresources, including possible reserves, are aboutthree times lger. The shalowerand largeroil and gaspools in the Dnieper-Donetskand Cpathian regionsare rapdly beingdeleted. Thesedeposits are replacedby reservesin smaller,dewer and less producdivereservoirs, which are more expensiveto find, to drill-upand to produce,to the point Xt a lae part of the reservesappear to be uneconomic. 51. The start of large-scalecoal production in the DonetsBasin (Donbass) coincided with the beging of the Russianrailroad eram and by 1913the annua productionwas 25 milliontons, 87 percentof the totalin the RussianZmpire. The highestoutut wasachieved in 1976,191 million tons (rtm-of-mine,before washing) including more than halfof the totalmetallurgical coal production of the SovietUnion. In additionto meaiurgical coal, anthraciteand otherhigh grade thermal coals are also abundantin the Donbass,as well as coalbedgas. Thereare significantshallow and surface minablelignite deposits in the northernpart of the Donbassand west of the DnieperRiver. 17 Bitu mouscokg coal depositscan be foundin the Lviv-VolynBasin near the Polishborder. There are smallcoal occurencesin the Crimeaand Transcarpathia,but theseare mostlyof local interest. 15 SeeAnnex 3 fora moredetailed description and Map A forthe locationof reservesand product facilides. 16 Ukrainealso has significant naural urium reserves.The Uranium Isitume (The Intentonl Indust Aocaion forEnergy from Nuclear Fuel) esmates economia rerv at 40,000ts, whichwould be sufcientto coverthe fuelneeds of Ukr'nes nuclearpower plants over the next25 years. However,mined uranium has to be hippedto Russiafor erihment, sinceUkraine has no enichmentcvapt. 17 Thedevelment of theseresources assum te commisog onew lignitebae thermalpower plants.Howevr, because of therecent drop in electicitydemand, there is noneed for aditona them powergenti apacityin Ukramnem the nea futue (seeChapter VI). -20' 52. Ukrine's totalcoal reservesamount to 52 billiontons of which23 billionare provenand probable(excluding possible) reserves. Cumulativecoal production(until end of 1991)was five billiontons. Ukrainehas practicallyunlimited supply of coal. Howeer, a large portionof the mines appearsuneconomic (see CbapterVII for moredetails). The unusay difficultgeological conditions (thn, steeplyinclined coal seamsat great depth)in the centralbasin detemdne a largepart of the miningcosts. Coalbedmethune is presentin highquantties in seeral rayonsof the Donbass. Total coalbedmethn resourcesare estimatedto be 25.4 trilon in3, of which5 percentare in the coal layers,13 percentin the patig withinthe coalseams and 82 percentin the suo dingrocks. 53. Oil, gas and coal reservesand resourcs are placedinto sevencategories. Reserves comprise the first four categories(proven producing, proven non-producin, probable and possible)and are the more certainprojected amounts within total resourc. Promthe volumetricalycalculated geological in situ figs the "recoverable"figures are projectedusing a recoveryfactor, which is usuallyover- estimated.The mostimportant difference compared to NorthAmerican requiremn thateven provenreserves are not requiredto be economicallyrecoverable under exis conditons. The reservesare screend witha very simplifiedecnomic criteria,i.e., they mustbe of "commercial size" and exploitablein industial scaleusing exin teclnology. Dueto this differenceand to pressureto meettargets, the reserveestimates are too high(about 25 percentfor provenreserves, and 50 percentfor probableand possiblereserves compared to NorthAmerican standards). In the Dnieper-Donetsregion, for example,gas reservesincreased since 1975 but anual production decreasedby 65 percent. Reliablereserves are essenti to productionplaning. 7herefore,reerves shouldbe re-emninedby includingeconomic viabin* i the class4flcatoncriteria. 54. In additionto the alreadydeveloped hydropower resources (see Chapter VII), there is a potentialfor the furtewrdevelopment of renewableenergy resources in Ukaine. Theseresources includesolar, biomass, wind, and geothemalenergy. Whle verylittle workhas beencarried out in the area of renewablesuntil now, the applicationswhich may worth exploring are the use of (i) agriculturewaste to generatebiogas; (ii) woodand otherforest products to fe exisig disrict hatig boilers;(iii) solarenergy to providehot waterfor households(mostly in the Crimea);"8(iii) windpower to generateelecticity (also in the Crimeaor other locationswith persistently high wind velocity)."9 18 Thereis a smallsolar power saion operatingin the Crimea,relying on a tecnologywhich is probably not commerdialyviable. 19 US Windpowerhas formeda jointventure in Ukraineto build,over a periodof four years,a 500 MW wind farmon the CrimeanPesla. Thc first25 MWof wind-driv caity scbeduledto come on line in 1993and is expectedto demonsre the commxcil viablityof the proposedwindpower project. Soure: 1 PowerRepor, March26, 1993. - 21 - B. Domesc Eeg suply 55. In 1990,amost half of Ukaaine'spimary emgy consumptionwas produced fromdomestic DQomVoEneoy Prduoon, 1990 resources, primaly coal with gas, oil, nuclear and hydropowermaking snaler but significantcotntbutions (see Figure 9). Domestic contributionto total primry energy demand fel from 61 percnt in 1985 to 49 percen in 1990 due to decl in gas and coal production. Domestic self-sufficiencyfiurher declined l| to 45 percent in 1991 due to a sbarp fall in coalON&VINd vI production. However, the decrse of coal production slowed down in 1992 and energy self-sufficiency aprached its 1990 level (see Table 3). pM_o FIgur 9 Table 3: Ukraine Primary Enrg Supply and ComsmnJon Year 1990 1991 1992 Production washed coal (nnt) 130.7 108.7 105.4 crude oil and condesate (mt) 6.3 4.9 4.5 natural gas (bcm)^ 27.8 24.0 25.0 peat & wood (mt) 4.3 4.0 3.7 nuclar (TWh) 76.2 75.1 73.7 hydro (TWh) 10.7 11.9 8.1 total production (mito)" 116.9 102.2 99.6 coal (mt) 21.1 12.7 11.7 crude oil (nit 54.3 49.6 34.3 naturea gas, net (bom) 87.3 89.5 89.1 petroleum products (mt) 11.5 13.1 5.0 total Import (ntoe) 150.6 14S.1 120.9 coal (It) 20.0 13.7 7.8 petroleum products (Mit 11.3 8.4 5.7 electricky, net (TWh) 28.0 14.3 4.6 total export (Imtoe 28.3 18.8 10.8 Primary Energy Consumption (mtoe) 239.1 228.5 209.8 Notes: * Includes dcanges In storage. A ton of oil equivalent Is defined as 10 milUlonkeal. The applied conversion factors are: coal - 0.5, cude oil - 1.0, peat & wood - 0.2, nulear, hydro & electricity export - 0.25, natual gas - 0.85, petroleum product- 1.O. Source: World ank staff e _st -2 - 56. Naural gas poductiondeclined by 33 percet from 1985to 1990,80 that domestic prodion fil from45 percentof totalconsumption in 1985to 24 percentin 1990. In 1991,the domesticproductioa of naural gas experienceda further 14 percentdecline and amountedto 22.9 bcmanXg 19 percentof conmption. The trendcontinued in 1992,when production decreasedto 20.9 bcmor 18 percentof totalconsumption (in order to meetdemand, domestic productionwas augmentedwith a net drawdownof 4.1 bcm fromundegound storage). Therewas a 10pement decline in crudeoil and condensateproduction between 198S and 1990,increasing Ukraine'shigh level of dependenceon suppliesfrom Russia and elsewhere.Crude oil and gas condesateproduction amounted to 5.3 and 4.9 milliontons in 1990and 1991,respectively, and covaeredabout 9 percentof consumption.In the short term, the fther declineof gas and oil productionappes unavoidable.Realistic medium tenn oil and gas productiontargets can be preparedonly after an economicreview of reservesis completed(see above). Wbilecountern the crrent declinewith new wellsand workoversis an un ble objectve,doing it with uneconmc wellscould be a cosdymistake. 57. The eisting crudeoll refiing capacityof Ukrine is about60 milliontons per year, distnued in six refineries.The utlizationof this capcity sharly decreasedduring the lasttwo years, due to the lac of crndeoil spplies. Whileamost 60 milliontons of crudewere refmndin 1990,the corrspondingfigures were 54 milliontons in 1991and 36 milliontons in 1992. Even thoughthe existng basicrefining capacity is morethan sufficientto handlepetroleum product demand,the refheies needsubstantia tecbnological improvement and modenizaton(see Chapter VII for more details). 58. Coalproduction decreased by about 15 percentbetween 1985 and 1990,followed by a 17 percentfall in 1991to 109million tons. An industry-widestrike for a monthaccounts for abouta halfof this fall, whilethe remainderseems to havebeen due to shortagesof suppliesof pit props and othr maerialsplus the woseninggeneral condition of manymines. The decreaseof coalproduction deceleratedto 3 percentin 1992. Continuingslow decline or stagnationof productionlevels seems more likelyin the futue than a significantreversal of the past trend. 59. At the beginig of 1992,the powersystem had a total installedcapacity of 53.6 thousand MW, of which67 percentwas thermal,24 percentwas nuclearand 9 percentwas hydro. 87 TWh primay electricitywas produced by the nuclearand hydropowerplants in both 1990and 1991, equivalentto 9 percentof primaryenergy demand and 32-33percent of domesticelectricity demand. In 1992,primary electricity production decreased to 81.8 TWh, representing33 percen of domestic electricit demand. In termsof electicity and heatproduction, public power and heat plantsbuing fossilfuels accounted for 65 percentof totalelectricity production and about20 percentof totalheat productionin 1992. Nuclearand hydroplants accounted for 29 percentand 3 percet, respectively, of electricityproduction in the sameyear. Industrialplants produced more than60 percentof total heat outputand 3 percentof totalelectricity production. As notedabove, between 1985 and 1990 there wasa signfican shiftfrom fueloil to naturalgas in powergeneration, so tht in 1990about onethird of total outputcame ftom nau gas, up frotm25 percentin 1985. C. Energy Import and Expt 60. Ukine is on the maincorridor of exportgas deliveriesfrom Russiaand Turbenistan to Cental and WesternEurope. The demonsed exportcapacity of the pipelinesused for the transit gas servicesis 104bhm/year. In addition,approximately 35 bcm of storagecapacity is also available to provideload baancing service. Transitgas deliveries(outside the formerSoviet Union) were 100 bemin 1991and 93 bcmin 1992. The Friendship(Iruzhba) oil pipelinewhich has a designcapact of about 100 mt/year also crosses Ukraine. The pipeline comes from Russiavia Beiarusand -23 - transported abou60 mt crude oil to efieies in Cena andWestern Euope i 1992 (see Map B for thelayout of themain gas and oil pipeies). 61. Ukrami Wported54mof EnergyImports and Exports 1990 crudeo11,1 II t of oil poducts, 87 bem of nura gs and 21 mt of coal from other Sovei republics(Russia., Cl product ft Turenis ta . an Kazakistan)in 1990. In the same year,Ulkine . exported11 mt of . oil products,20 mt . .28 x 3e) 3 of coaland 28 TWh N Exports(28.3 ito) eletrt mostlyto counties ousd Imports(150.8 mtos) the forme Soviet Union (see Figure 10). De to these exorts, the enea sectorwas asgfica sourceof foreignexchange. The volume of energyimports, measured in calorificvalue, declined by 5.5millon tn of oil equivalent(mtoe) in 1991. Ibis factor,together withthe dece of domesticproduction, caused a 9.5 mtoe drop of energyexpors. The decrease wasparularly pmwoncedin the (net)export of electricity,which feil to 14.3 TWhor 51percent of its levelin 1990. 62. In 1992,after the brek-p of the SovietUnion, the task of Importimg energy becme considerablymore complexthan before.Tle indicadvelist in the intergovern trade agreemen betweenUkine and Rtssia stpulatedthe importof 40 mt of cnrdeoil, 5.5 mt of petroleum products,55.6 bcm naeuralgas and 10 mt of coal(net) for 1992. Theagement did not establish prie for theseprodcs or for the goodsto be exportedby Ukaainein reun. Two calculations weremade when the agreetmntwas signed;one wasbased on worldmarket prices (e.g., crudeoil 127US$Itn, naw , gas 80 US$Itcm),the other on ruble pricesin effectat the beginningof 1992 (crndeoil 350 Rb/ton,natural gas 333 Rb/tcm). Neitherof these alculationsprovided a zero trade balance.Ukraine aso signeda trade agreementwith Belarus for the importof 1.9 nt of cmdeoil and 0.6nt petroleumproduc. Finally,the trade agreenmtwith tn c nedthe import of 28.4 bamnal gas. 63. Theindicative liss in thesegeneral trade agreementswere suppos to providethe basis for mmodityspcific impoteort ageementsto be signedlater in the year. It wasup to these specific to fix pricesand final quities. However,the onlycommodity specfic mport agreementsigned in the energ sectorwere for natral gasand eventhese weresigned ratderlate (in Augustwith Russia am! in Sptember widtTukmbenstan). The lack of specfic agree_eM sigificantlyaffected the secity of energysupply in 1992. Thefollowmg pargraphs descibe what during the year. 64. Cnudeoal I soon becme cleartbat not all the crude oi indicatedin the could be purhased trough govent channels. In the first quarte of 1992,7.6 mt of cude oil were v24 - deliveredto the Ulanian refineresat the officialprice of 350 rublesper ton (Rb/t). The refineries puwhasedan additionl 2.3 mt throughdirect conact with crudeoil suppliers. Theprice of the directlypurchased crude wastypically ha y betweenthe officialprice and the price at the commodityexchang in Russa for exportdelieries outsidethe formerSoviet Union. Thesituation wassimilar in the secondquater, when6.9 mt was importedunder the statedelivery system and 2-3 mt throughdirect concts. In June,the price underthe statedelivery system was 2,800Rblt, while pricesunder direct contra wereapproachng 12,000 Rblt. lhe sametrend continuedin thethiW quarter.The averageprice of crude oil fromall sourceswas 6,000 Rblt in July and Augustand reached8,700 Rb/t in September. 65. By tha time, Ukrie hadaccumultd a lae trade deficitwith Russia. WhenRussia decied to provideadditonal credit to Ukraine,payments made by Ukrainianrefineries through the Nadona Bankof Ulkainedid not reachRussian oil suppliers.- As a result,crde oil deliveriesfor domesticconumtion sloweddown in Octoberand cameto a halt in November(exlx t deliveries werenot effected). Fuelstocks, which were aready at verylow levels,could not avert the energy supplycisis. TheGovernment was so concernedabout the availabilityof motorfuel for agriculture activities,that it supendedgasoline and dieseloil salesto privatecars in November.Following the announcementthat Ukrine left the rublezone, additiona credit was receivedfrom Russia and oil deliverieswere restored. However,oil pricesjumped to about20,000 RbMtO For the year as a whole,total crde oil importfrom Russia and Belarusamounted to 34.3 mt, equalto about70 percent of the importvolume in 1991. 66. Basedon the intover l trade aee withRussia, Ukrainian enterprises camnot exploitdirecdy the differencebtween importedfuel prices and worldmarket prices by reexportng Russiancrude oil or naural gas. Theadministdve regulation of exportsin Ukrainerequires entpis to obtainlicenses before crude oil, gasoline,diesel oil, fuel oil, gas or cokingcoal could beexported. In line withthe Iergo agreement,no crudeoil or gas exportlicense were iued. Oil products exportsdeclined to about six milon tons in 19. Outof that, about five mllion tonswere exported outside the former Soviet Union, amost two million tons less than in 1991,but stil providing sbstan bardcu revenues. 67. Natua gas. Ukraie purchased5.1 bhm gas at a price of 333 mblesper thousandcubic meter(Rb/tcm) from Turkmenist in the first two monthof 1992. A requestto increasethe price of gas severalfoldwas rejectedby Ukaine and Turknenistansuspended gas deliveriesat the end of ebruary1992. In the comingmonths, kussia delivered more gasthan in 1991,which helped Ukine to avoida supplycrisis.z The intergovernmentaltrade agreementwith Russia regarding 19'", gas importswas signed in August1992. The agreed volume was 69.8 bcm, significantlyabove theindicative figure in the generaltrade agreement.However, the new agreement increased the price of gas to 2,048Rbtcnm effective May 18, 1992. Subsequenty,an agreementwas signed*,ith Turkmenistanabout the importof 2.3 bcmgas in Octoberat a price of 3,000Rb/tom and 4.7 bcm gas in November-Decemberat a price of 3,880Rb/tcm (effective at the Ukrainianborder). 20 It is notclear what role the extremelycumberm _tbanksetements system played in thepaynt crisis. 21 Whietids prie wasequal to morethan 12 timesthe average import price dung the firsquaer, the ea cost of the importedcrude oil Icreasedmuch less overthe sameperiod. An impora india, the ruble-dollarchpange rate, hrd about3 timesbetwee ruay and November. 22 36.2 bemarved for domesticcm tionin the firstsix monthof 1992compaed to 29.6 ban in the - 25 - 68. Thepayment problem mentioned above also affectedgas supples. Toal gas deliveriesto Ukrainedropped by about20 pecent betweenOctober 11 and October30 (meured as a percentage of tansit gas and deliveriesfor domesticconsumption together). AlthoughRussia's intention was to curtaildomestic delhvenes only, for vaious tschnicaland contractudreasons Ukaine implementedan approximely proportionalcunailment of all customers(in fact, deliveriesto WesternEurope were affectedthe most). Afterit wasexplained that the gas industryin Ukaine wasnot the sourceof the paymentproblem, deliveries were restored. Totalgas imorts (fromRussia and Turkmnemstan) reached89.1 bcm in 1992,repteseting a fige closeto the 1991import volume. 69. Electicity. The exchangeof electricitywith Russia and other republicsof the formerSoviet Unionresulted in a 1.2 TWhnegative balance (i.e., import)for Ukrainein 1992. The electricity price appliedto setde balanceswith any otherrepublic at the end of each quarterwas equal to the arithmeticmean of averagedomestic tariffs in Ukaine and in the other republic. At the beginningof 1992,Ukraine has sigpedexport contracts with severalnon-CIS countries for a totalof 5.5 TWh electricity.Contracted prices were 0.04-0.05 US$/kWh, although some of the contrcs werebased on barters.2 Additionalbarter contracts were signed later in 1992,however, many of thesedid not materiaizeand the volumeof exportsfor the year as a wholereached only 5.8 TWh. 70. Coal. In the past, Ukraine has consistentlybeen a small net exporter of coal. The first year whencoal importsslightly surpassed exports was 1990. The balanceof trade wasmore favorable thanexport volumes suggest, sice Ukraineexported high value solid fuels and importedlower value ones. In 1991,coal importsdeclined even more rapidlythan exports,resulting in an exportsurplus of one millionton. In 1992,however, coal importsstayed close to their 1991level, while exports dropped by 43 percent. As a result, coal imports exceededexports by about 4 mt. D. The Issue of Supply Seuity 71. The energysupply crisis of October-November1992 demonstatd the vulnerabilityof Ukraine'seconomy to outsideenergy supply shocks and raiseda mber or importantquestions: (i) is Ukraine'sdependence on importedfuels excessive? (ii) whatare the stepswbich Ukraine can take to increasethe reliabilityof importsffom Russia? (ill) is it desirableto diversifyimport sources even if non-Russianinports cost more?(iv) whatare the domesticalteratives to importedenergy in the shortand the longterm? 72. Thereare severa couies whichdepend on importto supplymore thanhalf of their energy needs.24Import depdency in the caseof electricityis generallyconsidered more disadvantageous than in the caseof fuels. Whilefuels can be storedrelatively easily, the storageof electricityis practicallyimpossible. However, Ukraine is a net electricityexporter. We may conclude,therefore, that Ukraine'simport dependency is not excessivein internationalcomparison. Ukraine's problem is its relianceon only one conry, Russia,for more than90 percentof its importedfuel needs. As it wasmentioned Jaove, Ukraine is locatedon the exportcorridor from Russia to Europe. The cost of supplyingUkaine's domesticneeds will always be lowerthan delivering oil and gas to the rest of Europe. If Russiacan price its energyexports competitively in Europe,it shouldbe ableto do so evenmore in Ukaine. Therefore,strictly on the basisof short and longterm supplycosts, Russia appearsto be the least cost sourceof importedoil and gas for Ukraine. 23 For example,the contrat with Romaniawas basedon the paymentof one ton of fueloil for 1,800 kWhelectricity, indicadng an implicitprice of about0.04 US$/kWh. 24 Forexamle, Germany, Sweden or Japan(the later impors 92 pct of itstotal energy m;rn~m..nt'~qw%-m Th-.v sam of OECDC o. OECD,Paris, 1992. - 26- 73. Thereis no evidencethai ethr the gas or oil curtailmentswere the resultof physical unavailabilityof fuelsor technicalproblems in the delivetyinastucture. Exportdeliveries of crude oil continueduniterrupted and totalgas deliveriesto Ukrie surpassedprevious levels after the crisiswas over (dueto the Turkmenistanagreement). Was the crisisunexpected? In retospect, lookingat the widerange of uneolved inte ublictrade issuesat the begining of 1992(e.g., prices,trasit fees,mode of payment,lack of commerci contracts,etc.) and the rapidpace of politicaland economicchanges in the formerSoviet Union during the year, it is surprisingthat a crisisdid not breakout earlier. The concl-sionis that the uncertaintyconceming payment mechanismsand effectiveprices caused the insecurity of energy supply and not the physical availabilityof importedfuels. 74. Sincethe inructure to importlarge volumes of fuelsfrom other countries simply does not exist,Russia will rmain, at least in the mediumterm, the mainsource of importedenergy for Ukraine. In orderto avoidanother supply crisis, the *nrlesof the game"must be clarified. Many believethat the solutionis an agreent betweenRussia and Ukraineto trade at worldmarket prices. However, it is clear that Ukaie wlfl not be able to pay in convertiblecurrency for tmportedenergy in the near futre2 , thereforethe pricingand compositionof Ukraine'sexports to Russiawill have to be takeninto account. 75. It is expecteddatat least for 1993,the two countrieswill coinue tosee payme in rubles,therefore the effectivecost of importedenergy will depend on (i) the price of importedfuels; (ii) the price of Ukrainianexport commodities; and (iii) the cost in domesticcurrency (karbovanets or hryvna)of producingthese commodities. In the mediumterm, there is littledoubt that this cost will approachworld market levels. The u inties are (i) howfast this is goingto happen;and (ii) whatquantity constraints on fuel importswill be in effectin the periodof transition. 76. Althoughprice icses for importednatural gas are expectedto be largerthan for crude oil,26 the availabilityof gas in the transitionperiod appears more certain. The reasonis that the marginalvalue of crudeoil is muchhigher for Russiathan the marginalvalue of naturalgas. It is easyto sell morecrude oil on the worldmarket, while developing a marketfor additionalnatural gas salestakes time. In addition,the capabilityof the Governmentof the RussianPederation to honora crudeoil exportcommitment (for anything less than cashpayments in hardcurrency at worldmarket prices)is increasinglybeing teatened by the growingidependen of oil producingregions and enterprisesfrom the centralgovefnment. OnI this basis, Ukrine shouldfollow two different .proachesto secureits fuel importfrom Russia. 77. Earlysigning of a specifc intergoveamentagreemem with Russia for de 1993import of naturalgas is highlydesirable. The agreementshould be similarto the one signedin August1992 and includescheduled gas deliveries,pricing of gas (basedon a price formulaexpressed in US$and the definitionof the applicableruble/US$ exchange rate), the frequencyof price adjustmentsand the pricingof gas transitservices (see ChapterVII). After theintergovenet agreementis signed, Ukrgazpromand Ga7promshould enter into a standardcommercial contrac in orderto further increasethe securty of gassupply. 25 The valueof Ukraine'snet 1992energy import was aboutUS$10 billion at worldmat pnces. 26 Theprice of Russianas was onlyUS$51tem in November1992 (calculated at the excange ate of 400 RbIUS$),or about6 pee of the price Russiasold gas outsidethe formerSoviet Union. This comparedto the price of importedcrude oil, wbich hal US$50/tonor about40 percentof the wold maket ricebv the endof 1992. -27 - 78. As eventsin 1992proved, the indicativeamount in the neal tade ag_eemt withRussia is of limitedhelp to securethe importof crudeoil. Thrfore, parallelto negotatinga genera trade agreementwith Rssia for 1993,Ukraine shoud focus its ffortson signingdirect Iport contracts between Uainian refinefies and Russian (and Kazakh)ol producng enterpses. The general trade agremen shoulddescribe a paymentmechanism and ensurethat exportlicenses in Russiawill be availablefor thosecompanies which wish to sell crudeoil to Ukaine. The directconracts should specifyprice adutment formulasand deliveryschedules for oil and, for barterdeals, also for the coodities to be exportedby Ukraine. 79. The diversificationof importsources in order to increasesupply security should form an importantcomponent in Ukraine's energystaegy. Turkmenistanis the leadingcandidate for diversifyingnatual gas supplysources. Therefore,negotiation of an intergovernmenagreement for thepurhase of gas withTwrkenistan is alsodesirable, followed by a commercialcona between Trcengazprom, Ga7prom(which provides the trans servce) and Ukrgarprom.Iran maybecome a third sourceof naturalgas, if the aangemen whichwas already under consideration in 1992is concluded.' However,these arrangementswill not decreaseUlkaine's dependence on the Russian contolledgas transportationsystem. In the short run, tnereis simplyno ateative importroute. Furthermore,the cost of constuctingand operatingan altemativeroute (e.g., a liquifiedgas terminal at a BlackSea port or a pipelinethrough Poland) appears prohibitive even in the longrnm. 80. The gas industry,because of the difficultyof storinggas and generalunavailability of alternativetransport modes, is a businesswhere relationships between buyers and sellersate normally basedon longterm commitments.Because of the lack of flexibilityof gas markets,it is in Ukraine's Interestto negotiate long term gas importagreements with Russiaand Turkmenistanffolowing the signingof theagreements for 1993). In addition,a longterm gas transitagreent withRussia and lukmenistan shouldalso be negotated(see Chapter VIl). Theimpotance of the Ukrainiangas marketfor Garprom(Russia) in the longrun shouldnot be undereimaed. Ukraineis Gazprom's largestforeign customer in termsof volumesof gas soldand is expectedto remainso evenwhen utadebetween the two counties willbe carriedout in convertiblecurrency. Fromthat perspective,a longterm agreementprovides advantages to bothcountries. 81. In the short rn, the task of diversifing oil importsources is also facedwith considerable difficulties. The arrangementwith Belarus for the import of two million tons of crudeoil to utlize excessrefining capacity saves transportation costs but has littlestrategic significance. Kazakhstan is a morepromising potentia supplier,however, the Kazakhoil wouldstill have to be deliveredvia Russia. 82. In the long mu, assumingthat Ukraine has the capacityto generate hard currency, crude oil canbe purchasedin practicallyunlimted quantity on the worldmarket. Theproblem is to ensurethat Ukraie has the inastructure to receivethe oil and deliverit to refineries. Thecapacity of the Odessaoil rminalto receivecrude oil shipmentsfrom other counties is limitedto a fewmillion tons of oil per year. Ukrainemay explorehow to udlizethis capacityin the short run,2 and also takethe necessarysteps to comnussiona cpacty expansionprojea (see ChapterVWI). In addition, adeque crude oil storagecapacity is also requird. An importcapacity of about 10 mtlyearin 27 Ukae plamedto purchase3 bcm gas fromIran under a displaceme angement withAzerbaijan (dte gas from ran wouldacmally flow to Azebaijanwhich in retum wouldaange withTurkmensta the ddiveryof an equa amountof gas to Ukrine). 28 Ukrale offeredto buy 4 mt of crudeoil fromIran and exporta packge of goodssuch as rolledmetal _.L.....A.. _ ...q.A ma,,.n.my 4i;nrwo*n ThAtti.trna2Mn ws n ConclUdedin 1992. - 28 - Odessaad a significawexpansion of the coumy Is totl storagecaqpaty from the prese 2.0 mt (0.7 mt cde oi and 1.3 nt ofilprodus) to abot t (dided about quay betweencru oil and oU prodct) shoud be suffiient to put a check on he price of the Russiancrde and alleviatefu short term supplyproblems. 83. In 1993,assuming that domesticcoal, oil and gas produton registeronly a moderatedrop whilenuclear power generation stays constant (compared to 1992),Ukraine's energy self-sufficien3y will stbilize or slightlyincrease due to the epected decline of energy demand. In the long term, however,increased energy self-sufficiency would require the expasion of the utilizationof coal, miclew:power and renewableenergy resources. Theseoptions are brieflyconsidered below. 84. Coal is neithera cleannor a convenientfuel. Similaly to whathas alreadyhWened in all developedcountries, the use of coal by smallconsmes will ievitably decreasein Ukraineas well. Froman environmentalpoint of view, this is a verypositve trendand shouldbe encouraged.Since Ukrine is alreadyself-sufficient in cokingcoal, it appearsthat the onlyway to maintainthe relative sbareof coal in Ukraine'sprimary ene;gy supply is to use a largershare of domesdcallyproduced coal in powerplants (which can be equiped for pollutioncontrol at a lowercost than smallboilers). That implies,however, that more coal shouldbe producedin the formof bitumins theal coal ratherthan cokin coalor anthracite(the ltter two coal typescurrenly representa disproportionate shareof coalproduction in Ukaine). It also reqies thatthennal coal shouldbe producedat a cost whichmakes it competitivewith importedfuels, primarily naural gas. In otherwords, the restctng of coal mkingwith a focus on low costproducton of tennal ca (uiizing resources withfavorable geological onditon) Is a necessasyconditon for preservinga marketsharefor domesc coal (see hakpterVII. 85. SinceUkmine has four 1,000MW nuclearpower units which are more thanhalf completed and represent considerablesunk vestmentcosts, incresed reliance on domesticallygenerated nuclearpower is an attractiveoption frm a purelyeconomic point of view.30However, if the istig moratorumon additionalnuclear power is to be lifted,an intens(#edeffort to demonstratei a tecnically andpublicy convinng way tht the plans are opemed wh highsafety stndards wouddbe needed. Also, boththe operatingand the waconwltedwats wouldhave to undergoa nwnberof safetyenhaemets to ensurecompliance with intenatioaly acceptednorms. Finally, operationof e4sdng andpossible fiure unts wotddrequire a soundplan for the shortand longterm storageof spentfuel,includingfirm asreemets to ship thefue to Russia(as before) or to storeit on- site or off-sitein Ukraine. 86. Therole of renwable energyresources is currentlylimited in Ukraine. Furthermore,the technologieswhich may become commally viablein the not verydistant future cannot produce the amountof energyneeded to makea significantconbutin to domesticself-ficiency. The 29 A the Zapriwh Rivne,Kbmelyzsky and SouthUkne nuclar pls, seeChapter Vll. Threeof theseblocb couldbe complted rlatively soon. Thesupply of coolingwater to dte fourh block(no. 4 at the SouthUkrine plant)is consderedan unresolvedis. 30 It shouldbe noted,however, that the cut reactorchoice (VVER-1000 pressrzed waer reactors) requiresthat Ukraneimpos the nuclearfuel. Sincenudear fuelcan be purchsedon the world mart and 02dly stored,its Impt does not sigficaty effct swpply ity. Ukrine has a plant thatcan producehev w and the apacityand resour to po nucerl uranium,the twobasic materis wkichare neededfor the opeaion of CANDUtypereactors. WhileUkaie coud achieve practicly compleeself-sfuc in nuclearpower baed an the CANDU,the hih cost of that technolgy impliesthat the marginalIrease in ney supplysecurity acieved dt way wouldbe ver exWn{v.fP -29 - additionalcost of investngheavily in theseteciologies is susta tiallyhigher than pursuingenergy savingoptions with the sameor largerimpact on supplysecurity. Theefore, the Governmenshold givepriority to measureswhich increase energy ownseraton as the mostpromising way of increasing the secnty of energysupplyfor the cowuty. -30- V. ORGANIZATIONOF THEENERGY SECTOR A. Entebrisesand Agendes 87. Geologyand Exploration. TheState Committee on Geologyand Utilizationof Mieral Resources(Urgeo) is responsiblefor oil and gas explorationin the entireUkraine. It carriesout the geophysicalwork, includingfield daa acquisition,identifies targets, proves them by drilling,tesfing and handsthem overto the producersfor developmentand operaions. Ukrgeohas policyadvisory and planningfunction in relationto coal exploration,which is carriedout by the UkmainanCoal GeologyProduction Association (Ukhrglegoologia) with headquarters in Donetsk. 88. Oil refleres used to reportto Ukrglavneftekhimprom,an agency directly under the Ministry of Petrc-hemicaland ChemicalIodustries in Moscow.In 1991,a StateOi Companywas formed whichincluded all reflner±esin Ukaaine. In addition,a StateCommittee was also createdwith responsibilityfor the ansport and distributionof oil products. In early 1992,the Oil Companyand the StateCommittee were merged into a new concerncalled Ukrneftekhim, which reported directly to the Cabinetof Miisters. The individualrefineries enjoyed substantial autonomy in their operations, however,their productpricing and investmentdecisions were subject to variouscontrols. In November1992, in responseto reportsof iregularies in domesticand foreigntrading of oil products,the govermnentabolished UkrneftRel and createda StateOil and Gas Committee.Two companies,Ukneft and Chenomorneftegazare responsiblefor the domesticproduction of crude oil (thelatter is a smalloff-shore drilling operation on the BlackSea). Whilethese companies were indepedentof Jkbneftekhimin the past, it is not clearwhether they will also reportto the new State Committeein the future. 89. The gas ilustry is comprised of two principal operatingconcerns: Ukrgazprom,wbich is responsiblefor gas production,storage and the highpressure pipelines and compressorstations; and Ukrgazwhich receives the gas at the city gate and distibutesit to powergeneration plants, industil concernsand residentialcoumers. Fromthe inceptionof gas exportsto the timeof dissolutionof the USSR,Ukrgazpron ad Its subsidiaryunits were operated as part of a UnifiedGas Systemwith magerial controlcetaized underGazprom in Mascow. UkrgaVprom,comprised of fourteen principaloperaig unitsplus a numberof subordinatedor affiliatetechnical insttes or other entities,became a separateconcern at the end of 1991. Duringmost of 1992,Ukrgazprom reported to the Cabinetof Ministers(although some supervision was exercised by the Ministerof Industry). 90. Wthin Ukrgarm, Ukhiugaz is the drillingcompany responsible for aUgas welldrilling activitiesin Ukraineand at fori locations(mostly at Urengoy,Russ). ApproxImately85 percent of the gas is producedby the Poltavaand Shebelynmagas companies(the balance is producedby Ukrneftand Chemomorneftegaz).Poltavagaprom produces 80 percentof the condensa whichis refinedat a refineryoperaed by Shebelynkaga l Transportationoperations are assiged to six regionalcompanies: Kievtransgaz; KharIlvtansgaz; Lvivtransgaz; Cherksytragaz; Poltavagazprom;and Shebelynkagapronm.A rvpaircompany (Ukrgazenergoremont) provides servicesat four maince centers. The regionalgas compaies operateas profit centerswith a highdegree of operationalautonomy. The localmanagers are responsiblefor not onlythe technical performanceof the gas productionand handlingoperations but also for farmsto supplyfood for employeesand the provisionof employeehousing. Resarch and developmentis carriedout by an institutelocaed in Dhaklv. -31 - 91. Ukrgaz is primarly a service organizationwhich provides technicaland centraliwd support services, such as gaS dispAtching,to 25 regionaldistribution companies. Thes autonomous companiesare furthersubdivided ito morethan 400 operatinggroups which distnbute both natural gas and LPG(liquifled propane/butane gas). On April 1, 1992,Ukgaziflkatsi, a construction companywas spun off. Eachregional company signs a gas purchaseagreement with UkrpWrom but investmentfunds from the state budgetare apportionedby Ukrgazto each companyin proportionto the amountof gas sold. Ukrgazreports to the Ministryof CommunalServices. 92. Coal Inxsy. Afterabolishment of the SovietMinistry of CoalIndustry and the republic leveladministtion at Donetsk,the Ukainian StateCoal Comnitteewas created,with the role to implementGovernment policies and to facilitatecommunication with mining associations and enterprises(23 associationsof miningenterprises, 3 associationsfor coal preparation,3 associations for min. wcnstrction,2 associationsfor cental repairworkshops, I associationfor eqipme manufacturingand 7 designinstitutes). 93. The miningassociations, controlling on average about 12 mines," directly succeededthe previousregional coal administrations.The associationscarry out essental selling,dispaching and purcasing functionsfor the minu, inchdingall dealingswith washing plants, central workshops and otherenterprises under the StateCoal Committee. The number of enteprises in a production associationcan be extremelylarge (in somecases more than60). The associationscondnue to channel profitsfrom viable to non-viablemines through a complicatedand rathernon-transparent system of pricing and costing. Finally,the associationsalso act like an enterpriseor holdingcompany, since they decideon investmentprograms and on whereto channelany surplusfiuds fromtheir mining enterprises.It is peculiarthat the salesauthority is entsted to the mines,at a lowerhierarchia level thanpurchasing, which is normallyexecuted by the associations.Mines and associationsare en g in manynon-mining activities, often under the premisethat withouttheir participation essentalservices would collapse. 94. Elecicty. Ukrainewas one of the three republicsin the formerSoviet Union which had its ownMinistry of Powerand Electificatio (Miego) awountableboth to the republicand all-union levelCouncil of Ministers. The Soh Incoected PowerSystem was the largestof the I1 iterconected systemsin the fomer SovietUnion. It includednine power systems - Donbass, Dnieper,Kiev, Kharkiv, Lviv, Vinnytsia,Odessa, Crimea and Moldova.Despatch and controlwas carriedout fromKiev. Followingindependence, most of the operationaland organizationalfeaures remainedunchanged, except that the Moldovantrasmission and generationnetwork was split off. 95. Mineergo is a verticallyintegrated state-owned utility responsible for the planning,design, prowement, constructionand operatonof the generation,tranission and distibutionof electric power. Minenergohas 47 productionassociadons or enterprses. Onlythe eight regionalutlites and the associationof hydropowerplants are responsiblefor generation.The remainingorgaizations carry out variousspecialized functions, such as natonaldespatch (Ukergo), a foreigntrading company(Interenergo), a highvoltage constuction company, and severalresearch and development huti_tes. 96. Withinthe regionalutilities, each power station consues a separateenterprs, as are the individualdribution networkswithin the uility. Thereare also a munberof individualsrvice 30 Threeof theIge andmost proftble mines,eah withan output of 1.5mt/year, do notbelong to the associations. - 32 - companies. In the case of Donbassenergo,for example, these includea computingcenter, the regional control center, a procurementcompany, a company responsiblesolely for commissioning new plants, a transport enterpriseand two agriculturalco-operatives, to provide food for the workers. There are marked differencesin the way the regionalutilities operate. This is partly a consequenceof the large variationsin the amountof capacity they operate, ranging from less than 1,000 MW (Krimenergo)to 12,700MW (Donbassenergo). In Kievenergo,for example, each power plant operates as a profit center and, provided that targets are met, there is minimaloperational involvementfrom the regionalcompany headquarters. 97. Nationaldespatch gives instructionsto the regional control centers regarding load requirementsand the frequency/voltagestandards to be met. In order to cover regional imbalancesin supply and demand, nationaldespatch trades electricity with the eight regional utilitiesand individual nuclear and hydropowerstations. Trading is based on a contractualmatrix between national despatch and the generators. Individualcontracts stipulate single uniform prices. Nationaldespatch is also responsiblefor maintenanceof the high voltage transmissionassets (750kVdown to 330kV). 98. Nuclear power. In 1991, the Governmentestablished a State Committeefor Nuclear and RadiationSafety to supervisethe operationof nuclear plants from the point of view of health and safety. In addition, a Ministry for Protectionof the Populationfrom the Consequencesof the ChernobylAccident (Minchernobyl) was also stablishedto administerthe large remediationeff(rt mandatedby the Parliament. The generationof nuclear power was placed under Ukratomenergoprom,an organizationformc followingUkraine's independenceto manage the country's five nuclear plants.31 At the eno ,f 1992, the Governmentdecided to turn Ukratomenergoprominto a State Committeefor the Utilizationof Nuclear Energy. In January 1993, an advisory Commissionon Nuclear Energy Policy was establisheddirectly under the President. 99. District heat. The regional utilitiesof the Ministry of Power and Electrificationalso produce thermal energy for district heating in the large cities in Ukraine. The thermal energy is delivered through the transmissionsystem to district heat distributionnetworks, operated by municipallevel housingenergy agenciesreporting to the municipalexecutive councils and to the State Committeeof Housing and CommunalServices. Both the regional udlities and the municipalhousing energy agenciesoperate a number of heat only boilers to cover peak demand. In additionto residential buildings, industrialenterprises also buy heat from the district heatingnetworks. B. Sector Manament and Coordination 100. In principle, governmentshave three basic functions in the energy sector: (i) policymaking and coordination,covering the major strategic decisionsthat affect the sector and those areas where the govermmentis seeking a wider nationalinterest than impliedby the objectivesof the energy enterprises alone; (ii) ownership, i.e., ensuringan adequate financial return on the nation's investmentsin the sector; and (iii) regulation,whereby the governmentseeks to ensure that the consumerhas appropriateprotection in respect of prices and qualityof supply. These three functions are not withoutconflicts; for example, the owner and regulator roles conflict over the question what is the desirablelevel of consumerprices. For this reason, these roles are given separateentities in market economies,i.e., separate entites/agencies are responsiblefor policy, ownershipand 31 In the past, the five nuclearplants reported direcdy to the Ministryof NuclearPower of the former SovietUnion, which also controlled the nuclearexpansion program. .33 - regulation. Thishelps to crea ansparencyin the way govenments eact withthe sector,which is a conditionfor atacting privae capital. 101. Duing mostof 1992,Ukreftekhim, Ukgzprom, Mnenergo,Uatomenergoptom and the StateCoal Committeereported directly to the Cabinetof Ministers. is arame gavegreat powerto thesesubsector agencies which operated Independently from each otherwithout much atempt to producecoherent policies that involvechoices about the allocationof imvestmentand oher resourcesacross the energysector as a whole. In respone to that problem,a Deu Pdm Minister positionwith the task of coordinafingthe sectorwas createdwithin the new Govement at the end of 1992. 102. Thereare five agenciesin the energysector reporting to the DeputyPrme Mi now: Minene-go,the StateCommittee for the Utlizationof NuclearEnergy, the StateCoal Commitee,the StateOil and Gas Committeeand the StateCommiuee for Nuclearand RadiationSafety. Assniang that it is adequatelystqffe4 the offlceof the DeputyPlime Minister ill be wellposWoned to cany out thefucton of sectorcoordinaion, polcy developmentand preparaion for majorstrategic decisionsat the Cabinetlevel. In orderto providemore focus on energyconservadon ises, an energyefficiency unt shouldalso be createdwider the DeputyPfhme Minster (see Caupterm above). 103. In the fonner SovietUnion, the sectora or lineministrie actedas the ownersof the enegy enterprisesand preparedinput for the policydecisions taken at the Depuy Price Miister level. In order to sepamtethe ownerhipfunction, a StateProperty Fund was establishedin Ukrine in the fall of 1991. In early 1992,the Parliamentdecided to movethe assetsof about 17,000enterprises (amongothers, Ukrgapom, Ukz, Ureftekhin and the coal asociations)under the Fundand assignedto it the responsibilityfor preparationand executionof a privatizationprogram. However, the Fund lackedthe staffand resourcesto prear and implementa viableprogram and to act as the ownerof the enterprises.As a result,the role of the ownerwas not proWerlyflfilled in 1992,which led to a numberof problems,particularly in the oil refiing and marketng ubstor. 104. The StatePrice Committee(oskomtn), the formerprice regulator,was mergedinto the Ministryof Economy(the formerGosplan) in 1991. The Minity of Ecnomy tookthe lead in establishingenergy prices in 1992and, at leastpartially, acted as the regulatorin the energysector. The StateCommittee of MaterialResources (established in April 1992)suprised the operationof the oblastlevel fuel (coal,fuel woodand petroleumproducts) distribution enterrises. Thesystem of state orders(inherited from the formereconmic mchism basedon centralplannng) was maintained,although it coveredsubstantially less than 100perent of fuelproduction and distribution. 105. In summary,the energysector started 1993 with a newlyestablished coordinaion center (i.e., the officeof the DeputyPrime Minister) and a manageablenumber of subsectoragencies which act likemonopolized, vertically-integrated concerns having the dual functionsof a goverment agency and a holdingcompany. Thereis a dangerthat this new set-up,despite being fully justfied fromthe pointof viewof efecive sectormanagement, will lead to a returnto the old centralplanning system. In orderto avoid that, the Governmentneds to take stepstowards the restructuringof the vaious energysubsectors. -34 - C. Demoopot, C eca Prvro 106. Generally,economic activities can be dividedinto two grows. Thefis groupcontains naural monopolies,i.e., activitieswhich, for technologicaland otherreasom, are most efficienty carniedout by a singleorganization.3 Within the energysector, oil trtation (viapipelines) and the transmission/distruon of gas, electricityand, to someextent, district heat belongto that group. The secondgroup contains activities which can be carriedout competitively.Within the energysector, coal productionand distnbution,oil production,refining and distibution,gas productionand electricityand heat generationbelong to that group. 107. The objectiveof the ownershipfuntion of te Govenmenti to enswe that state-owned enterprss are subjectto pressureto improvetheir efficiency.Although competitive makets create this pre-suremore effectively tha bureaucracies,competition is not a solutionfor all enteaprises. For natual monopoliesin the energysector, the Governmentshould set shortand mediumterm financialtargets. However,once these targets are set, the enterprisesshould be operatedon a comnercialbasis and the Govermet shouldnot iterfere in their day-to-daymanagement. Exeessivecontrol undemines the responbility thatthe managementhas for performance. 108. In 1992,large scaleassignment of nrprise assetsto the ideutely stffed StateProperty Fundweakened the accountabilityof enterprisemanagers and blurredthe linesof decisionmaking. The Government,therefore, needs to strnte its ownersi roletemporarly even in thoseenergy subectors, which,in the longterm, canbe operatedcompeitively and partlyor whollyprivatized. The optial (or feasible)speed of cat competitionand movingahead with joint ventres and privatizationis not the samein oil production,refing and distibutionas in coalproduction and distributionor in elecricitygeneration. Government ministries and comte_s may representthe ownermore effectivelyin the short run thanthe StateProperty Fund, whichshould focus its efforts on privatization.In orderto createan arms' lengthrelationship between the minisriescommittees and the energyentprises (to separatesomewhat the ownersip functionfrom the coordinationand policymaking role of thesegovemment agencies), there is a needfor holdingcompanies to act as intmediae owners(for moredetails, see below). 109. For the provisionof mostgoods and services,the objectivesof the Govermnent'sregulatory functionare best achievedby mantning a competitivebusiness environment, i.e., competition providesthe best pmtecdonfor consumersin terms of both qualit and price. For natural monopolies,where competition is not a feasibleoption, separation of the ownershipand regutory ficdtions is probablythe key step towards adequate consmer protection. The regulaor needs to applyindustry specific price reguationformulas or criteriato controlthe changesof prices,and it shouldalso exercisecontrol over the obligationsto supplyand comect, qualityof serviceand customerrights. 32 Comm nalon meansthat an enterprisestops to opert likea govermentdeprten andadopts commerialmanem and operationpratces. Enteprs managementis primariyjudged on the basisof profitabiltyand has no responsibilityfor the ahievement of socialobjectives. The entepise is eSplicidycow_esW fromthe budgetfor the provision of non-commerciasevices, which are graduallyphased out. Thecompany may either retain its swtu as a stateownedenterprse or be coverted to a joint-sockcompany subject to corporte law. 33 Naturalmonopoly, as definedby economists,is an activitywith ireasing retumto scaleor positve eoonomiesof scale. - 35 - 110. The reuatory authoritymust achieve a high levelof publicconfidence. In orderto do this, it needs Autonom,objecivity and transparency.The regulatormust have a degreeof autonomyso that is not governedby short termpolitical interests. Also,it mustbe indqenent and seento be independentof the enterpriss that are beingregulated. ITe regulatormust make objective decisions basedon law and the availabledata and its conclusionsmust follow logically from these elements. Finally,the regulatoryauthority must be anpret in that it consts withall majorinested parties,inchuig, of course,the enterprisebeing regulated, and it shoud publishhow its major decisionswere arrived at. 11. The EnergyPrices Darmenm of the Ministryof Economy,althugh it is idependentfrom the energyagenies, does not meetall the requiementsfor a regulatoryauthority. Its focusis on anly one aspectof regulation,prices, while other Imortan aspects,such as the qualityof service,are somewt,atneglected. Its proceduresand decisionsare not transparent.Thcrefore, in te mediwn tenm,there a a need to establishan open, ndependet,legaly basedenergy regulatory system by w*k the interest of the customersboth redential and industrial),the centraland local govemmen, potentialcredtors and the reguted enterpnsesare all takenio accouwt.The top mament of the regulatoryauthority should have a highdegree of job securityand shouldbe appointedby the PrimeMinister or the Depuy PrimeMinister for a fixedtime period. It should promotecompetition in oil and gas production,oil refiningand distribution,coal miningand distibution,electicity and heat genration and energytrade. It shouldclosely regulate the non- competi ery activitiessuch as gas, electricityand heat transmissionand distr on. 112. il and gs producton. AUlmineral resources should remain under state ownership. However,that does not meanthat there are no alternativesto a statemonopoly in the etraction of crude oil and naturalgas. As a frst step, the policydevelopment. supenisory and longterm scientificfunctions of the StateCommittee on Geology(Ukzgeo) shotdd be separatedfrom the petroleumexploration fwntion. It couldbe achievedby splittingUlrgeo into a state geological surveyand a stateowned petroleum exploration company (similar to Ukruglegeologiain the coa ubsector). In the mediumterm, exploraton acties couldbe movedto the proon compane, whichis the mostcommon stucte aroundthe world.34Paralle withthat step, the Governent should At a minng law whk* wouldestablish a liceiming/concessionregime with rdes govendng Proer for the exporaton and devopment of oil and gasfids (see Annex4 for a draft TOR for the proposedOil and Gas LegislationProject). This is a necessarycondiion for creatig competition and atracting tbreipninvesutent and moderntec logyinto the subsector,which, in return,are the conditionsto arrest the productiondecline.35 In the shorttern, the ownerhiprole shouldbe played by the StateOil and Gas Committee.In the mediumterm, Ukmeft, Cheomorneflegaz and Ukrganrom (seebelow) should be corporzed and the ownersip Anton transferredto the State P Fund. 34 Thisarngem was tred duringthe 1960sand rpotedly led to the diversionof funs from exporatin to production.Th sameconcerns, in our view,would not applyto a maret basedsystem. In an economywhh is governedby supplyand demand,production requiements and potnal detere the levd of exploat actes. If a prospectpromises to be conomicaland the landis available,an entepris wil soonexplore it. 35 he imprvementof the generallg system,te developmentof a soundbanking system and the adoion and impl tn of a clearpivatizain saegy are additond (altough not specificto the enerysector) conditions for a dincme in foreg directsinsm -36 - 113. Oil tnsporaton. The opertion of oil transportpipelines (the Dnhbatansit pipelineand the twopipelines serving refineries in Southernand EasternUkaie) is also a naal monopolyand it requiresthe samekdnd of reguation. Thepipeline operaing compaies shouldtreat allpotential usersin a fair and non-dscrindnatoryway whileshould be allowedto earnadequate retorn on their capital, Assumingthe existenceof a proper regulatotyframework, state ownership of the pipeline companiesis not an economicnecessity. Thecompanies should be corporatized(.e., trafonned intojoint stock conies) and, in the longrun, sharescould be offeredto privateinvestors. 114. Oil refiningand distibution is a subsectorthat shouldoperate on a competitivebasis. That impliesfreedom of entryand exit, libezaion of foreigntrade 3' and decontrolof domesticprices. In addition,the refineriesand the distributioncompanies are primetargets for futureprivatization. As a first step, refineriesshould be corporatizedand maderesponsible for thepreparaton of investm.ntproposals and identifiaon offnancing sources. The StateOil and Gas Committee shouldfocus on policymaking and regulatoryfumntions and allowthe refineriesand markeing companiesto maketheir ownbusiness decisions under well defined regulations for taxation, accuntabilityand performance.While the Govemment(specifically, the Stae Oil and Gas Committee)may facilitate the provisionof foreigntechnical assise to the refineries,promote joint venturesand advicebanks before loans are commutted,no investmetsin the refineriesshould be financedfrom the budget. lhe systemof stateorders should be abolished.Retail maieng of petrolewnproducts should be demonopolizedand cludWdin the initial,small scale privtzation program. Marketingcompaies shouldhave equalaccess to productsfrom all operatingrefineries and also to the infrasucture for bulkproduct distribution. They shouldhave the freedomto choose betweenimport of finishedproducts and liftinglocal refinety products depding solelyupon cost factors(see Annex 5 for a draft TOR for an Oil Refining,Transportation and MarkedingIndustries RestructuringStudy). 115. Gas transmissionand distribudonis an industrywith a positiveeconomy of scale,i.e., it is a naturalmonopoly. Currently, Ukrgazprom and Ukrgazact as holdingcompanies for the regional transmissionand distributionenterprises. As it wasmentioned earlier, their assetsformally belong to the StateProperty Fund, and the Ministryof Economyregulates the pricesthey chargefor their services. Theydo not receivegeneral budget subsidies, although Ukrgaz receives a price subsidyon its salesto residentialconsumers (see apter VI). Therefore,the conditionsfor the commercalizaionof the operationsof bothcompanes have more or less beenalready created. However,there is still a needto reformtheir in l orgitional structureas wellas management and controlprocedures to conformwith those of gas enterpnsesin marketeconomies. 116. Prior to Ukrainianindqedence, the six transission companieswhich are responsiblefor transportinggas from the Russianborder to the export staions on Ukrie's western border reported directy to Gazpromin Moscowin regardsto mostactivitids. This resultedin a highdegree of autonomyfrom the centerin Kievin each of the entities. SinceUkrgazprom became inde ent, it has assumedmuch broader responsibilies and its existingoperaonal and managerialstructure and proceduresare no longeradequate. Whilethe opertiDonalautonomy of each profitcenter (trportation entities,the dilling enterpriseand the Poltavaand Shebelynkaproduction enterprises) shouldbe maximizedto the extentpossible, concentration of authorityat headquartersseems to be necessaryin certainareas scich as budgetpreparaton and control,finania reportng,accotng, 36 Crudeoil exporshould be considered an excwponand coninue to besubject to resictons as longas Russiaprohibits rexport. However,the export of oil productscan be ' T beralizedas soonas domestic pricesare deconolled. -37- strategicplanng. invesmm programmng,contract negoiaons and customerrelations In the longterm, the possibii of separatingthe gas trans buinessfrom dometictrantportand productionactivities should be examined.The objective would be to facilitatedevelopmnt of transit operationsas a commercialactivity (sepe profit center)and to isolateit fromthe reguationsand requirementsof the domesdc energysector. Ultimately,the transit system may operate as an open accesspipeline servng gas exporters(Russia, Turkmenistan) and importers(Cental and Western Europe).3YIn the longrun, boththe transitsystem and the trsmission companiesserving the domesticmakret will probably be able to amactprivate investors. 117. Coal industry.In 1991,the central dminan of the Ukrinian coal industrythrough the Donetskbranch of the MoscowCoal Ministrywas abolished.While theoretically all minesare now idependent,the production asciations and the Coal Committeestil direct the industry,basically by contiuing the old procedures, with the main differencethat the influencenow allegedlycomes throughadvice rather than control imposed from top. Thepseudo-demonopolization so far has shown hardlyany positiveresults. Productionand productivitydeclined, costs increased and the difficulties of contiung productionaugmnted vastly. Therehas beena lot of debateabout privatization of someservices, but hardlyany real progresshas beenmade. Thereare unrealisticexpectaions that foreig investorsmay be interestedin newmines. 118. Thereare manyconstaints to true ci on. Financialand commercialfunctions are severelyunderdeveloped, and thereis a lack of expsure to internationalperformance criteria. Thereare no skillsand insuments for financialanalysis. The principlesand reliabilityof costingare doubtful,meaningfu cost breakdownsare apparely not available,financial sttements exist only in ruhmentaryform, and auditsand capitalbudgeting hardly exist. Thereis oftena preoccupationof mine magagementto sell coal outside the traditionalchannels and to raise prices rather than achieve cost reductionsand productivityincreases. During1989/90, mine managers were appointed by voting of the workers;however, this practicehas beenreversed in 1991,and minemanagers are again appointedby the associations.Apparently, a stronginfluence of workers'representatives on management'sdecisions contnues to exist. 119. Sucoessfulprivatization of the coal industrymay utimately be the best vehicleto address theseproblems, but it is not likelyto be a realisticoption in the near future. Importantpotentl new shareholders,such as Ukrainianelectricity enterprises, steel firmsand banks,are still state-owned enterprisesthedm ves, whichhave to strugge withsimiar problemsas the coal mines. Also, at the presentstage of the coal industry,nobody can be expectedto makea seriousbid for ownership. Whilethe establishmt of an appropriatepolicy and regulatoryframework for largescale industrial privaizationshould be advancedwithout delay, it is also urgentto advancethe restructuringof large and difficultstate-owned enterpries, such as the coal industry,in orderto reducelosses and to enhancethe prospectsfor eventuallater privatization (see ChapterVII for details). 120. The StateCoal Committee acts as the de-fato ownerof the coal associations,while also carryingout the functionsof coordinationand policydevelopment in the coalsubsector. The mine associationsperform mainly administrative functions as intermediateorganizations between the Coal Committeeand the mines. Minesand associatedenteprises are pardy run as productionunits of the association,but partiythey also enjoythe privilegesof idependn eneprises. The numberof enterprsesand assocationsis too large for effectivecoordination and control. Thereare too many 37 Beforesuch an arrangementcan be implemented,a vaiet of tehenicaconditions should be met(set ChapterViI). -38- non-minig actvies. Adm of mine opeons, saty regaons and tade unions are too closely lnkbd. 121. Modernization,restructuring and institdonal refonmin the coal miningindusry is expetod to take at leastten yeas. In thefirst phase, the Governmentmay tranfom pat of the Stae Coal Comiee o a holdng company. swmilseparate the ownepfuton from the policy devopmentfunctionof the State CoalCommttee. The new holing companywow exerse control overthe cod miningassocito, whichwould be organizeduito sevn to ine larger,commercaly operaedmining comypaes. Thenew holdingcompany's management would be appointedby and reapoble to its boardof directors. Theboard would be appointedby the Cabive of Mins , whichlater may delegate that task to the StateProper Fund. Themembes of the boad should represena broadscqpe of Interests,In pard arfrom the Miray of Fiance, Mistry of Power. MinLy of ndWte and crei agencies(a labor ive may also be a boardmember). Te edsting coalmining associaons in the Donetskand Lagansk proinces wouldbe regroupedinto 2-S mning companieIn eachregion. the assodationsat Ukzapad, Okiandria and Pavhrad woud be tnsfonned Ino the mining ompanies,which eventay, due to their relavely lowprduction cost couldbecome ideeen fromthe holdingcompany. The mintngcompes wouldopere the mi, waslin plantsand serviceorganions essentalfor coalproductio. Otherservices and eatepnses shouldbe spun-offand theirownership trsferred to localor regfionalgovenmet. 122. In the transitonperiod to the second,competitive phase, the role of the holdingcompany wouldgradually de andthe coal compaes wouldbe pven increasingsutonomy not only in their opeaion, but also in makin Investmentdecisions. In prepaionfor the secondphase,the Governmentshould start the developmentof a new legaland regulatoryfromeworkforthe coal mning acvdes. The new mininglegislation should promote competition and prvate investment.However, liberalztion of coal pricesshould be carriedout gradualy, overa periodof severalyears, parael withabolshing the systemof state orders,demonopolizing trade and developingthe infrastructure neededfor competitivetradig of coal (see ChapterVI). 123. Ieedidly. Economicstebooks usedto cite powerutilities as primeexamples for a natuWal monopoly.However, recent technological advances in electricitygenerAtion (gas-fired combined- cycleturbines and cogeration options)have signficandydecreased the validityof the economies-of- scalearumet (however,it is stillvalid for transmissionand distrbution). Furthermore,several counties (e.g., UnitedKingdom, United States, Canada) have implemented changes in their reguIatoryand instiuonal systemwhich created a certainlevel of competitionamong electriity gener.a. Thesedevelopments prove that there is no needto treat generationas a naural monopoly and, more importantly,also demonse that regulatoryreforms can brng significantefficiency improvementsin eectricitysupply. 124. A reformof the Ukrainianpower industry should include the sepaationof policym ng, ownerhip and regulatoryfunctions, commercializion of electricitysupply, inroducdonof comdetitonand the promotionof privatesector participation. Minnergo, whichacts bothas a governmentagency and the hadquarts of a large,integrated uti, shouldtransform te4 into a stemned gover ntminsty. Itshouldfocuson policy deopmentand the praraon of strtcdsofor the wholepower instry. It shoulddevelopan arm's length relanship wit the generaton,transmission and distibuton coanies. InitiallyMinenergo, but lar the StateProperty Fund should represent the ulmate ownerin the non-nuclearelectricity hduty. However,Mineergo shouldexercise that functiontrough a numberof holdingcompanies, whichwould act as the real owners(see below). -39 - 125. The inroductionof cometitionin the powerindustty requires the breakig up of the current verticallyitegred stture intoseparate comaies responsiblefor generaton,transmission and distibuton. All generators(inchig cogeneratorsin the industrialsector) must be allowedopen accessto the tranion networkand havethe rightto seullbulk power to distributorsand large usms at unrgtd prices. Also, generatorsand other independentproducers must be allowedto bid for the rightto developnew geneaing capacity. Pricescharged by the transmissionand distribution companieswill contue to be regulated. 126. Thesedchnges will requdrethe drAftingand adoptionof an electridtylaw thatlays down, amongother things, the respectiveroles of ma*et competitonand Gowvrnentregulaton, the fuions of the regulatoryagency and the rightsof potenta privateparticpants in the supplyof eecticity. The law shouldestablish a licensingregine wth ndes governingprocedures for obuining generatonlicenses and operaion of the transmissionand distributionsystems. In the short term, regulaioncan be carriedout in coopeaton betweenthe Miistry of Economyand Mienergo. The Ministryof Economywoud conte to focuson prices,whlde Minenergo would issue licenses, seguard and encouragecompetitio, controlobligtons to supplyand conct and deemine the quaity of service. Althoughthis temporaryarrangement is expectedto prove workableafter the ownrhip finctionsof lNenergo are splitoff, it will notbe withoutdbadvantages. Minepgo wi combine(some of the)roles of the regulatorand the agencyresponsible for policydevelopment and preparato of subsectorstrategy. The Ministryof Economywil conne to regulatepnces in a non- asparet way and whout adequatecustomer represntation. Therefore,in the mediumternm Mienergo shou give up its reguatoryfons and transferit to the new energ regulatory ahority (seeabove). 127. In 1992,Minenergo actively studied the experienceof a numberof indusialied countries and develd a blueprintfor reorganzaion. The regionalutilities would be organizedinto holding companes. To fostercompetiton between the generators,certain power stations would be splitoff from the reginl utiliies and operateunder a separateholding company (see Annex6 for more details). The proposalas preparedwil bringvery significantbenefits. Decisionsabout generaton cacity developmentwill be moresolid economically and financiaUly.There will be clearincentives and pressumsto reduceoperation costs. Transparentprces, whichbetter reflect costs and reducethe extensivecos-suidiztion, willsend the rightsignals to electricityconsumer. The needsof the customerswill be in the focusof serviceimprovements efforts. Mostof thesebenefits will come froma new, competitiveset-p for the operationof the industryand willnot dependon privatization, whichmay or may not be the ultimateobjective of the Govenmment. 128. In the next few years,due to decliningelectricity demand, there will be a surplusof geneon capacityand reducedoperational pressures on the transmissionand distnbutionsystems (see ChapterVII). Thisprovides Ukaine witha windowof opportunitywhereby the transitonto a compettivepower supply system can be implementedwith less difficultythan in a capacity constainedperiod. Therefore,a decisionon the timetableforimplmentation is neededin the near futue. TheImplemnatIon of thefudlreform wiU require several years and -should be carriedout gradualy. A star ould be madeby exeimenting witha smphlifedpool on a shadow/trialbasis. In addon, the budgetpreparaton and control,financal repordng,accounting, stregic planning, contractnegoations and asstomerrelationsfunctons should be strengthenedboth at the regional ulUdesand at naional despatch. FnaUy,Minenergo should start the disposton of non-core acties. One opdonto be consideredist agricuturaland odteractivies, whichare only rmotey relatedto dhebusiness of electicity supply,would be spit offfrom the regionalutilities and transered to regionaland localgovermet. -40- 129. Nucleargeneato technologyhas opeatal and safetyrequireme whichare very diffent fromconventional generation, t fo tere are significanadvantages in the present wherebyall nuclearplants belong to the StateNuclear Energy Committee. However, the Committeeshould focus on its policyreed acdvitiesand maypreserve part of Ukratomenergoprom to operateas a holdingcompany for the nuclearpower plnt. The holdingcomPany would carry out a numberof centlzed fnctions, such as prorement of fueland spae part, dispositionof Spent fuel, fuelcyde (loadin calculations,train, appliedreseah and development,etc. 130. An effecdvenuclear regulatory agency is an absolutenecessity for the disciplinedfunctioning of nuclearilatons and for ensurig publichealth and safety. However,the presentstatus of the StateCommittee for Nuclearand RadiationSafety is grosslyinadequate to the task set by the Govement. Owingto the heretoforeprevailing structure of responsibilitiesand dearthof local Uraiian personneltrained in nuclar matters,it is not sing thatthe ecisig arangementsare tentyi-c and incomplete.In the iwarfpture,the authorityand responsibilityof the Committeeshould be establshedby law, a stong organ nai1stucture shouldbe put In place,and the Commitee shoud be providedwith a budgetcomnmensrae with its responsibilites. 131. Dlstict Heting. In principle,the iroduction of comPetiionin the generationof district heat requireschanges similar to the onesproposed for the electicitysubsector. However,since the cost of ansportingheat over longdistances is prohibitive,the competitionbas to be localin name :nd willdepend on the avaiaNil of a significantnumber of iependent genators in the direct neighborhoodof the districtheating network who are intested in sellingheat. Sincesupply conditions(generation, transmission and distibutioncosts, the balanceof supplyand demand,the numberof hidepdent suppliers)could differ drastically between cities, there is onlya ninimalneed for regulationon a nationwidebasi. lhefiuacons of regulafingtanmission/distribuion systems, issuingheat supplylcenses and awarding oWntractscoudd be ddelated to the mnicpal execuive cowacs. The proposedenergy reglatory authoritycould prwvide technical stanrds for the systems and cat out an ovrsightfiuction in cooperationwith the StateCommittee of Housingand communalServices. -41 - VI. ENERGYPRICES, TAXATION AND SUBSIDIES A. The System of Er Pdng 132. In 1992,the Governmt applieda varietyof insumen to contol enery prices. Pricesof all energyconsumed in homes- electricity,heat, coal, heatingoil, kerosene,natua gas, liquified petoleumgas (LPG)- were set by the Cabinet. Becausethe Cabinetalso set the averageprice of electricityand heat, it effectivelydeendned the pricespaid by non-householdco_umers for these services. Pricesfor domesticallyproduced crude oil and natml gas and70 percentof steamcoal and 90 percentof cokingcoal werealso fixedby the Govenment. Maximumprices for oil productswere determinedindirecdy. Wholesale prices of refied productswere not allowedto be higherthan the sum of the crudeoil cost"s(including transportation) plus refining costs plus a 30 peret profit margin. Theretail prices of petroleumproducts establisbed by the productdistributor (Neftesbitovaya)were equal to the sumof wholesaleprices plus distribution costs plus 40 percent profitmargin." Theprice of naturalgas for non-householdconsumers was based on the import price agreedbetween the Russianand Ukrai governmentsplus actal transmissionand distribution costsplus 40 percentmaximum profit margins for the transmissionand distributioncompanies (Ukrgazpromand Ukrgaz). Theresult was virtuy completegovemment ontrolof domesticenergy prices. 133. This wascoupled with strict controlover exports. Exportsof mosttypes of energyrequired a license. Exportswere taxed at ratesranging from 20 to 75 percent. Mostof the barterswere also taxedat 10 percent,however, if the goodsreceived in returnwere not sold but usedby the Ukrainian exporteras inputsin its productionprocess, the barterwas tax exempt. Accordingto these egulations, erenergo(the foreigntrading arm of the Ministryof Power)could keep only 25 percet of the hardcurrec receivedfor electricitysales, but 100percent of fuels,materials and equipmentif thosewere used by the powerindustry. 70 percentof hard currencyearniDgs had to be surrenderedto the centralgovemment and 5 percentto Kievoblast. Althoughthe exportof electricitydid not requirea licensein 1992(this changed at the end of the year), the highexport tax seriouslydiinished incentivesto sell electricityfor convertiblecurrency. The exportof steamcoal was liberalizedin 1992,while the exportof cokingcoal stll requiredan exportlicense (at the end of 1992,the exportof steamcoal wasre-monopolized and subjectedto licensingagain). The exporttax initiallywas 50 percent,however, it was reducedto 20 percentin May (out of the 20 percent, 15 percentis to be paidto the centraland 5 percentto localgovements). Barterswere taxed at a rate of zero to ten percent,which gives rise to a problemsimilar to the one mentionedabove (however,the differencebetween the taxationof bartersand cashexports is muchless pronouncedin the case of coal than electricity).In summary,the structureof the exporttax promotednarrowly definedbarters in 1992,which could be a veryinefficient way of tradingwith countries which have access to hard currency. Therefore,the kwl of the eport tax should be lowered in the future and it should app'y to both efpr sales on a cashbasis and barters. 38 In the secondand thirdquarter of 1992,the Govenme sistedthat refineriesshould not purcase crudeoil at priceshigher than 6,000 Rb/ton(VAT included) from Russi In practice,when the refinerespurchased crude at higherprices durig the firstsix monthsof 1992,they could not passon their full coststo the conmers. 39 Thebasis for calculaingthe margindid not Includethe wholesaleprice. - 42 - 134. Mostdomestic energy sales were subject to a 28 pecent valueadded tax (VAT),although coal and electricitysales were tax exempt.40The VATwas alreadyincluded in the price of the crudeoil and natu gas whenpurchased fom Russia. The refineries(and Ukraprom) recovered that fromthe VAT whichwas included in the price of the products(and gas) sold to the distributor. In essence,VAT paid to the Russiantreasury was creditedthe same wayas a tax paymentto the domesdctreauy. B. Ery Pres i 1992 135. Pricesof domestidallyproduced crude oil and natal gas wereadjusted two timesin 1992(in Januaryand August). In the lastquarter of 1992,producers received 42 and 65 timesmore reveme than oneyear ago for eachunit of crudeoil and gas produced. Theprices were set to cover all operaptgcosts and providea 35 percentprofit, i.e. a marginabove opeaing costs,including depreciation.However, the new priceswere still substantallybelow import costs and did not provide for the replacementof obsoleteproduction nepment. 136. The price of naturalgas for industialusers more or lessfollowed the weightedaverage increaseof the pricesof importedand domesticailyproduced gas. Householdprices were set at about 25 percentof industr pricesin April 1992and werekept cons=t untilthe end of the yeardespite a sixfoldincrease in averagecost in that period. It shouldbe noted,however, that household consuiptionis notmetered in Ukaine. A flat fee4 is paid,therefore the moregas a housahold consumes,the loweris the effectiveprice of one cubicmeter of gas fe' the householdW 137. Oil productprices for mostconsumers closdy followedthe rise of importcosts in 1992(see Table3 in Annex1 for actualprices in July). Pricesfor householdsand agriculturecooperaqves wereexceptions; in responseto politcal pressuresthe Governmentintervened to keepthese prices low. Pricesof heatng oil, keroseneand LPGfor houeholdswere set at a fractionof industrial pricesin April 1992and did not changeuntil the end of the year, despitea fourfoldincrease of productioncosts in the sameperiod. Maximumgasoline and dieseloil pricesfor privatecars were tlly establishedby the Cabinetand later, in eachoblast, by the regional aes of the President. In responseto increasingsupply scarcities, these prices were adjusted from time to time andgenerally followed cost increases(although with some lg). The Cabinetset the maximumdiesel oil pricesfor agriculturalactivities at a levelwhich was calculated on the basis of the cost of producingdiesel oil fromthe low cost crudeoil importedthrough official government channels. 138. The largemajority of coalsales were subject to pricesset by the Cabinetin April 1992. Averageex-mine prices were about 5,000 Kv/t for cokingcoal, 4,000 KvJtfor anthraciteand 2,400Kv/t for steamcoal (comprisingsemi-anthracite and highlyvolatile coal). Whileconsumers 40 Coalmines were also exempt from profit taxes. In 1993,the exem is plannedto be extendedto elecicty utilities. 41 Theprice paid by thosehouseholds who use gas onlyfor cookingwas 1.9 KvCperson/month. Householdswho use gas for spacehetng in apamnentspay an additional80 kopeks/square meter/monthand those who use gas for boilerspay an addedche of 2.9 Kv/person/month. 42 In 1984,Ukrgaz purchased 500 gas metersfrom Germay in orderto measurethe volumeof gas conumedat a varietyof domestc intalation. Basedon these-nh, it is estimatedthat householdsactualy use abouttwo timesmore gas thanh umed as a basis for their flat rate billig. - 43 - paid the sam price for coalof the samequality, there wasa differentprice set for each mine,based on their historic(1991) opatAng cost stucte. Induial consumespaid priceswhich were very closeto ex-mineprices; on average,there was a differenceof only3 percent. It is bighlyunlikely that this dfferencecovered the true costsof transportand distributionservices. Householdspaid only 50 Kv/tfor the coal deliveredto their house. 139. Averageelectricity and heat priceswere increasedby the Cabinet3.2 timesfor electricityand 5.7 timesfor heat in mid-April1992. The nextprice inre (2.2 and 2.4 tmes, respectively)was not approveduntil Novemberand did not affecthousehold prices. Theparabs belowdescribe the appied priing regimein the periodbetween the two prie increasesin 1992. 140. Nationaldespatch purcaed electricityat a flat price of 0.55 Kv/kWhfrom nuclearpower plantsunder Ukrtomenrrom. The price at eachnuclear plant was diff and wasbased on the operafingcost of the plantplus a profit mugin necessaryto contnueongoing investment eforts.4 Sinmlarly,each hydropowerplant soldelectricity to nationaldespatch at a differentprice that consistedof two components:a capacitycharge and an dectricitycharge. Thelevel of the price wasbased on the cost-pluspricing method described above (the average price was 0.09 Kv/kWh). Theseprces werenegoted betweenthe mnclearand hydropowerplants on one side and the Ministry of Poweron the other, subjectto confirmationby the Ministryof Economy. 141. Nationaldespatch sold the electricitypurchased from nuclear and hydropowerplants eight regionalelecicity productionldistrbutionassociations (which operate the thermalpower plants and the regionaldistnbution networks) at a price of 0.63 Kv/kWh. The regionalassociations sold that electrcity togetherwith the electricity produced in their own thermalpower plats for 0.40 Kv/kWh to urbanhouseholds, 0.21 Kv/kWhto mral householdsand 1.00Kv/kWh to agricuturalcooperatives (theseprices were deTmined by the Cabineton April15, 1992). Thenationwide average tariff includingsales to industrywas set at 1.44 Kv/kWh.Household (and, to a lesserextent, agriculte) priceswere cross-subsidized from indusil saleson a regionalbass. 142. Theoutcome of thesearrangements was thatthe regionalvariation of industrialelectricity pricesreflected diferences between the eightregional associations in three factors:(i) electricity production/distributoncosts; (ii) the shareof (cheap)power purchased from natonal despatch;and (iii) the shareof housebold/agricultureconsumption within the totalconsumption of electricity.As a result,industrial electricity tariffs differed significany betweenthe eightregions and, for large automers, werein the rangeof 1.1 to 1.8 Kv/kWhplus a 220-300Kv/kW/month demand charge. Smallindustrial customers, transport and other enses paid fiat rateswhich averaged 1.7 Kv/kWh acrossthe eightregions. In November,when the Cabinetincreased average electricity tariffs 2.2 timesbut left householdprices unaffected, the averageindusi tariff was increasedabout 2.4 times to 4.0 Kv/kWh(with large consumerspaying 2.5 to 3.0 Kv/kWhplus a 1600KvIkW/month average demandcharge). 43 For eample, the Zaporizzhianuclear plan applieda 60 peren profitmargin to pay for the completonof it sixthblock. Still,it had the lowestelecricity price while Khmln4yi, withone block ninwngand two underconstucdon, had the highest. lhe Chenobylplant wasa specialcase. It paid threedmes higher salaries tban othermnulear plants (to compensatewoes for exposureto radiaton)and was not ableto coverits costs. The centralgovemment budget provided the plant witha subsidyof 3 blllon Kv in 1992. -44 - 143. The price of district heat for householdswas set at 30 Kv/Gcal. In practice, consumptionis not metered and householdsare billed on a square meter of occupiedspace basis. The unit charge is calculatedto result approximatelyin the price detrmined by the Cabinet. Power plants, before the Novemberprice iease, sold heat at a price of 66041150Kv/Gcal to idusi customers, 20-90 KvlGcal to greenhuss and 110-200Kv/Gcal to the district heat distributionnetworks. The regionl varlationof prices was based on consideratons similar to the case of electricity prices. These prices were increasedabout 2.4 times in November. C. Effes of th PricingSystem 144. In 1992, differencesbetween average costs and householdenerg prices were financedfrom the budget (electricitywas an excedon, see above). District heat and solid fuel subsidieswere distributedthrough the local govenments, other subsidieswere given directy to the energy distributon eterpris. Accordingto the budget approved in May 1992, planned householdenergy subsidiesamoused to Kv 53.2 bilion, or close to 5 pecent of total govement exendiures in 1992. This was calculatedas - Xv 11.2 billion for distuictheat; - Kv 13.9 billionfor naurl gas; - Kv 10.0 billion for LPG; - Kv 16.9 billion for solid fiuels(out of which 16.3 was for coal); and - Kv 1.2 billion for oil products (mostlyheating oil and kerosene). 145. Since there was no householdprice inrease after April, the budget had to cover the increasingdifferences between householdenergy prices and costs. Accordingto esdmates prepared by the Ministry of Finance in October, the total cost of energy price subsidieswere expectedto reach Kv 79.8 billion in 1992, represening an increaseof almost Kv 27 billion over the original budget allocation. Naual gas (+Kv 8.1 billion), LPG (+Kv 7.7 billion), coal (+Kv 6.1 billion)and district heat (+Kv 4.5 billion) were the main items responsiblefor the increase. 146. Whetherthe govermmentsubsidizes energy consumptionor not, it will not change the fact that Ukraine has to pay higher and higher prices for energy. Budgetsubsidies move part of that burden from those who conme the energy direcdy to the populationat large. While it is not known who are the losers and winnmersin that redistribution,it is cear that the more energy a household consumes,the more subsidy it receives. The subsidy has the undesirableside effect of discouivging energy conservation. Many energy saving m ues, which are worth undertng for the hoaseholds at prices which reflect the full cost of energy, will not be implementedat the curret very low prices. 147. There are more efficient ways to protect low-incomegroups. For example, targeted social programscan protect the poor without the distortionaryeff of energy price subsidies. In 1992, Ukraine assigned 8 percent of its GDP, probably a too high level, to over 60 cash allowancesand assistace programs. A World Bank reporet suggests that the number of programs should be reduced but key programs benefitingthose who are most at risk should be protected. These include ailowancesfor sick pay, maternity leave, short term disabilityand victims of Chemobyl. Other benefits that aid low-incomegroups are redrement and disabilitypensions, free provision of education and health services. 44 See *Ukrane- Employment,Socisa Proteion andSocid Servicesin the Traiton to a Market Economy',Report No. 11176-UA,November 1992. -45 - 148. Householdprice subsidieswere not the orly buday ouas for the energ sector. Unadjustedsince April, coal pricessoon became madequate to couverproduction and distribution costs. The distibutionoranization Uglesbytreceived shortterm bankcredits of Kv 14 billionfor increaseof workingcapital and anotherKY 8 billionfor increaseof reservesin May 1992. Next month,coal mines received about Kv 46 bilion short-termcredits in order to set arrears. Finally, whenthe minesrequested a 50 percentprice increasein July, the Governmentdecided to providea directbudget subsidy of Kv 46 billionand left the price of coal unchanged.Short term creditswith arificiallylow trest rateswere given also to the powerutlities and other enterprsesin the energy sector. In viewof the hi inflationduring 1992,these low interestrate creditsprovided hidden subsidiesto energyproducers. 149. Howlow are the ener prices? Sincemost enerW products are tradeableand the cost of importedenergy is expectedto movetowards world market prices in the fuure, worldmarket prices providethe best referencepoints for the analysisof the levelof energ pricesin Ukraine. Dividing the October/November1992 prices paid by enterprisesand householdsby the economiccost of energyestmated as the sum of borderprices (based on worldmarket prices) and domesticdistbution costs(expressed in US dollars),the exchangerate implicitin domesticprices can be calculated(see Table4 below). Coparison of these implicitexchange rates to the commercialexchange rate (500 Kv/$)shows that industrialprices approached 30 to 50 percentof economiccosts but the levelof householdenergy prices (with the exceptionof gasolineand dieseloil) was a very smallfraction of botheconomic costs and industrialenergy prices. Tabe 4: EnergyPrices In U ine (October/Novembe1M) counnsfinerIc@AvJ _*fionv ost (J nItrt Exdt Role PM*ot Pg v.i_~~~~~~~ duct_ic I_Fv RibetWWcer 1KV) kIdusCo__e Hous eduH_ EcoomIII ct(i hdustryIiitE. HoueoldRlte Coal (ton) 2,400 2,500 500 40 65 62.5 9.1 Nat. gam roocur) 975 3,000 132 120 160 25.0 0.8 Crude on (ton) 3,618 20,000 135 148.1 Gasolne 78 (ton) 41,000 41,600 40,000 265 265 157.0 160,S Dieel oi (ton) 38,000 38,600 37,000 230 230 167.8 160.9 Heatng on (ton) 35,550 30,000 180 210 220 171.4 0.8 LPG(on) 32,600 38.600 700 250 300 154.4 2.3 Fueloi (t) 17,200 17,800 80 222.5 Heat(Goal 1.300 2,400 30 35 62 68.6 0.6 Eetrcity IMWh) 3,200 4,000 323 50 65 80.0 6.0 Source:mnstry of Econony, Mnisty of Power and Bank Staff Estimates 150. In additionto the problemof energyprices being geneally low, therewere a numberof distrtions in relatve energyprices. Naturalgas was the mostundervalued energy source, wbich led to inaable demandfor gas and practcallycontimous raionmg of gas suppliesfor powerplants and other lae induial conum . For the inustrial consm , even coalor directheat purchases werea reaively low cost sourceof energycompared to oil products. - 46 - 151. The averageprice of thermalcoal for powerplants and industrialconsumers, in effectsince April 1992,is 2,400Kv/t ecx mine. In April, whenthe exchangerate was about150 Kv/$, this price was equivalentto 3.6 $/Gcal(using an aveage beat contentof 4.4 Gcallt),about 60 percentof the price of hypoteical importsfrom sources outside the formerSoviet Umonm 5 By November1992, the exchangerate has deprectd to 50 Kv/$, and the effectivecost of domesticcoal for power plantsdecreased to 1.1 /Gcal,or a smallfraction of the worldmarket price (averagecoal production costswr severaltimes higher). Relativeprice differencesbetween different coal types(coking coal/antacite ves stem coal)were also out of linewith interationalmarkets, where anthracite has practicallyno prem overordinay steamcoal, and cokingcoal has a premiumof only 15percent. 152. The supplyof automotivefuels for pnivatecars illustratedwell the inefficienciesof the system of price controls. Therewere at leastfour parallelmarkets in operationin 1992:(i) non-commercial gas stations;(ii) commercialstations; (iii) the privatemarker, and (iv) gas stationswhich sold fuel onlyfor convertiblecurrency. Becausethe cost of crudeoil purchaseddirectly from the producersin Russiawas significantlyabove the cost of crudeoil purchasedthrough the stateorder system,the Governmentdesignated certain gas stationsto sellthe highercost gasolineand dieseloil produced fromthat so-caUled"commercial" cmde oil. Therewere about 50 commercialstations in everyoblast in 1992. Initially,the maximumprice set for thesestations was equal to three timesthe non- commercalprice (establishedby the Cabinetat the begining of the year). Later, the task of settg maximu pricesfor the commeral and non-com cial stationswas delegatedto the oblasts. 153. The fuel soldon the privateor "black"market originated from the driversof state-owned vehiclesand smallscale private imports fromRussia. Gasolineprices were higher on the pnvate marketthan at the commercialstations, but dieseloil someimeswas available at a lowerprice, due to the relativelylow numberof dicselengine vehicles in privatehands. The convertiblecurrency staions (two in Kievand a few more in the other large cities)sold gasolineat a price of 0.6 US$/iter, whichwas similarto pricesin neighboringcounties west of Ukraine. 154. Duringmost of the year, there weretwo to three days longlines at non-commercialstations. Evenat commercialstions, the waitingperiod was usually one to two hours long. The lengthof the lines increasedwhen a pricejump wasexpected and decreasedafterwards. Also, the lengthof the linessignificantly inceased in the agricultualseason, when the authoridesintervened and redirected all amomotivefuel produced in refineriesto agriculuralcooperatives. There were w linesat convertiblecurrency stations. 155. Waitng in linesis a non-oductive and frusatg activity. Even if we do not take into accountpersonal discomfort, Ukaine probablysuffered a significanteconomic loss as a resultof peoplewastng their timestanding in lines. In addition,the systemwas invitingcorruption, since potenialprivate gains for the staffinvolved in fueldistrbution were very large. Werethere any benefitsderived from this systemin compaisonwith a systembased on unifiedmaroets and market 45 Bulian powerplats, forexample, were offered (i) anthracite with a calorificvalue of 5,900kcal/kg at a priceof US$19/tonPOB South Africa or US$38/tonCIF Vana (thetnsport costis rlaively highfor Vama because that port camot receive ships rer than15,000 DW]); and (ii) bitmious coal withsimil calouificvalue at a priceof US$23/tonFOB Indonesia or US$37/tonCiF Burgas. On thisbasi, the cos of alenative temal coal importfor Ukraineis esimatedat 6.046.5$Gcal (however,the pricesquoted above are lowerthan published ineaonal coal pricesand may notbe sus_tainbefor lage quantitiesover a longertime period). -47 - clearingprices (i.e., there wouldbe no excessdemand or supply)?The systemof four parallel marketsprovided consumers with an optionto spendtheir timerather than their money. Since relyingon publictransportation was still a possibilityfor somebodywho could not affordto drivehis own car at higherfuel prices, the existece of positivesocial effects is in doubt. D. ergy Pic Reform 156. The currentsystem of energyprice controlin Ukraineis inefficient,since it does not permit competitionamong energy suppliers, discourages energy conservation and misallocatesresources. It is also unsustainable,since it requiressubsidies at a rapidlyincreasing scale which undermines efforts to containthe bud4etdeficit. Thereis a needfor a comprehensiveenn,y price reformwhich should be closelycoordinated with the organizationalrestructuring i the energysector (see Chapter V above). 157. The first (andprobably most important)step is to stopthe escalatonof householdenergy subsidies. Therefore,a severalfoldincrease of householdenergy prices should be inplementedas soonas possible.4 In addton, a medium-term(three to five yeaw)program should be developedto graduallyeliminate household energy subsidies. Theprogram should be linkedto a nationwide programof instng gas and heatcoiwnption meteringlontroldeices for individul housesor blockof apartnen. In orderto assistthe popuationto makethe right decisionswhen purchasing new energycog devicesor improvingtheir homes,the scheduleof energyprice increasesshould be announcedin advance. 158. Althoughnon-household ener pricesare designedto reflectthe averagefinancial costs of supply,in thosesmbsectors, where competition between suppliers is possible,the presentsystem is inferiorto a liberalizedpricing system wkich would exert competitivepressures to reducecosts and increaseproductivity. This applies paticularly to petroleumrefining and distrbutionand coal mining. 159. All refineriesand dibuion companiesreported to one concemn(Uk heftekhim)in 1992. Therefore,demonopolization of the subsectoris a necessarycondition for price liealization. Specifically,the lbeazaton of pereum productprices icding the elnation of margin controlson refineriesand distibutors)should proceed parale with (I) the corporatizationof the refinenesto increase hdrautonomy; (ii) abolishingthe systemof state orders;(iu) allowingopen accessto oil tranportationp ,e (v) iberalizatonof eWortand *nportof petrolum products, (v)dewnopozauionof domestc rtotontrade; and (vi)privatiion of gasstatons. 160. Theprices of domesticalyproduced cnde oi and natua gas shouldbe raisedto the leel of importprices ncludingquality ajustmes). Thedfference between import prices and domestic produon ostscould be cptured by the budgetva a systemof royales andprofit taxes, which shouldbe an integralpart of a new licensingtconcessionregime designed to attractforeign invesunme in oil and gas explorationand producion. 46 On December23, 1992,the Governmepassed a decreen singhousehold energy prices for 1993. Coalprices were Ioesed 3 imes,natural gas 13 tmes, heatingoil 18tmes, LPG21 times, electricityfour times and district heat 7 umes. Despitethese large price Increases, household prices au stillsgnicy belowbot economiccosts and industril energy prices. In essence,the decree simply retoredthe eatve ga betweenhousehold and industi erg pries to thelevel in April1992. - 48 - 161. Full coal price liberaliaion in the near futurewould bear a highrisk that producerswould set theirprices signiflcantly above import prices, due to the highproduction costs of severalmines, their inabilityto adjustproduction patterns rapidly and the non-existenceof the necessarymarket infrastructureand experienceof tradersand consumers.The first stepsshould include measures whichliberalize coal imrt, commercializeand demonopoliedomestic trade and developinstitutions and transportand storagehIfrasucue neededfor competitivetrading of coal. Meanwhile,coal prices shouldbe graduay adjustedunilfll importparis i reached. Pricesshould reach at least 75percent of Wortpary by the end of 993 andfiuUsimport parity in 1994. lhe gap between householdand industrialcoal prkes shouldbe reducedin 1993and conpletelyelimnded in 1994. Thereafter,coal prices for smallInd consmwersand householdsshould be decontrolledtogether withthe liberalizationof exports. 162. It mayprove necessary to fix coal pricesfor large and strategicconsumers (i.e., powerand steel idustres) at importpaity levelfor an extendedtime period as part of a comprehensive governmentprogram for the stuctural adjustent of the coal industry(see ChapterVII). Sucha programwould aim at trnsferrng laborfrom uneconomic coal minig to other activitiesin a socially and politicallyacceptable manner. Its key feaures wouldbe torary and decreasingbudget subsidiesfor an agreedminuwm coalproduction plan, whichprovides a secureshare for domestic coa in thepower and steel market. Folowingthe eliminationof the profit equalizationsystem (see ChapterVlI), the grantingof subsidieswould be transarent and conditional,while the competitivenessof consumerswould be maintained. 163. Pricesfor electricitygenerators followed fuel cost increaseswith a considerablelag in 1992. Also,because capital assets were undervalued in 1992,4contnbution from amortization funds was Indequateto cover recurringequpment replacement costs and rehabilitationworks needed to maintai the capacityof the electricitygeneration, transmission and distributionsystem. 4 Finally, the pricingformula applied by the Ministryof Economycontrolled profit margins on the basisof operatngand depreciationcosts and did not expUcidyconsider financing needs or a rate of reurn on capitalinvestments. In the shorttern the Governmentshould adopt a policy of morefrequent (at lea.. quarterly)price a4dustmes to keeppace with increasingfuel costsand to reflectinternal cash generationreqirements at the enterpriseleve derivedfromthefinanng needsof an adequate rehbilitation nd investmt program(see ChapterVEII). As soonas the separationof ekltricity geerationfrom transmissionand distributon is implementedand a systemnfor competitvesupply of electricityis estabfishetLprices for ectricity generatorscan be liberalized(see ChapterV above). 164. The rest of the acdvidesin the energysector - oil transportation,operation of electricity,heat and gas transmissionand distnbutionnetworks - are nanuralmonopolies. The regulator(initially the Ministryof Economyand later the proposedenergy regulatory authority - see ChapterV above), couldadopt various approaches for the controlof prices. The US approach,for examWle,allows reglated companiesto earna reasonablerate of returnso theycan (i) maintaintheir facilities; 47 Thecost of capitalIlcuded In theproduction cost was based on amordzioncost calculatedat assets valuedat historl pricesmultplied by a factorof swven.On thatbasis, the 3,600MW Zaporzhzhia tbemalpower plant had a Kv3,220 million gross and Kv 1,680miion netasset value and calclated its annualamortzation cost at Kv 110million in 1992. 48 Minaergo staffesiated totalfuds cmuaing fromdepreciation in the elestricityindusaty in 1992 at aboutKv 8 billion,equivalent to aboutUS$ 40 millionat the averagecommerial exchnge rae for the year. -49 - (ii) generatefunds for finanng repacemet and part of their expansioncot; (di) bocrowfimds at commercialinterest rates; and, in the longterm, (iv) raisefiund in the capitalmarkets. Also,the regulator'stask is to ensurethat the utfiities'expendiures are pmde and that their invesme are economicallyjusdfied ("used and useful"). In the UK aroac, the regur allowsprices to be raisedaccording to the generallevel of Infltio minusa percetp reflectngthe _tmatedpotenial for efficiencyimproements, plus a percena basedon the neoeto expandthe system. Underboth regulatorysystems, regulators ensure that tariffsfor each clas of cosume ae reaonable giventhe costs of servicingthat consumerclass and the kindof servicesprvided. Thereis moreexPerience withthe applicationof the US approach,however, it is also morecompl :x. TheUK systemis less intusive, providesclear financial incentives to controlcosts, however, it is morevulnerable to irprewtations. In wewof the crrent distortedretve prices, rapid iplatonary environmentand lack of eVeriencewith utii regulationin Ukraine,the mainconsiderations which should be taken intoacount n seectng a regulatorysystem are: ) adnistrative simplicity; ) abilityto respond quicklyto changesin inmportedfwcosts; and (M)flexbiity to take ito accountthe financing needs of econonicalyjus4fied rehailitation and inestmentplans. 165. Pricesshould become the primay isument for ene demandmanagement in Ukrae. Underthe currentpncing regime, consumers pay the sameprice for dectricityirrespective of the timeof their electricityconsumption. However, the cost of supplyis timedepeent, i.e., it is higher than the averagecost in the peakdemand periods (there is a monimgand eveningpeak in Ukrie), and lowerat night. Similarconsiderations apply to naturalgas consumption,but on a seasonalbasis. In the summer,Ukrgazprom pumps gas to undergroundstorage facilities. The gas is withdrawnin the heatingseason, when demand is higherthan the sum of importand domesticproduction (which do not fluctuateseasonally). As a result,supply costs are higherin the winter. In manycountries, these differencesare embeddedin time-of-dayelectricity tariffs and seasonalgas tariffsapplicable to mnediumand largecustomers. Also,electricity and gas utilites offerinterruptible supply conract6. Iterruptible contractscharge lower prices to customerswhose supply can be interruptedin the time of peakdemand. Thesepricg techniquesproved very suiccessfulin potonig the need for new capacitydevelopment. the Gonent shouldencourage Ukrainian power and gas uties to developtimf-day, seasonaland hine tbe ta4rt. The introductionof time-of-dayelectricity tarf for certantomer class wil requirethe instlon of mete whichcan dec the timeof electricityuse. 166. At a later stage,after the trackdngand reporingof variouscost elementsis drastically improved,the regulaoryauthority may designincentives for the electricity,gas and districtheat distbution companiesto supportefficiency iove at the consumer'slevel. A threestep processcould be initiated: (i) The tariffcalculation formula applied by the regulatorwould be changedto remove any disincentivefrom a reductionin sales(i.e., the calculationof the allowed'profit" wouldnot be influencedby the levelof sales); (ii) All reasomnable"costs involvedin pusuing cost-effectiveend-user efficiency measures wouldbe allowedto be recoveredthrough prices; and (iii) An addidonalincenDtive, in the formof a 'managementfee", couldbe providedfor the succsfl implementationof cost-effectiveend-user efficiency meares. -so- 167. In smmay, theproposed energy prce mre wouldensu that bodt mponand domestic costsof egy Supply(Includig capitalcoss) aro fullypassed on to comers. Thes objectdves wouldbe achievedby the gradualelimination of subsdiesto aeg produac nd consme and the Inrducto of ompeion andprice lizatdonin thoswsubseto, which notnaur monopolies.The price refwm selfwould have no addiion naonry deff sih the alteative - low energypries coupledwith budgety subsidiesand paymet chnled throu tho banking system(to fiac lossesand captal expenditurein thee sector)- is eqully inflatory. In fact, competioni incrase theefficiency of energysuply Iu_sty ad trby rst in lower eergy costsin the mediumterm. Positiveeffect of the ene price reformare contingenton the adoptionof a strict maconmic stbilizadonprogram which woud effectively buden the budget constrin of boththe ery producingand energy consua ing entepi. In manyWestem Europen countries,the eney sectoris a sigificantsoure of budgetmv . Ths I usually achieveI via a set of eie tae whichfall on final consme. In Ukr, elimiaion of subsidies willprobably complete anly the fist phaseof the energyprice rform F e adjumentof consuor prices to refct the Govermens need for revene and the costsof erg consumptionwill be advisablein the longtem VII. SBSECBOR ISSUES A. Oll 168. Demand. Ukraineis the secod largestconsumer of petroleumproducts among the fifteen in _depedRepublics that emergedfrom the formerSoviet Union. In 1990,the consumptionof the four mainpducts (gasoline,jet-kerosene, diesel and fuel oil)was aboutS1 milliontons of which about45 percentwas fuel oil (see Table5). Table 5: Conswmpdonof Perolewn Products 1980 1985 1987 1988 1989 1990 1991 1992 All Figuresin Millon MetricTons)- (6 Mondh) Gasoine 10.60 11.45 11.44 9.72 9.07 10.99 9.20 2.80 Kerosene/Jet NA NA 2.51 2.43 2.26 2.61 2.50 1.10 Diesel 12.70 13.57 14.40 14.48 12.40 14.36 12.60 4.60 FudOil 31.02 29.52 28.31 24.60 24.00 22.88 19.30 6.50 HeatingOil N/A N/A N/A N/A N/A 1.70 1.40 0.40 Bibtmen N/A N/A N/A N/A N/A 3.00 1.10 0.30 ldrcamns N/A N/A N/A N/A N/A 0.60 0.40 0.10 TOTAL 56.145 46.50 15.80 Source:Ukreneftekbim Consumptionof th mainprducts deased by 14 percentto 44 milliontons in 1991. The derese coninuedduring the fr six monthsof 1992,when conumption drop to 15 mnion tns. Histoically,demand for gasoline,jet-kerosene and dieseloil inreaseduntil 1987,with a decine startg in 1988. Consumptionof fid oil reacheda peakof 31 milfiontons in 1980and decined steadilythereafter. Most fue oil is conumed m powerplants and large heat onlyboilers (see Table6). Thetotal conmption of oi productsin the next 10 to 15 years is expectedto be in the 30-40mt/yea range(see Chper II). 169. Producio. Manyof the Ukaminianoil fieldsare relatvelyold. The initia pres drive has beendepleted, water floodingis widespread,and manywells curMtly producelarge amount of water(up to 80 percent). The fidds are relativelysmall, frgmented with difficult permeability. One of the largestfield, Dolyna,averages only about 1.5 tons (11barrels) per day per well. Past operadngpractices focussed on the maximiion of currentproduton ratherthan on the yieldover the lifime of the field. Somereservoirs may havebeen permanendy damaged by the accelerated productin rephemen. Pricesreceived for the domesticallyproduced oil did not justfy invem in well maageim. In orderto increaseoil production,there is a needto (i) improvecurrent prodution methodspcularly waterflooding; (ii) carry out additionalwell loggg (i.e., analysisof formaon s)to detemi undisoveredtraps and urpoduced zones;and (iii) car out additna sismic work and apply3-D technologyto ideW cuently undiscovered servois in the samefields. - 52 - Table 6: Couusunptlouof Fuel 0 by Eud Uses (millionmetric tons per year) 1985 1987 1990 1. Therma power plants 20.64 20.25 16.35 2. Heat only boilers 5.49 4.96 4.00 3. Industrial proms heat Steel 0.57 0.54 0.43 Cement 0.41 0.58 0.49 Glass 0.76 0.74 0.68 Construction 0.30 0.29 0.25 4. Transport 0.46 0.43 0.29 5. Agriculture 0.24 0.22 0.18 6. Other 0.65 0.30 0.21 TOTAL 29.52 28.31 22.88 Source: UkneR ekhim 170. While the expectedinmcrease in oil production due to these meures is going to be modest when comparedto Ukrine's domesticneeds, the cost of achievingthat increase is likely to be below mport costs. Therefore, the Govemmentshould change the regulatory environme to (i) allow the producer (Ukreft) to accumulatefuids to financeinvestment requiements; (ii) encourageforeign dir' t investnents in oil productionto bring both additonal fuids and modem technologyinto the subsector. The former requires the icrease ofprodwcerprices to the evel of the inport pnce (see ChapterV7 above), the later the introductionof a new licensing/concessionre8ime (see Choapter15 and the promon ofjoint ventures. 171. However,joint ventures face considerableobstacles today. Major oil companiesfind the opportumitiesin Ukaine too small when comparedto Russia or Kazahstn. Small and medium independentfirms cannot afford multiplevisits to put a deal together and get quicldy discouraged because of the slow, bureaucra prccedues. The high price asked for data on oil fields makes the enty costs for the small firms even higher. Addional disincentivesare presnted by the arrangementscurrently proposed by Ukmeft, wherebythe foreign investor would share only in the incremeal production (agreementon a baseline of current production is difficultand the flow rate of individualwells is not recorded in Ukraine). Investors(through jcint ventures) shouldbe allowed to share in the whole production, which is the norm elsewhere (see Amnex4 on th requirementsthe licensingprogram should meet in order to be able to attract foreign investors). 172. Refining. Ukraine's availablerefining capacity is about 60 million tons per year. Utilization of the refing capacity came down considerablydurng the last year (about 54 million tons in 1991 to 34 million tons in the first 11 monthsof 1992). Based on the availabilityof crude oil at extremely low prices, the refineies were designedand operatedto provide heavy fuel oil. The yield of higher value distillatesis only about 50 percent, comparedto about 75 percent in Western Europe and 85 percent in the United States. The total crackingcapacity of 3.5 million tons is less than 6 percent of refining capcity, comparedto about 25 percent in modem refineries. Also, within the 3.5 million tons, about 60 pecent is of inferior tecnology (thermalcracking and coking), rather than more modern catalytc and hydro cradang (processingunits and product patterns for the six refineriesfor 1991 are presented in Table 4 of Annex 1). -S3 - 173. Staffinglevels in the refineriesare consierablyhigher than in refinerieswith comparable capacitiesIn marketecoomies (see Table5 in AnmexI for actualstaffing levels). The energ efficiencyof processig unitsmd utilityfaciites is also wellbelow modern industry sandards, especiallyin the olderunits. SpecificaUly,waste beat recoverythrough crude oil preheatngis very lowcompared to the standardsIn modernrefieies (170to 190"Cagainst 280°C in a modern refiery), flue gas temperate Is high(350°C against 240°C to 270C) and efficiencyof the firnaces is low (generallybelow 75 percet as against93 percentexpected in such large units). As a result, the consumptionof steamand electricpower is substantly higherthan in similarsize modernunits. 174. Since >*,reversal of the decliningtrend of petroleumconsumption is not expectedin the near future,there is no needto installnew refineriesor newdistillation capacities. However, even the continuingoperadon of the refineriesat Lysychansk,Kremenchuk, Kherson and Nadvirnaassumes considerablem nizon, whilethe refineris in Odessaand Drohobychneed almost complete replacementof the mainprocessing facilides. As crudeoil costsmove towards world market prices, the operationof the Ukrainianrefineries, which process cmde oil to producemainly low valueheavy fueloil, willbecome increasingly uneconomic.4 Those refineries will survive the wehakeout", whichare able to attractthe necessarycapital to istal secondaryconversion facilities to reducefuel oil produedonand increaseproduction of highvalue products such as gasolineand dieseloil. The coporatizaon of rfinery eterprises, iberazationof oil productprices and trade (includingexport) and othermeasu are neededbefore the reeries wiUbe ableto forn joint ventures(see Chapter V, Section C and Annex 5 for more detils). 175. Dowsizingthe refinerycapacity to about45 mt/yearseems to be unavoidable.In order to speedup the process,the State Oil and Gas Committeeshould comnission a set offeasibilitystudies which can lead to investmentproposalsfor modenizaon of eistingfailities and inslion of new cracking,reformung and hydrodesuYlrizaoounits (see Annex7 for a draftTOR). Pollutioncontrol facilitiesalso needsubstial improvementin all refineries,since (i) desufization facilidesfor fuel gas (or liquidfuel, wheneverit is used)are inadequate;(ii) there are no desdfurizationfacilities for vacuumgas oil (whichis used as feedstockfor the crackingunits) to reducesulfur contens in the end products,diesel oil and fueloil, to below0.2 and 1.0percent, respectively; (iii) facilities to remove mercaptansulfur from gasolines are lacking(it increasesodors at groundlevel in the refineriesand alongthe roads);(iv) faciflitiesto removeoil, coke fnes and pheols fm wastewatersare insufficient;and (v) there is a practiceof disposingoil contaminatedsolid waste and sludgein open areas. Safetystandards are not enforcedand, in general,safety awareness is lacking(use of gloves, helmets, safety glasses, gas leak detection equipment,etc. and separationof constructionwork from operationalareas). 176. Storage. Thereis J.7 mt availablestorage capacity for crude oil and about 1.3 mt for oil products. Evenauming that the domesticconsmnption of oil productsdrops to 30 mt/year,total sorage capacityrepresents not more 24 days of conmption. For reasonsof supplysecurity, most countriesaim at petroleumreserves at a levelof 90 days of consumption,equally divided between crudeoil and oil products. Ukaine shouldadopt the sametarget. Therefore,the StateOil and Gas ommitteeshould prepare a longtenn programto gradualUyepand Ukraine'stotal petroteum storage qpaity to about8 mt (4 mt crde oil and 4 mt oil products). 49 Basedon cran productpattemn and world market pnces, the combined value of therefinery output is abou US$100per ton of crudeoil refined,while hecost of thecrude oil itselfwould be about US$135/ton. -54 - 177. Traport and di. Productsfrom the six rmfinerisare transportedto about300 depotsin the fow regions(including 25 maindepots) by rail (70pecet), piine (18.5 percet), road (9.8 percent)and barges(1.7 percent). Pipelineand rail facilitiesexist in the westernregion to import products fram Russia. The eatemn and the central region of Kiev are well connectodby rail and pipelinefrom the reneries at Lyqsk and Kmcuk, respecvely. Presendythere is no pipelineor adequaterail tank-wagonloading facility to amsportproducts from Odessa to the interior of the country. In the futue, ((Odessabecomes an importterminl to diversif Ukr ine's optionsfor pelem inpour,a produc ppeflne networkconnectng Odessa and the ctral regionshould be dewepod to improveproduct movement efficieny and reducecosts. 178. Presentfacilities for handlingpetroleum in the Odessaharoor are insufficientfor any large scale import-exportoperation (see SectionD in ChapterIV). The oil jettes needreconstuction for reciving larger takes; addional storagetanks are requiredto unloadsuch ners; and additonal pipe Hlnes,mesurig hisumets, and ballastwater cleanng faciictiesare requiredto achieve capacity,quantity audg and reliability.A feasibiy studyfor modenuato of thepetrolewm handlngfalties in the Odessaharbor and developmentof an &po terminl shouldbe carled ow, taing into accountdiffere opdonsavaiable (the draft TOR in Annex5 also inclu the Odessa terminal).R 179. Pollutioncontrol facilities are also inadequatein the Odessaharbor area. Oil jettiesdo not havemodem facilities for cleaing accidentalspillage of oil. Thereare very smalltanks for receiving oil contamnatedballast water and absolutelyno facilityfor cleann such ballastwater. As a result tanes callingat Odessa,without declaring to the authorites,often discarge ther ballastwater into the openseas. Disposalof oil contminatedwastes, drilling wastes, drilling mud and debrismust be of concemin the oil and gasdrilling areas, especiallywhere such wastematrials coud reac inland waterways,lakes and maine areas. 180. Curntly most retailmarketng is ctzd out via directsupplies from the refineriesand main supplydepots to largeastomers. Servicestations for the generalpublic are scarceeven in major cities lk Kiev,and highy ureliable.5' In 1992,long lines of queing cas couldbe observedat mostof the statio (see SectionC in ChapterVI). Shortagesand totaloutage of supplieswere experiencedfrequently, particularly in the outlyingregions. Theaverage satsfctn of demandin three mainproducts at the prevailingprices, as esiatd by Uknetekhi, is prented in Table7 below. Mhelibeazaon of produaprices and retai mwretng are neededto fl) addee a balance ofprduct st4pplyand demandand (a)to attractprivate inments in perolm mareting, wi*d*, in return,are neded to improvemarketng effieancy and relaiiy. So An optionthat could be considered is theconversion of thestorage tak andother Infuur avaible inthe Odesarefinety into an oil import-exportterminal by connectingthe facilitiesto the jettes afte hr modernization.The crude oil refiningfacilities in the refineryhave almostreached their usefuleconomic Hfe, and the Odessamunicipal authorities want the refiningopraion to be taken awayfrom the presen locaton. Conversionof the facilidesinto a petroleumterminal woud save cousiderbleinvestmen in ste tanksand reated facilitiesand largeareas oterwe quied for a newtank-fam in the busyharbor amea. 51 Cuntly ereare fourgrdes of gasolinein themaret whichh aes thecost of segregaed storage, an od maedtng. Thelowest gade, 72 octae, shouldprobably be abolished. Tabb 7: Podu Dmd Sd In the Four Roegm (1914992) Re8ons Gesdic Diesd Fad Oil -(Perceamge of DemandSatted)- Weat 28 27 80 Cental SO 47 57 East 56 53 76 Sot 58 45 100 Source: U m _ B. NaturalGas 181. In 1990, naturalgas Gas Use by Sector repesent (% shares) fortypercen of toeal priay enr 70 - Ukraineone co- Ofthe most as- 50 ...... intensiveeconomies in theworld. OUt Of 40...... the llSbillion cubic ...... - (m) V 20g ...... forpower 48poernt m PowerGeneration Irdustry Hhold/Services industriasector, Sector 17 perent in thie CM Ukra 16 EB Bulgarial000 G W.Germany 1Q97 ousehold/services 1g own lay aI Hungary1986 EI Yugosiavia1087 sector and 6 pe t for gs Operations 1m11 inclug translortationof tranlsit gas. Compared to oditer Europea countries, the share of power generation was high whble tbe sae of the sectorwa low (seeFigure 11). Totalgas consumption dropped to 102 bcm I 1992. howev, die cumo of the hosebhold/services sector increase by S bem and amounted to almoD 25 percet of the tot consumpton (se Table 8). -56- TalAe8: Natal Gas Bane for Ulraie 1990 1991 1992 SUPPLY Imo (includingtransit) 204.4 203.4 212.0 Production Ukrgaprom 23.6 20.0 19.5 Other 1.9 1.9 1.4 Storageout 20.0 21 3 20.6 TOTALSUPPLY 249.8 246.6 253.5 DEMAND Transit CIS 12.9 14.2 30.0 Non-CIS 104.2 99.7 92.9 TotalTransit 117.1 113.9 122.9 DomesticConsumpton Industral 55.0 51.5 53.5 Power 33.9 30.8 25.4 Res/Commercl 19.9 24.4 26.5 Comp.Fuel 5.4 5.4 6.4 Losses/Unacct. 1.0 1.5 2.3 TotalDomestic Use 115.1 113.5 114.1 Storae in 17.7 19.2 16.5 TOTALDEMAND 249.8 246.6 253.5 182. Producon. L scalenatural gas productionsated in the early 1950swhen gas was discoveredin the Shebelynbregion. Productionubsequently incmsed whenthe fields in the Poltm regionwere discovered. More than 2000operating wels delivergas to 82 gas treant plants. Productionpeaked at 69 bcmin 1975and has decnd to a lowof 20 bcm in 1992. The primaryreasons for the rapiddecline were the depletionof the existingfields and the lack of investmentin fielddevelopment. In order to slowdown and arrest the decline,the drillingand workoverprograms need to be accelerated.Investment in equipmentis neededto completethe new highpressre wellsand replacethe smallworkover igs withheavy duty rigs. 183. Severaldevelopment projecs have beenidentified, the mostpromising ones in the Donets- Dniepe regionwhich undeles a large portionof eastemUkrie. However,the naural gas resouce baseis nOtwell defined. Currentestmates of provedrecoverable reserves are not consistent withthe estimatesused by mostindustriized counties (see also SectionA of ChapterIV). The quaity of reflection-seisicequipment and poor depthpenetration is a seriousproblem in a country, wheremost of the new wellsare deeperthan 4000 m, up to over 7000m.1 So is the lack of three- dinensionalseismic in exploringfor salt suctur. Shear-waveseimic and modemprocessmg techniquesare onlyheard of. Turbodrills are still common,which are slowand ineffectiveto 52 TheState Geolo Committoehas begum drlln a deep(7000 mer) exploratorywel to gathr In a on the deepbains. - 57 - peneate hard strata at great depth. Drillingsome wells takes years, and a large percentageof the wellsare abandonedabove targeted depth. Roty drils are needed,which are capableto drill to 7500m depth,with good quality drill pipes, casingand wellheadequipment capable to hande 1000 atm. pressure. DIcoveries and developmentare also curailed by the shortae in offshore equipment (seismicand drilling). The effortsto morepredsel esie the gas (ondoil) resourcebase shoud be eanded usingmodem technology. In adton, reservesshould be re-classifiedby incorporatng economicviability In the c1assUicationcriteria. Technicalsupport could be providedto ensurethat the newesttechnology is availableto gatherand analyzedata 184. Thegas qualityis high, withno sulfur,small amounts of carbondioxide and an average condensatecontent of 36 gram/m3.The condensateis recoveredand processedIn the Poltava stabilizationplant and the Shebelynkarefinery. The stabilizationplant requires new condensate pumpsand a flaregas compressorto recaim stabilizertop gas. Between30,000 and 40,000cubic meters of the top gas are disposed of in a burn pit admaiy, which has caused significant envirornentaldamage in the area. The flare gas compressorwould eliminate the environmental problemand wouldrecover enough gas and naturalgas liquidsto pay backthe cost in a very short tme. A gas processingplant is proposedat the Yablunivhagas fieldnear Poltava. Theplant would recoverabout 300 thousandtons of gas liquids(LPG and condensate)anmnally and provideother beneflts.S3 185. The Shebelynkarefinery is a smalloperation producing high value products due to the lightnessof the condesate feedstock.The productslate in a typicalyear is: 200,000tons of 76 octanegasoline; 110,000 tons of dieseloil; 30,000tons of otherwhite products; 40,000 tons of fuel oil; and 1500tons of propane/butanegas. The productsare marketedin the localregion or shipped by rail for furtherprocessing. The reinery is consideringthe instllationof a catalyticreformer, costingmore than$30 million,to upgradethe gasolineto 90 - 95 octae for salein localmarkets. Otheroptions for upgradig the productsshould be evaluatedfirst beforea decisionis madeto go aheadwith the project. Also,the possibilityof injectingthe condensateinto a crude oil pipeline shouldbe investigated. 186. The first gas cyclingproject will be startedthis year in the Poltavagas company. The plant, whichwill extract condensate from 5.5 millioncubic meters of gas per day, wasto havebeen completedin 1991but the Polishconstruction firm walked off thejob. An agreementhas been reachedand the plant is expectedto be completedby the end of 1992. Otherprospects for cycling operationshave been identifiedbut improvedmethods are neededto evaluatereservoir performance and condenateproduction. 187. Ta o. Ukgzprom opaes (i) 34,500kn of pipelinesfor gas gatheringand transmission,out of whichover 10,000km are highpresure pipelineswith a diameterof over 1,000 m;n4=and (ii) 12 undgroundgas storagefacilities with an activevolume of 35.5 bcm. Untilthe late 80s, transmissionpipelines were bitumen-coated. The pipelines construucted in the last 15 years are tpe-coated. The trmission network is 98-99 percent cathodicallyprotected. There are 66 majorcompressor stadons, with 847 compressorunits rated at 5,600 MW. Gas turbineprime movers 53 Suchbenefs wouldbe improvwpipeline operions dueto theremval of lquidswhich would otewis condnsein thetnsmission lines and eHmination of air poliution which occurs when the condensedliquids are pured fromthe pipdines and bumned. 54 Maximumoperadng pressures range from 55 to 75 Atmor 800to 1,100psi. - 58 - withumit capacity of 2.6 to 25 MWpower 76 perce of the compressorswhile electric motors drive 19 percen The balanc e drivenby gas-firedengines. A widevariety of eqipment is used. Manyare of Sovit manufactu withsturdy constuctin and (reportedly)low outagerate, although their efficiencyis lowand stackemissions are high. Thenewest equipment was purchased frm Westerncountries and, for the mostpart, represe the best tecnology availableat the timeof instalaion. 188. Compressormaintenac has beengood and periodicoverhauls have been conductedfairly wel on schedule. However,some units have exceeded their normaloperaing life and othersare approachingit. Ther is a severeshortage of the replacementparts and materialswhich are neededto keep the compressorsruming. If the turbine/compressorunits are allowedto deteriorate,the outage rate willrise and systemcapacity will decline. Eventuallya muchgreater investment will be required to replacethe damagedunits. It is essentialthatforeign exchange be madeavaible as soonas possibleforsuch reawvely* ensiveitems as turbineoil aNdtune overhaulkits. In adtion, a programto renovateor replacethe old compressorsneeds to be prpared and hmlemd. 189. The highpressre pipelinesappear to be in surprisinglygood condition, which does not supportthe popularopinion that leakageis excessive.Their good condition can be attributedto (i) the shorttime most have been in operaion;(ii) extensiveand effectiveuse of cathodicprotection; (iii) the non-corrosivenature of mostsoils; and (iv) goodconstuction techniques used on the newerlines. The onlyknown pipelhe problemsare reportedat watercrossings and in the carpathn Mountains due to the instabilityof the terrain. Theenvironmental impact of the transmissionsystem is relatvely low. Ulrgavpromestimates that fugitivegas losses,exclusive of productionoperations, were 768 millioncubic meters in 1992,86 percentof whichwas fromthe pipelines.Based on the totalgas throughputof about220 bcm, the losseswere about 0.3 percent,which compares quite wellfor similaroperations in NorthAmerica. Safetyprovisions at the old gas compressorstations are isufficient. Gasdetectors, water deluge systems over the compressorsand fire wallsbetween compressorsare missing. Noiseabatem is totaly ignored,however, the compressorstations are locatedfar frompopulated areas. 190. Dis&tr on. The domesticgas distbution systemincludes 60,000 km of smalldiameter pipelinesoperating at pressuresfrom 0.005 to 12 Atm(0.07 to 176psi). Out of the total, 59,000km is weldedsteel lineand 1,000km is highdensity polyethylene. Most of the systemhas been installed in the last 30 years. The steelpipes are mostlybiumen-coat and 97-98percent of the pipeshave cathodicprotection. Uklgaz,the distibutioncompany, estimates annal gas emissionsat 300million cubicmeters or 0.3 percentof domesticconsumption, which is abouttwo timesthe ratio reportedby gas distributioncompanies in NorthAmerica. However, there havebeen no reliableinvestigations of the los8Se.Residential gas use is not metered,and evenwhere meters are installedfor bulk measrement,their accuracyand reliabilityare questionable.This makes it impossibleto checkthe accuracyof gas lossestimates. ThereIs a needfor a diagnosticstud of the dribsuion sysem, i.e. from the irdetof the city gate stationto the consuners'equipment, to WenJfydtepripal sourcesof naturalgas lossesand to prpare a loss-reductonprogram. 191. Thereare 6 miLionnatual gas customersbut, while70 percentof the potenal consumersare servedin the urbanareas, the saturationlevel is only 10percent in the townsand villages. A programto attach300-500 thousand residential customers per year, primarilyin the smaller populationcenters, is underway. In addition,Ukrgaz is consideringthe constuctionof a residenial meterassembly plant. However,the installationof metersis a rther costlymeasr whichmakes economicsense only if the presentextremely low household prices are revised. Thefore, Ukrgaz - 59 - shodldcommisson a gas tariffstd to developa trIff strre w wouldencouage atl onsmersto onrve naturalgas and put theregional gas distbuon eprlses on a finan y seV-sWAlgbasis. Thestudyshouldalso clude the de met of a steforinstallinggas metrs in the resdentia ma (see Amex 8 for a draft TORfor the proposedstudy). 192. Gas trnsit. Naturl gas exportsfrom Russia and T bs via Ukaine to counties outsidethe formerSoviet Union amount to about 100bcm per yar. Transitgas is designatedfor conumptionin Gmny, Italy,the CzechRepublic, Slovakia, Fce, Hungary,Buari, Romania, Auswta,Yugoslavia, Turkey and Switzerland(in decreasingorder of quantity). Six major transmissio lilneswith a total length of 8,600 km and about 85 percent of the capacity of the storage fcilities servethe transitoperation. Thevolume-weighted average length of haul is 1,190km. In addiin, pipelinesto RussianCatcasia with a totalcapacity of 33 bem/yearcross the1eastemnpart of Ukraine. 193. Withthe exceptionof machineriesand contol unitsfor the Soyuz,Progre and Urengoy- Uzbhorodpipelines, the technologiesbeing used are obsoleteand ineffcient,resdtng in system ureiability. In comparisonto modemWestern pipeline Systems, the follwing areas wouldneed upgrding in the near future: (a) systemdesign practices and planningcapabilities; (b) energyefficiency; (c) metering,system control and dataacquisition; and (d) safetyand environmentalprotection. 194. Gazpromof Russia,without warning, reduced gas deliveriesat the Ukrine border in mid- October1992. Ukgpom did not havesufficient time to switchfrom storage injection to witdrawal and wasnot able to forgoa portionof its conrats entitementin orderto maintainfull deleriaesat the westernborder delivery stations. Gas compaies in Germany,Prance and other cmntria wereforced to imposecontingency plans in orderto maintaindeliveries to their customers. Althoughfinal consumers suffered no great problems,the incidentdid shakethe confidenceof WesternEuropean custome in the reliabilityof the supplynetwork with much of the blamefocussed on Ul¢gazprom.The incidentprovided several lessons and, if actedupon, the confidencein the reliabiLityof the gas supplychain can be restred. Most lnpo#anty,UrgaWprom should strengthen Its condngencyplas to copewith the type of cut-brs whichoccurred. Also, the communicon lint betweenUkrgaprom and Europeangas buyersshoudd be greaty Iproved. 195. At present,transit services are beingprovided on a yearo-year basis. A short-mn, year-to-yearperspective has been ecraged by the prospectof rapidevolution of key pameters affectig costs and pricig of servies durig the nitona periodwhile Ukae movestoward a marketeconomy. A longer-termcontractng medaism Isneeded In orderto providea stable grondworkforsystem managent andfacilitesplanning. Thiscan be a lished by seeking long-term n for key parameterssuch as volumes,type and qualityof serice, standard definitionsand businesspractices (such as paymentprocedure), forcemajeure and provisions governingpemlties and sanctionsin the eventof nonwperformanceby eidther party. Pricingof services,on the other hand, canbe left openfor periodic tion. However,the initi contract Irmet shouldspecify clear procedures for the timingof such renegotationsand shouldseek ---mitmentsconcerningthe overallrate stmcureand formlas that will be appliedin makingthe periodicprice redtrmination. -60- 196. The rate agreedbetween Russia and Ukrainefor transitservices in 1992was a one-part, distanced-basedfee whichcovered both tortation and storageservices. Thisstrcture makesthe recoveryof storagecosts sensitive to transit-vohlmefluctuadons. In addition,it placesUkrgazprom at risk for under-recovetyof its fixedcosts in the eventtransit volumes fall belowprojection. It is recommded that (i) transitand storagefees should be billedsepely, or "tunbded"; (ii)a two- part transitrate struauaethat provides for separatebilng offixedand variablecosts should be adopted,since this willprovide a fairer sharingoffinandat nsks between krga2promand the transit-systemwers (underIts present one-part rate struatre, Ukraineis bearing100 percent of these volume-relatedrisks; and ffW)compressorfke and ost gas shouldbe bWUedas a retainedpercentage of throughputvolne, whichwould reduce the sensivity of ratesto flucp ationsin the gas commodity price. 197. in 1992,the one-part transitand storage fee recoveredonly about 1.5 percent of the value of gas suppliesdelivered to the Europeanmarket. This, to a certainent, reflectseconomic distortions in the broadertrade relationshipsamong Ukmaine and Russia. Russiaprovides gas suppliesfor internalconsumption in Ukraineat pnces belowthe worldmarket value of gas. Savingsdue to these low importgas pricesoffset Ukraine's losses due to the low transitrates. Thisrelatonship should be carefuly monitoredin the future. So longas a favorablebalance condmtes, Ukraine is in a very weakbargaining position with respect to transitrates and is likelyto feelpressure for less-than-full recovery of its tranmit-relatedcost of service. However, it is possible to accept the reality of this situationwithout placing Ukmine "at-risk" for non-recoveryof the costsof inremenal system improvements.the way to do this is to introdue a temporaryhard cwrencysurdcarge mechanism basedon the cost of agreedsystem improvements. Over the longterm, Ukne shouldbe abk to recovera significantlylarger share of the marketwlue f deliveredgas squplies. 198. Ukzprom currendycommkngles (for accountingand administratvepurposes) the gas steams destinedfor domesticconsuwmption and for transitdelhveries to Europe. Commingled operationgreatly simplifies the administrton of whatwould be referredto as "balancingprovisions" in marketeconomies. Non-commingled operation of accountswould require more sophistcated balancingprovisions such as thoseseen on openacoess pipelines, which require modem measuring systems,telemetry and compueied accounting.Therefore, a modenizatonproject seems to be a prerequsiteto tlizng limitedrecourse private or commercialprojectfinancing schemes which could resultin fractionatedcapacity ownership within the transit/transmissionsystm C. Coal 199. Afterthe October1917 revohltion, Ukrainian coal mininghas been one of the important pilars of the Sovieteconomy. A vast numberof minesand relatedindustrial and socialinfrastructre weredeveloped, prinarily in the Donbass(see Annex9). The trend wasarrested after WorldWar II, whengeologically more favorabledeposits were developed elsewhere in the SovietUnion (Kazadistan and Russia). New investmentswere then directed to theseareas. Therehave been no effortsto increasedte competitivenessof Ukrainiancoal mines;operations were carried on as before,with large crosssubsidies from the new low-costmines outside Ukraine. Ukaainiancoal minerscontinued to receiveall historicallyacquired privileges. Today, the industryis overloadedwith services, and miners'salaries are still by far the highestof all employmentsectors, while the cross subsidiesfrom otier partsof the ex-SovietUnion are no longerreceived. 200. ProdigL Afterfive yearsof stabiliy in the 1981-85period, coal production declined about 15 percentbetween 1985 and 1990. Productiondropped a furher 17 percentto 109million - 61 - tons (afterwashing) in 1991:90 percentfrom the Donbass;5 perent frm the Lvovarea; and 5 pere (but only2 percentin termsof heatcontent) from ligie mines. About55 milliontons wereproduced in the first halfof 1992,equivalent to about2 percentincrease over the 1991 productionrate. 201. Totalemployment in the coalmining industry, including associated enterprises, is closeto 1.2 million,represeting about5 percentof the country'stotal labor force. Comparedto coaloutput, the employmentnumber is very highin Ukraine,e.g., to produce1 milliontons per year, North Americanhard coal producersemploy 100 - 400persons, West Europeanproducers 800 -1,500, Polishmines 3,000 and Ukrainianmines about 6,000. As a result,manpower productivity lags seriouslybehid intenationalstandards. While at Donbassthe productivityat the mechanized longwal is below10 tonsper man and shift(t/MS), and the totalundmeound productivity is below2 tlMS, the coondig figuresare 25 t/MS and S t/MSin Germanmines, and significantlyhigher figuresare achievedin competitivecoal exportingcounties, such as USAand Australia. 202. Thereare probablysignificant capacity reserves in all majormine and suface installations, possiblyin the orderof 50 percent,given the generousoutlay of inslations, the previoushigher productionrate and operationalinefficiencies. Utilizaon of key undergrund equipmentis poor and probablypresents an importantbottleneck of production.The averageannual output per longwallis about 150,000tons per year, achieved with 7 days per week continuousoperation, while in Western Europe, under similar geologicalconditions, the averageoutput is about 500,000 tons per year on a 6 days per weekbasis. Thesedifferences and the underlyingcauses of machinedowntime and reduced machineoutput noed to be analyzedin detail,possibly with assistance from foreign technical experts. 203. Typicalproduction costs reportedduring the first quarterof 1992were about 2,500 Rb/t for cokingcoal (andsome anthracite), and 800Rb/t for steamcoal. Thevast majorityof the costswere cash operatingexpenses, mainly with the c cs of variablecosts. For cokingand steamcoal minesthe shareof personnelcosts, includingsocial insurance and benefits,was about65 percentand the shareof materialsabout 25-35 percent. The shareof depreciationwas about5 percentand appearedgrossly ifficient to coverurgent replacent investmentsneeded to maintainproduction. Contnrbutionsto pensionfimds, medical insurance and unemploymentfunds appearod to be far too smallgiven increasing prices and the difficultf&tre of the industy. Basedon 1991cost figures, there are significantcost variationsfrom association to association,up to about50 percentabove and belowthe average(see Table6 in Annex1). Withinassociations, similar variations are repeated betweenindividual mmies (see Table7 in Annex1). 204. The averagewage of a minerworking at the face was Kv 12,000per monthin March 1992, about80 percentbigher than the wageof other undergou workersand 200 percenthigher than the wageof the averageindustrial worker in the Donbassarea. Even surfacemine workersearn significantlymore than otheremployees of the minin enterprises(e.g., maintenancepersonnel for housing). Despiterelatively large investmentsfor housingand socialfacilities, living conditions are poor and socialfacilities are poorlymaitined. 205. Env impct. The majorenviromental problems are salinewater discharge, inappropriatestorage of rockand washingplant rejects, sewage problems, air pollutionthrough mine- ownedboilers and metha emissions.About 20 percentof mine waterdischarged has hier salt concentraionsthan sea water. Thereare alsoproblems wth slopestability and dust generationat -62- older mining waste dumps." There i8 probably a need for a responsibleenvironment officer at each miningenterprie. It is preferableto delegateenvi e responsibilityto the operations'level, ratherthan transferring it to a centralspecialized environmenal company, as has beenrecenty 206. Thereare manymines wh dangerousworking conditions, such as rockfalland gas bursts. Safetyprcedue ar inadeqately stitutionalized.There are about300 fat accidentsper year. Whencompared to producionlevels, this appearsto be amongthe highestaccident rates in the world. Thereare also 2,000 - 3,000 new silicosiscaes per year, which is also a high figure. 207. Reductionof meane concenaion in mineventilation air is a prinmeconcem in gassycoal mines of the Donbass. The average gas content value of the coals is 8.15 melt; in some locations, gas contentis as highas 40 m3/t. To radce the risk of gas eruptionsand explosions,methane gas is extractedfrom gas rich coal seams, in particular cokig coal seams, ahead of mining. Boreholes serveas the mostcommonly applied technique: gas passesthrough the boreholesand is released direcdyinto the atmosphere.It is estimatedthat coalminin activitiesliberated 3.4 billionm& methanein 1990,of which1.2 billionin werecaptured by the existng drainagesystem and 2.2 billionia werevented ino the atmosphere,coniuting to the greenhouseeffect. TheseecLssions are sigificanty abovethe me lossesestimated in the gas induy. In orderto redce the greeoe ect (andpos aolsothe min Costs)optionsfor the inyrovedetacto and Uilizaonof the gas shouldbe explored. A few proposalsare listedbelow. 208. It is claimedthat before steeply inclined thicker seams can be mined,the miningof neigboringthin seamsis requied for decopion and gas reease. It wouldbe worthwhileto investigatewhether the reuen ouldbe droppedby applyingimproved gas extraction tehology. Curty, only 17 mine utiize coalbedmethne in boilers. Muchof the coalbed methanegas recoveredanmually by minemethane drainage systems are not consideredof pipeline quaity. However,several different low-cost enribment processesare availablefor copingwith tis problem,among them, Pressure Swing Absorption and MembraneGas Separation. Following emichmnt, exitig natr gas pipeine systemscould be used to t pot gas awayfrom the producing sites. Coalbed metae can also be used to power small to mediu-sized ineal combustionengies for elecicity generation.The eetricity canbe used to refrigeratethe air for vendlaionin deepmines. Whileefficient uses of ventilationair are currenty limited,new technologiesate bing developedin severa countriesto harnessthis otherwisewaste product." 209. Coal markels. About40 milliontons weredistrid to the steel indury in 1991,35 milliontons to powerplants, and 32 milliontons to the generalheat market, consisting of households, 55 Somemines Id to udiizethese was dumpsby buidngplants for brik manfctn andrre earthetracdon Suchprojects -oe likdy to be uneconomic.It appearsmuch more adviable to concentIatedeos on resbtpg andreculdvang the was? dumpsand to insal prope dranageand treatmentfor rwcewaur. S6 Themrp br-,nn oneadattm ha bomdwaw from "Aa_me t of the Po al forEcoomic Developmentand Udtzaion of CoalbedMedtane in Russiaand Uraiuew (Raven Ridge Rewourees Inc., Sept.1992), a studyprepared for the UniedSates Envromnment Proction Agency. -63- services,own consumptionof the minersand others(see Table8 in Annex1).' The steel industry was still the mostimportant single consumer, accounting for 37 percentof totaldomestic consumption.I 199i, shipmensto householdsand the servicesector declined, while shipments to powerplants reportedly increased by 15 percent. Thismay be the beginningof a long termtrend, i.e., the direct use of coal for householdsand industryis expectedto shrink(assuming approprate pricingof coaland availabilityof alternativefuels) while power plants will probably become the dominantmarket segment in the future. Cokingcoal consimptionis likelyto decline,possibly by as muchas 40 percent(to 25 milliontons per year), dependingon progressin the resgtrcturingof the steel industry(due to sulfurcontent of more than2 percent,the coal is hardlyexportable). The reductionin cokingcoal consumptionwill resultin more washingcapacity being available for steam coal. A portionof the cokingcoal production could be convertedto steamcoal production,possibly at lowercosts by adoptinga modifiedcoal washingflowsheet.a3 210. For variousreasons, coal-fired power plants, which are mostlydual-fired (with gas or oil), are not utilizingther fullpotendal for coal consumption.Assuming that the technicalavailability of theseplants is sustained,a potentialcoal market of an addiional30 milliontons couldbecome available(see Table9 in Annex1). With the constrmtionof new coal firedplants after the year 2000,coal consumpdonin the powersector can theoretically surpass 70 mt (seeSection D below). However,the additionaldemand depends on assuminga significantincrease in the cost of gas, which, in turn,depends on an increasein gas priceson Europeanmarkets. If Europeangas pricesdo not increasesignificanty (in real terms)and Ukrainehas to pay pricessimilar to the pricespaid by other importersof Russiangas, the use of coal in powergeneration will probably stabilize at the 1992 level. If Ukrainecontinues to enjoyspecial atment (in comparisonwith other European customers),coal demandin the powersector is expectedto decreas even further. 211. Untilrecendy, all coal wasdistributed by Uglesbyt,a companyunder the Ministryof Resources.As from 1992,about 15 percen of the ouut, includingexports, is beingmarketed by a few new tradingcompanies, which are ownedpardy by the mines. Minessell the coal to washing plantswhich, in turn, eithersell directlyto large consumers,e.g. powerand steel plantsor to the distributionand tradingcompies. All sellingof coal involvingmmes and washingplants are arrangedby the coal miningassociations at condidonsset and controlledby the Stae Coal Committee.These arrangements appear to be quite complicatedand there is a lackof information and tansparency. Themines often do not knowwhat their coal is used for and whereit is going. Therealso apear to be too manycoal gradesand, comectedwith it, too manyprocedures for sampling,testng and processingdiff batchesof coal. 212. Reg' I PIF' In 1992,revenmes were indequate to coverproduction costs and the losses of the miningenterprises were financed from budget subsidies and short-termcredits from the bankingsector (see ChapterVI above). Unlessprices are increased,the budgetburden will become 57 'ne exa con ptionfigues of the majorsetors are unknown.Data fom distributorsand consume canot be reconciledat this stage. In particular,there are sigificant uncaintie conceningthe leve adndutilizatio of hnportsand stockcdanges. Thereis al concer abo t adequac of prcedm used for data collecdon. 58 Onlya smal portionof the co suppliedto powerplants is washed(the aveag sh contentof coal deliveredto pow plant is31 perat). Withmore finecoal washing,probably significant savings couldbe achievedin coal sportand powerplant operation. - 64 - unsustainalein 1993.59However, price increa are not enoughto solvethe sector'sfindamental problems. Giventhe changingmarket, there are significantover-capacities and too manymines. Due to difficultgeological conditions and inefficiencies,many of the mineswill be uneconomiceven when domesticprices reach import parity. The majorquestions which should be addressedto improvethe sector'sperformance can be summarizedas: Productionplanaing: there is still a widelyspread belief in the industrythat the goal is to icrease productionwhile strategies dictated by marketdevelopments and the need to reducecosts are not accepted. Incomedistribution: the industryis enpged in -inelaborated system of distributing equallyits incometo the minesand associatedenteprises. The economic performanceof the enterprisesis not transparent,and there are no incentivesto create finacial reseves for own investmets. Organizationalstructure: the mineassociations perform mainly administrative functionsas intermediateorgnizations betwen the CoalCommittee and the mines. Minesand associatedenterpnses are pardy run as productionunits of the association, but partlythey enjoy also the privilegesof independententerprises. The mnmberof enterprsesand associationsis too large. Thereare too manynon-minig activities. min on of min operations,safety regulations and trade unionsare too closely linied. Commerce:mines and associed trad organizationsare makingcomplex barter trade arrangementsfor the saleof coal and the purchaseof materialsand equipment. Negotiaion and ainistration of such deals take too much time andaention of management.Accounting for distributionand saleof differentproducts is uneearily complicated. - Labor:there is low workmorale and lackof discipline.The situationis aggravated by significantoverstaffing. Mineworkers enjoy far highersalaries and more generousbenefits than the averageindustrl worker. Thereis no incentivefor better resuts, but there is constat demandfor belttr menion and socialfacilities. 213. A recenly preparedreport' has acknowledgedthat the Ukaminiancoal mining industy is plgued withseveral major problems which need to be addressedurgenly. The reporthas suggested that moreemphasis should be placedon miningcoal for powergeneration. It has aso proposedthat improved ion l protectionand provisionof bettersocal conditionsfor the laborforce should be importantelements of a stey for the futuredevelopment of the industry. However,the report has not addressd the crucialproblem of highproduction costS in comparisonwith domestic and 59 Te KY329 biom subsidyrequted by the miningindustty for 1993is equalto a tansferpayment of aboutKy 25 thousandto bemade by evry householdin Ukraine. 60 Programfor the Developmenof theCoal Industry', State Coal Committee, Kiev, 1992. The PrOram hasbee preuredin responeto a requestmade by the Councilof Ministersin early1992. -65 - intenatonal coalprices. 61 Instead,it has emphasizedthe needto incrase productionand to underakemajor investments. Whfle there i no doubtthdt under any realisticscenario significant investmentsare unavoidable,such investm shouldbe cauriedout in the contextof a wellprepared and realisticprogram to restructurethe ieduy and to reducesubsidies, which would require agreementbetween the Governent,the Idustry's m gem, trade unionsand regional authorities. 214. Apparently,there are effortsto atract foreigl investrs to investin the Ukrinian coal sector. However,it is doubtfulwhether any foreignfim wouldrisk its own fundsat this stagein any significamway for a coal miningventure in the Ukaine, giventhe poor geologicalconditions and the sector'smany other problems. The ineest shownby foreignfirms may be due to a desireto help, withthe expecationthat financingby forelgngovernments may be forthcoming.However, such financirg is likelyto be limitedto technicalassistan. Privateproject investments, if at all applicableto the coal sector,may only be expectedin a moreenabling macro-economic environment, wbichwould provide a provenpolicy and regulatoryframework and efficientmeasures to address such fndamenta problemsas financialundiscipline, non-mobility of laborand absenceof a market history. Anyattempts of early locl privaization,e.g. though schemesof voucherdistribution to the publicor stronglabor or managementparticipation in the ownesip of coalmines, would likely not result in accptable solutions. Therisk of woreningmngement and labor conflictsis high. 215. Sincerapid privatization does not appearpromising, a packageof measuresto achievemore efficientoperaion of the coalmining sector should be implementedby the Govemment.The package wouldinclude 0) the traWormationof part of the StateCoal Cmnittee io a holdingcompany and reorganzationof the industry'ssttre (see Oapter 1); fil) newprice regulationsand the developmentoffree coaltrading (see Japter VI); (di) legislativedtanges; fv) replacemnt of the proit eUzaon systemwith a systemof targete4 teporary subsidesbased on (v) a market oriented,least cost producion and invesmentprogram; and (vi)development of a socal programfor the retraningand empyment of reda coal miners(see below). 216. Cerain regWationsof particularinterest to the miningindustry should be changed. These wouldpertain to: miningregulations requirng exploitation of uneconomiccoal seams, istitutionalizionof statemine safety superiione 2, and the laborcode withparticular regard to conductat the workingplace, enforcement of discilinary measues and procedurs for negotiating laborcontcs. 217. The equaizaton systemshould be abolished.The mines shoud adopttasparat profit and loss acontng, in line withintemational business practice. A thoroughcost analysis,mine by mine, is neededto identifyhigh- and low-costproducers, takdng into account both minin and transporion costs. Theanalysis should include an evaluationof geologicd,envion , healthand safety 61 Therepor argues ta itea coalprices are likelyto ineas significantlyin the future; however,this is conVtr y to pastexrinoe andacepted cmmodity price pojections. he rport rfers to gasficato (andeen liqefacidon)of coal,however, these processes have proven to be uneconomiceve in couta withvery low-cost coal, swh as the UnitedStaes. 62 Curnly, minesafety svilla by thestate is organed inthe sameway as themining Industy Itsef. Althoughthe inspectorsae dxndent dejure, theclose rplication of theorganiziona stucu appearsinappropate. Stae mesay surveace andmime operatn shouldbe stily seaae. - 66- conditionsof each mine. All possibilitiesto increasepoduction from exist installaionsin good seam through systematicde-bottlenecking, including Impnh oanon and material supplies,should be utilized. Subsidies,to the extentneeded to facilitatethe difficulteployment adjustment,shoud be grantedon a temporarybasis and againsta fitm, comprehensivedevelopmaet planto whichthe industrywould commit itself (see below). 218. Completionof startednew minesshould be questionedand ondywhen it provesto be part of the least cost investmentprogram should consruction be condtied. 7he bnestmet programshould be based on asswnptionsof constantdemandfor steam coal in power genaon and decining demand in the steel, householdand serices sectors.03 A grdual switch from coking coal to stem coal productionis needed,supported by improvedsteam coal washig. Inly, te investmen progm shoud concentrateon the lowest-costexi nes. However, tureplans couldconsder the pin ofpardy shiftng coal ndning to reserves with lessdffcult geological conditions, sus* as O)biwnous coalsfromNorthern and WesternDonbass, where the seamsare thider, flatter, and shalowerthan In the center Qfolded)Donbass; and (i) lignitesand sub5mnou coos, whichcan be mneeLoften in openpits, at a fractionof the cost,compared to the cost of coa from the ceer Donbas. No investmntsshould be madein the higest-ost, mostunhealthy, most unsafe and environmentlymost damaging mines. 219. It is likelythat significantefficiency increases and cost reductionscould be achievedin a short timeby shiftingequipme andponel fromthe geologicallyworst zonesto the mostfavorable on. Certainy, not all personel couldbe trarsferredin such casesand a significantdecrease in the numberof coal minersappears unavoidable. Ukraine will not be the first countrywhich is facedwith that problem. Thisadjustment process in the miningindustry has been ongoingin WesternEwrpe for a whilenowe and madea goodstart in Hunguy, Poland,the CzechRepublic, and Slovaia a few yearsago. Theexperience of these countriescould be a valuableinput into the developmentof a progm for aduent of the Ukrainiancoal ind4sty and the retrainingand employmentof redundat Ukrainiancoal miners(see Annex10 for tha draft TOR of a restructu studywhich tk into accunt the experienceof other countries). 220. Oneoption for employmentcreation is to capitalizeon the abundantopportnities for cleaning up the evonm aroundthe minesand rparig and impovig housingand odtersocil ir. Iher couldbe a way to engage,without any significantinvestens, reduda mine wo,mersin scsh acdvities,which could begin around the mnes bw enaly be broadned to cude regionalpublic ilhfrascte. Giventhe historicallygrown attides of mostworkers, union leaders and managers,these tasks may politicallybe difficultto implement,but couldalso be very rewarding by gfliat the transitionto more efficientmining and betterliving conditions, a goalwanted by most. 63 Te stabilzationof coal demandin the powersector sfill requires signfim to rehabili coal fired powerplants (US$250400 milliom per year in the next ten years,see SectionD). 64 In 1955,Britsh Coalemployed 700 toumsandpeople who prduced slity morethan 200 milliontons of coal. Thirtyyam later,prodution wasdown to 100million tons, while employmet decreaed to less ta 200 thusad (i.e., minr productivi5yinreased by about100 permet). By 1990, employmt dowppedbelow 100 dthud, vAthoutpraticaly any dece of produton. -67 - D. Elecriit 221. In 1992,the total Insld nameplate CEd _y_n caaity wS 53,569MW. As lustrated o pootionay in Figure12, this capacity consistedof: o 12,880MW of nuclearcapacity; o 33,789MW of condensing stem powerstations; o 4,700 MWof hydrogeneion in svenstadons; and 3 2,200MW of gener at Fa 2 industrialplants. 222. The locationof the majorplans is prsented in Map C. The plants,with th exceptionof nucear, are genly old. The ageprofile is smmaized in Table9. Table 9: Age Profil of P1t, 1992 Per.tge of plant in opemtion TWp 0-4y 5- yes l-20 y, 20+ yr coal 1.3 4.1 19.7 74.9 Gas/amu" 2.9 7.3 61.9 27.9 Nuoba 31.2 46.8 22.0 0.0 Hydro 0.0 10.0 33.3 56.7 Heatonly sttIons 1.8 5.1 33.2 59.9 ANstatIons 8.8 15.8 30.5 44.9 SourceoMPvtre o0- Power 23. Th generationof deeticity incremedfrom 270 to 296 TWhor by about 10 percen betwen the yeas 1985and 1990(see Table 10 in Annex1). In 1991,total generation was 276.8 TWh(or 6.6 pect les than in the previousyear), of which66 percen was genrated by thermal,27 pecet by uclea, 4A rcent by hydro,and 2.6 pementby industralcogeneration plants. A fiurer 9.3 perent drop in totalgeneration occurred in 1992. Nucleargeneration dereaed onlytwo peret comparedto 1991,so its ratve dware increasedto 29.4 percent. 224. Nucler plant producedbetween 23 and 30 percentof gross lectical energyconsistnty overt lastfive years. Ave nuclearplat utization fhctorhas been68 percen whichi good by intnatonal standards. Themcldear plants are of three ypes: (i) the RBMKtype of whichfour uis were alled at Chernobyl;(i) the earlierVVER-440, model 213 type of whichtwo uni are in operationat Rhme; and (Iii) the laot, VVER-1000type of which ten units are in peatd and six moreunder constuco A detailedlist of theseunits is givenin Table10. 225. The Chnobyl PowerPlant belong to the RBMKclass of reactorsdepgned and constucted by the USSR's yMistryof Nuclear Power Constucon; thirteen1,000-MW units (in Russi and the U ine), and two 1,S50MWunits (at lgnalina,LUtuania) are in operation(units #2 and #4 at -68 - Table10: UkrInle'sNuclear Power FPla Operting UnderConsr. Station Unitsx Cap. Unitsx Cap. C4nWkd= Zaporlzhzhia 5x ,000 I x 1,000 95 % SouhiUkraine 3 x 1,000 1 x 1,000 civilwo*s 70 %, eipment20 % Rivne I x 1,000 I x 1,000 60 % 2 x 440 KhmelnytdWi I x 1,000 I x 1,000 60 % 2 x 1,000 cvil worlcs20 % Total 12,880 6,000 Chernobylare not includedin the cout). TheApril 1986accident at Chenbyl unit#4 brought forth seious safety concer regardin the desig and operationof tee reactors. These have been identifiedand analyzedextsively in the technicalliterature. Theyinclude the positivesteam reactivitycoefficient, the susceptibilityof the graphitemoderat to grphite-steam(endothermic but potentiallyexplosive) and grapiute-air(highly exothermic) reactions, the lackof considerationby Sovietsafety analyses of accidentsconsidered credible by iational standards,i.e. ruptureof reactorexit pipingand mainsteam piping, rapid reactivityexcursions, and accidentsiniting in the core itself,such as a blockedflow channel or multiplechamel ruptures(many of th. above occrences were, as is well known,part of the accidentat the Chemobylunit #4). Finally,the reactors do not have an adequateconanme sure that could containthe radioactivityfrom being eleased in case of a severeaccident; this is a serious omissionof a most important element of the conceptof "defense-in-depth"that is of paramountimporance according to internationallyaccepted standards. 226. As a resultof the accident,unit #4 has beendestroyed and its remainsencased in a concrete enclosurepopularly known as the "Sarcophagus". As a result of an extsive fire in October 1991, unit #2 has also beenshut down. Units#1 and #3 are operationalbut a Parliamentaryedict mandates that the entireplant be shut downby the end of 1993.6 The extensivefire at unit #2 illustratesthe highvulnerability of the RBMKunits to firesand indicatesthat evenfor the remainingoperating time, fire detectionand preventionshould be enhanced. 227. The Sarcophagusand its statusare mattersof great concernand are hotlydebated in Ukraine. The worriescenter arud the stats of te destroyedfuel, the engineeringsoundness of the conete constuction,its hermeticsealing, the integrityof the strutmueand its behaviorwith time. Minchernobyl,the Ministrycreated to lookafker the problemsof the Chernobylaccdent, coversboth the problemsinside and outsidethe plant. It appearsthat a dis ate amountis beingspent on problemsof grout, and soil cntamiton and on of the afected populationcompared withthe amountspent on monitoringthe statusof the Sarcophagus,studying its behaviorand preparingfor fiture contingencies.Following the closureof the powerplant, the decommissioningof units#1-3 and the man of the Sarcophagswill be closelyinterrelated tasks. Therefore,it wouldbe moreeffeRcve to sprate the responsibiyfor the paint and a narow exclusionzone (afew klodmete,)around itfrom the widerresponiwbilityfor the environmentbeyond dhe exclusion zone and 65 Seepaagap 8 in Chapter1. -69 - popdaton protecion. lhe allocationof fws shouldalso be madeacording to praoritiesdicated by objectve and sdentic adterla. 228. MLncwrbyl has lamchedan intemati compoetitonfor the submissionof proposalsto improvethe presentcondition of the Sarcophgs. The originaldeadline of December31, 1992for the submissionof prposals was extendedwith Cabiet approvalto April26, 1993.1 It appearsthat the projectfor whichpropoa are invitedhas not beenadeqWately defined, nor havethe nulesof the competitonbeen properlyspelled out. Someof the proposls includeplns for consution of a new Sarcophagsaround the existingone and gradualdisassembly of the destroyedreactor under remote handlingmethods maldng extensive use of robotictechnology. 229. It is importantthat clearpriorities and cost-effecnes criteriabe establishedfor any expendituresin pursuingthe siteremediation and cleanupprocess at Chernobyl.Experience from similar cases (i.e., the cleanup at Three Mile a id, where much les damage occurred) indicatesthat the processwill be longand expensive.The imple tion of someof the plansare expectedto requirelarge sums of capitalthat willbe beyondthe capabilityof Ukraine. Grantfinandngshould be soughtfrom nlti- and bilaeral organatons. The Sarcophaguscould become an excellent opportunityof inteaonal coperation fromwhich invaluable experience for the worldmuclear industrycould be derived. 230. Thetwo VVER-440/213units at Rivneare of the secondgeneration of WER440 and are equppedwith additional safety sstem comparedto the 230model, although they stil lack al the redundancy,diversity, and physicalseparation requred by internationalstandards. A fuhllconim stucture is also missingfrom these units. Safetyhiprovements can be realizedthrough primaily incrased operatortraining, stricter procedures and the developmntof a "safetyculture' and through cost-fective systemupgrading. 231. The VVER-1000units are of a latervintage and are fWlyequiWed with the safetysystems considerednecessary by intralona standards.However, they are knownto haveweaknesses in the qualityof constuctionand, more specifically,in instmentaion and controlequipment, fire protecon systemsand steamgenerator performance and integrity.The operatorsof these unitsare wellaware of their shortcomingsand are alreadyened in programsfor safetyimprovements. At Zaporizbzbia,a full-scopetaining simulator,now in the assemblystage in Moscow,is beingplanned. Connectionshave been established with international ,rgaizatons such as the WorldOrganiation of NuclearOperators (WANO) and the Institutefor NuclearPower Operations (INPO) for the exchange of operationalexperience; exchanges of staffare beingorganized and willbring tangible benefits in operationalsafety. 232. The bIternationalAtomic EnerB g Agency(LAEA) as tken the initiativeto organizesafety reviewsof the Soviet-designedreactors. The efforton the RBMKwill not be relevantto Ukraine sinceall the Chenobyl unitswill be pemanendy out of opion by the end of 1993,as mandatedby the Parliament.The IAEAhas also initiated,at the requestof Bulgaria,Czechoslovakia, and the Ukaine a comprnsive reviewof all VVER-1000units. At the first meetingin June 1992,a 66 Three inrmation metings wereplanned: one was convenedin Kievin July 1992,die secondtook plac on Dec. 1, 1992in Washigton, a third meetingto be coavenedin Euwpeis nowconsdered rdda and willpobably be cancelled.The meetigs servedas a forumfor the Ukrainian auorities to eWplainthe edstingconditions at unit#4 andthe Sarophau, and theneed to convertit intoaon vm y actble site. - 70 - progam of iaslist wceas dedded for dhe18 VWR-1000units in opeaton. Te objectivesof the LhEAProgam wouldbe to: (i) developan n ay agreedlist of aty issuesfor VVR-1000 unitson the basisof defyng weaknes in design,construcdon and oation; (ii) prioritie the safetysignificance of issues; (iii) evaluate modificationsalready perfonned, going-on,or poposed to improve safety; and (iv) asit JAA memberStates in the resolutionof safetyissues based on intall acced safety practices. 233. Initialinformation on the subjecthas aready beencompiled in the IAEAreport on 'Safety Aspoctsof VVER-10(0Reactors'. An OperationalSafety A ReviewTeam (OSART) mission was performed at the Rivne plant in December 1988 with a follow-upmission in June 1990 (similarmisso wereundertaken at Kozioduywhere two suchunits are in opeaion and at the constuctionsites of Temelin,Czechoslovaia and Belene,Bulgaia - theselatter mision are called Pre-SART). The actvitiesplanned under this progm indude(i) the deveopmentof a prelimnary Ht of saft issuesin 1993;(ii) safetyreiew missionsby inational team of expet, at least one in 1993,probably to a sitein Ukrine; (iii) topicalmeedngpworkdwps to assistLIA nembr Stes in d timelyresolution of safetyissues; and (iv) completionof the inaol a list of safety issus usingal availableresults and analyses. 234. A similartechnica assistace programhas beenestablished by the LAE for the upgradingof the VVER440/213units (in Ukaine, the #1 and #2 wnitsat Rivne). Thiseffort is centeredon the Bobumice,Czehoslovaa uts andcomprise_ of safetymargs, updatedanyses, impovementof accidentm gement,and the de on of safety I if needed. The resultsof this effortare expectedto benefitall operaors of this reactortype. 235. Multatal and bilatel assistanceprograms are alsoof greaesignificance in theirpotentl to hiprove safety. Mostprominent among them are thoseof the Commissionof the European Communities(CBC) and the US Goverment. The lattr, underthe ftameworkestablished at the Smer 1992G-7 eoomic summitin Munich,has authrized US$25 millionfor FY92 (US fiscal year begis on October1st) for the NuclearSaety nitative. Thisincludes a trainingcenter and a flil-scopetraining simulator for the Ukraineto be establishedat the Khmelytsyl site (another simulaorfor VVR-1000units is beingplanned at theBalakovo site in Russia)and regulatozy asae to be pwvidedby the US NuclearReglatory Commission(USNRC) to the Ukrainian Rguaory Agency. lbe cost of the Uanian comp t is esated at US$13.4 million, consistingof opeationalsafety mprov ns, a trainingcenter with simulator, fire prevention and _ewmasiw. 236. The CEC progrm providessimila assistancedirected priarily towardopetional saf Improvemietand risk studiesrather than fwudsfor hardware. A primaryrole is assigned to WANOwhich played a leadingrole in the IUple a of the CEC-PharePgam for the K-y VVER0 units. -71 - 237. Usual pwr _ats. There are 17 mao thermal plants all using conventionldsteam Cycles. The larges can be found at Zapodrizia with a design capacity of 3,600 MW. Three of the majorplat producecombined heat and power(Kiev S and 6 and Khartiv 5), the rest only eecticity. he majorityof the thermalplants is over 20 yearsold, reflectingthe policyof focussing developmenton mnclearcapacites during the 1980s. The effectof agingon plant performe has been recognizedby applyinga totalof 2,600MW deating. Manythmal stationsare sufferig frm boilerproblems, turbme ageing and deficienciesn controland s on systems. Histoncd recordsshow surprisgly goodplant availability, wih annial forcedoutage rates being m the rangeof 1.0 to 2.5 percent.6'7 238. Manythermal plns havemultiple fuel capability (see Table 11in Annex1). Mat (heavy fuel oil) and naural gas are availableat all thermal stations (exceptKurakhiv, where only coal and nmt are available). Three of the main stations have no acces to coal. In 1991, the volumeof fuels used in the powersector (including some heat onlyboilers) was 37 milliontons of coal, 11 million tons of fueloil and 30 billioncubic meter naal gas (see Table 12 in Amnex1 for fiueluse in the majorpower plants). Withinthe 182.4TWh electricity produced by thermalpoWer plans in 1991, 62.1 TWh(34 percent)wVa produced from coal, 38.8 TWh(21 percent) from manzt and 81.5 TWh (45 percent) from natural gas. 239. The iteal ney use of thermalpower stations, as reportedby the auwt ies, is in the rane of 2 to 9 percent,with lower values for the largerand moremoden and higbervalus for the smller and older units. Themodmic efficienciesare mostlyin the rangeof 33 to 37 percent, withsome modern units showing figures as highas 39 percentwhereas in somecases efficiency may be as low as 28 percent. Frequently,the qualityof coal deliveredto plantsdoes not matchboiler requiremens,redci boilerefficiency and irsing maintenancereqieMens. In addition,it affectsthe perfom of particulateemission control devices (see below). The blendingof coalsto moeetindivua pla reqWementscould probably solve these problems. 240. Plt No. 5 in Kievis one of the betterequipped and n timnedstations in the system. The pla operatesold, slowresponse oxygen analyzers which can onlybe used for manualcontrol of excessair, usuallythe singlelargest element of heat lossesin a boiler. The sameproblem probably exi in oter hemal powerstadons causing inefficient combustion and fuel waste. In the short ru, eos erablegains h boilerefficieny couldbe obained dough the use of porable combstion monitors. W theselow cost devices,the conbusdonprocess can be asnedperidca bahya4jusdng uwess air to the opmuwn amowat(autmatic conmol wouldbe more reliable,however, it is also more costy). At someof the oldercoal fired powerstations (Luhansk and Starobeshevsk,for example), boilercasing leaks permit so muchair inleakagethat it overloadsthe induceddraft fans and reduces unitcapacites to the exten tat dte plantslose about 25 to 30 MWper 200-MWunit. Station ma_gemem at both stationsbdieves thatcomplete rebuildingof the boilers is neceay to eliminate the problem. 241. Manyunits have exceeded 250,000 hours of operation,are becomingincreasingly unreliable, and needeithr retrementor on. The Ministryof Powerhas developeda chensive plan for dte reabilitation of the temal power units in a phased progrn. Some units need only moderte rdeabilitationwherea others,being very old, needradical or completereconsucion. The MiWstry'srehabitation plans can be classifiedas follows: 67 The outage rates may be Inlflueacd by a bonus system which creates nmcendv for static personl to - foriutem. -72- (i) Rhabilitationand repowerig of 800-MWunits with the additionof a single150-MW gas ubbble; (ii) Repoweringof existig 200- and 300-MWunits with atmospheric fluidized-ed combution(APBC) boilers and high-efficiencyfly-ash collection equipment; (iii) Installationof sulfurremoval technologies at powerblocek that are expectedto operte for at least another10 years; (iv) Insllion of high-efficiencyparticulate (dust) collection equipment at coal-fired stations; (v) Modificationof bumersat oil, gas and coal-firedstations to reducefonnation and emissionsof NO,. 242. However,the rehabilitationprogram has not beenbased on the applicationof cost-benefit iteria and the economicviabilit of someprogram components is in doubt.- Suchquestionable componensare the completeremoval and replacementof turonato sets and entre boilers, wherethe remaninglifetime of the newlyrenovated plants has not beenestablished with the necessarylevel of cerinty. In addition,the propo installaon of wet fluegas desulfiization (POD)units is also questionable,as arguedbelow. 243. No powerplant is equippedfor contmin emissionmonitoring. Most plants have very high sacks, limidngthe extentof localair qualityproblems. As a result,the lowefficiency of the dust collectionequpmnt does not lead to adverseair qualityconditions, alo there are a few exceptions. he saaion ofnewer tednologyfabrcjllters shouldbe consideredduring the rehablation of exdsng unitsas a 'posuitvebarrier' to de reease of paiates and, in addon, as an effcte cd cat reactorfortde lower-costdry processesof sulfr dde emowv. In viewof the relatvelylarge domesticmarkt for thesemodern fabric filters, it mayprove to be economically viableto establisha domestic ri cp . 244. Mostof the boilersuse wallfiring and probablyhave relatively high emissionsof nitrogen oxides(NO.). Severalpower plant have alreadyimplemaeted NO. reductiontechnology in dte form of low-NO,burners, achieving a 15 to 20 percentreduction in NO,emissions. No flue-gas desulfurizationunits are currenly in operation. Dulfian Unitsare expensiveboth to buildand operateand, in the presentdifficult economic situation in Ukraine,could only be justifiedif high ambientair concentaons and severehealth impacts were demonstrated. The highstacks mentioned abovedisper SO2 evenmore effectivelythan particulates, therefore, local air qualitymeasurements seldomrecord ele S02 cone tons. Whilelocal health effects do not appearto be a problem,the longdistance transport of emittedSO 2 contributesto acid rainproblems both in Ukraine and in the neighboringcountries. However,Ukmine does not haveforests at highelevations (which are more afected by acid air masses)and its waterbodis tendto havehigh pH levels. 245. Ukaine is a signatoryto the Helsinkiprotocol, which requires the reductionof S02 emissions by 30 pct between1980 and 1993,and the Sofiaprotocol, which requires the levellingoff of NO, 68 SeeTable l3 and14 i Aex Ifor a desrpdionof the Ministry'splanmed mnen andt mal habiitatio programs.Table 14 dividesthe proposedreabilitation program into projects ,uch seem to be of highprioriy andprjec whichmay be ques_onable. -73- emissions.Due to the substitutionof naturalgas for fuel oil and coal in powergeneraion, SO% emissionsin the energysector decreased from 2.5 milliontons in 1985to 1.7 milliontovs in 1990, despitea 2 percent creasein thernal electricitygeneion. Theprogram of Insallig low-NO, burnersand other masr decreasedNO, emissions fom 460 thusand tonsto 414 tousand tons in the sameperiod. The declineof SO, and NO,emissions acceled in the lasttwo years, due to decreasingelectricity generation in thenmaplant. 246. TheMinistry of Enviromentestimates that SO2and NO emissionsfrom all stationary sourcesdecreased, rpectively, by 34 and 16 percentbetween 1980 and 1991(see Table 15 in Annex1). Thistrend is expectedto continueat least until 1995,suggesting that SO and NO. emissionscontrol are not amongthe shortterm priorities. However,a fumreeconomic recovery, coupledwith increased reLance on domesticcoal for powergeneration, may reversethat trend. Therefore,in the longrun, compliancewith the targetsin the Ontransboundasr pollution may requirethe implemen of SO2 caol meures. Even In dtatcase, less costlyS02 redaion technologiessuch as th use of cleanedcoal, lowsulfr oi, sorbentinjecteon and dry scrubbers shouldbe consideredbefore investing in moreepsve flue gas desufhrization(FGD) mehods such as wetFGD. For nitrogenoadde emission reduction, buwner modifcaion (when applicable) and new 'rebumr technologiesmight be nldee. 247. The costsof firter reducingS02 and NO,emissions might be lowerin other sectorsof the Ukainian economythan in the powerindustry. Therefore,an analysisis requiredwhich would establishthe cost curvesfor reducingthese emissions on a nationwidebasis. The resultsof this analysis(in the formof shadowprices for SO2 and NO,emissions) could be incorporatedin the appraisalof temal plant rehailitationand new genatng capacityoptions. 248. HydropowerpatS. In 1991,hydrodectric capacity in the Ukrainestood at 4.7 GW, 9 percentof total installedcapacity. Hydrodectricplants generated 11.9 TWh (4.1 percentof total electricitygeneration) with an averagecapatq factorof 28.9 percent. Table 11 belowpresents hydroelectricenergy production in the Ukmainefrom 1970to 1990. Table 11: Hydroelectric ner ProduedonIn the Ukraie CWb) 1970 1975 198 1985 1986 1987 1988 1989 1990 11.6 9.7 13.4 10.7 10.7 9.6 12.1 10.1 10.7 249. Mostof this electricitygeneration occurs on the Dnieperriver, whichhas six majorfacilities, and on the Dnestrriver, whichhas one. The Dnier river's drainagebasin is 503 thousandsquare kiometers,its meananmual runoff is 53 bilion m&(vaiance between 18 and 73 billionne), and it flls 220 meters on its course from Russi and Bear through the Ukrne to the Black Sea. In short,this systemis characterizedby veryhigh flows and low head. With the snowmeltin the spring (betweenMay 1 and June 10), the flowsin the river cansurge to 2500Onfs. Reservoirsgeneally are broughtto ninitnm levelsbefore the snowmelt,and duringthe periodof maximm flowthe 69 Reburnhas reely beendemonstatd to reduceNO, emissions by 60 percentin a coalfired block of the Ladyuyn powerplant. lhe on projectwas jointy implementedbetween Ukraine, Russiaand the UnitedStes. -74 - reservos are rSfiled and the entire ain of power saions is opated contiwosly at full cpacity to use all the water. Themal powerplants on the systm replacehydro's peaking and loadfollowing sevices durtiig this period. 250. The nextdominat fature of tis cin is the needto maintainwater lvels so thatmaximum capacityis availableto meetthe winr peakdemand. In normalyears, reglar nver flow drop to 700-1200m&/s, and in drier years the flow can go as low as 200 ivf s. Accordirgly, frm the end of the springflood through the summerand faill,the plantsare operatedas peakng, loadfollowing, spinningreserve plant (i.e., generallyat minimumlevels), taking into account river flows,systan powerrequirements, and other waterneeds. Oncethe winterpeak has beenmet, the final importa operationalmeasure is to draw reservoirsdown (if any water is left) in prepaationfor the followig year's spring flood. 251. The Dnieperchain is regulatedby the Kremenchukreservoir, which holds 13.5 billion to? of water,of which9 are available,while the hydropowergeneration is domnae by the Dniprovskaya powerstation (1538 MW). Whileantiquated in certainrespec, the systemworks well as it is, and plantstaff are quiteexpert at keepingit mnning. Thereis no apparentsignificant loss of capabilityto meet peak loads or satisfy system requirments. Replacingold with new would not tefore be exected to increaseoutput (capacity or energy),but couldbe expcted to reduce m and operatg costs and incrase reliability. 252. The Ministryof Powerdeveloped a hydrorehabilitation program. he programrequares detailedanalysis to assesswhether is is economacaUyjustifiable or necessay. The majorityof the programconsists of turbinereplacements, however, other measues mightbe more appropriate.Also, sincethere are differenttypes of ubines oprating in differentc ions, each replacementwill requireevaluation and justfication. 253. In the hydrosector, there has beenparticular interest in developingmajor pumped storage projects. Four of these wereplaned duringthe 1970s,and it was proposedto developthese in conjunctonwith the expansionin the nuclearpower subsecor. Theseproject includeKaniv (3600MW; canoperate 8-10 hours in geneat mode,7 hours in pumpingmode), Dnstrovskaya (2,268MW; can operateS hoursin genemaigmode, 5.6 hours in pumpingmode), Kosiantynivka (380 MW; canopeate 4 hours in geneatingmode, 7 hours in pumpingmode) and Tashlyk (1,820MW; canoperate 4 hours in generatingmode, 7 hours in pumpingmode). Workis underway on the Dnistrovsayaplant - its first unit is expectedon line in 1995,and subsequentunits will follow everyyear thereafter. Theodier projectshave not gonebeyond site preparationphase and havebeen suspended. 254. Ge _atonpbanng. Enrgosetproekt,a Kharkivbased technical insttute of the Ministryof Power,prepares the detailed5-year generation expansion plans as well as a longtefm program. The programis basedupon demand forecasts denved from information and data providedby the Institute of Economyof the Academ of Sciences.The institutehave developed a modelincorporating various generationoptions (nuclear, ther and hydro)in orderto opdmizethe generationschedule. In additionto the minihmion of genertion costs,a longterm objectiveof generationplanning in the institte is to achievea balanceddistrbution of geneaing capacity,defined as 60-65percent thermal, 20-30percent mwclear, 10-12 percent hydro and 1-3percet otherpower sources such as windand solar energy. - 75 - 255. An intal anlysis of variousgeneration expaion optionspreparWed for a roee WorldBank- IEA repot's showsthat closing down the remainig Chanoby uits posesno thrat of capacity shortageswitn the next sev years in most scenariosconiderd (see Annex 1l for a smmary of the anaysis). Thereis adequatetm to carry out a fll evduationof al option for nowcapacity addons. In the short term, prioriy should be giv to d. h of esng non-idear widtsto main caacity leels and improvethe effidencyofproducdon. Howevwer,the rdelitationprogran of the Mistay of Powershould be reexned basedon the aplicaon of costbeng* critena. Only the progm componenswith proven econonic viablty shouldbe implemened. 256. The completionof the three VVER-1000blocs in Z hzhia,Rivne and Khmelnytsk mightcost US$400-700 million and woud saveabout USS 1.6 bilion in investmentcosts in dthemal generatoncpacit beween 1996and 2005(see Annx 11). Takingalso intoaccot the lowerfuel cos asocated withnuclear power, completion of these units dealy the mosteconomic option for Inestment in new geration capacity. However,in viewof past hisory of nuclearpower in Ukrine and recentreor of mnclearsafety violations at the SouthUk i plat nd fie outbakes at the Chemobylplant, the publicis undestly concerned.Therefore, before a proposalIs made to die Parliamt to lft the noratoriw the Govermen shol dmnstae th it cou ope nuclar plants in a mannerconsistent with safety regaons. In addiion, a pul Iformaon progrm on nuckar eneIr safetyissues would be desrable. Sucha progm woulddisemiate relevantinformaton regarding the risks of this formof energy,wha is bing doneto addrs the safety issues, and the other risks to which the public is exposed.n 257. The needfor investmentin newthermal genecation capacity depends on the evolutionof dectricitydemand, whch, in tun, dependson economicgrowth and on pricesand other incenives for the efficientuse of electricity.Rapid adjustm of electicityprices in the conte of a compehensiveprogrm of economicreform (which would elminate or restuctr inefficient producersand hardenthe budgetconstts of the remainingenapes) will snificantly educe both ivestment costs and fueland other operationcosts in the powerindusty. Accordingto one estmte, the cost savingsmay amountto the eguivalentof USS8.2 bilion (see Annex9). Fter ines in pwnpedstorage should be ti accordingto growthi peak deman4 and wil certainly not becomeeconomiucaly attracdve unless the abovenucar blocksare completed. 258. The implementationof the thermalrehabilition programof the Minitry of Powerwould stabilizecoal use in the powerindutry at about40 mt/year. Significantincrease in coal use depends on the choiceof new thernal generationcapacity, which, in turn, dependson the relathiveprice of coal and naural gas. Even if the price of importednatural gs fromRussia reaches parity with curt Russianexport prices outside the formerSoviet Union, combined-cycle gas turbinesstill appearto be the mosteconomic opdon (see Anmex11). Coal fired newplans willbecome economic onlyif the price of as approachesUS$200Mtcm while the price of coal registersonly a moderate 70 'Ukraine- Non-nuclarPower Supply Alteratives", Joint Rept of theIerional Enr Agenc and the WorldBank, Report No. 11561-UA,Febuay, 1993. 71 Mmecompletion of unit no. 4 at the SouthUkraine nuclear -Is considerodhighly uncein even f the Prlim lif the moraorium. A atsfcty soluion for the supplyof coolingwater has to be foundfirst. 72 USAJDhas offeredas to Ukatie in design and imple_met a public nomadtonprrm. -76- increaseand staysclose to US$401t.Under that scenario, coal use couldsurpa 70 mt/yeartowards 2010,however, this shodd be considereda highlyunlikely development. 259. son. Themain tnmion voltage of the systemin Ukine for the comection of mainpower saions and substationsto the networkand the tansfer of bulkpower throughout the countryand to otherborderig countriesare as follows: a. 800kV DC Link b. 75OkV AC, SOOkV AC, 400 kV ACand 330kV 260. Thebasic systemlnfrastntr is basedUpOn a 750 kV singlecircuit lattice steel tower line, whichoverlays an extensive330 kV network,which in tbunsupplies the 220Y110kV systems. The 330 kV transmissionlines are of double circuit and single circuit contnetion and are also the lattice steeltower type, equpped with a lightningshielding earth wire. Power is injected iwto the network at the main powerstations, primarily at 750 kV and 330 kV substations.Power transfes occurfrom and to the Ukrne system from six other sorces outide the country, namelyCentral Europe, WesternRussia, Belarus, Romania, the Caucasusregion and the Volgaregion. 261. The 750 kV networkconfiguration has beenbased on twosingle circuit ring systems,one in the westernand the other in the ean part of the coutry. The westernring has been foramedby linig the nuclearpower stations at Khmelwntskyiand Cheroyl withthe Wester-Ukrinian and Vhlnytia substaions. The eastern ring has been based uponlinkg the nuclearpower station at aporizhzhia with the Dnlprovsayaand Zaporizskayasubstations. The two ring systemsare interonected by a singlecircuit 750 kV tranmsion line betweenthe Vinnytaya and Dniprovsayasubstations routed via the South-Ukraan mnclearpower plant.7 262. on panng. Transmission ons at 750 kV are plannedby Bnergosetproedtin conjction with Ukrenergo(the Central Dispatch) in Kiev. The 220/110kV networksare the primaryresponsibility of the regionalpower enterprises, which submit proposals for reinforcementof their areasto the Ministryin Kiev. A 5 yearplan is then preparedfor the whole transmissionand distributionsystem. The bulkof the trasmiion systemis planmedand designedin accordancewith Western European practie. 263. The basicplaning crria used in designingthe trassion/ distributionsystem in Ukaine is that of the (n - 1) ratherthan the more onerou and iwnst intensive(n - 2) criterion. However,the (n - 2) criterionis also used in dedgningtransmission connectieLs to nuclearpower stations." Perfomancestatistics indicate that this plaing criteriaadequately satisfies the needsof the consumer, as the lossof supplyover the yearscompares satisfactorily with many other countries. Extensionsto the systemare basedupon a leastcost methodof proviig reinforcementsin order to meetthe acceptedsystem criteria. 73 Voltgesof 22OkVand lOkVare caified as di in, sincethey are usedpdmaily for the supply of powerto conumers. 74 SeeMap C fora diagramof themain lines. 75 Nuclearpower staton connectio areplaned in a waythat the system should be able to cope with the lossof the twolarest miso circuitand only a thirdloss or failurewould rsut in dteshutdown of at leastone r . - 77- 264. The planed invesmns in the tramssion systemare drivenby demandwhich is probably overestiated (see Annex11). In the mediuLuzrm, ttie rehabilitationor reconstrucon of edsting genaing plantswill not rei significantcapital investment for tansmissionas the transmission capacityalready exists. Withoutthe constructionof newpower staions, there willbe littleneed for additionalcircuits, except :- caseswhere exising power lines need complete reconstruction becuse of age and substantialdeterioration in their suure. 265. TheChernobyl nucear powerstaton is scbeduledto be decoissioned by end-1993.It is plamed tat the 750 kVand 330 kV substationsumendty ilsvice wouldbe closedand new750 kV and 330 kV substationsestablished about 40 km southof the existng site, in an environmentallysafe zone. In conjunctionwith this work there are plas to divertthe 750 kV and 330 kV linesand constrct a new 750 kV singlecircuit transmission line extendingfom the east, at a 750 kV substationsouth of the Kurk nuclearplant in Russia,to the new 750 kV substationlocated south of Chernobyl.Thir is a mnj0oreinforcem of the 750kV systemand requiresfpll tecnidal and ecmonmcjusifction beforethe woikproceeds. 266. Systmacontrol. Economicdespatch of poweri achievedthrough the use of computer programs,taking into account the fes nanuallyassociated with providing power at the consumers"'tminal at the least cost. In general,the nuclearpower Stons formthe bae load, followedby the thenal plantand the hydropowerstations, which act as peak loppers,together with the pumpstorage. 7' In commonwith many rge tsmission systems,reactive power control is achievedthrough several means, such as shuntreactors, synchronous condensers, swithed capacitors and by controlof gearator exciters. Frequencycontrol thoughout the inteoected systemis carred by largeRussian hydropower stations on the river Volga. 267. Internaltransfers of powerare reguatedaccording to the availabilityof geneatng plants withineach region in Ukraine,taking into accountthe cost per unit genated and other facors (such as the securityof supplyat the time). The DispattbCenter in Kievis equippe with SCADA facilides. The ommication betweenthe Control/DispatchCenter in Kievand the eightRegional DispatchCente i Ukmaineare by wire rentedfrm the nional telephoneservice, supplementd in someareas by powerline carrier equipmt. Load flowcontol in the 220/110kV systemsis performedby the RegionalDpatch Centers,where similar c ucatn facilkiesexist. 26M,. The systemhas a numberof weaknessesthat preventeffective and satsfctory operaion withinthe specifiedvoltage levels or limits. In the Odessaand Crimeaareas, consumersare subjectedto low voltagesat timesof maxhum systemdemand (between December and January). Also, due to the veryhigh levelsof naturalsusceptibiit providedby the 750 kV transmissionlines, there are severeproblems in controllingthe voltageat timesof minim loadnecessitaing the disconnectionof someof the 750 kV transmissionlines. Thisdecses the reliabilityof the system at off peaktimes, and couldlead to disruptionof powersupply. The problemcould be solvedby addig furtherlarge shuntreactors or staticvar cn, althoughthe latercan onlybe justified on the groundsof improvingvoltage response, transient staWlit and powertransfer. 76 lhe opero of thedespth softwarehas met nceasingdifficulties receny dueto the rapidy changingfad pricesand con thephyscd avaUlblt of fuds. Economicdespatch futer copicad by the pactice of cetaized fe prcement whichobse pla-by-pla differences in fuelcosts. -78 - 269. and tde. Ukraineis inte ed to six powerblocks through their powersystem and the tr on cacity. Posible maximm powerinterchanges are as follows: 1. UkmIn-Belars: 1000MW (ATC1200 MW)" 2. Ukaine-C. Europe: 2000MW (ATC5000 MW) 3. Ukraine-Roannia/Bulgaria: 3500MW to 4000MW (ATC7500 MW) 4. Ukraine-NorthCaucasus: 1700MW (ATC2700 MW) S. UkalVolga: 200/250MW D.C 6. Ukrainussia: 2200 MW(ATC 7000 MW) 270. The 750 kV trnssioan cir eaend fromwitin the bordersof Rusa to Romaniaand Bulgariaand also to parts of WedemEurope. Coordinationof control facilities in relationto through powe flowsae caried out by an etional contol centerat Prague.Connectons to 400 kV and 500 kV sysm to the wet md eastof the contry are madethrough back-tback substi stuated both in Ukraineand in the egborig couanies. A limitedamount of poweris suppied throughthe 800 kV DC link to the eastern side of the couy, and is used in conjunctionwith the 330 kV system for freqtueny control purposes. 271. The ecang of elecicity betwn Ukrie and otber republicsof the formerSoviet Union rested in a negativebalace of 1.1 TWNhin 1991(i.e., Ukraineimport electricity).For 1992,it s expectedthat Ukraine'sexcha withothr republicswould result in a zerobalance. Ukamine Wedto be a large exporterof deceicity to counties outsidethe formerSoviet Union. However,the exportpictre has been chJging dramaticallyover the past years. Whileexport volumes were close to 30 TWhbetween 1988-90, they dropped to 15.4 TWVhin 1991. At the beginig of 1992,Ukrne has signedexport conacts for a tot of 5.5 TWh electricitywith several no-S countries. Contractedprices were 004-0.05 US$/kWh,although some of the contractswere based on barters.* Additionalbarter con for about4 TWhwere signed later in the year, however,toal sales, due to the shortageof fuel, are expectedto be onlyabout 6 TWhfor the whole1992 year. 4f Ukraineis able to sign contrmasfor the sle of ekeciciy at silarprices or slight lowerprices (0.03-0.04 US$/kwh)Jbr1993, it can be wortile to inyp gas orfud oifor hard crrencfor the tial pwer stadtos. That wouldensure that Ukrine benefits frm idle geneing and transmission capacyin the electricity ubsector. However,effetve demandat that price is expectedto be limitedsine neighboringcountries are also goingthough a periodof ecommicrecession and (with the posible ecepto of Bulgania d R _matla)have no shortageof generatig capaciqty. 77 ATC- Actu Thbem Cacity. Totl possiblepower anser capabiliis dependenupon both ntra ad exdeal sysm supy conctons whch can redue or increasethe totalpower trfe capqab. As a resultof powr boaies, gneating pln location voltg sbly and ot maco(such as securitycritera, the powertsfr tmal capabilityof the circUitof approximatedy 23,000MW i8decreased to 10,200MW, whichis equalto about20 percentof totalgewatg capacityin Ukrie. 78 Fo example, e conuactwith Romala was based on thepayment of oneton of fel oil for 1,800 kmhelecticity, Inicating an mHcitprice of about0.04 US$/kWh. -79- E. Distilt Reat 272. Ubaine bas a fairly longheang seaso fromend of Octoberthrougb May. Duringthis perod, the outdoortemperatum ca be ratherlow (January average Kiev munus 8°C, Charkivminus 6C and OdessaOC), requiringcontnuus heatingof all resiential buildings,as well as officesand factories. In mostof the large cites in Ukraine.this is accomplishedby cetalized districtheating systems supplyingthe final consm with hot water through steel pipes. The hot water is provided by combinedheat and power(CHP) plants and heat onlyboilers (HOBs). Thissystem is considered advantageous,due to the substnal energysavings achievable as wellas its environmental compatibility,compaed to individualhouse heating. To accomplishenergy savings, however, a nmber of technicalprerequites haveto be met; the transmissionand distributionsystem should be well insuatd and the consumerInsato shouldbe able to respondto meteorologicalconditions and customerrequiements. Prvided that supply-watertempertr canbe keptbelow a certainlevel (85"C), combinedheat and powerproduction can achieve fuel savingsof 60 percent(on beat production)compared to the separateproduction of beat and power. 273. The Minstry of Poweroperates 52 CHIPturbines instaled throughout Ukrine's major populationcentern with a combinedelectric capacity of 3,800MW, and corsponding thermaloutput of 14,000MI/s which,in co*uction with 149supplemenay boilers producing about 11,000MJ/s, supplya trsmission networkof 2,800 kn and a distributionsystem of about3,000 kn of pipe length. The thma outputfrom these facilities was 324 petajoules(PJ). In addition,the municipalitiesoperate a large nmber of heat onlyboilers with a thermaloutput of about250 PJ in 1991. The CHPplants and the heat onlyboilers burn mostlygas, due to an effornto limitpollution in large cities. 274. Descriptionof the systm In Kiev. Kievcity has the largestdistrict heang systemin Ukraine. The systemis fed from3 CHPplants (named no 4, 5, and 6 withan instaed heat capacity of 2,500Ml/s) that also includesome HOBs, 9 large HOBplnts (witha totalcapacity of 3,300 MM/s),and 113small peaking boilers primauily innded for supplyof domestichot water. All unts providewater at temperu varyingfrm 60"C in the summerto a maximumof 130°C during wiver. Thetransmission stemconsists of about800 km of doublesteel pipes with diamets from 50 to 1,200mm, coveredby mineral-wool-typeimulation material and geneally insaled in closed concreteducts. The transmissionsystem feeds the distnrbutionsystem which consists of 1,000kn of doublesteel pipes of a similarconstucto cirtig 90,000m 3ihour hot wat in winter,dropping to 30,000 m'i/hour in the summer.9 However, some parts of the disribon system are not connectedto the maintasmission sysm; theseuncoected networs are suppliedby HOBs. To complicatethe picturefurther, someconumers are supplieddirectly fom the transmissionsystem. The consums are about6,000 apartmentbuildings plus a numberof industries,all directly coMected,i.e., disict heatingwater from the disution systemis circlatd in the radiaors of the end users withoutgoing through local heat exchan. 275. The temal inaon of the pipesis prvided by mineral-wool-typeinsulation material, held in placeby glass fibre mats. The professionalstandard of the insulationwork is not satisfactoyand couldbe imprved greatly. Theinsulation thickness of the pipes anges from30 mm (on the 100mm supplypipes) to 80 mm (on the 1200mm supplypipes), which seems to be inadequate,in the viewof 79 rbe trmo system(operated by Kieveno) and the dsbuti n system(opated by Xt Kiev HousingEnergy Office) ar act sepaatedby heatexchangers, which makes it diffict to ebish areas of resit for the two orazatos, as wel as to measurethe truee flow. - 80- the materialBand technologyemployed. This problem iBfurher aggravatedby the adverse conditions previling i tie concret ducts, resultingin a life expectancyif less thenseven years for the inaon material. The highground water table and the poor drange of concreteducts also results In excessiveexternal corrosion of the pipes. Pipeslast only S to 10 years, comparedto 50 yearsin WesternEurope. During1992, 17 kanof the tansmsion systemhad to be repaired. Beingexposed to similarcorosive emvironment,the distributionsystem is expectedto needrepairs of a similar magnitude.Water losses are esdmatedat 1,S00cubic meter per hour, or 1.7 percentcompared to a standardof 0.3 pementin WesternEurope. Themogrnpic detectionequipment has been employed in the past, but for unknownreasons, without much success. Thisis sutprisingsince this methodologyhua proved very effective in detectig Insufficientinsulaion and waterleaks in other countries. 276. Theend usersof dsrict heatingare both industriesand resodentialbuildings. Reachng the building,the waterenters a venturinozzle with te purposeof mixingthe supplywate withthe retun water.S°Radiators are fed fromvertical risers, as apposedto lateraldistribution on each floor as employedin WesternEope. The consequenceof this pracice is that individualregulation in the aarmt is not possibleand heat consumptionm ent of eachtenant is severelyhampered. 277. Reguation of heat supply is basicallydone by the CHP and HOB plants, which adjust the supplytemperan accordancewith prevailing outdoor temperature. For a systemof the sizein Kiev,such a reguaton systemis completelyinadequat. Sincepayment for heat by the households does not reflectthe actualconsmption, there are no incentivesto conserveenergy and aparment temperaturesare regulat by openig the widows. Heat lose are futher aggrvatedby the fact that wallsand cilings in the buildingsare not insulated.Reskietial buildingsover eightstories in height,have booster pumps to circulatethe districtheaig water,however, fillure rates are reported high,due to breakdownof electricmotors. Domesticwater is generallyproduced through heat exchangersconnected to returnwater from radiators. 278. on mta_. Conderg enery lossesand the poor conditionof the distict heating system, extion of the system to supplynew residentialareas is not mmended. Direct connetonsof new apatme bloc to tuegas netwo* is a moreattractive alteraive bothin terms oflnvertnentand enerV costs(modem gas boilers,down to the sizewhich is suitablefor individual buildings,operate with vety highfuel efficiency). In addidon,there is a needfor detailedtechnical reviewsof the edstng dtistct headngsystems in a nwmberof lre oites. The reviewsshould analyzein detailthe presentcomposition and operati of fte systems,identk-y technical sotoings, quantifythe pote for er sav and suggesta phasedprogram of corrective measures.0 80 Thislowers the tempat of thewater cilating in the radiators,and ty pteventsbuns by peopletuching the radiats whichhave no meansof tempatr or flowregulation. 81 Scopeof the mvis shold include(i) the choice of fel withpartcular aion to technologieswhich canbum cod in a more y friendlymanmer; (ii) alteaive heatproduction plants; (iii) hydraulicntork caluti; (iv)renvatio of the pipe networkand secton of altemativepipe systems;{v) consumer Islaons; (vi) temerature nd pressr lves; (vii)renovation and modanizatlonof pumps;(viii) optmal control and regulain of supplysystems; and (ix) substaions. -81 - 279. Studes fromo pf of the f Sovit Union have provedthat 50 to 75 pecent reductionof domesticheating requiren canbe achievedthrough (i) thermalInsulation of buildings;(ii) therostatic valvesin each apartmn (room);(ili) double glazing of windows;(iv) individualpaymen for heat fromeach tnant basedon actua consumption.A completeawhedl qdating" of a representatveapan*et blockin Kievshould be LWlemente withte pwpose of vefyIg the savingpotenati and actua costsof dese msures. -82- Vm. INVPSI?T COSTSAND FINANCING OPllINS 280. Due to the eaWed continuingdecrease of energydemad, Investme in the eneg sector shou primaiy focuson the rehalitaion of eisting capitalstock. In conra withpast pracce, the highestpriority should be givento safetyand efficency mwov ratherthan capacity e4amion. As descrbedbelow, annual investment neds in e energysector are estiated to total abouttwo billiondolars per year (includinglocal costs) in the 1993-2005period. Assumingthat the isttonal retucting of the energysector is implementedand pricesare set prperly, mostof theseexpens canbe fanced withoutdirect budgetay support. The Governens role shouldbe restictedto angingthe Jfinancg for cetain non-commercianvestment,such as the safety upgades of nuclearplants and the improvementof oil supplysecurity. 281. Oil refg, tage and trortaIon.u Basedon the expctd contiuig deae of demandfor oil products,the two largestrefineries (Lysydbnk and K _menck)have enough distillaon capacityto supplythe domesticmarket. In other words,the loqgerterm viabilityof the KhersonNadvirua, Odessa and Drohobychrefineries is in doubt. However,the closureof the Khersonand Nadvirnarefineries would significantly increase product dibuio costsdue to the geograhc locationof thesetwo refineries. In addition, n couldbe carriedout in a way whichallows for somecapacity decrea. The cost of the necessarymodernization of hfur refineies is estimatedat aboutUS$ 4.5 billion(see Table 12 below). Morerdiable cost esmaes (together withthe prioritizationof mvesmet) wi becomeavalable aer the proposedfeailit studes re implemented(see Anex 8). 282. In orderto increasethe securityof crudeoil supply,a caciy expasion projectis proposed at the Odessaport (see ChaptarVU, Section A). The cost of increasingthe capacityof the oil termina at Odessato 10 mt of crde oil per year is estimatedat US$0.6billion8 In additon, dhe constructionof new pipelinesto conec the Odessaoil wrmi to Cental and WesternUkrie will cos aboutUS$0.5 billion. Finally,the constucdonof crudeoil and oil prduct sage tankswith a totalcapacity of 6 mt willrequre aboutUS$1.0 billion (plus the cost of the cude oil, whichcoud be an additionaUS$0.7 billion). On this basis,the totalcost of the inv proposedto increasethe secry of enrgy supplyin the 1993-2005period adds up to aboutUS$2.8 bilLion. 283. AUinvesms relatedto the modern on of the exstig refiries are xpectd to be commercialyviable. If the domesticand foign tradeof crde oil and petolm pdtucts is liberlized and oil productprces ae completelydecontolled (see ChapterVI), the referis should be ableto ata bothcommeal loansand euty investorsto financethe requed projects. Ihe Govenun's rok shoud be restrictedto the argemn of the reqef iy stdies and odher mtech asstance and the promton ofjoint ventwres. 82 The costof necesry invsmn in crudeoil productonis eed to be weladveysmall. Te cost of modenizingand expading the productdtributIon and martatg sym s difficl to esimae and is not patcuy relevant. As descibed in ChapterV, the role of the Govnment shouldbe limited. to trade libaization and rapidpriv n of the eaisig fiiies. 83 Ts includesnew jetties placingthe old onesto handletaks of 70,000DWT, pipelines, the convaen of tanks at the Odessa refiny, safetysystems, bulk cmontrland ballast wate ceang faches. - 83- _a 12: Falmatud knvesdmaiNeed in 0OiRufinfes, 1993-200U Rqlriwles MqaorWor*s Invwlved Appoxmatecow (U ulWoi) 1) Ly k: (24 mtyr) Mdeat of existig faclities, now 1200 crackingui perohmiW feed-stock pr_ aion filities and associaedfcilities 2) Kremchk (16.3mt/yr) Moderniztionof existingffilites,new 1100 rackingunit, new refonnig unit, andother assoiatedfaclties 3) Khlaso (8 mtlyr) Moderniationof existingfailties, mew 900 distillatunit, ackingUit andrefoning unit and ode asociatedfclties 4) Nadvlrea(3.4 mtlyr) M of existingfaclities, new 50 crackerand associatedfaciities Now. Moderniationmeans complete ireaboion for improvedproduct paten, enerV convaion in the bsat.exdmmg.sstem ad furnaces,repamnt of obsolete withmodern digata contol sysems,oltio cool meau and evronmal cean-ups.Cracking uit enviagd is Fid Catlytic craing. Associatedf ts hidude facilitesfor desulfurizaton, tg, blauning,etc., and imprwed safty systm in all aof operion. 284. The commercialviability of invesamentsaimed at a higer levelof supplysecriy (partualy the additionalstorg capacity)is uncertain. Therefore,the Governmentshoudtake an tve role In deidig on the tfindg of theseinve andprovding supmntary fnds for tir bsplementahlo.The sourceof the supplenty fimdswill ultmately be the budge, however, bowing frm mti dev agenciesor biaal sources to cover foreign eachag cost is a an apt whkb coud be considered. 285. Na ps pro in, h and ds equ e n gas podcin are estiated at US$90million in 1993-95,US$160 millon in 1996-2000snd US$150 millionin 2001-05. Theseinclude exploration and development(about 7 pementof total),gas production(30 pecet at the beging of the periodincreasing to 60 pecent towards2005)" and gs pocssing (about60 per at the beginning,decasing to 30 pece Iaer). 286. Mm neededreabtion and rplacemnt of compres on the transmissionsystem will rquire US$200milion in 1993-95,US$250 million in 1996-2000and aboutUS$100 miion in 2001- 05. lhe cos of cou tingnew tranmiion capacityis estmatedat US$500million in 1996-2000 84 nludhe costof Uing wels to maintainproduction at 17-18bmy inthe 199397period and gradualy increaseproducion to 30 bemyewrby 2005. 85 Indes a US$35millon nal gs lquidsreowvey project (pmpared by Ukrgap_omwith assitac frm Cht 3Desiga),a US$75 milli condensasystem upgradg pject andsome additioal _in late yeaomto processthe gas produced. -84 - and US$1S500million in 20014)5." Conting expansionof the domesdcdistibution system accordingto the programpxepared by Ukrgazwill requireabout US$180 million in 1993-95,US$470 millionin 1996-2000and US$50 millionin 2001.05!7In addition,a nationwideprogram to install mets on existig customerconcions willcost about US$30million per year between1995 and 2000. 287. Theseinvestmet requiremen are summarid in Table 13 below. The investmentsin gas productionare expect, to be highlyprofitable. However,the curren reguatoryand institutional arrangemen makeit Yerydifficult to attact foreigncapita' and moderntechnology. The most mportn stVs the Governmentshould take are (V)establishing a stateowned exploraton company by separatingthe explorationfientionof the State GeologyComnmteefrom its surve and regulatory fnaions; ia)draing a new minng law vhich estabushesa licensing/concessionregime; and ii) raising heprice of dometicallyproduced gas to the levelof the inport cost (seealso ChapterV and VI). Table 13: Estimaed veAtmuentRe e in the Gas IndJutry, US$ Mon (1993-2005) 1993-95 1996-2000 2001-05 Production(ici. Wxpi.) 90 160 150 Transmissionrehab. 200 250 100 Newtransmission cap. 500 1500 Distributionexpansion 180 470 500 Customermeteing 30 120 Total 0SW 1500 2250 288. Transitfees fromRussia and Turkmeni shouldbe the ultimatesource of fundsfor most of the transmissioninvestments. Assuming that (i) the Governmentnegodates long term transit agreementswith Russia and Tfirkmemstan,and (ii) the transitfee is graduallyincreased to coverat least the longrun marginalcost of the servicesprovided by Ukraine,Ukrgazprom will be able to borrow(and repay) the foreign change omonet for these investments.Initially, multilateral developmentagencies such as the WorldBank and EBRDare the mostlikely lyders, however, Ukrgazpromis expectedto be able to borrowmoney on fullycommel tes and attractprivate investorsin the long run (see ChapterVII, SectionE>. 289. Finncing of investmentsin gas distrbutionwill dependon the pricingpolicy followed by the Government.If the price of gas for householdconsumers connes to be heavilysubsidized, these invesm s costs will ultimaty haveto be bome by the budget. Gas is a convenient,clean and efficientfuel for houehold consption. Thisis reflectedin the willingnessof housholdsin other counties to pay the fullcost for gas services(including distibution and metering). n the short ru, 86 In the 1997-2000period, the esaimateis basedan the costof installingcompressor stations on the new Torzhok-Dolynapipeline and developingsoage capacit to supportthe Increasedtasit capacitq. After2000, the costcovers the constrton of 300 km per year new tamission lines. 87 We asumed that 250,000new cusomerswill be connectedin 1993and he numberof newcounecdons will gradually ach 500,000per year by 1998. -85 - the Gowrment mayauthorize Ukrgaz to soicit signian contributon towardsthe cost of the expansionof the dstrbun systemfrom new aome, argldngthat ese costsare not refleced in the price. This approach as beentrid in other coutries (Franceand Hungary,for eample) and provedto be very successfulin allevitng the shortageof funds for sstem expassion.UIn the long run,proper pricing of the gas shouldenable UAugaz to acmdatefwids (supplementedby borrowing)to finance the gas dstributionexpion program(however, inroduction of a separate, one timecomnection fee coveringstrictly the cost of connectingthe custmer and installingthe meter wouldbe advisable). 290. Coal mig. The longtsnm progam for the coal industryprepared by the StateCoal Conmmtee estimatesinvestmentquirem at 2.3 bilo (constat 1991)rubles per anmumfor the next 15 years. The proposedinvestments incxlde normal mine development to maintain productionand constuctionof new min for a modete productionincrease. Thereare also more ambitiousplans for large scalem ation and capacityexpansion of the idusty, includingthe developmentof newmine levels,the deepeningor new sinkingof shafts,and completionof new mine. Sincethe analysisof eoaldemand shows that the consumptonof coal willdecrease in most sectorsof the econom (powergeneraton being the onlypossble exception),the eanion plans shouldbe abandoned.Invesmes to maint productonlevels should be pospned until he reorganzatonand rstuctng of the Musty makesthe vabi and non-vibily of enteprises twssparent. A of the invest t plansis importantin orderto exit fromthe aional cycleof inefficiency,wbich was fueledby the creationof additionalproduction capacity without bringingthe efficiencyof past investmentsup to the necessarystandards. 291. The 2.3 billionrubles per anmuminvestment cost quotedabove is equalto about20 percentof the actualoperating costs in 1991.90Assming US$25per ton of coal outputaverage operating costs in the 1993-2005period, the cost of the proposedinvestment program to maintain1991-92 production levwsis equivalentto US$550million per year. The cost ot a less ambitiousmodemization and mine developmentprogram (which asows production to decline)coud be estmatedat aboutUS$300 millionper yer. 292. If the Governmentincreas domesticcoa prices to importprty levels (as prposed in ChapterVI above)and dismal the profitequalizion system,the viablemining enterprises are exected to be able to accwuwlatestntia funds to financepart of the necessary mvestments themselvesand rely on commercialborrowing for the rest of their needs. After coal prices reach importparity, budgetay subsidiesshould be restrictedto the financingof programsto phaseout 88 Thedirect financing of systemexpatsionlconnecdon costs by the new customersraises the issueof faimess. Extg customersreceived th connectionsfree of chargeor for a nomial fee. In order to paly alleviatetese coneems,the proposedficing schemecould be operatedon a voluntary basis,wheey communiteswho are wling to contribe wouldbe conaectedfirst. In addition,after pries increaseto a levelwhich cove systemexpaion costs,customers prepyments can be deductedfom their monthybils. 89 Programfor the Developmentof the Coal ndustty, StateCoal Committee, Kiev, 1992. 90 Twentypercet is a elativelyhigh share in iniational companson.Even in the UKand Germany, whereeensive Imensm havebeen made in new underound mineswhich in hindsightshould not havebeen developed, the historicratio of capitalinvesme andoperating costs is about10-1I pere. -86- uo i minesand to employor retrin utls labor (seeChapter VH, Secdon C above). If a eowpdnive 4restucuingprogram is adoptedby the Governunt, mulateral lendig agencies (suchas the Word Bank)may be wiling to supportprojects aimed at deveopingor maint the suply of eam coal to domesticpower plants from exitig or nw least-costmines (e.g., in the Obsdra and Pavlobrd associations)and Vowvingcoal washing. 293. IEc godty andn,_ distribudtl. In the nuclearsubsector, ie cost of the safetyupgrdes of existig nuclearplants could amount to US$100mllion per yearfor te not 10 to 15 years.'1 If the moratoriumis lifted,completion of the thre VVER-1000units at Z yporlihzla,Rivne and Khmelnytskyicould cost US$S500700million.9 If RussiarIs to accept spet nuclearfuel from Ukrie in the future,there will be a needto constut a longterm strage facilkywith an estimatedtotal cost of US$200-300million. Fmily, g i of e Sarcophagusat Chernobyl(or the costuction of a nw eo for unitno. 4) and of the plantwill reure large, curty unknown 294. Basedon tie analysisin Amn 11, there is no immediatneed to investin newcapacity to repace Cernobyl. Howe'ier,the thermalrehabilitaion program of the Mhustryof Power,which w take as grantedin all scenariosanalyzed, will requirecaqital invesments of about US$250million per year in the period 1993-95and US$500million per year in the period1996-2005. he estdmatedcost of the turbinereplacement program for the hydrpower plan is US$17million in 1993-"S, US$45million in 1996-2000and US$28million in 2001-05. In addio completionof die Dnistrovslayapumped storage plant will cost aboutUS$150 million in 1993-95and US$100million in 1996-2000. 295. As descibed in Annex11, each of the evaluatedscenaios has differt reqiem in terms of themal capcity additions,O&M costs, and fuel costs. We selected Case 4 to illustrate the ivstm costs(dtis case is basedon a scona in whichthe mediumdemand forast is assu_ d, de Cheoyl unitsare reired at the end of 1993,the three nearly-completednuclear units are broughton line, naturalgas pricesare flat in real terms,there are no electricityexports, and there is f deta onti of the hydroand theml powerplants). Underthis scenario,no new thermal capacityi requiredbefore the year 2002.'4 Between2002 and 2010,9.9 GW of gas-firedcapcity 91 P y esdmate,based on rports fom IAEAand BIRD. 92 In July1992, the audrities esdmatedtotal compledmn costs of Kv9.7 billion, consstg of Kvl.O billionfor Zpmiazhia #6, Kv4.2billion for Khmelytsky#2 andKv4.5 billion for Rivne #4. It is waydifficult to trnslt the abovecosts to US$. Conideingthat (i) the lattertwo units are only about60% complete; and (il) theauthrities are negodatingwith Westighou to upgradethe _- rwiatmioand control (O&C) system for theunfmiied units, coetion costscould reach sverl hundredmilo dollas(the cost of I&Cupgrdig forthe similarTemelin unfinied unitsare quoted at moreta US$100 miion per unt). 93 Spent el, aftera thryear coolingpeiod, needs to be transportedto anoff-ste stoae ft. Followigthe period of o sble uncetaty in 1992,it is possiblethat raoyarsk (sa) will resumeacepting spt fuel*om nuclear torsin theform Sovietrepublics at an agreedprice. Howee, a moderte epansion of on-sitesge facilitiesat the Ukrai nuclearplans wili stillbe need2edtoprovide a bak-upsolution for short term prblems. 94 Completionof the threeVVR-lOOD units saves US$1.62 billion in investmentcos betwe8n 1996and 2005. -87-^ is added. As a result,no capitalInvesme in new thermalcapacity Is neededbetwee 1992and 1995. Investmenbegins in 1998;tota investmns requiredare abot US$210millian in 1998-2000 and US$2,020millionI 2001-2005. 296. As descrid In ChapterVII above,closure of the Chenobylplant will requie the ndnt of tbe extg 750 kV and the330 kV transmissionequimeand constuctionof a new750/330 kV substation40 bmsouth of tCeplat. The total(one time) cost of tee activities esdmed at US$110million. n addinton,the strengtheningof the systemto meetthe (n -2) security criti in reion to the Zapodria mclear plantwill rqire aboutUS$110 million. f the moratoru is lifted,the connctionof new nuclearblocs at Rivueand Kbmeblyskyiwill reque ependitur of aboutUS$35 million and US$15million, pectvy. 297. Closeto the yar 2000,the installationof new tmal generationcapacity at Odessaand Dauhtynskwill implyabout 2 x US$25million additioal vements in uamssion facities. Due to its remotenesfrom both the 750 kV and 330 kV systems,transmiion inesmet relatedto the cosruction of a newpower plant at Chyhyrynwill cost aboutUS$100 million. Basedon dtese c i d it is eaxpoctedtha transmiion investmentwill cost US$150million in 1993-95, US$170miLlon in 1996-200 and US$150million in 2001-05. Due to lack of reliale estiates, we simplyassme that e cost of necessaryinvesm in electricqydistbution is about UTS$100milion per year. 298. Basedon the above,the expectedieent costsin the powerinuy (for Case4) are -sulmaizd in Table 14. Although,for the sakeof simplicity,these (very prelimay) cost esdmates are expssed in US, i is estimatedthat abo 50-70peret of thesecosts will be incured in Table14: Ulrine - Inves_ lR In the PowerIubtry Cae 4 (USSmm) 1993-95 1996-20W) 2001-2005 NON-NUCLEARGENERATION Thera Rebiliaton 7S0 2150 2050 HydroRelab./Expnlo 170 150 NewT1hmal Caaiy 210 2020 NUCLEARGENERATION Sfety Upgading 340 300 500 NewNuclea ap 400 200 PFld DIposal 250 aCerobyldecommis. ? ? ? TRANSMISSION 1S0 170 IS0 DISTRIBrUTION 300 S00 500 TOTAL(wio Chenobyl) 2360 3880 S220 -88 - domesdccurreny. Undobtedy, bothforei excg and domestic rncy requreme are large." In pdrciple, fin can orginte fromthe foowing sowcs: (i) ntenly gneraed fundsin he poweridustry; (I) domesticborrowing; (Ill) foeig brrwing; (iv) domsdc equity investments;(V) fign equityiv _ ; (vi) dmsdc grs fromthe budget; and (vii) grants firomfioign aid agencies. 299. Availabily of fnancingou of the first fivesources wil dependlargely on one faor: the relationip of electricityprices to the costsof electricitygenation, tanmssion and distribution.If prc are iadeqae to covercosts, the powerindustry will be unableto geneae nestmen funds internally. As a result,neither domesdc bak nor foreignlenOlg agncies (suchas the WorldBank) will consier the;indutry crdtworthy. Neiher will imnveorsbe interestedin akng equity psitions. Sinceforeigp grants, even under the mostoptmisdc scenario, will cover aoly a small fractionof the inestmentcosts, the Goverimt will be forcedto returnto the old practiceof financing invtmnts directlyfrom the budget. Due to lowprices, consmers willbe less intrested imenergy conse in. Demandwill grow morerapidy, necesstag evenmore invtm . Budgetsubsidies at sucha lre scae willseriously endager the successof fte macroeconomic abilition program. Also, financingof the hard acrency requiementswihout accessto foreign borowmngwill lead to severebard currencyshortages in other sectorsof the economy. 300. In additionto dering Wvestmentru e, hie electricityprices will permit the profitableoperation of the power industry,leadn to the accmulationof significaninternally generaedfund. In rin, that willensue s for the industryto bothdomestic and foreignlending istitutions. Assumngthat the neoessay isutional changesare implemented,private investors maybe willig to commitsome of ther fundsas equityto suport the investm program." Due to the traUsferof modem tchnoloy and kaow-how,this process will resldt in a more efficiendy operatingpower industry. 301. Technicalassice needsare also large,but this is an area wheresignificant support has beenforthcoming already. Numerousforeign aid activitiesrelated to nuclearsafty are describedin ChapterVII. TheUnited States Trade Development Agency provided fimds for a feasiblitystudy to rehabitae the Pdnrovsk powerplant. In order to prioritizerdabilitation plans on a nationwide basis,EBRD ofed to finance sceeningstudy. As a follow-upto tht effort,the WorldBank, udizmg fundsfrom the Governmn of Nethermds,will fince a thermalrehabilition project feasibiltystudy. The studyis expectedto be completedin the secondhalf of 1993and preparethe stage for World Bank and EBRD lendig oons. 302. DsrIct heat. The abitation an modeaon of the Kiev district headng system may cost about US$30-40million per year for the next five years. The cost of the "thml updating" of 95 12 comn o toal revenuesfom elecicity sas in 1992were equivale to aboutUS$ 1.6 bilLion. Howeer, _8 that averae electicityprices ar increasedto the equivent of S cent per kWhby 1995,USS800 million will representnot me tan about8.5 percentof total revenuesin duthyear. 96 If agreemeuon the ezy strategyis reachedbetween the Govewnm and the WorldBank in 1993, fte Bankwill be readyto provke a loanto supportthe Implet of a highpriority rmal power 97 NordlandPower, a Caadian en erator,has aleady ewpessedinterest in participatingin a _u hMkiopphjU ikmi. - 89 - apartmentblocks (see ChapterVll above),if it provs economic,would be addiional. Investme requiremensare expectedto be lowerin the other cideswith less exteive ditrict heatingqsyems. In viewof the curren exremelylow paymentsfrom hueholds, there are onlytwo possible fina sourcesin the shortrn: loca govn budgemand support fom the cftral goverment. However,if the proposedprogram to eiminatesubsidized household prices is Implemeted(see Capter VI), user chges couddbecome he main finncing sourcefor system improvemet. Gover shud assist es to obtain tchiucal assi e fom mul- an bilateralsources to camyout the necessarytechnical riews and prepe system febabilitationmodernztiateiplansm. 98 In 1992,USAID started a prom to iaprove the efciec of the Kievdistict heaig sysem The pro includesa deied sstem viewwith K1vnego andthe Kiev Houing Eny Officeand the Intlion of conuoland monhoig equjp_mat omeheat producer (the Kiev No.5 cSg ersDi pla) and sevea end- (e.g., a bookprig factory, the Kiev b and opea hots nd an VapK -. - 90- IX. ACTIONPLAN 303. Thecornestoe of the proposedmedium term energy stregy are (i) the adjustm of energ pricesto reflect uilythe cost of importedand domesdcallyproduced energy including expendltureson highpriority reabiitation and investmenprojec; (ii) the developmentof a domesticcapibility to provideenergy effiiency impovementservices and new incentivesfor energy utilitiesto promoteenergy saving measures among customes; (ili)the separationof the Governent's policymaking, ownesip, and regulatoryfonctions; (iv) the promotonof competitionin oil and gas prducton, oil refiing and markting, coalmining and coal dution and electricitygenation; and (v) the improvementof the secrity of ery supplyby diverfying energ impts, matning the use of domestccoal in powergenerion and improvingthe operationaland technl safetyof the supplyof elecicity fom nuclearplants. Theaction plan belowsmmrizes he most hmporta Measuresnede for the Implementaionof the proposedmodium term ener strategy. Theplan. whichis prentd in a tabular m, indicatesfor each actionthe responsibleagency, whether there is a needfor tecical assistunceand a schedulefor implemeaion. ENERGYSECTOR ACTION PlK ._ . t AREAISSUE ACT-N RBSPO TA IMPEM TATION ad. SIBLE 9_ " I 97- L _ GEWMANAGE9WAND _RG_IA_ION ______.1 101 poh&ofagencies in theseneg - - ,..- setrd developnentatndlinreng6mdae h office of dieDepvty Prime Ministe rsonUsib fr ':Aot of K - - - - . - - ______of ______aidniad perison of Govenunetagenc ien keenerg sectr MinistersI Ii2 I11 egulationof enrgypiess not unpru si disco d Se upan onomos unspan lgl bad regulatry tm to regulate of X 1.3 112 Lc of egabas for comnpetitiond Pavat inaan In oda pere NWco minn la NWan ecriCKY law to establis Ctbinot X 122 ad gs eorin and dewn, ca minn ad eetiiy conesslonnglumand to pmo copu ad freMlSl 126 sqVy blv_m Sumt Ib lwsk diebPame:lt 01143 1. _ w Rn n of 1.1 _S lnhl eoW s= dbut pcemmoly a a '-at mm pillsam 0 ram be_ db_ _ _ _ _ siter n odueoS eocnsingosbode naderkya caw h bed ps AdpuIt L2 IS7 (mmas> ibm dw abv p m Of o 2 o_w3 i,In do iaduto do pM d _fO GO___A_ 2.4 161 Comlsaeuld"I wbcoalpdcesae bdawisp Wontc cadc o8rl commnus(pomlsstSpm _inof ps I * | ] j j -_jpaulty by ad 1993and Si iyopt pady by M*ofied10994. 23 161 Caospd cr _dsos do notcover pducdon fad coas bsid fr ho d_stu ibe oal*tMpies b ofw dictA osis ad thetylm of find pdbe _mnots_ a lsodl_i c _aie OfP 2.6 1L cof hadso miwnvesetinindiedowesdiproduotion instoduea sysmof 'adssad Pr aX*app iableoi c on.ramd nal gas gas produI Incres tbepdie of domericaiyp Iducedcrude oil adW Pss0 6bvIndf bpoapdo O Page 2 UKRAD4 8ENERGY SBCTOR ACTION PLAN _. Tex AR. AIJSS ACrTON REION- TA DAIMLMEATN Par. Rot. 3LE _ - _- D- 93_ 9_ _ - .7 163 1 icy and ba producer prices are inadeqW e ta cover a policy of quately po mstmt and a revisodpricig fala Counit of X * roment and rehabitn costs, do not tabe intoacownt te Io accstwinteal cash genain reqremts to fnane an Prinvesumn needsand 1b w bd prke inass widt a reabIlin ad Inestounprcgm. Liberallu.primes for M. of Considerablbg. Ftxed ptices do ox allow competitonbetween eeators dier a corqetav electrict spl system is ECMoY/ _ge_era.o.se______-__ __ .8 164 Pcespaid to de op sof oiL Vs ad distict beat pipefies c p:o w Adptab fsion and masof Eci X the ee annbdon am dibuonservies a low di_ ntrs to recoe their oprati costs and genetensfbr f adnotregulate Ina transpart manne. rpaentand futurespacityexpWanso S on-.as onComa .9 16__ __ andgas pricesdo ot refecaupply costdiffaees elteicityadg s tf MbLof X _- bw p k peakandof-emak d p-aors __ffs- I eXNRG CONVATION__ .1 35 a b no agency in die Govemamo response for the Set up an Eng Efficieny Unit to coordina ery consvadt orts Ai COUcil of X cooination of energy consaton efrts on a nationwide, coss- de office of dhe Deu Prime Mnistr b rs __is ______I .2 36- a few oe i existw whcyhcan CAMyout lusla foregn teciimca n to cam cut dustuis eneyl aodtsD. X _ _ _ _ 38 e audit and assist entps to devdop ener conservaion Ensu tte audits are canrd omtjoindy with domestic eneefficien Pcime strategies .~~~~~~~~~~Promtoth, deelopment of do'asti firmswhic can provide Mnse .3 39 Elecry, gas aod disi heat distributio enterprises have no and _mm r*eguWlo mecbh ms whc offer i-ce " X M Of _ _ __bcentves to pomote co1m_ en eff y improvmentse to_ p __cm_" _s_u______s_mga J Econmy DtOLBVBffCTOR_ _ .1 7 Oi sMPy tieBcutit ref ieresto sig dre coat. twh Rusdsi* oi pX ._. Sa O _ 82 tnhdiecapaci of Ihe Odessa port oil mal and bld pipelleso and G(as 176- er cude oil ftom Odets to rfires. Expand crude oit and oil pmoduct Com Jvin 179 song c Of BoCoM .2 112 Crode do and tal gas exploration is monopolized and separsd Splk the Stae Geoogy Commitee iNo a Stte Geooy Survy and a Counclof O* from produco. Pe 1xpbadon Company. In dte medium m, move explozma hl M ioJSte the onild So production CompaniesGaod. C. .3 114 Lack of compe_tio.' an oil rfigg and maketing A o stt orden. Corporatize efneries Demonpoie and privat SL Com.f X * ISO mnmarkig. Libelize dho export import and maretng of oil products. E== open access o p tranasport pipelies Resoure _ _ I _ . .~~~~~~~~~~~~~~~~~~~~~~~~~tOa-_ _ Page 3 UERA _ ENE3RGYSBCT'OR ACTION PLAN _. Ten AREA/SU ACTON RESPON- TA DMPLBMENTATION Pa. Saw _ _ - lif. g49 697- 283 le aactc a loanadpvamtcapilo fiee viabprojes cGas GASSUBSCTOR______1 77 gssansupplysec of 79 iimmotpf a mnt 1993. Sig a coamm l c wiGapm ) coU- soa8--I0 NedoX b4 Om pas bWoMst_emlm wmm 2 116 OrgnIato of ps prod8cio ad tnsmissctvite nca t opstna atnomy Of as du productionand Sao O___ II - IeouPt wbmqoS_t s gictdowa andOn ____p___. b_,_gas coo cac - 3 3 NatId gs resourcebase s ox we defnd an mum ad u modemtchnolo o stma th eser ba MM S_t GaOL X 183 k-- is not based on economicvibility .Re.cbss119Y reservesby' Iopraingeoomcvabiiy kditoUe C.Alit- -8- w C.- - - - 4 188 A ber Ofconsso hav ezuded hi norma operatig i compor rhabi o and replacementpogm Ubgaz- X _ *_ C C libandosdam a it. Tbeis a oie of nw eplaementputs and mates to kep de comprors g 5 194 oDiupton of gas de_ve to E pe afets ie va"le of uansit Oth conngencyp ft cope WMthmep d suppy diraption Ukra- X _ _ servicespve by Ukraine _ be Upm ad t 13u pm 6 195 La* of a og tem gas t wsta afect U ine's abiity avlonga rM contrating c l fre transi sevices and seek bfn of X * rOlanaeem irvne bam commitmnt-y p P ______g arpro~~~~~~~~~~gam a 7 196 co of s cosadWMge fne costsof Uke's trasit Sepae sto adS fees. Negop a wo-pt nsite hat ofL C serces is en_daersdbydI curntonep vome ad fr sept billngof fied andvarib cos. Billcompessfue Eonkr- baedfo asaedit pen______p_tv_ of ___ UPmm 8 197 Lac of fonds to fa rece t ad rhabilto of a d itodu a bard cuMIIncymr j mechanim based on ie of co_rmsm said oher iwsuI neededto m dan d e oostofa redsysew Econ.Uk- - libit of nst ses _ gp _- _ - .9 1_6 echnic andin conos arelacig for otewisyte _ ie Maeny VkrgmeandzU- X _ _ C C vi cc_mmec projea finncing sches in gas transit . In dke on em spte t transitsbuinessfra domestic prm ------. 190 n pbably exces gas lss in dhed d butnsytem Cay out a diapostic study. Prepareand iplement a lons reducfton ra X _ _ _ C - - _. , ____- - UKRADM seclYA,CI1 AM PLAN_ Ton _ AREN-ISS_ .. ATILAMdWTATR) d. 93 _ _97 1191 so1ebofdmsint icmeud sadpnd agi gUkas ng X * * * * * 2 29 afhda to&fin ts oexpnc edi_mbuo a _w ______h _ _c. *" ex- dn 8cuo_adF nk _J AL W1 3 ______ 1 121 StmsCoadCoinmIels bo&do dobwo wm ofdmo ad anputof ansW ofdms8wsCod of * ad is repob_Ib de kelpolw il dacoam Ce beadofdo cdseasof de c0uu, sOu iditate 16bo ubaclor mpmmmtatiwsof do am rogaMyroo Mi y of .mmP,Mnly of _ _~~~~~~~~~~~~~~~~~~o. ,of yh,bo an dib _a _ _d __ I 122 r oo o ia m es mcooao i Dowakand LIank it a kw m _ _ I__of _ r eaecotivbd 8_Ie csdbipo cdof ad 3 161 lAckof cowipetiulonin coal rna neomdd a delo isiuo1 and tanspo 8ams SLComOf 0 insmd Consmers C9 4 16 mAnerof obsoeb miningad borreg8ato decorase S ie_nsat mveon ad miw opetos. Do not equpiream Councflo P d _oof - _ . ~~~~~~~~bbercod~~~c do 17 tioncoefeuaicaiontsykstembetweeni mining itshe oencoeeepslsms 5 217I m pVd m wb"L k Wget Abatdo ep d _m Adopt Mnuf pwSS ad _m _c f _t o _ nI dffimto eIanub* perfomace. er asedecrsed in eachminn enpse. Carr outa tnxost analysisto ien bigb Commec ines to10 repednfomaneand no inaenisto at lowcostpdcs. 9ubsidiasto ighcomt pmducesod be Miity Of lavestmentfunfa nd awomay.ded so an Induy widelast costprodn FmjmiL P ~~~~~~~~~~~~~ofBcAz ,6 18 Tbear nopmdutn anddevelpm plns basdn lsc k leaswost poducto and nvesbmproam basedon consta S Coal X * * aboutol dmandant minimiatonof ml dem or stam coalin powergeiationa declinned c dema in a* Coee costs oNr secs Theprgam dbod bebasd on dsn minn torsev .7 219 Moredficiet anddecasig coalpw_Qm wl rm itn a elopaid lapimmatapropm fotrtb re iinngam empbynt of SL Coal X * * * * * s2n20n delie in te mIof coldmiers. empeiyed calmies. Tbeprgm woddbeaimdasenply CoynJSL h_c;t infastom and Iemnt du-p project do d Coo on }of SC_O - ~~~~~~~~~~ENUGSECTIRACTIN PLAN- - a. Tet AREAIISSUE ACTION RESPON-TA IPEETTO ftgf* ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~SE9366956N97- 8 0 mudenisausatilmid and vessd bno Rkeuasp.uR ftecimWicafasblly andcosdtefectveness of de Improved slawColw X * ______~andutilization of oas"e me iaa gas .1 a24aas amabthisy, ,naaa gAY$ewcaind asTiaeb Khaeaeo,intoasmueamilm itafyfocusslnon poUcy C4 of X 126 of a hap Intesratdudtit andstati 4decsionsin Repoa werndsy. In diemedium mo mtW s.erMlnuerows regglator finacions to Renew eareg reglaos '.2 1I7 OfcomIesl'o in elecrhinitseppl adotdkImpemt a planfdor Re teston to a compethiftipower spply Councl f X * 1.3 126 Smas above SWH ailc M mewldtsules,ovemngproeduzuslbobbealln WMhseage X* ______~IIYW Ncnces anddo operdonof aamlsslonand distributloi on yms Mof Bcon TJ 130 Nwmein y. manes andbiedgtofRe Nuclearsey Commiftteprepare a law to seiahlteudoawuoity of toeNuclar Safet Counmmte and CouncIlof X * * Inadequatcompare to its task ______TA 226- UMspoeubil,ithyfor de stausof theoubA of blockno. 4 Separatde responsibilitylb.hMYII ;1mdO 22o e Checooftmcl OMnis Motclear. Not atoug finania Rttd*tepobmulm of Re Sarophaus)from Reo WIde resonslty of Mlaiters ,ic~Iam allocted to monboslodie msoof doRef Reconseqmueesof the1966 accIdentbeyond plan boundaris Maeeo "Sauc~bgs andsmtteyg 1 behaIou. 7leacos of sit fuadsbased on an objective awd scientfic auesssea of prioritiss byrIStat renulonm andclean-u at Re plan Isexpecewd to bever larepin finenclofor cetain expeiurs fromde intermaioomNl ______~~~~~~~~~~~~~~~EC O nOL 7.5 23ExcessIve patticlat eatissio=afronsaa powr plant detofeedem ubecfiler duringRke eabIlIatIon of Retinapower plant Mfitinego* bla duetcollection eum ______7.6 25 long distanctrnspor of 8O andNO emissloas fromtb~ullo comSh rdedcdontecdmlgis suchas Re use of cleanedcoal.Mnnro X * 246 pbr feeloil moteatIqlcdos ani dry scabbers.Reuce N06 M.Of by waanWOkdlflon sii appllcatloof new 'armEnvron Du7 diedosmeofReCheinObylpVIM tsndbaglugoftberma Rebwevoudon of denund.Iqslesneta widrae of demm X 257 plant.availblegeneatio,caaciywill lubedecrese wAs meascres, hbasdReluro&duclnof mtlno-da6yad M.Of LISHoweve, de reenated ofdecreasin demand isexpected to Itenptibe servicetarffs Improvedmeleter of electric ityanpdud Economy 166 condamofcnue fieyupea . dW d dm i ~~~~~~~~~~~~~~rlailniaprogram~ ~ ~ basedon the application of cost-benefitcritri PAge6 UURAW SXER"SCTON MO PAN _ ARAM_SSUE ACTION RISlUN- TA DIFP A IDON hf.~~~~~~~~~~~~~~~~~~~~~~~~~~W 93 94 9S 96 97 pdolfe Irse VVR-1000mdr unisappes die d Ukaintecan opert mcr pbntsin a_mrcon SL Nuciear low" a X * * * * bww amtcon 8pm iowe.o ovA Pr,actices a _ adopted _s. Wi&bm assice, 2e3ist Elq uci leansr pointof view of mwkr saety a_ p a pwmp of safet upgadesof I VVER440 and Cnm.tSt an atolfc_ VVoER-1000unit. Desg and kq*nn a pabbo _ntbaon pomam on Nwda , s SdFse ? 252 Tb hydpower platm_nbablaon progm and planned on a deailed oost-beneft aninlss, prioi 23 Investment do bydpower * Inpumped storag capacitdo not reflec -merl' ebl pongmun Investigatdo vlalilt of buiMdin .ll kydcpowe 257 ftvd"mem in deecrity demd ad changesIn kedmtg of Reeauate nsiod of iwvsmamd copeonof o3 blcob rmwarsmerdcwy -mdppuz M h 10264 T boInvestenipumm doesnot efetent a aid piorize de pxoposedim ens in dIotms sym 265 invein docilyeplr udmado chaves in thogeaon * _ _ . - . . It 271Avao" suipbssmagdon and wasuddon - _ _ _- _--_- _ apact NegotiateaumaNl or meim tam cona for IbesiDe of elecic to or oof * :ounaesat pie which cove On abd cw wa) lnas4m mgnal B/ OMny _ _ _~~~~~~~~~goAaid wsomiss cooX_ 1 131 potJpm for orpeon betw hea supplis is dffetl Deat rpoelb for beasupp licenes and la h bolween b io . of * * cins. Tber lao needfor deailed aton of disw b_riand disb ion ssm o tben cipalexive councl RciSta beall ryslms an a _lonwO bob P nsea oversh ntion ad providetenl ad vicesandads at CoIILof ac ComL 2 278 Dstrc bestig systm on chatied by lge e y loms, C out dtailed te a rviews of die sWems In do large ciies and inee inadequater n and conaol X __ _ and cording transms and pe r _sysemi lh m sat s. Stop syem expansionadl St Como. dwationpiprs rey on dict comedon to dhegs distributionnwort Housi ______S ervic~~~~~~~~~~~sevies .3 279 adequa therma inution of aprmn budngs andlak of 3 _com plet *era udatg of rprentate beatomo_mpton aam blocs i Sae Com. X* gW Kimvand odher lge cities Studydi Affecnessof ts measue and of Housg pmpuoa ntonwie pgram tOdease eng lossesin residential andComm. buidin SenMces wcnw_nwf*8wa.wwf-1,n.wD 81U SAAC8 O UKRMNB.10(13) Cod a Coke CM" o_a Dcams re LdEoar G o e- was ae * uy&. u.d.w DeyW fi TOrAL Fed tadb..Vi iD 22m to" 6 1t2 las 496 442 5 2a7" int I1 225 32 #5 s7 1 Uq.rw -42P 4 -Im -54 -t1S -- -4 -U 8 -2 -t -111 a _ _ = - s 18 -U s-9_74 w - - -8 _ -2_ e_ ~~ ~ ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~A Cud| 1am -1) Otwh* b y -t -7 -t -1t# -$ -1I Neal u.s - .4 -as~ ~~~-s ~~~~~~~~-n Cessna -we n7 a_1dhudu 53 -74 -mm4 45t 462 lw6 to t28 24 -2t 45 Xt N s" -m -14 -3 0 -t117 EaddN. Nl -3 -ti - "ff us -ts @o tb.b45ram. 3.5Mg -u~:$-n? -um -2t#m -6f ftw*di~ - -15 0 -In -4 .42n -1a0 0 -l .4 04 20 _ - P_bW * t1 IIIt 1 Ch_Ib dmq 11 $ 4 14 74 am.mnsarqU0tSt * Wad bay 5 0 U14 28 1 Ma*hSS_bwaft 74 tX 2l 0 49 210 2 2 4 1a tt5 s oans.uy 74 6 112 a t 19 1 n n t4t U t tO * *17 2t iS a 13 Aptlinn 2S7 I 0 67 7 9 0 6 2 7_ ut.salsic.m.Id 28a , 0 6 20 55 56 1 8 28 2 WtfUNtMAAMIWLi"aJ6 sW-469wKI lEROY AANCBPM UKUAINI.t16(3) Cod A Ct CmS GuSh Obd hid LEO O_t Em- lwa Me1h ra EA E._i Moau"1W Ike ToL _4wm ON og uOtIJ gm g Ss WM _s... tas X_P~~~~~~~~~~mamsa 2 4m 67 112 55t Sagan 54~~~~~~~S15s n mn st7 asI a isa SWS 226 I" 272 45 24 54 176 2 SWsee _ma -in -n -to -us -44 -7 -24 Oak 1 -166 im~~~~1) 14 -1 -23 -3 4 46 1 CoMhduuu -u 4 0*., poe sy -1 -40 -1 -2 -4 Pow aiftef -t -1 -10 -n -r3 Cab -1174 94 Pdra _maim 275 -14 -f -2no2 491 66 its 2S *4 S4 -16 0 FOS. hamS's 11am -75 -74 -19 -4 -1 -7S - t 1Z -$s6 ex 31 Steww Yes LFew" -so -14 -10l Musi Resg Hkal -4S -221 -1 at 256 -133 -1 -f -2 -10 N -t# Loom0I - 0 -1 -57 -4 0 - - t.-F_amMs y S 3 2 t 2t Cbao"Mb& tt $ 14 tO a 2 17 1 419 7 i1 4d) Wtl Ummy S I 1 t1 22 2 7 22 Z __h.bahihghduuiQ 220 a I 4 t1 2 2 77 O*uulads,y 1 67 1"t 4 24 a 46 1 5 42 4 C__auaS.. 21 to t22i6 m 7 so 1s 4 24 1 # Sa 29 A5rn. 4t 35 1 2$ 14 s EaMflm.mid 4 24 41 ~~~~ ~~456 4?26 so5 51 4 14?- 1 Ii _99 - ANNEX I Table 3 UKRAINE ENERGYSECTOR REVIEW ProductPMe hI July 1992 (Kv pe to) Nameof Refiery Lvyschanhk Kromunrhuk Kherwon cost of cnudeon (a) 4,150 3,886.4 3,738.8 (b) 4,374 3,089.4 5,148.0 (A) &~Ii Exefnewy la) 5,387.9 7,612.3 6,219.0 (b) 6,901.2 7,612.3 8,935.2 Dirbution argn (a) 388.0 388.0 388.0 lb) 388.0 388.0 38^.0 Tax (a) 1,617.2 2,240.0 1,850.0 (b) 2,041.0 2,240.0 2,610.5 ConsumerPrice (a) 7,393.1 10,240.3 8,457.0 (b) 9330.1 10,240.3 11933.7 (5 KeroJet Ex-refinery (a) - 7,391.2 (b) 7,391.2 Distributionagin (a) - 388.0 (b) 388.0 - Tax (a) - 2,1782 b) - 2,178.2 Consumepice (a) 9,957.4 (b) - 9,957.4 (C) Diesd Ex-refewy (a) 4,752.0 7,704.0 5,153.7 (b) 5,735.5 7,7A4.0 7,277.0 stribution margi (a) 388.0 388.0 388.0 (b) 388.0 388.0 388.0 Tax (a) 1,439.2 2,265.8 1,551.7 (b) 1,714.6 2,265.8 2,148.2 Consumrprfic (a) 6,579.2 10,357.8 7,093.4 (b) 7,838.1 10,357.8 9,811.2 (D) Fud lI EXt-rfNery (a) 2,642.4 4,435.2 3,345.6 lb) 3,476.9 4,435.2 4,749.8 Dktbution norin (a) 388.0 388.0 388.0 (b) 388.0 388.0 388.0 Tax (a) 848.5 1,350.6 1,048.4 (b) 1,082.2 1,350.6 1,438.6 Consumeprice (a) 3,879.9 6,173.7 4,779.0 (b) 4,947.1 6,173.7 6,576.4 Source: Ubm - 100 - ANNEK I Table 4 1dinag Capmdtyad Pndue pattm (1991 (All flgr In toand metricto) _rMUbu Rhin Warn DuApb Nait Lyqs k Totdl DiUai 18,30Q.0 1,1.0 3,7.0 3,600 3,400.0 23,6000 6.W765 Caytic s8u 1,793 634 3 3Sa.0 30.0 214.5 5, Tuu .add - 700.0 500.0 - 1,200 Caayicrcii 1,5 - - 1,35 Ck 50 - 90.0 S00.0 . 946 DIAt XDS ,35.0 - - -- 3,675.0 7,110 sad. %M2,390A 1,191.3 46.5 61. 518.3 2,71.0 79.A et kbasm 941.5- 237.2 60.0 - 91.2 2119.9 DiIl 3,S2S 1,3706 792.1 1,071.6 4,815.1 11,2I1t Fad OHad bastiag fuel 7,441 5,515.6 t1,9.0 1,61LO 1,163.0 961 25,040.1 B _ 3SS.9 284.7 5 2.0 - U S3.4 Oak. 1062 - 14.0 40A - 160. Au. tu1 4093 - - 4093 1.. bbs 121.2 - -* 2.0 1491 PG 150.9 54.7 25. 11.0 16.6 38.0 276.7 o0 1,0Z1.4 S6.5 9152 - 41.6 654.9 3,48746 L.t_ 177.7 S24 21.9 33.0 3S. 171.1 491.9 Rfimy uld 50 219.0 1060 11X.0 38. 587.0 Sawtel wank eatmas oandu mu,Mh..ouI ca d os.I1daa. - 101 - ANNEXI Table 5 Pamel Employd In the Renee In 19 Refinery ~~~~~~~TotalPersonnel 3417 Kherson 1286 Odessa 670 Drohobych 1645 Nadvirna 1557 Lysyck Q Tota Sourc: Ukredefkm - 102 - UKRAINE- ENERGYSECTOR REVIEW AibE I KEYDATA OF MINEASSOCIATIONS -Coal Resefvs - Producton Production f eld Cos ateam Formatof ML coaW l Wnftoaa DonkObat 4,110 45* 60 65.0 l10 2s% Donetsk 1,110 23% 80 14.4 138 mso% Makeew 450 18* s0 8.S 126 147%6 Sdov 200 100% s0 4.2 s6 99% KmanoarmenJs 400 28% 60 7.1 77 89S Dobropoie 6o 39m 110 5.0 78 9g AMM 290 10% 60 4.8 134 154s Dserilnsk 110 es 50 2.4 142 163% Ordshonlkldae 180 76% 50 35 130 149% Otober 330 70 6.0 86 m" Shachtmk 300 100% 70 4.5 95 109% TOMes 200 100% 30 6.5 8 101% LuganhkObtest 2,660 73% 60 436 90 1es% Lugansk 550 93% 80 7.2 96 111% stwt v 270 41% 60 4.9 131 151% Pewvomak 270 52% 110 2.4 113 131% Us_andk 170 100% 60 2W7 106 122% Kramiodon 400 1316 70 6.0 81 94% Donbass 280 100% 50 5.3 82 94% An,tICt 110 100% 40 3.1 77 ssw RO ld 220 100% 30 6.3 69 60% 8Ardlov 310 100% 50 5.7 74 85% PaoWad Oblast 1,000 100% 90 10.8 65 74% Total Donbls 7,670 62% 60 120.3 93 1i7% Uklapad 170 53% 20 8.0 52 60% Aioxandda 160 100% 20 7.2 28 33% Total Ukaine 7,990 62% 60 135.5 67 100% atoal mineablerev (seam coalacokln$coal) V sare of steamcoal in total reseves .l lfe-me of total mimeableresere at prent productin rate d/ctual raof-mlne (unwashed) productionof 1991 elacul V991cot - 103 - UKUNE - ENERGYSEC",TOR REVIEW ANNEX I Tabbe7 PRO0WCTIN CosTs OF INDMDUAL.MINES T b/ of Production Production Cost Pacenf MVi fl~~~ avuag ChyeWntsv 0.5 164 1% Peooveky 0.3 228 171% T ndorkays 0.7 116 87% Yudamodonbacaya1 1.0 117 87% Yushnodonbesmak3 0.6 137 103% UdiWoa 0.4 171 128% Abaumoa 0.7 138 103% K bowsmy 0.3 200 150% -wcot.klnkgo 0.9 113 84% Kutbahsvakoe 0.8 144 107% Towkogo 0.9 134 10% Oobr 0.7 140 105% Zasyadko 2.1 86 65%s Butovka-Dorwsay 0.3 118 88B Kafna 0.7 135 101% Mushketovskaya 0.1 224 16B% Donbas 1.4 140 105% Krmaa 1Svwda 0.7 161 in% Pravda 0.3 186 t39% dOyem Ukrane 0.6 138 103% Mosp _k 02 133 100% Wmt 14.4 averW 0.7 134 1006 Lug1n"& 1.1 96 100% Lutugfnkaya 0.7 93 97% Ltnksa 0.4 82 86% . LCones 0.6 78 81% Bdmotmemy A0.4 118123% SUmaiim 0.2 136 142* Chwkmk_a 0.3 129 134% 'Jskle 0.6 113 117% Moms 0.6 89 93% Koml vskya 0.6 71 73% Nlkor 0.3 96 1o% Pemstsa a 0.5 105 109% Kosor 0.4 113 U8% Fah ka 0.4 74 77% tot 7.2 aveae 0.5 96 100% alody.flhetwomime.odadoawhibh waetbed dudngtbe Septmbe 1992 mn laIiu.fe-mlo (unwashd) pmducdon at 1991 *sdn l10moo - 104 - UKRAINE- ENERGYSECTOR REVIEW ANNEX1 Table 8 COAL SUPPLYAND DEMAND oInmiflon tons) 1990 1991 change 1902 change 8UPPLY RawCoal Production at 164.8 135.6 -18% 133.6 -1% coking¢oal 67.8 55.3 -18% 54.9 -1% thermalcoal 97.0 80.3 -i7% 78.7 -2% Saleabe Co4alProductn 19 0.7 1 -17% ilQA -3% minus Exports 20.0 13.7 -31i 7.8 -43% to non-CIecounries 10.9 7.2 -34% 4.4 -38% thermal coal 83 6.9 -*c% 4.0 .42% cokngcal 2.4 0.3 4. 0.5 S6% to CIScountbIs 9.1 6.5 -29% .4 -48% themal coal 8.2 6.0 4% 3.4 -44% coklngeon 0.9 0.5 -100% plus Imports c 21.1 12.7 40% 11.7 -s% from Russia 15.6 10.8 -31% 8.7 -19% themal coal 6.3 7.0 11% 53 -24% cokingoal 93 3.8 -SD% 3.4 -10% fromotwr counwts 5.S 1.9 65% 3.0 60% ApparentConsumpton 13. 12A -18% JQf 2% CONSUMPTION Powar Pants 40.2 d/ 35.4 el -12% 35.6 1% Coking & SeeolPlanlt 52.7 a/ 40.1 tl -24% 33.5 -16* General 38.9 32.2 -416 40.2 ZS* households 13.7 b/ 11.9 h/ -13% 11.6 -3% other 1,m 25.1 20.3 -i9% 28.6 p/ 41% Total j,j luz -18% 21 1 run-off-minequalty bl about 70%washed * 30%unwahed coa c/ asrecorded byUglsbyt theaemay be someadditonal import not reorded by Ug1esbyt d/ Bank esimate, based on repord 12% cosumption drop 199l91 el fgure upplIed by powar industy V Bak esmatebased on Ugleshyt data for distribution of dometc producdon and exportsAmporm of balue hl Bank esmate, basd on ratios reported by Uglesbyt U inceding commul use, small industie milzty users, mines' own aeeds(bathes, clinics, free coal for workers), bro coal losses for briquulg ad others .V posI by including sgifkat tockpie chan Soe: Ugsbt, ualess noted othawie - 105 - UKRAINE - ENERGY SECTOR REVIEW ANNEX1 Table S COAL UTILIZATIONIN POWER PLANTS 11991) Instabed Col Powr Gneratn Coal Sha Potentia Coalred Coa fom cod t Capaciqt of Coa Addkiond Capacity Utilization Coa Use MW "Mt oWh aWm MIta a at d 4! a Ua A. Anthrcit & Low-Bitum. Coa mvi RoO 820 64 1Z941 17,96 70% 74% 0.5 Zmlevsk 2000 4.3 9,059 14,181 81% 64% 0.8 Stwobeshevsk 1,750 3.5 6,3 10791 70% 59% 12 Pdkepovs 1,606 2.7 5, 10, 77% 49% 1. Lugmsk 1,300 26 4,158 8,13S 71% 51% 1A Tdpoisk 1,173 2.5 4,515 7,421 72% 61% 0.7 S!8anek 715 0.7 1,331 1,772 28% 75% 1.1 subtotal 11,364 22.7 43,705 70,514 71% 62% 7.1 B. HBgh8ltumlnous Coal Burtnsk 2,292 2.3 3427 1012 52% 33% 6.3 L z*hsk .1 1,778 1.9 2922 9,158 59% 32% 4.6 Kurakhov 1,447 4.1 5,06o 7,969 63% 63% 25 zaporozi *I 1,161 2.5 4,111 437 48% 85% 1.6 Zusvsk *1 1,160 0. 1,7 6191 61% 21% 3.6 Uggors * 1,050 0.7 1,312 7,0 82% 17% 2.4 DobroMosk 600 0.2 364 3543 67% 10% 1.8 *tivelymoe and efirdejant(3MWUns) subtta 9,488 15.7 18.473 49,713 60% 37% 22.6 C. A Coi rd PowerPants toW 20,852 35.4 62178 120,227 66% 52% 29.7 campi fundlscqv"Wpefa sfkgc*uiI kmbeplutsddps-an *4hdunits b/ a*cWalquauty wa ic&6blw6uum 4, af % ash 9%mAWL4%S h14bkmIn= 3.7*kaftM%s, 11%alL.%S c dmsatdGWhegnredtomcuol d! estdmadttalOWhgetedbyIcouawd tfrm copaasado e/ avenilmtlaIScaosl'dflredapscqiy U dsetcod inftm wle(ofd) 0/ basdon oX iaw mpftlacapsdyutizlmotlrailplan asadto ;7;shre tcoalIn plantb inSande&kwvbltum hcreasedto75% shareetcoal in lanbts gw.bm. wueasedto8S% So= m af.bqopowm,fflBazdce - 106 - ANNEX I Table 10 - SlgRae gC S R i i g g l R t # § R S t { (0{ P a d 2 lE#||irsE- .4 .4 4C 5igiE i llp! p£t X $ l$-X'SX~~I- - at .4 fiZ"?y aip a§g li ffiiXs X111111ts j - 107- ANNEXI Tabe II Prfemd Fewb of Eusng Thrml Plant Station Year Desigp Main Fuel CV Of Backup Capaci MainFuel Fud(s) (1M) Ladyhynsk 1971 1800 Coal - bigb volatle) IS022k/kg Gas Pridprovsk 1960 600 Coal - (ow volatile) 20582 kdig Gas 1200 Coal - low volatile) 20582 /kMg Gas Kyvyl Rih 3000 Coal - (low volatile) 20291kl/kg Gas Zaoirhzhia 1200 Gas 33500kJ/m3 Coal (H.V.) 2400 Oil 40235IJ/kg Gas Uglegorsk 1200 Gas 33500kJ/m3 Coal (L.V.) 2400 Oil 40235kJ/kg Gas Zuiv 1200 Gas 33500Id/m3 Coal (L.V.) Luhansk 300 Coal - (low volatile) 17811kJ/kg Gas 1600 Coal - (ow volatile) 17811kl/kg Gas Starobeshevk 2000 Coal - (low volatile) 19603ki/kg Gas Slaviansk 80 Oil 40230 kllkg Gas 100 oil 40230 kl/kg Gas 800 Oil 40230kl/kg Gas S00 Cold- (ow volale) 21420kJ/kg Gas Kurakhivsk 200 Coal - tigb volatile) 13126kJ/kg Oil 1200 Coal -(igh volatdle) 13126 ul/kg Oil Trypilia 1200 Coal - (ow volatile) 17756kl/kg Gas 600 Oil 40234 k/kg Gas Kiev No. 5 200 Oil 40234 kJ/kg Gas 500 on 40234 kl/kg Gas Kiev No. 6 S00 Oil 40234 k/kg Gas Burshtsk 2400 Gas 33500 Id/m3 Coal (L.V.) Dobrotvirsk 300 Gas 33500k/iii- Coal (L.V.) 300 Gas 33500 kJ/m3 Coal (L.V.) Zmiiv 1200 Coll - Oowvolatile) 20264 kU/kg Gas 1200 Coal - (ow volatile) 20264 Id/kg Gas KharkivNo. 5 200 Gas 33500 k/kg Oil 250 Gas 33500kl/kg Oil Others 2859 CoalGas/Ol E8TlMATB OF UKRAINETHERMAL STATION FUEL CONSUWTION AND EFFICENY BASE ON 1991DATA (GEN TATDOUTPUT, ORO CV) N.o 992MW Col Buwr GWb G. Bured OGWb M.Bmud aOWh EtaGWh m91 Na G WE C4acky Ohliens) ftoal (8Cm) f.1a1 -pit) Ii *.. Om OWa pa S Ladplia1 am Igo 2922 Ida * 5774 111 461 9W58 939 37. PzalFi 580 1100 180 s04 * 1 O4 75 ' 27 3671 304 337 146 1723 3458 958 * 3129 142 * 5s I74s 7140 5.1 zyvyiRsb 2820 63t4 12941 692 * 2247 56U 220B 17316 11391 3Su _ ,oi~.his 1161 2546 4111 220 * 7 * 437 4636 3J5 2400 1947 * 7068 1475 * 6413 13461 13476 39 U*qost 1050 690 1312 1400 ' 442 356 * 144 75 7506 A4 2400 1657' 6060 2000 * $785 1484 14"3 39.3 Zn4v 1160 879 127 1435 4031 23 93 691 68 36M1 Lu.oak In 0° 1t0 202 14S 467 760 79 28 1300 2611 4158 512 1534 67 8 2439 J131 8131 Saroheahovek 1750 3452 6373 185I S4 1012* 38U4 10791 10777 IWO O180 m 460 * 460 462 286 , 670 3S57' 5106 34 a 136 5242 5241 37 ? 7I5 68 1331 * 16' * 441 1m 1773 lutth1~vit 3.0 IS7 30s4 4372 50 250 687 6876 335 1260 56s 688 * 1o0 404 1W92 101 33.2 TzypIlBu 1173 2SIS 451S 620' 2100 19n 806 '7421 7421 36.4 w 444 * 1504 541 * 2201 375 3711 36.4 Om No.5 200 360 SSI 125 397 134 1349 28.4 00 773 2431 2W 44 3376 3373 33.# Kisv No. 6 500 921 2"? 2W 944 3 41 31t41 33.8 B110111"A 2292 2316 3427 1534 * 5282 436 * I3O3 30512 10517 37.0 DaMotyk300 130 178 560 ' 1746 *9I Du34 33.5 300 130 186 440 ' 1433 * 16V9 1639 35.0 Zmfh 973 2208 4314 585 * 1 J6 153 * 5s3 6753 671 341 3025 2314 4745 613 * 2042 160 * 41 7428 7439 35.8 aNo,vNO' 3 470 1032 206 2096 2995 3t2 Oduc 2210 5250 12214 31214 12218 25.0 TOTALS 31 15? 355m 62179 26129 81510 9596 38783 182472 182486 - bO:. s 1. Fad bum mwbed'*' am f. acted 1991deice Oa bwns 2. CoolCVs we amou lfr 1991. - 109 - ANNEX 1 Table 13 CAPACITYRITIRINSUT PROGRAHME Year Station Type of Plant Rated Capacity (NW) 1992 Small thermal Thermal 40.5 1993 Chernobyl Nuclear 2,000 1993 Luhansk unit 4 Thermal 100 1993 Small thermal Thermal 59 1994 Small thermal Thermal 34 1995 Small thermal Thermal 30 1996 Small thermal Thermal 70.5 1997 Small thermal Thermal 13 1997 Pridniprovskaya Thermal 600 1998 Luhansk unit 5 Thermal 600 1998 Small thermal Thermal 15 2000 Small thermal Thermal 15 2005 Slavianskaya unit 3 Thermal 80 Total 3,157 UKRAINEPROPOSE THEMAL POWERPLANT AUBITATI PROJECTSWITH SUGGEST PbORIE8 PROPOSEPMMGEMT PREUM.PROJWET PRORM AtLOAMON I PRIORITYNEED UNIT RATED COST RATED COST RATED COST YAR STATION NO. AOTPAY CAP MW 8(MIL) CAP tVK *(MIL) CAP $KW $S(MIL) 1803 PIRDNIPROV6K 1 DEOU8H & REPLACE1X300 MWTUR SENE 80 18 800 18 1803 TAROEEVSK 8 RECONSTRICTI X200 MWTUOGENSET 200 100 20 200 100 20 TOTALIOU we 20 60 No so 0 0 1994 BURINTYNSIC I RECONTRCTCOMET I X200MWSET&INC.FOG SOILE M 00 188 o m 18 184 LUHANK 8 RECONSTRUCTI X200 MWTURBONSET 200 100 20 200 100 20 1t04 STAROSHEVSIK I PT FGDDENOxEUMENT 0 265 1 200 61 1804 STAROSE1HEVSK 7 REDONSTRUCTI XSOO MWTUR8AOENEr 200 100 20 200 100 20 1814 Z3V 1 DEMOUSH& REPLACEI X20 BOIR IN FODAENOX 200 460 8s 200 460 80 TOTALIN 1000 2w 400 40 287 1806 BURSWiTYNK 2 RACONSRUCTCOMPLETE 1 X200 MW SET& INC.P0O OILE 200 0 1t8 200 6o0 l13 186 LUHANSW8 0 RECONSTRUCTI X200 MWTUBOGENSET 200 100 20 200 100 20 1906 PRIDNIPROV8K 12 OEMOLIUH&REPLACEIX300JMWTUOGENSET n0o 180 so S0 180 1S IM5 STAROBESHEVSKB RECONSTRUCT1 X200 MWTUROENSE 200 100 20 200 100 20 1iml STAROSESIEVSK 2 RT DENOx EQUIPMENT 200 255 e1 200 561 1905 ZAIIN 2 DSAOUSH& RELACEI X 200MW BOLERS IN POENCX 200 460 as 200 460 9 TOTAL1665 1800 se 700 79 400 149 ilm BURSHTYNSK 8 RECONSTRUCTCOMPLETE X200 MW SET& INC. PC BOILE 200 80 188 20 800 1 10 KURAKHN 3 RECONSTRUCT1 X200 MW TUROENSETU 200 100 20 240 100 20 IM KURAKHIV 4 RECONSTRUCTI X200 MW TURSOENSET 200 100 20 200 100 20 1608 LUHANSK 10 REONSTRUCTI X200MW TURoSENSEr 200 100 20 200 100 20 100 PRIDNIPROVOK I3 DEMOUSH& REPLACEI X00 MWTUNROGENSEr 800 180 as 300 180 29 t8 STAROBESHEVSK9 RECONSTRUCTI X200 MWTUR306ENSET *00 100 20 200 100 20 18088TAROBESHEVSK a RT FODiDENOxEQUIPMENT 200 256 61 200 255 51 1806 TRYPIWA I RECONSTRUCT1X3000 MW TURSOENSET 80 100 0 3800 100 a8 1680 ZMIIV 8 DEMOLH &REWLACE I X200 MW BOULER INC FODENOx 0 460 66 20 490 B0 TOTAL910 2g0 488 1400 146 Soo 287 10?7 iUR8HTYNSK 4 RECONSUCTCOMPLETEI X20 MWSET & INC.FB BOILE 200 60 1t8 200 80 138 9163 KRYVYIRIN 8 DEMOLISH& REPLACEI X800 MW TURBOOEE 800 180 89 800 180 39 1697 KURA*CHIV S RECONSTRUCTI X200MWTUR3OENSET 200 100 20 200 100 20 1807 WHAN8K 11 RECONSTRUCTI X200MWTURSOENET 200 100 20 200 100 20 1097 STAROBESHEVSK4 PT FODIENOxEQUIPMENT 200 265 61 200 2 61 ' 30 1807 STAROBESHEV8K10 RECONSTUT I X200 MWTUROENSEr 200 100 20 200 100 20 ( 33 1t07 TRYPILWA 2 RECONTRUCTI X300 MW TURBOGENSET 800 100 80 S0o 100 80 * 5 z 1607 ZMnv 4 DEMOUSH& REPLACEI X 200 MW BOILERS INC FIDENOx 200 480 93 200 460 S80 O p TOTAL1S07 180 416 1200 129 000 287 UKRAINEPROPOSED THERMAL POWER PLANT REHABILUTATION PROJECTS WITH SUGGESTED PRIORITES PROPOS8DPROJECTS PREUM.PROJECT PRIORITY ALLOCATION HIGHPRIORITY NEEDREVIW UNIT RATED COST RATED COWS RATED COST YEAR STATION NO. ACTMTY CAP UVKW(MUIL) CAP $IKW! (IAIL) CAP $1XW SW 1999 BUPSHTYNSK S RECONSTRUCTCOMPLETE I X200 MW SET& INC. FBC SOILE 200 460 98 200 490 98 1iml SURWRSYNK 1 FITFGD E0ULPMENT 200 230 20 200 230 26 1198 KUIAXHIV 6 RECONSTRUCT1 X200MW TUFR OENSET 200 100 20 200 100 20 1998 LUHANSK 12 RECONSTRUCTI X200MWTURSOGENSET 200 100 20 200 100 20 16 LUHANSK 8 FIT FPD EOUIPMENT 200 280 26 200 2 26 19 PRIDNEPROVIK 14 DEbOUSH&REPACEIX 00MWTURSOENSET 800 180 as 800 180 so 19B STAROBEBHEVSK11 RECONSTRUCTI X20MW TWOGENSET 200 100 20 200 100 20 19 TRYPILUA 3 RECONSTRUCTI X300 MW TUOENhET 300 100 30 300 100 s0 S84 ZIIIV 8 DEMOUSH& REPACE1 X200MW BOILERS INC FGDIDENOx 200 490 98 200 490 38 TOTAL tm 2000 377 1200 129 600 248 119 SURSITYNSK 8 RECONSTRUCTCOOPLETE I X200 MW SET& INC. F BOL 200 990 188 200 680 138 1996 KRYVYINH 9 ODIOUSH&REPLACEIX300MWTUREONESET 300 180 38 800 180 so I169 LUHAN8K 13 RECONSTRUCTI X200 MWTURBOGEN8ET 200 100 20 200 100 20 19i sLAVIANsK 6 REONSTRCT0MWTUBOGENsET 800 100 80 800 100 80 199M STAROBESE8K 12 RECONSRUCTI X 200MWTUROENSET 200 100 20 200 100 20 199 TRYPIWA 4 REDONSnRUCTI XS0 MWTURBoGENSET 300 100 80 300 100 30 - 1999 2MIIV 6 DBIOU8H & REPLAC X200MW BOILERS INC FaDIDENOX 200 460 88 200 490 98 TOTAL1998 2200 425 1800 189 400 236 2000 URHTYNSK 7 RECONSTRUCTCOMPLET1X200 MWSETINC.P09BOILE 200 990 138 200 an 138 2000 SURsTYNsK 2 FITFOD EQUIPMENT 200 230 2 00 230 26 2000 KRYVYINIH B DEMOUSH& REPLACE I X 00MW TURBOGENSET Soo 18o 39 300 18O S 2000 LADYZHYNK I RDONSTRUCT1 X 00 MWTUROGENEr 800 100 80 200 100 8o 2000 WHAN8K 14 RCONSTRUCrTI X200 MWTUOOGENET 200 100 20 200 t00 20 2000 WUHANO 9 PTOD EQUMET 200 28 20 200 230 26 2000 STAROBEHEVSK 18 RECONSTRUCTI XOM MWTUOOENSET 200 100 20 200 100 20 2000 TRYPILLIA RECONSTRUCT1X00 MWTURBOGENSET 800 100 80 800 100 80 2000 UGLEGORSK I RECONSTRUCT1X300 MWTURBOGENrET 800 100 8o 800 100 8o 2000 ZAPORMIZHIA t RECONSTRUCT1X800 MWTURBO9ENSET 300 100 80 300 100 s0 2000 ZMIIV 7 DEMOLISHa REPLACE I XM MWBOLES INCFGDENOx 200 480 98 200 460 99 TOTAL2000 2700 487 1800 1Se 800 288 I"J;b UKRINIE PROPOSDTHERMAL FOWER PLA REr ASIUTATION PIOJECTSWITH SUGESTED PR KO PROP-SD PROJ-'TS PREHIMH.PROPECT P I LLOCATION UNT RATED YEAR STATION NO. coSr RATED COST RATED ACTIVITY CAP KNW 0OST CAP VW $M cA mm MW $(MIL) 2001 TymS 8 RONSTOrUCOMPLEE1X200MW MW MW 2001 KIEVS ETrI.FBC0OLS. :00 60 1 8 RECONSTRUC1 X*Mw TURSOGEmSE Mo a09 1in 2001 KIRVYIINH am 100 as 6 0WOUSII &REPLJCE I XSMOMWTUEOGENSET W 250 100 g6 2001 KURAKHIV Soo 110 so 7 REONSTRUCTI X200MWTURSOGENEr 80 180 so 201 LADYZHYNSK 200 100 20 2 RECONSTRuCTXI a0nMWTURUOSU3TU 200 100 20 M0 TRYPILLIA 20 100 s0 S R 1OtSTRUOrI X800 MWTULSENSET MO 100 30 2001 UGLEQORK Soo 100 so 2 RECONSTRUCT1 XSOO MWTUR1OSGSET So0 100 80 *00t ZAPOFIVZI 300 100 *0 2 RECONSTRUCT1 X MWTUROBENS 8o0 100 so 21t Z0I1V 800 t00 30 8 DMOUSLIH&REPLACEI X200MWOILERS SOO 100 so TOTAL*2001 INC DNK 100 400 96 2MO 410 St 2960 440 1#10 204 400 228 2002 WUReHTYN5K 0 ROXSTRUCTCOMPLETEt 2002 X2 MWSETINC P0SOILE 200 660 BUR4TYN8K 8 PITF50 EQUIPMENT 200 0 183 2002 l(EV6 100 230 26 4 RECONSTRUCTI X2M MWTURSOEN MO 280 go 2002 KNYVYI 260 100 26 t10 DRIOUSN4 REPLACEI X800 260 100 26 2002 MWTURSONSET Soo 120 KURAMIV 8 REtCONSTRUCTt XtMWTUI 39 S00 IS0 29 2002 NM 10000 LADYZHYNSIK S RIIONSTRUCTI 20 200 to g20 XO00MWTURtO8RT Moo 2002 LUHANSK 10 FPIFD EQUIPMENT 100 0 Mo 100 s20 2002 SLAVIAMSK 2M0 210 26 7 RECONSTRUCT M800MWTUOENT 200 2S0 20 1002 USLEGORSK 800 100 80 3 RECONSTRUCTI XS00 MWTURS0QE8ET 800 100 s0 2002 ZAPORINI 800 100 80 3 RECONSTRUCTI XSOOI MWTUWWGUNI 800 100 s0 202 ZUIIY S0 tOO s0 S OOUSH & RELACEI X 20 MWBOILERS oo tO1 20 'TOTAL20 INC PGDIENOx 200 480 98 26 MO 460 00 6 1460 A $co 8 2008 URPSHTYNSK 10 FREOONSTRUCTCOMPLETEIX200 200S KRYVY1 MWSET&INC.FlPCIOILE 200 ESO 1S8 RIH I FITFSOIDENOx EQUIPMENT 00 6 1se 2008 KURAKHIV 800 256 77 9 RECONSTRUCTI X200 MWTUR9GENSET 800 266 77 2003 LADYZHYN8K g00 100 20 4 REOONSTRUCTI X 100MWTURSO 200 100 20 2003 GNET Moo 100 UGLEGORSK I IT FOENOx EQMENT 30 800 100 so 2008 UGLEQORSK 0 5 77 4 RECONSTRUCTI X 200 MW TURSENSEr 800 265 77 2003 ZAPOFiZHZWIA 800 100 30 4 RECONSTRUCTI X 300 MWTURBOGENSET 8oo t1 so 2003 ZMIIV 8oo 100 0o 10 DEMOUSH& RELACEI X 200MW 300 100 2o TOTAL BOILE INC ODIDENOx 200 490 98 2003 200 490 98 2100 600 1100 1tO 1000 390 2004 BURAS'TYSK 4 FITFOD EQUIPMENT 2004 M00 290 SURSHTYNSK 11 RECONSTRUCTCOMPLETE1 2B 200 280 2004 X200MWSET&INC. P OILE 200 600 go LADYZIHYNSK 5 RECONSTRUCTI 138 200 60 X 300MW TURBOGENSET 300 188I : 2004 LUHANSK 11 FITFOD EQUIPMENT 100 80 S80 100 30 2004 ZAPORIZHZHIA 200 230 20 2 1 FiT FODIDENOxEQUIPMENT 200 230 28 TOTAL2004 800 266 77 8002 66 77 1200 267 S00 SO 900 26 4 - 113 - ANNEXC1 Table 14 Pae4 0 I g 1E Ii Y WE |; FS I~ :03 - 114- ANNEX 1 Table 14 pageS PROPOSE UKRAINETHERMAL POWER STATON UFE EXIENSIONAND REHABILITATION PROGRAM 5-YEARAVERAGES Year MW *MIL 1993 o00 59 1994 1000 327 1995 1300 3 TOTAL''95 2800 752 AVG''95 988 251 1996 2000 436 1997 1800 416 1998 2000 377 1999 2200 425 20W 2700 487 TOTAL''00 10,700 2,141 AVG''2000 2,140 428 2001 2350 440 2002 82s5 542 2003 2100 500 2004 1200 297 2005 1000 271 TOTAL.,'01-'05 9,900 2,050 AVG'01-'06 1980 410 TOTAL,'93 THRU '05 23,400 4,943 Bukn Of MS* MUk by Sec or l0 tNW po yer) 11860 11520 10440 9440 9439 8775 fim-Bmr Comple 4530 4520 4280 4110 3 6 6 2710 2551 M _wbuV 4483 4060 3900 3650 2 3263 2861 Choml-Forutry Complx 1000 101S 910 340 740 .. 767 Machi budIn 340 330 310 310 290 .. 324 Fc ill seckn 3849 3390 3260 3210 3070 2780 27m2 2538 P.S-Berg Complex 2480) 2330 2290 2180 1900 1690 t547 Mealuv 400 360 370 340 335 335 279 Cbhnc-Pcresty Compl 150 120 1O 130 120 .. 132 o&ddmbuildiog 33 34 33 36 3S .6 For an sectors 841 754 8O2 79S 788 767 761 709 Pud-Berg Compex 460 480 470 460 440 414 377 Meallry 160 140 140 130 140 145 132 Chmec-Peorety Compl 46 44 42 38 37 36 Machi bilding 14 IS 14 13 14 .. 21 For anl-sect sso 538 606 S27 469 462 S09 Fud-NErg Comple 108 208 170 110 so . M _lurg 22 22 20 210 18 1 16 aiCmical-fo y Complx 330 300 260 260 260 232 222 Machis hulkIng 26 26 29 30 35 .. .. SOURCE:_Miniatwyof hl l rtt andSa1 Commite, U (ain(1,92). - 116 - ANNEX 2 Page 1 Eng Utadon at fv bw&a Enterpis Itoducton 1. Improvementsin energy utilizaion and conservationIn industrialenwtepises offer significant opportunitiesfor cost-savingand incased efficiencythroughout the manuf r sectorin Ukraine. Currendy,industrial energ use constit 59 percentof tot fina eneWrgyconsumption. Likewise, enemr-intensiveindusties resent a disproportionatelylarge share of totalindustrial producdon. Whilethe potal for energyconservation varies from sector to sector,wastefl consumpdonis commonto the industriasector as a whole. A reviewof severalindusial facilitiessuggests that there are low-cost/nocostenergy savings meaures that couldbe implementedin all enteps. Thesemeasures include the instllationof boilerIn andcontrols, air preheater.in fuel- firedequipment (boilers and funaces), wasteheat recovery systems, inceased steamcondenste retmn, and insulationon steamand hot waterlines. Additionalmeau entailreplacement of steam boilerswith hot waterboilers, repair and replacementof defectivesteam traps, and installationof steamturbines/nras to step-downhigh pressure steam to actua processrequiements. Finally, simplemaince meures that requiresmall capita investmentscan producemingful reductionsin energyconsumption and impre performanceof capit stock. Ibis annex,based on on-sfi obsevationsduring plant visits in October-November1992, describes enr consumption patternsand the oppornites for improvedenergy utilization at fivetypical plants in Ukraine. L EnterpriseProfile Nameof Enterprise: Ukrtsement Location: Kiev(one plant) ChiefProduct(s): Roofinginsulation board Production(1991): 500,000tons corrugatedroofing insulation board No. of Employees: 820 Apparn Ener Co _snton 2. Electricitydemand is 8 MW:the firm purchasesabout 60,000-70,000 kWh/day. The companyworls on a 7 day per weekschedule. About12 millionni' of gas are purchasedanmually to fire four boilers,only two of whichare presendyopertg. Eachboiler produces 16 tons per hour of 120-C,8-10 bar steam. Somesteam is used to preparean asbestos-cementslurry in large heated tanks, but steamis not used to dry fonmedinsulation board as finishedproducts are stackedand air dried. Heat is providedto workers'dwellings. Only about 20-40 percent of condensedboiler stem is returnedas boilerfeed wat. Thereare no heat recoverysystems in the plant: the boilerswere operatingat about85 peraentefficiency, a fige not basedon measuredvalues. Electicitycost as a percentof finishedproduct cost totalledapproximly 1.4 percentand gas 2.7 percentin 1991. 3. Electricity is utilized for comprsing air, miing slurried asbestos and cement in water and for the board-formingmachin whichare drivenby constantspeed motors. Compreed air is used to conveyasbestos and cementfrom storage to sury tanks. Tbreecompressors are used:two produce100 m3/h and a smallermachine prduce 50 m/h. All tree machinesare antiquatedand requirecomtant repair. - 117 - ANNEX 2 Page 2 Erg Coau"°Wton 4. Boiler Eicleq. True steamboler efficienciasare unknown(the assumed efficiecy is 85 pcent). Onceeach year, boilertuing is providedby a stateenteprise that vist theplant. This entprise makesboiler mesur ad, basedupon calibrations, prepares a chart advisngthe boileropeaor howto set theair-to-fiel flow ratio for the entire nextyear. Th. chart is basedupon thepercent of capacityat whichthe boileris opating, ftom 20-100percent For eachoperaing level,t cht list therequird air-fuelrato whichis then set by the operatorusing simple pressure drop devicesand U-tube manometers as indicators. Ihe chart also lists oxygen,CX) and CO concentrationswhich should be in the combusiongas effluentand the expectedboiler efficiency (whichvaied in this cae fromabout 84 percentto 86 percentover the operatingrange). No other tuningtakes place between annua visits. It is doubtfulthat theboilers actually operate at thestated perfrmae level. Opp ies for devwiaonfrom suggested operating conditions dictate that a dynmic air-fuelratio controlsystem should be employedin large boileroperations. These control sytemscanbe eithermechanl orelectronic: thy operae on the principlethat 4 or C0 2 and combustiongas exit _me are the best indicatorsof boilerperformance. The combustiongas leavingthe economize(no preheateris installed)stood at 225'C and the "tuing" chartlisted an 0 contentat about4 percentfor optimaloperaing conditions. These indicators, i.e., 0 and exhausttempertu, ae app y compable and suggestthe boiler was operatingwith 20-2Spercent excess air anda maximumefficincy of about81-82 percet. Excessair for natural gasfiring could be substaly lowerat a maximumof 15 percentwhich would icse boiler efficiencyto 85 percent. A smallincrso in efficiencyfrom 82 percent to 85 percentwould save about360,000 cubic meters of naturalgas annualybased on thecompany's stated gas use of 12 millioncubic meters per year. In this case, the operatorhas no way of knowinghow to manually adjustthe air-fuelratio to achieveeven this smalleffency increasewithout appropate instruments to measure0 (or C02) in thecombustion gas. 5. Other me_es. Lossof steamcondensate represents approxm y 4.8 tons per hour (about5 m3/h)of low gradeheat at 40-C, assming boileroperation at 50 percentof capacityand only40 percent,condensate return. Thispercent of condensa returnis too low and shouldeither be increasedor used as a sourceof wasteht Givencurent pricesfor natura gas, plansto recover this lowgrade heat sourcemay not be economicallyattractive. A reasonableeffort should be undetakento reduceleaks and to replaceaged equipment. 6. issues. Housekeepingin thegel plant area ea satisfadoryexcept, of course,for theunsecured presence of exposedasbestos. Workerswear no breathingprotction. Steamfrom the papermachines should be collectedby side ventswhich pull the steaminto ducts whereit canbe condensedand thenrecycled or sewered. In general,the use of this composite materialshould be disconnuedbecause of the healthhazard associated with asbestos. This is true not onlyfor plant workersand peopleliving in the area but there is concernfor the deteriorationof these insuationboards insIled in buildingsaround the country. The boardsare not very sturdyand their decompositionover time will, in aggregate,release considerable asbestos particles in the air. - 118 - ANNEX 2 P 3 EL Eatayrbe Profil Nam of En_tere: Donetk Cob ad awa Loon: Dontk (tr plat) Che Product(s): Coke aud hmicals frm cokeoven gas [(NISO 4 and H1SOa Prodon (1991): 1.8mIllion tons of coke(6.4 perct Slationdtota) No.olEmployees: Apprx. 2000 7 Theplan purchasecoal, ectricity,blst fonwe ga (firomDonetsk Steel for only one coke plt), nat Suag(mainly for offiuresident spaceheat, smam(*m DonetskSted for on cokepln only). Theyalso utlie the cokeoven gS, prducd in their owncoke ovens. Basedon d* uowwidieterrs officials,the followingconsumption pattern for the 3-plantcomplex was Plan No. Eltriity cosumption Caacity demand Fudel 1 50 percen 4,200KW 40 pecnt 2 30perce 1,700KW 25 pnern 3 20perce 700KW 35 puen 8. Cokeyields for the t plantsae quitehigh: Pan 1 78.4percent Plat 2 77.9pecn Plat 3 78.7 pret Coke ovengas producedavage 365 cubic eot per ton of mied cokingcoals used, which i very high. Mostplats in Wesr Europeor the UniedStes has a cokeyield of 6S-75percent and p-2oduce2340 m'A 9. In complely Integed iron andsel mills,coke fin wouldnormaly beused to produce snt alongwith iron ore fines. Ho er, DonetskSteel does not producesinter and, in any even, the cokefl are producedat anothe plat 10. Sta boiles: P1a I 4 bolers (each30 hat 9.S atl, 350 C) (3 operational,I in reserve) Plat 2 0 boilers (steamis prd fiom DonetskSteel) Pisa3 3 boilrs(eac 1Slt* at l0 am, 350C) (2 opeationa, 1 in rese) Therear pla to Ia 2-30 th eam boilersin Plat No. 2 becaus t steamsupply fiom Donuk se i Isuficet for their needs. * - 119M- ANNEX2 fte 4 BMW CAWiad Opp 11. Stm leakswer evidt thoughoutthe pa thedeiinamtin of such ks wold badto energysavin. llu opeation of the suns pross at 3 diffeet location leadsto erg dthatwould ot ent if ho ntire operationwas under a singleroof. One obviousrecomda wouldbe to combinethe activitiesof DonetskCoke ad Chemicaland DonetskStl, sn thir avites complemeneach oher. However,it Is dsd hat DonAuk Sted s onsideingclosing its two blat furnaces,wbich removes th opporunityto we coke producedat the cokeandchmi pln for iron poducton at Donetk Stel. IlL Uuier PMr Nameof eprise: DonetskSeod Location Donetak Chl Product(s): on and ste products Producin (1991) 1.3 milion to of Irn, 1.4 mlllionts of steel Nlo.of Employees: Approx.150 12. Blt fuce is cleaned,colected and used as a fuel in the plant. Tis fuel represe 70 pecn of tot gaseousfel utilizedwih the balae, 30 percen, beig natural s. In genal, four fuels,in additionto cokeand coal, ar used at the plant blastfrnae gas, cokeoven gas, naturalVs andheavy fuel oil. Cokeoven gas is purced fromone of the nearbyplant of the DonetskCoke and Chemi enteprise (see above);some blast furnae gas soldto this eaW se. Th two blastfiurnaces t Donelakar eac 2,000 il. Iron productionin 1991wa 1.3 milliontons. Exceptfor coke in the blt furace burden,t onlyothr fue usedi somecoa addedto the funce air bat. Appa y, the Internationalpractice of addinggasous ydrocarbonsto the funce blast-tohve pductviy and reducecoke conmpton I no practcd. 13. Ihe stel hp have8 opeahearth funaces, eachwith a 152ton apacityper heat Only six openheth fnwes an cnty optng. Tere are two electricarc fiuces, each with 100ton apacity per heat. Openhet sed makig, whichi fuel iefficin and low productivity, represet obsole tology no longerused in dveloped countries. Fuel for openheath funace operations 85 per naturalga and 15 percentheavy fue oil. The electricarc fiunace work on 100pecen scrap d, wle the openhearth furnaces use a mixtureof pig iron (70 percent) producedat the pla and scrapiron (30 peren). The enterprisehas a fairlynew merchantoxygen ystem,produig about7,000 i/h of oxygen. Mostof thi oxygen,23,00-25,000 m/h, is used for steel productioni dectric arc frnace; about6,000 mh toal for the openheah faces. Refriacs for ling blastand ste furaces are madeat the pla. 14. Therear two continos cast systemsfor the openhearth funaces, whichprocess about 40 percnt of the l producedand roled into ets. Theremaining 60 percentof openhearth sted Is producedin the formof blooms,whih are reheatedin walkingbeam funces prior to rolling. he elctric arc funaes do not havecontius casters. Reeat fiunacesare fird with nar gas withno hat recovery. Reat furae fiing controlsare trimmedtwice monthly. -120 - ANNEX 2 Page 5 15. The hash five steamboilers onsstg of twohigh-prsure boilersproducing steam at 80 atm,SVC, one making am at 140t/h and a secondat 160t/h. Theseboilrs daft from 1964and 1978. Therea lso 3 mediumpresure sm boes, each producng75 t/h of sm at 35 atm, 440 C. The bolers werobuit 1956,and rehabiaed in 1990,1991 and 1992. Fuelfor WIboies comistof blst fiunacegs and naturalgS. Theboiers at DonetskSteel wer thefir in Ukraln tit badf&d fiig controlbaod upon measuredcombustion gas empau and oxygen cowvmon. Oxygmmonm m _waspefomed by a pInsay- led zirconiumsensor, All fiveboiler haveair p a and aeonomis. Procisoboiler control and highful efficincy is probablymadatd by the factthat the high prss boilersare used to produceelectricity in three u egenerar. One urbi is a 25 MW conden utrine in additionto two 12MW extacion tubis (onefrom 80 to 35 atmand a secondfom 35 to S atm). Boilr fficicie, depedingon thetype of fael, are reportedas 94-97percent, m likelyan overtimate. 16. Theenterpise alsoo five old hot waterbo es fired withblast ace gas and nal gasused for plantbuilding haftng, districthat and for hthous heating. Somesteam is sold to local dustry,he larges mountto thenearf DonetskCoke and Chemic Plat (see above). Exceptfor thecoke and chemicalplant, stm not tuned. In genal, onlyabout 30 percen of steaproduced i recyed. Compr air for pla oeraoS is providedby both steamand lectricdrives. Thee arethre 35 atmsteam iven compreo for blastfiirnace air whichmove 2,300- 2,400m/h. Therea twoGOrman sm driven ompressors,Installed in 1934,moving 700 m/h for openhearth andcating o. Comprsed air for generaluse i providedby five electricdrive comprss of 1 MW acb. Mhmplant power facor is said tobe measuredat 0.90- 0.95. Ew cam"k 01 17. Uni six yoes , enr coervatn wasundthe contolof a deput plantmanager: it i nowt resp ity of anenr manager.Typical projects include funace repairand to rhabilitatea hea recovery ww on n openhearth f e. I i quiteclear that some economy usingecticity can be realited if thetwo electricarc fu are operatedsequenially, not 9_muitaneouay.In the longrun, if ontined eelproduction at theplants provs t be economically viable,obsolete open hearth fnaces shouldbe phsod out and replacedwith basic oxygen or electic furnaces. IV. pdtriN Nam of Enterprise: KievMorycle Plat Location: Kiev(one plnt, 35 buildis) ChiefProduct(s): Motorcces and motorcclespare pA Produc99on(191): 90,00ounits No. of Employees: 6,000 Operationsof the KievMoorcce Plas aredivided into the fllowing caegories:boilers; foundry andblacksmith (rods, gea, pistons,bks); thedr pmreing (metalsue treatnt); paint shop; lectoplatg (Zn and Cr plaing); and asembly. One partitonedbulding served as a wood- workingshop outfttd withdecically operatedsmall wood saws, woodworking lathes and sanding aqWp_. -121 - ANNEX 2 Page6 EMU CoupoU 18. The plant pu appr y one millionkWh/month elctricity, alongwith about th millioncubic meters of na gs. o y 40 percentof this natu gas is used to fire boilersfor steamand hot watr producton. Heatingfor plantbuildings, th workerresidenil buildings,and a hothouseis providedby two hot waterheaers. Ihere are six steamboilers, four of whichwere origindly desigAed fbr seventon/hour eam productionbut upgradedand modernid in 1970. Two of the fourboilers produce lS h of 8 atm, 170'C steamand heother two boilersare standbyunits. Steamis used for processheag and to producehot waterfor electroplati. 19. The foundryconsists of 15 smallfunaces, abouthalf of themnatural-gas-using cribles, the bace electricallyheatedInduction funacs withautomatic controis. Somefurn are operated for two shift, whilethe othersare operatedfor three shifts. A walkthrough the foundryarea showedthat te gas-fred furmaceswere old and in poor condition.Some of the crucibleswere open, and gas flamesused for heat clearlyvisible. Therewero nO heat recoverysystems on the equipment. 20. The planthas seve electically-drivencomprer for presses,hammers and odier pnummac eqipment: 2 compressors 250 m/min 1,600kW 1 compressor 100ms/min 630 kW 4 compressors 50 m'Imin 300kW Thisequipmen represents 35 percentof connectedload and account for 30 percet of electrical energycoumption. her are reportedlylots of compressedair leaks. 21. The entprise has an energyefficiency deatmen whichdvelops plansfor reducingenergy usage. Individualinitatives are welcomedand reviewedby managementHowever, the only exaple of enery efficiencyproject mentioned was the conversionof steamopeated forgehomme (whichhad been suppliedwith stam at 3.5 atm, 120-125*)to pneumaicoperation. This conversion occurredabout 7 yearsago. Energyflows are not meaured and do not appearto be considered important.Energy audits are not conducted.Tota energycost is about6.9 percentof totalproduct cost withelectricity consumption acounting for about2.5 percentand naural gas about4.4 percent of finishedproduct cost. Enegy Coemlio oppw"a 22. Equipmentnot opeaing shouldbe turnedoff to saveenergy. Leaksin the compressedair systemshould be repaired. Operatingsteam boiler presure, 8 atm, is muchlarger than needed. It mightbe possibleto let downsteam to pressuresactualy neededwhile extracting some work. One possbilityis to convet elecricalto directsteam drivs on someequipment Considerablefuel energycould be savedby conrt cruciblesnow using naual gas to electricalinduction heating AlthoughIt will not saveany energy,the company'scost of demandelectricity could be reducedby furtherload factor impovement (the loadfactr is about0.8 withcorrection equipment about 2 years ago). A managementtaining programin energyaudits and enr conservationprocedures seems appropriate. - 122 - ANNEX 2 Page 7 V. nepriseProfie Nameof Entwpris: MalynPulp and PaperPlant Location: Malyn(one plat) Chief Product(s): Electrical iulatiag papers and cllulos boad Sales (1991): No. of Employees: 3,000 Consuction is curndy ulder way for two new lines;speia papersfor govement formsand high strength,high te ate resisant paper madefrom a Nomex(DuPont) type mati. Eegy Consmpio 23. Thebulk of electicity is consumedin grindingraw materias(70 percentof total),operatng electic driveson papermachines (thristor controlled),rning sury pumps,mixr, compressor quipmentfor positoningpapermachine rolls with high pressure air and vacuumlifting of Iarge sheetsof finishedproduct. The companyrequires 14 MW of powerbut is currendyreceiving only 8 MW. Electicitycutilme genealy occs from5:00 to 10:00PM daiy. In 1990, he company purchaed 120million kWh of electricity,100 million in 1992. Plant authoritiesclaimed the load fuWtorfor the plant was0.94-0.97 and controlledat four electricalsubstdaons. Energy costs as a p,entage of productcost waereesmated as 4.5-5.0percent for ecticity and 6 percentfor thermal energy 24. Heavyfuel oil is usedto fire sevenboilers aU rated for 25 tlh of steam,four of whichoperate at 14 bar, 200-C and hrmeat 18 bar, 300'C. Plantpersonnel statd that all boilersare equipped withprimitive controls for air-fueladjustment and thateach unitpossesses air preheaes and water economizers.Stem is used mainlyfor paperdrying (60 percent); most of the balanceis utilizedfor buildingand distrit heatingfor workera. Somehigh pressure stem is usedfor a vegetable hot houselocated very near the boilerhouse. z COuevatio Opportwalt 25. wer Genratn: Considerationshoud be givento selfgeneratingpower using steam from boilersnot currentlyoperatig. A bak pressureturbine is availablefor powergeneration but is not used becmseof its hgh cost. Somesteamis us- in the plant at 13 bar but mostis let downfor heatng at 3 and 1.5 bar whichis wasteful.An extractionturbine would have the advantageof providingboth process stm and powerbut the technical nagr claimsthat this has beenrejected ater studybecause of th variablesteam load requiremenss due to eraic productdemand and becase the requied intment is not available. Paper Dryg: Mostpaper maies use steamfor drtying,although two machinesare saidto haveinfra-red drying systems: 'he lattermachines are highlyefficient and, if possible,should be usedto replacesteam dryers. Boile Rfkecy Irovemt: Thoefficiency of the boilersmust be broughtunder control:at present,boiler efF is unknown.Simple mecanical controlof air-fuelrato would be desirablecompared with the mehod nowused: meteg air and fuelat fixedrates betweenAnnual inpections. Althoughfuel oil is heatedin storage,it is not heatedprior to deliveryto the boilerand - 123 - ANNEX 2 Page a possby rest in poor aomzation at the noize. Control Iselst_w,n as re ecordingdvioes. A bettercontrol of boler opeation couldavoid the peniodiccleanout of the ecnomizer by mainag the combustiongas out of te preheaterat a t_e whichwil elidmnateSo Blowdownshod be doneUatmalcaly Inted of mamdly.as k now, each mori, checkedanlyly, and then repeatedif solidsconman is high. WasteHeat Udlla_on: About40 pecn of steamcondenste (emertu unknown)is now swered to the company'sown waste water tatn systembecau of con inationwith sueded solids. It mightbe possibleto use this wautestream to heat the gr ouse in placeof boier soem whichis currentlyused. la any event,heang the geoehu withhigh emperatu boilerstm shouldbe diswconti and replacedwih heat froman avilable waste ram. Dsict Reatng: Insteadof usingboiler stem for ditrict heating, closed-loophot water boflersshould be installed. Fuel Switching: Switchto ga in placeof heavyfuiel oil. t is unrstood ht, althoughnot baable now, a gas line may be broughtthrough the regionin the net two yea. Usinggas would avoidcorsO8ion problems from 80 andeliminate particulate and sulfuremissions from the boiler stack - 124 - ANNEX 3 Pag I OU,GO&, - CoalReources dt Ukraine 1. Uki is locatedon the southen marginof the EastEuropean craton. The oil, gas and coal-baing i y areas ae depresionson the craton,which bece embaymentsof the MediterraneanGIeosyncNne. More than 80 percentof all fossilfuel resources of Ukrainecan be foundin the Dnliepe-DonDdepruion in the easternpart of the country. Thisregion produces 90 percentof the gas and coal (Donbass),and 23 percentof the oil foundin Ukraine. Some aural gas and significanoil productionare locatedIn westernUkraine, in the Carpathianforedeep and mountains.The southernregion (Black Sea, mainlyoff-shore) is, by and large,unexplored, and offerssome promising potal for significantoil and naWal gas development.This annexexamines th key geologicaland quaitativefres of oil, gas, and coal resourcesin Ukraie on a regional basis,paying heed to historical,current and poteni sitesfor resourceextraction. Tables and figures mentionedin the mainbody of the text canbe foundatacbed to the annex. A. Pelaim and Naturn Gs Resources 2. Extraco HItorq. Theeadiest informtion on oil depositsin Ukrainecan be foundin sixteth-century textsdetailing oil extractionfrom seeps and hand-dugwells. In the 1860s,steep pricesfor whaleoil and increasingdemand for oil productsprwoved the impetusfor eady modern mieral oil explorationboth worldwide and in Ukrne. Modemoil productionin Ukrainebegan withthe discoveryof oil in the CarpathianMountans (Dolyna, 1866) and follow-upstrkes at the nearbyNahuiechi, Sloboda-Rungursoand Nebylovskafildds. In 1866,drflling also beganon the KerchPeninsula (in Crimea),spurred on by observaionsof surfaceoil and gas seeps,although commerciaoil productionin Crimeadid not commenceunti 1953. Oil explorationexpanded to the Dnieper-Donetsarea commencedin the 1930s,after a smalloil poolwas found surrounding a salt diapir. Today,80 peent of the oiloil condensateproduction of Ukrine originatesin te Dnieper- Donetsarea, withthe remaindercoming from the CarpathianRegion. Oil and condensateproduction peakedin 1972at 14.4 milliontons. Annualoil productionfor 1991stood at 4.9 milliontons [Table11. 3. Foundin conjunctionwith oil drilling,the first industri use of naturalgas tookplace at Kalushin 1912,near the Dolynaoilfield. Owingto fte stategic locationof the Dnieper-Donesarea betweeJUkainim and Russianpopulation and industriademand cenrs, extensivedevelopment of this region'snatura gas resourcesbegan in the 1930s;by 1964,over 20 gas fieldshad been discoveredin this region,including the sizableShebelynka Fields, from which 566 billionm3 gas has beenproduced, coniat nearlyhalf of the 1274billion mP cumulative toWal production from the Dnieper-Donetsarea. Today,this regioncontributes 92 percen of the totalgas producedin Ukraine. Mostof the past productioncame from 2.5-5 km depths,but recenty wellshave been sunk 4-7 km, as deeperzones of reservoirsare developed.Offshore souther Ukrainealso promisesto be a potenial sourceof naturalgas. The GolitsinField, discoveredin 1975from a fixeddrilling platform, is boththe first offshoreand the largestgasfield found to date in Ukrainianwaters. 'Te first mobile jck-W rig was sent to the BlackSea in 1980,when a secondoffshore gasfield (Shmit) was discovered.Gas production in Ukrainepeaked in 1975at 68.8 billionmn. The correspondingfigures for 1991are 24.4 billionn', 84 percentof the outputin 1990. - 125 - ANNEX 3 Page 2 4. Estrn Uke: Geolog. The Dnieper-DonetDepression (see Figure 1) is Ukraine's mainhydrocarbon region with more than 90 percentof gas, oil and coal resourcesand production.It is 750 km longextending southeasterly toug Easten Ukrainebetween the Dieper Riverand the northeasternfrontier. The depressionis 150km wide in the southernpart narrowingto less than 100 km furthertrthe north: otedepression's southefn part formsthe DonetsCoal Basin or Donbass, whichextends into Russia. The largernorthern part of the trugh includes77500 km 1 prospective area witi 285 gas and gasfields. Its extemsionto the north is the PrypiatDepreion in Belarus,a significantoil-producing area. 5. Sedimentsof Devonianage are excted to contain15.8 percentof the totalremining oil resor (43.8million tons) Icluding 14.5 percentof the reserves(16.6 million tons) tTable21. They are expectedto includeone percentof the ttal remain gas resenres(12.1 billion ni) but 9.6 percentof the resourcesdue to 238.3billion min "prognosticated" resorrces. Thecumulative productionis 3.8 billionen gas and half a milliontons of oil and condensate.Reservoirs of the Tournaisian-LowerVisean assemblage serve as a sizablereplacement for shallowerzones currendy beingdepleted. Cumulativeproduction by the end of 1991amounted to 22.9 billionmn gas, 6.6 millionmetric tons of oil and condensate[Table 21. Gasresources are expectedto be 698 billionm3 including237 billionin reserves,25.7 and 19.7percent of the correspondingtotals. The oil and condensateresources are estmatedto be 80.3 milliontOns including 33 milliontons, 17.7and 16.2 percentof the totalsrespectively tTable 21. 6. The UpperCarbonifous sequencesare 150-1150Sm thickand composedmainly of sandstone and shale. The 1014wells operad by the Ukrinian Gas ProductionAssociation (Ukrgazprom) in the Dnieper-Donetsregion produced 1034 billion m' gas fromUpper Carboniferou-Lower Permian reservoirs,more than one billionin per well. Ihere has beensome oil productionin westernareas withinitial production in the 120-150ton per day range. Consideringalso the high liquidcontent of the gas and the relativelyshallow (650-4050 m) reservoirdepths, it is stably difficultto replaceprodcion fromthe UpperCar_niferus-Lower Penmian reservoirs economically with reservesand productionfrom deeper zone. Thetotal production from the MiddleCarboniferous to the end of 1991is 42.5 billionmi gas, 7.2 milliontons for oil and condensate.Gas resources amount to 187.3billion mg including 72.6 billionin reserves,6.9 and 6.0 percentof the corresponding totals. Oil and condensateresoures are 60.4 milliontons, including20.5 milliontons of reserves, 13.3 and 10.0 percentof the totalsrespecvely. Part of these reservesare lessthan 4 km deep [Table21. 7. In the LowerCarboniferous/Upper Visan-Sepukhov laye, publishedinitial production of successl oil wellsis 19-240tons per day. TIe cumulativeoil producionis 32.4 millionmetric tons to the end of 1991. Less than 0.1 to 1.5 milion v? per day inia gaSflow rates are published.An "averagesuccessfl gas well' startsat 0.5 million S (gs) and 25 tons (condat) per day, decliningat 10 percentper year. Howevr, clative productionof all 146wells tots 54.4 billion in or 372.6million in per well. Assumingan averageage of ten yearsfor each well,the awrage productionof all wells(complaied in the UpperVisean reservoir) is approximately25 perceMof an "aveage successf well." UpperVisean gas resouc are estmatedat 676.1billion i, including 329.8billion mi reserves,24.9 and 27.4 pecent of the totalsrespectively. Oil and condensate resourcestotal 161.6million tons, including76.4 milliontons reserves,35.5 and 37.4 pe of Ukraine'stotal rarves. lhe Iniil producto of an "averag successfulSepukhov gas well" is 0.5 milion en (gas)and 175tons (codensate)per day, from4500 m depth,declining pproely 10 percentper year. Cumulave productionof aUl108 Serpukhov gas welb is 27.1 billionai or 250.9 - 126 - ANNEX 3 Pag.3 milon ie per well. Agan, a _singand averw agoof ten yea for each well,the averae productionof all wells(completed in the Sepukbo reservoir)is approximaly 20 pee of an *average,successfulu well IT"b 21." 8. _astn ukran: Pfor FIrtw uThe Daleper-DonetsDepresion i a ma basinIn tem of exlorationand development. Heace, oly a smallquantity of remainingoil canbe extactedat economicrates. Likewise, prospects for fiarhr developmentof naturalgas are hamperedby a decasing rsour baseo d increasingcosts per unitextracted. In 1991,gas productionmouned lto22.5 billion in, 3Speet of the 1975peak and 84 prce of 1990out lTis productiondecln is expectedto conie to 12-15billion ml per ye if a acceleraonof workoersand dtilling is notunderken. Cmulativegas producdon stands at 1.3trfllion mn, approxutely 32 percentof theoril and48 pece of remaiingin-plae resourcesor 50 and74 pecnt of thoseresouc at a 65 pecnt coveryrate. Ontie basisof thesefiures, halfthe gas in theDiper-Donet d ssWinhas been produced. 9. It inby no mn clear hatraining gas rources canb exoactedand produced economically.The reseres in pla amountto 1204billion in at a 65 pecet recoveryrate, ie., 35 yeas supplyat the cumr rt of productiontTable 21. However,reservs ae not screaendon an mc bads,but athr on thebasi of "commecalsize." While56 percentof thecmut gas productionhas come from less 3 kmdepti andonly one percent from below S kmn,these percntsg" are 23 and 12for theen rermes, 12 and46 for theprobable reserves, 11 andSD for the rest of the gas re c. Reservs producedat conventionaldeps are beg replacedby some of thedeepest production resv in theworld. Drilling,completion and operating coso forvery deep wells are significanty er tiha for thoseat convenionl depths,espeially wheremodem eouipmentand matials are lacing. Deeperwels are also riskier,as driling tets are less deined. Couplewidt this bhe riskand cost, the nwer, deeperwells produce less dtm their sdallowerpredecesos. Anaveg wel prd onebillion in fromthe Upper Cabnifro- LowerPerman (1014 wells), 184 mfflion ms from Middle Cabonfers (128wells), 2S2 million in fromSerpukhov (108 wells), 373 million mi' from Upper Visean (146 wdb), and473 milion ne fromTournaisiwaower Vse (48wlls) reservoirs.' 10. WestemUkral: Geology.Wtern Ukraine,where oil wasfirst discoveed in Ukraine,i stillan importa oilprovince with 0.75 milion ts oil productionin 1991tTable 11 and 292 million tons oil rsure, whc are 18 p andt 45 p nt of the tas for Ukraine. Mm 1.4 bIlio in annualgas poduction andGI61S bilione nsource (6 pementand 13 perent of Ukaines total)are alsosignct FTable11. The Volyn-Podolian Basin in a depressionon thewestern margin of the Ukraian Shield.The souten part of thebasin lies in Ukraine,the nortern part in Poland[Figur 11. Mostof dteso_i areof Paleomoicag andof a platformcaacter. Theylie almost horizontallyor "flexed"in lage, gte eongatedantddies. Coal-berg Catbonifoussequences haveapparendy been targeted by drill holesin the middlepart of the secdon,as they are not deep enoughto reah oil andgas prospcts in theDevonian, Silurin and Cambrin sediments. he Sihian reef bufldupsare tho most prosedve: tee formationsoccur in twobrance of a zone adjacentto the Rade elovtogftAts. To thowes of thi fat, the sbubsesd abrupty. Mostof theabove apl qultatvel to c_mda, a te ar natul s lqd. 1he1991 produolowas 0.9 miI tsam,fiom 90.1 mIlion torno wervee, which is partof 177.6 dmiont4r rsour * A - 127- ANNEX3 Page 4 Shalloww marineshelf depits are foundto the east, and deeperwater depoits are ond to the east and west. Ree buildupsare 5-7 km wide, 0-%60km highand can be tracedfor 300 km. Core analysisof the biohermallinetnes and dolomitesshow 8-10 pcent porosity,up to 47 mD permeabilityand oil saturation. 11. WesternUkaie Pumcts for Furthe Devopme Oil has beenproduced at 36 fields fromUpper Crtaceous, Paleocene(Yamtne), Eoce (Boryslav,Vyhoda), eady (Kliv)and late Oligoceneand Miocene(early Helvetan, Volhynian, Khersonian) sandstone reservoirs. Yieldsof 1.5 to 120tons are common. GoodEocene reservoirs are 20-SOm thick with10-20 pecent porosity,50- 200 ml) pmeability and 85-170tons of ofl per day initialproduction. Good Oligocene reservoirs are 10-60m thick with8-10 percent porosity, 24 mlwpemeability, 40-50 tons oil per day initial production.Primary recovery is 8-10percent As reservoirsin the shallowerthrust sheots are depleted,the deeperones are exploredand exloited. Mostof the structuTaltraps have beenfound exceptsmall pools associated with steep and overturnedstrata. Smallpools with stratigraphic traps are beingfound even at shallowerdepths. For eample, newwells at the DolynaField yielded 4.5-9 tons per day from2824-2883 m depthoriginally and 15-20tons per day after acidtreatme. A similarlydeep wellat the TanevField yieded 51,100m& gas and 30 tons of condensateper day initially. Ihe EoceneVyhoda sandstane had 9-16 percentporosity at 5200-6200m depth in the Boryslav-Pokovzone below the overthrustand yielded26 m3oil per day initially. The deepest publishedwell (Shevchenko#1) wasdrilled to 7520m. 12. The discoveryof the DovbyshOflfield in 1975established commercial oil productionin the southwesternpart of the Foredeep (Nadvirnaarea, Ivano-Frankivskregion more than 25 km east of the front ranges of the CarpathianMountns). At Dovbysh,20.6 tons oil per day was produced initay from 2.50-2860 m depth from Oligocene(Moenlitov) reservoirs in an andiclindalstnucture of the Boryslav-Pokovzone. Two similar adlacent strucure have been found since. Jurassic to Padeogeneclastis and carbonatesof platformcharacter lie on the crystallinebasement under sedimns strucaly elevatedby trs faults. Seismicsurveys idcated sevetalprospective 15- 20km strucums at 6-7 km depthin the Ivano-Frankivskand Chernivtsiregons. Eachof those sucres has a geologicalin-place oil resource potential of 120 million tons. One such stuctu has been drilled ccesfully, and, whentested, 300-500 tons oil daily. 13. The first commerl gas field in this area was discoveredin 1964, i.e., the small Veldkonostyfield locaed in Lower and Middle Devoniansand- and siltstones. Ihe larger Lokachi field was discovered15 yearslater: it c-nsist of tree gas poolsin up to 20 m thickcLower and MiddleDevonian sand- and siltstonesin anticlinalstcues at 800-1000m depth. Initi production of up to 0.15 millionnm per dayhave beenreported froim some wells, but a thi of thatfgue is more likely. The remaninggas reservesalong existig pipelinesare estimatedat 10.5 bilion rie. One billionbarrel oil resoues are also reported. Gas is the mainproduct at th fieldswith Oligocenesandstone reservois: the averag dailyyield of the regularly-producingwells is 0.12 mmiionm3. 14. Souther Ukame: Geolegy. Sedimentaryrocks cover the southrn part of Ukrainefrm the Sea of Azovto Dobrudjain 630 km lengthand 185km widthor over 116,000square kilometers, including73,000 offhore [Figure13. The curnt (1991)production is 509million mn gas and 131 thousandtons of oil from 110bfllion n ga and 14.8million on reserves. Totalresources stand at 1254 billion in gas and 178.3 milliontons of oil, 27 perent and 19 perent of Ukine's otal Table 41. he conribtion of offshoreara is 1030billion in gas and 124million tons oil resures -128 - ANNEX 3 Page 5 tTable4l. Ofhore souhrn Ukine remainslargely uneWlored. At presen, 10 gas fieldshave beenlocated the inlesn Oa6 mr, 28ta rgp areprepad for drillng[Figure 21. Whflean additional200 struct highshave been regnized, 28 have beenstdied in detail. Approximaely 60 newfields are suspected:two medium-sized,six smallfidds, and 52 very small-sized. is. fctn of O and Gas Reservesand Resow_: (SeeTables I to 4). Oil and gas reservesand resourcesare dassifiedas A, B, Cl, C2, C3, DI, D2. The maincharacteristics of the resae and resourcs, wilhNorth Ameican terms,are as follows: A: Provenor mesured reeves, producing,re-aculaed annually; B: Provenor mesured reserves,non producing; Cl: Probableor indicatedreserves. Testor favorablelog indicationwith correlatable test, or adjacentA or B categoryreserves are requiredin the morecertin division, "potential in the less ceran division; C2: Possibleor ihnerredrere: potent eslished by erapolation; C3: Identifedresources: establised by specuativeeapolation, or an arbitruay70-80 pecent of C2, but etent can be shownon a map; DI: P _ or hypoZthi resources; D2: Less certainprog nostit or h cal resources; 16. Reserves(A+B+Cl +C2) representmore cert projectedvolumes within the resources. IT lagest differencein Ukiniat and NorthAmean definons lies in the fac t proven resevs in Ulmaineare not requiredto be reoverable underexisting economic conditions (see Table 8). Dueto th definitoa difference,Ukranian estmates are too high;by as muchas 25 percen for provenresv, 50 pet for probableand possibleresev. Fromthe volumetrically- calculatedgoological in-place figures, reoverablewis projectedusing a usually-overestima roovery factor. Re estime e approvedby the StateCommittee for Geology,which follows die for"nerSoviet guidelines (GMZ, 1971). Theseguideines are very specificfor details,but do not roere an estmatedprobablity for the recoveryof the projectedvolumes. 17. Ihpldm md DeI-and Ted,niebus. TUequaity of reflection-eismicequipment and poor depthpenobiun is a serius problemin Ukaine, as mostof the new wellsare deeperthan 4000m. Turo drills-low and inefctive in penetratinghard strata at great depths-are commonly used. DrIiig of wels maytake years, and a lar percentageof the wellsare above taged depth. Rotarydrills-capable of drillingup to 7500m depth-are needed,together with high qualitydril pipes, cuing and high-pes wellheadeqipme. Thereis also a needfor modern core drilling,dowhole geophysicalloggig equme and heavyduty workover rigs. Additional discovedr and fPtr developmentare beinghindered by a generalshorge in offshoreseismic surveyand drilIng equipment - 129 - ANNEX 3 Page 6 18. hmons Sta Committeeon Geologyand Utilzaton of MineralResoure is responsiblefor oil and gas explorationthroughout Ukrain. Iho StateCommittee perform geophysicalanalysis, collecs field data ideifie ivtment tare, direct testdrilling, and advies the productionassociations on fild deveopmentand opetions. B. Coal _ 19. tory. TheMmtnatbn Dones CoalBasin or Donbassi almostsynonymous with coal in Ukraine. It i the sourceof more than90 per of coal production,and daims a similarshare of coal reservesand resources. Ihe Donbas is the mostheaily industrid area in Ukrane. LargI- scalecoad production bega In the Donet Basinin 1870,at th outsetof the railroadera in the RussianEmpire. By 1913,annual production readhed 25 milliontos, 87 peerentof the tot producedwithin the Empire. Coaloutput reaCed its peak in 1976widt 191million tons, a figure whichincluded more thanhalf of the tot metallurgialcoal productio of the formerSoviet Union. By the end of 1991,cumulative cow productionin the Donbassstood at fie billiontons. Extensive developmentof the Donets Basinwas spurredby th nearbyavaiability of the primaryresources for iron and steelproduction: Iron ore is broughtin fromnearby Krivyj Rih and ferro-alloymanganese fromNykopil. Limestoneand refacty clay for funace liningsare minednear Donetsk. During the Sovietera, the Donbassranked thr in pig iron production. Thereis also a well-developedlocal coke-chemicalindustry, based on by-productgases and tars of cokeproduction. In additionto metallurgicalcoal and a acite, otherhigh grade thermal coals and coa be gas are abunant. Shallowand srfaceninable lignitedeposits can also be foundin the northempart of the Donets Basinand westof the DnieperRiver. 20. Significantcoal productionalso takesplace in the Lviv-VolynBasin on the Polishborder. Minedevelopment commenced in 1947,after the southernfields became part of Ukraine. Undergroundmin producecoal in the Lviv-VolynBasin for two localpower gerator plantsand for metallurgicaluse. The LublinCoalfid constite the Polishside of the BasinL.Athough coal occumenc theCrimea and in Transcarpathiaae onlyof localintrest, the Illni minein Transceapaia recentlyreopened. IlMnitsimines up to 5.0m and 15.6 m Mioceneand Pliocenesub- bituminowseams: these coal seamshave signficant regionad importn and maymerit firther study fromboth a mi_n and coalbedgas pective. Commerca coal seamsand large depositsof medme gas in elongatedfolds of Sarmatin sandsare reportedto occurat llhi l. 21. DoesesBal (DoWbs): Geolrgy. The DonetsCoal Basin or Donbassis the southernpart of the Dnieper-Donetsdepression, which, although iefly in Ukraine arlkiv, Dnipropetrovsk, Doneakand Luhanskdiscts), extendsinto Russia (ostov District)[Figure 1]. It is 650 km long and 200 km wideand coversapproximately 60,000 km 2. Te wrth and vwsternareas produces theml coal fromrelativedy shallow mines in genty basinward-dippingstrata. h foldedsouthen partproduces antacite and metallurgialcoal fromdeep mines in foldedstrata with dip ranging fromgende to deep. 22. Virtuallyall coals in the Donbassoccur in Cabonifous sequencestable 51.Ihe thickn of thesesequces exceeds12 km in the centralpart of Donbas. The thicks of similarsediments indicatesthat subsidencedelicately balanced the proess of sed n. As such, the coalgeology of the Donbassad Appaladciain the UnitedStates are quitesimilar. The LowerCarbonifeus seqence beginswith the Tournsia stage, representedby 260 m of limestoneswith beds of dolomiteand claystoward the bottom. Similaly marinei the lower60-70 m part of the Vis8 - 130 - ANNEX 3 Page 7 sediments,overlaid by 5SX-600 ranitional and 800m errigewouscoal-beaig sedimets. The coal seamsoccur throughoutmost of the Dnieper-Donetsdresion, but onlyin the wster part of Donbassdo they reachworkable thicknesses. The Serpukhovsequces of th Namurianstage lie trasgressivly withan angularunconformfty on UpperVisean rocs. Te Seukhov sediment are 2.5 kmthick at the centerpart of Donbass,but pinchout on the margins. They includemarine sandstonesthroughout and manycarbone bands. Theterinous zonesare codabring, but the coal seam of this C-1 seris, or suite"in Russia,are of workablethicksses only in te weste part of Donbass. 23. The MiddleCarboniferous sediment are 2-6 kn thickand includesewe (C-21to C-27)coal series,with most of the extensiveworkable sem (53)in the upperfive suites. Ib. lowertwo (C-21 or Manuirkovand C-22or Mospin)are workableonly in the Donets,Makilvka, and K mii raon. The Smolianov(C-23) and Kamen(C-25) suites are best developedin the central,folded part of Donbass,the Almaz(C-26), in the Done-Makiivka,Central, Lyycde and Almaz-Marivka raions. The Bdokaltvetn(C-24) coas are thikest in the Russan part of the bas Seamsof the Gorov (C-27)suite are workablein each raion. Woriablecoal occurs only in the Donets-Makiivka armaand onlyin the botom part of the 1.5-3.0km thickUpper Carbonifeo cntinental sedime. Workableseam thicknesses range from 0.5 m to over2.2 m, but the proportonof the less expensive hickeroccurrences decreases as miningr ogresses. 24. Donbas: Coal Quty. [SecA,gure 3] Virly everystago of coa dais-from ligniteto anthracite-is prsentd in the Donbass.The maindtrmng factorin coal diagene is the depthof burialbefore tecnic uplift,folding, and faulting. In the case of te Donbas, depthof buria was a functionof subsidence.For example,coaly matera that sank to greatdepths in the cera grabenbecae anthracite. Wheresubsidence and depthof burialwas sigdicant but limitdo (e.g., alongthe norten edgeof the centa graben),bituminous and cokingcoas canbe fund. A combinationof unusuallyhigh (45-80percent) vtrnte and low (lessta 25 percent)in ite contn explainste ecellent cokingand cakdngcapaci, strengt, plascity of the Donbas coking coals. 'Me phosphorusconteot is also favorablylow (0.01percent). 25. Due to the relativelyrapid subsidencein the grabenand the proxmity of th sea, ash (25-35 perent) and sulphurcontent (2-3 percent) are quitehigh. The mau specificationfor cokingcoal i 10-12percent ash and one percentsulphur. Althoughthese specificationsare atained at an aver recoveryof 56 percen (or lossof 44 percen), part of the refuse uilized for powergeaion. Often,however, the spefcation is not aievled and melrgical coalwith higher-a-specified ash and sulphurcontt is sold. Thermalcoals undergo more ha mechaal cleanig and are soldwith an averageconten of 25 pecent ash and 2.5 pecent sulphur. Noneless, withd histallationof proper cleing plns and epnent, excellentquality coking ad thermalcoal couldbe povided for iernatona markes. 26. Deb Prospecs for U br Deve . In this anum, coal resour are not examinedbeywd rerves, as reservesalready amount to 46.9 billiontons (117years supply at crnt producdonand 2S pe overy). In addition,the economicmineabiltyof part of the reser is alreadyquesionable. In 1991,"run of mine"and "cla" coal productionstood at 135.6 milion tons and 95 milliontons (254mines) respectively, compared to 131.5million tons (runof mine)and 94 milliontons (clean)in 1990(268 mines). Hencforth, mpario are basd on "run of mine prduo. The followingtable showsthe prducim by od tp and minesby min productin 1991: - 131 - ANNEK3 pow a _49Anret rsf wm o Podon znlflomta 61.4 38.7 35. 135.6 oent 4S3 28.5 26.2 10.0 UN"s. No. 118 86 5s 2540 pnaat 46.6 33.9 19.5 1OQ. 27. All productionis undergound: the mjoty of it undertakenby lotgwallmechaed comlaes. Waterinflow is lfes tha 20 n' per hour in 49 percentof the min, 200-00S n' per hou in 43 pet of te mines,500-1000 m3 per hour in seve percentof the mines,and moreth 1000mW per hour In one percentof the mines. The Nortern Donbassi the mostwateratud: dev-watingis necessarybefore production. Since mine wastewater is oftenmore saline than seawate, its tratment and disposa is a major vi t concern. Germaniu is recoveredin someof the cokingplants as a by-product.Tne most serious comseqe of the geologia tuctuo is the dept of workablecoal. As withthe thickercoal, the proportionof shllowerou decaes as miningprogresses. Accordingly, the average depth of producon was624 m in 1990 (nreiasg by approVimately15 m per year), but 1000m depthwas reaced in 38 of the totl of 268 mines. The followingtable shLows the 1990production and the provenreserves of the mines,at the ed of the year, by dep categories. TotaL <3d 0 3014( at0-AV "01-120l >131 Poducti minlCstoCss 131.5 22.S 492 41.1 182 0.5 1990, w p.r.c 100.0 17.1 37.4 31.2 133 0.5 hseI_tsvsWof Now bionmes 10.30 1.23 3.10 358 1.65 0.74 as of ha 1, 1991 Pao"O 100.00 12.00 30.00 35.00 16.00 7.00 Rok temperatu in ses by 1.6-1.9*C per 100m to SOO5600m depthand by 0.9-4.3 C in grea depts. t reaches53- C at 1000m depthin somemines. The maximumalowed air tempeau in minesaft i 26- C: not suprsin y, muchmore ventilat is requredat geate depths. lock preur also ina withdepth and, alongwith its increase,the frequen and itsity of coal and rock obursts. 28. Dn i_erDeDtC Geology. In a northwestenextension of the Donbass,Lower and MiddleCaboniferous seq coal undediesthe rest of the Dnleper-DonetsDemeion (ue 11. Theseans are usuallyless than one meterthick. Theyare usualy at 60-1000lO m det on the two side slopes(up to 300 m depthat someplaces along the odges)and below 1600m in the contra grab.. Reurces of R2 and R3 categoriesare estimatedto be 1.7 and 5.0 bilion tos respectively. Theseresources are not Inclrudedin the tablesof this reportas economicmineability is not freseabl. Theret of the coal in the Dnleper-DonetsDepression occurs in young sedime and Ihe suftmm occurrences(Novo-Dindtrovsk, Bresk) that ovedapthe Donbas. Coal in Jurasic sWimeMhas not yet boenfound with a minablethickness. In additionto the two localiis mentioned,the Sul&-Sad Syndinein Mirgorodis notablefor 18-20m coalthcnse. 29. Dep o D so Prospectsfor F w Dee n best prospectis at NovoDimtrovsk. wherelignite can be foundin seamsof up to 14-33m thi rangingfrom the smurfeto 404 m dep. Thevolme of recoverablecoa is 400 milliontons wih 3.65 of rocksper ton of coal for the entiredeposit. Considen t this depositundeles a smallarea (12 kiz', minig th are maybe advantao alsowu from _ and ramaonviwpods. - 132 - ANNEX 3 Page 9 Reducingthe sulphurcontent of boththe feedaock and emittedgases would further improve the envronental aspects. Ninemillion tons annualproduction (enough for a 2000MW electrical power generatorplant) could be sustainedfor 37 year withthe followingexpected coal quality: mouba0: 2040p ea as NsWd Asb: 1628paet dry HeatValue: 35004200KCal1 dryad fiee Sulpar: 2345 41y 30. Similarprospects can be foundin Zhytomyr,located west and southof the BuhRiver. Similarlignitic coal depositsoccur at approximately200 localities,80 of whichappear to be economicadlyminable. Coal seams are up to 8-9 in numberand up to 28 m fr thickness;three workableseams with 10-15m aggregatethickness in a 20 m intervalare als present. Currentannual productionstands at ten milliontons from 13mines (six undergroundand sevenopen pit), eightof whichare locatedin the Aleksandriaraion. Onlymechanical cleaning is utlized, and this process only to a limitedextent. lhe reservebase of the existingmines is 15 years, and for new mines:30- 60 years at presentand plannedprodution levels. Coalreserves (854 million tons) and resources (2485million tons) rTable 61, could support a significantincrease in the use of Dnieperlignites for electricalpower generation. 31. Ihe openingof four newunderground and five newopen pit minmis beingcomidered at the presenttime. lhis newdevelopment could increase annual production by 12.3 milion tons. The plannedUpper Dnieper open pit mineis particularlysigniflcant: briquettes would be producedfrom four milliontons amnualoutpu. In additionto the proposednew mines,the SanzharovField (the one nest to Donbass)warrants consideration. Large open pit and unegound (20500 m depth,flat- lying)reserves (A+B+Cl), (98 milliontons and 268 milliontons respectively)occur there in up to 5.8 m and 12.3m thickseams. The upperpart of the depositis ligitic, the lowerpart sub- bituminous.Paleogene coals in the DnieperRegion contain minera wax in recoverable(6-11 percent) quanities. In fact, an andquatedplant presenly proces 1,500tons of minal waxper year. In theory,with a newplant, production could be hnreasedto 20,000tons per year. In the Dnieper region,coa is foundunder prime agricultural land: topoil stock-pilingand ongoingreclmation willhave to be takenino accountif largescae openpit minig is to proceed. 32. Lvlv-VolynCoaUidd: Geology. The Lviv-VolynCoalfield in Ukraineis part of the Volyn- PodolianBasin on the westernedge of the EasternEuropean Platfm [Figure11. The coalfidd extendsinto Poland (Lublin Coalfield). Workable coal seamsoccur in the Lower(Serpukhov) and Middle(Bashkiria) Carboniferous sequences. The field is subdividedon stuctr basesinto three geologic-industriralons [Figure 4]. Theyare separated,but also fiuter subdivided,by major fauls. The Novovolynskeraion is the northanmost. The VolinskFault subdivides this raioninto two simiar stuctr. Strat flattenfrom five to one degreessouthwesterly on bothstructures. The two mainseams rage from0.9 to 1.5 m thickat 120-140m depth. The coalis of "Gasoviy"rank, i.e., a highlyvolatile (b-c) bituminous themal coal. Ihereare ninemines in the raion, all of whichhave closedwithin the past two years. Reservesstand at 25 milliontons. Coal is thickerin the eastern part of the raion, but that area is largelymined out. 33. The strucure of the Chervonogradraion is a synclinecut by a majorfhult. The coal seams are less than 0.7 m thickon the norther strucure and have not beenmined. Anotherfawlt subdividesthe remainingpart intoa nort (Chervonohrad)and a souther (Velikomost)structre, wheretwo and ten minesare locatedrespectively. The reserves for the raiontota 255 milion tons, and lie many in two 0.7-0.8 m thibckseams at a 320-360m depth. Ihe coal rankfrom this raion - 133 - ANNEX 3 Page10 rangesfrom highly to modrately volatie biuminouscoking coal In the southernpart of the Velikomoststc , and Gasoviy"throughout the rest of the ralon. 34. The Southwesrn raionconsists of two almostssparate synclines. the northernstucue (aeglovka) is broader,less steep, than its southrn counterpart(Karov). The mainseams are 0.6 m thick at 300-600m depth. Bothseams contain highly to moderatelyvolatile biuminous ("Zhiroviy") cokinggrade. Threeresrves constitut 102million tons in A+B+Cl categoriesand an additional 142million tons are understudy. In the Karovfield, the mainsms are usually0.70-0.85 m thick, steeply(over 30 degrees)dipping at 520-950m depth. The coal rank is similarto that in Tiaglovka, and reservesare esimatedat423 milliontons. The coal in this area is relativelyclean, but couldbe cleanedfurditer. 35. Run of mine ash is 13.5 and 18.5 percentin the Novovolynaskeand Chervonohradraions, whichcould be cleanedto 5.6 and 7.1 percentat 81.0 and 75 percentrecovery with an additional6 percentproduct of 24 percentash. Decreasingthe sulphurconte is difficultin the Novovolynske raion, but in the Chervonohradraion most coal over 1.2 percentsulphur comes from Shaft No. 2. TMreenew minesare plannedin the Lviv-Volyncoalfield to increasethe annua outputby ten million tons [Table61. However,production in 1991was 8.0 milliontons (downfrom 10.5 milliontons in 1991,14 milliontons in 1987)and at least nineof the twenty-onemines are closed. 36. C bf of CoalReserves and Resources:(Tables 6 and 7). Coalreserves and resourcesare estimatedsimilarly to oil and gas. Reservesin A and B categoriesare technically provenor measured. Of the rest of the reserves20 percentis placedin the Cl category,which with reservesin A and B categoriescomprise the "balanoedreserves"; 80 percentis placedin the C2 caegory and called"unbalanced reserves". The technicalconfidence level of reservesin categories Cl and C2 is similarto ihatof the probablermdicatedand possible/inferd reservesin North America.The resources,in additionto reserves,include volumes, which .e eitherprognosticated or of quationableminability [Table8]. Totalresource figures appear to be reasonablyreliable, but are determinedtakn intoaccount that reservesneed only be of commercialsize and exploitablein industial scaleusing existing technology. 37. ImUtud_o. Ukruglegeologia- the UkrainianCoal GeologyProduction Association - is responsiblefor coal explorationthroughout Ukraine. Basedin Donetsk,Ukruglegeologia advises coal productionassociations on policiesand planning. The productionassociations are responsiblefor developmentand productionand each productionassociation operates one or more mines. There is a productionassociation for each geologic-industriraion in the DonetsBasin and one each for all raionsin the DnieperRegion and in the Lviv-VolynBasin. C. Coabd Gas 38. Owingto the overbudenand tecoonicpressure and increasingtemperature with depth, buried plant fia undergothe processof coaldiagenesis to varyingdegrees. The originalthickness of cover and geothermalgradient ae the mostdetmining factors. Plantfrgmes accmulatedin marhy lowlandson the UkrainianShield have not had muchmore than the presentcover and the coal diagenesisprogressed only to the lignitestage and to the sub-biuminousstage at the lowerpart of the deeperdeposits. At the centra part of the DonetsBasin the coverwas more than 20 km at some placesand morethan 10 km virtualy everywhereand the coal diagenesisproceeded to anthracite. Frompeat throughlignitic and sub-bituminouscoals to highvolatile bituminous coals the decreaseof - 134 - ANNEX 3 Page II moistre contnt (from75 to 9 percent)i the ma changein the coulificationprooess. Furtr on to decreaseof the gas contet the main chag, which resul in methanegene_aon up to 416 mn per ton of cod, if the c goestroh the i processof diagemsist antroe. Actly mostof the methaneIs geneatedby the semianthrait stage,and the xetmophosedanthracite Seanmsr msgassy ta lowe rank sems above. 39. Mot of the mhae genated lea the coalbeds and migrats throughthe rWeky untl it Wtapped,or findsits wayto the atmosphere.Porous carbonates and clast adjace to coboeds,updip from cod meaur and withseal are primetarget for convmeionalas exploradon. lhe oai mteria holdspart of the meth genated, whichcannot be separatedwithout heating. The thd part of the _sme genead h adsorbedto the coal in maSt andfratre pore spa and holdthuer by the pressureof thefluids and gasesin the rocks. Thismee is liba if the preu deceased by d-wawrg ad gas productionthrough boreholes. It is obviouslylibead by minig isedvities.Mhe disbuto of liberatablegas contet in the Donets Basin (inlCuding the shalowr par of the Westernand Norhen Donek Basin)is very low Oessta 5 and S-15 ' methaneper ton of coal). The methanecontent is "medium"(15-25 ms/ton) in h deeperpart of Norten Donbs and in the adjacet part of the Folded Donba. The methameconten i very low (less thanmSemJon) in the Xn s where carbonium-dioxidebecomes the most abundant S especily at greater (1200-1400m) depths. Do-gassingis mandatoryover 10 n metae per ton Ofcoal. 40. TMe_o contet is high (25-35ms/ton) in the Zalizne,Orlkbiv raions and in the southern part of the Kasnodon Sorokynelralon. It is paricularlyhigh (3740 mIton) in Bashkirian(Almaz of C26 Serie ) sem. De-gasng wellshere produce28,000 ml) methaneper day. R has baenestmed, that in 1990mningliberated 3.4 billionmeme3dne of which 1.2bWfion m was capured by adsig drange system,2.2 billionW was ventedinto the atmophere. The total coalbd mbae resources in the Donbass are estmated to be 25.4 trillon in, 1160 billion m3in the coal layes, 3.4 trillionmi' in the partingswithin the coalseams and 20.8 trilion m&in the sroning rocks. Besidede-gassing in co-ordiaion withundegound mining,gas productionfrom old wokingsand fromhigh gas coott areaswith wells should also be considered.The following Tablegives the gas and mehane contentof the gassiestzon in the Lviv-VolynCoalfield. R*.u IJb~~~~~Wmt*kew MdAhe to g NOVcOlb=k*0400-m 3.9-6.1 64"-S MAo 2.5 -123 53 -94 Sao&(370-47ni) 5S - 22.1 73 -97 hsIovk(510-780m) 4.2-180 68-94 - 135- ANNEX3 CONVENTIONALOILANDGAS RESOURCES OF UKRAINE Page12 BY REGIONSAND RESOURCECATEGORIES Geo*&gssin plow resoross of jsfwuy I,1ion EoSf WEST SOUTH UKPAl gAS NONQ ASSOCIATED eD Bd EM3 9 efm3 8sf &a w Pon + Pobabb(A+S+C) _ w 07 +)SW78 11I (+I) 3018 63 (+I6) 1871 1121 3957 Passabe(0C9 esw 230 .15) 8119 22 (-1) m 56 (+19) 2047 310 10943 defd (c3) Reecume No (3 17660 68 (0) 2047 284 (+9) 10025 842 2972 Rgokd (1+C PRsoue 97 7 34 35 12602 846 (4) 294 2100 773 TOTALRESOURCES 2674 94302 54 19344 1241 43607 4463 1744 19 PKduso 26is 770n 1 35 0. -la - -a" * Cumuidvducon 1282 48255 23s a225 10 SOS 1532 54080 Orignl eoure 3957 139662 71 276 1257 44372 5904 21166 AS- ASSOCIATED DmS SOd E9m3 Boa EmS3 Bdo EmS3 5sf Pon + Phbl (A+5+CI) R Ve 1. (0) W530 23.5 (0.4) 830 0.0 (0) 0 38 1359 Possoe(0c) _eeVS 34 (0) 65 4.8 (0) 16 0.3 (0) 11 75 2 ldenfld(03) eeowoe 0.0 ( 0 0.0 (a) 0 0.0 (0) a 0.0 0 Pogoeated (D1+CMResore. 233 (0) 622 3.1 (+4. 1345 12.7 (.0.3) 446 74.1 2816 TOTALRESOURCES 40.7 1437 GS4 2344 13 459 120.1 4240 I Puduodon 0.7 25 0.4 14 0 o 1.1 39 Cumua pv.du 24.1 651 41. 1468 0 0 66.7 2319 Ol resoces 64. 227 3 13 459 165.4 6545 rL -E_ E6bbl- EB Eb ESt Mbble E Ebbt Pn+PrcPbeble(A+50+ 1)RPerte 04.7 (f.1.) 62 55.1 (+0.6 97 32 (0) 23 153 1102 pOa. I(c2) P _omes 19.4 (.7.4 140 16.4 (+1.4) 132 4. (0) 35 42.7 307 k-ned (CS)Roure 40. (+64 292 136.4 (+3&1) 975 21.7 (+8.7) 16 197.6 1423 -Pro _gnotd(01+09) Rsmotxe 122* (+S.0) 883 82 fM.1) 590 51.1 (.2.9) 368 257 1841 TOTALRESOURCES 272 (+5 IM 200 2094 80.9 52 649.0 4673 1 3Produo 31 22 0. 1 4 2 CuW prdL 166 1210 9.7 71 0.1 1 267.6 198 OrN o e 442 325 390.6 212 e1 583 918.6 660 CONDENSATE EOt Ebbls Emt ESbl ESt .bbis Ea Mebb Prn + Pobbl (A+8+Ct) P _eee 74.1 (+0S) 534 2.4 (0) 17 3.2 0 23 79.7 574 Poslble(C2)Reewes 16.0 (+4.0) 115 0.8 (0) 6 4.5 (0) 32 21.3 1s3 kIdnt (C3)RPsouroe 0.0 (0) 0 0.0 (0) 0 0.0 (0) 0 0.0 0 Prcg-noftd(D+D2)Resou"m 67.5 (-1st 630 2.3 (.0.4) 17 69.7 (.4.3) 64 179.5 1292 TOTALRESOURCES 177.6 1279 5.5 40 97.4 701 280.5 200 191 Prcducn 0.9 6 0.1 1 0 0 1 7 uailv prduon 499 359 2.4 17 0.4 3 52.7 378 Ordgw resoure 64.68 467 107S 775 13 94 165.4 1335 OIL EQUIVALENT El EOt Etb ER E6bbs Em Ebb Proven+ Prbl (A+B+Ct)Resm" 1141 8215 192 1382 59 425 1392 102 PoabI (0) Resevss 268 1o30 46 331 68 490 382 2750 Idek d (C3)Resoure 541 3595 193 1390 306 2203 1040 7486 Progna+ld (0+09 Ameource 1220 8674 479 3449 1000 720 2699 19433 TOTALRESOURCES 3170 22824 910 6552 1433 10318 5513 394 1991Produolln au. 1911 2.4 17 0.6 4 29.5 213 Cumuld prduotn 1524 10973 377 2714 17 122 1918 13810 Odoialwrso 60 43603 1387 9986 1364 9821 8807 63410 Or1 toln3(APu - 3t) - 1.115m- 7 l * 1OOQng 3530013 ED-aerm s ES-ne mdlllon Chaqnga.reur-es p htu.ayswqsnbme -136 - Table2 ANNEX 3 Page13 EATENUKANE: DNEPRD!ET EGO OL AND "AS CUMULATIVEPROD W ONAND REMI NINGRESOUR CES EYSRAIGRAPHIC ZONES AND RESOURCE CATEGORIES Qeooga In plae tm orese_sofJanuay 1.1992 t 2: na Sl 12M.- 2 fR orA GAS. NONA86OCA1D- C mwAowprduon: ES t0. 1040. 407 3.312L 220 3.7 12_2 % 1.3 81.1 3.2 to 9.6 1.7 0.3 100. T&AL EllrnS 63 3664 162.1 355. 670. 694.6 266.7 918 2574.1 % 0.2 14.4 CS 14.4 2.1 26.0 9.6 3.4 100.0 Provef 4 PrbObal(A4S4.C1) RAmmas SbuS 6. 316. 56.6 1466 221. 168.0 11.4 7.8 967.3 II 0 333 19 1. 23.1 19.6 1.2 0.8 100.0 Possbme(CS) Rserves 9m 0.7 47. 14.0 .2 101.2 4.9 0.7 25 229.8 WFA 03 20.7 6.1 7.0 44.0 20.4 0.3 1.1 100 Ided(3) Rsoure E9m3 0.81 50 98.6 251 111 6.3 6.1 499.7 9S 0.1l 11.0 19.7 43.0 23.6 1.3 1.2 100.0 P noe5cied P(D1+M Resourof. 59mB 19.6 so6 124 132 341.6 233 76 967.3 % . 2.0 W7 12.4 5 34.6 24.1 7.7 100. AS-AS6OaAIED CumalwpnmdmI: E9rn 0.4 8-2 118 2.2 95 0.9 Q1 24.1 s 1.7 36.2 7.5 19.1 39.4 3.7 0.4 100.0 TARLRM : oneS 0.2 52 7 16.1 34 6.7 3.4 40.7 1 -I 128 1.01 39.6 8.4 185 64 100.0 Pvn + P.robae B(A++C1)PRe EeHn 0|2 1.9 1.2 3 2.2 2.3 0.9 1.0 V. 1.3 It7 8.0 42.0 14.7 M15 6.0 100.0I PosIbe MCI)PRO E93 | * . 0.2 0.2 12 0.2 0.6 2.4 -%3 ; _I 3 8.31 60.0MO 3 25.0 100.0 MeJMsd(03) Pssowm UrS .- ellm3 1~ -r Proven4 Prbbe (A+B+C1)Resenoes E0N3 | * - 3-1 4.3 8.6 1.0 3.8 25 23.3 OL Cumulativeprduto: ESt 3 II&I a0 e 32.4 4.0 * Q4 MO S"2.00 3 4.0 19.3 2.4 0.2 . 100O TOTAL REI: ES 7.1 28.8 32. 111.4 35. 43.8 1.8 277.6 V. 2.6 10.4 11.8 40 t 129 15.6 8.4 100.0 Prvn + Prbabbe (A+B*CI)PRsvee o6 t1.11. 39.9 13.8 14.4 5.6 95.1 % . 1.6 1Z4 U.8 42.0 14.5 161 0.1 100.0 Possbl (C2)Reeves ESt 02 26 0.5 .9 2.6 22 Z4 19.4 V. __. 1.0 13.4 2. 45.9 13.4 11.3 124 100.0 IdenW (3)_ed PReource EM 1.9 02 2.6 12.3 183 52 40.5 % _ 4.7 05 64 30.4 45.2 1.8 _ 100.0 Prvsn + Proabl (A+8+C1) seve on 3.5 14.2 21.8 603 1.2 20 9 122.6 % . 2.9 11.6 17.8 41.0 1.0 17.9 7.8 100.0 COND1ENAE - Cumulaeprodon: Eam| t| 25A 1I6 4.1 158| 2A6 0.1 - 49.9 % 0.2 51.3 3.2 82 31.7 52 0.2 100.0 TOTALREMANE: Eat 0.4 2U8 7.4 27.6 50.2 44.4 16.9 3.9 177.6 % 0.2 16.1 4.2 16i5 28.3 2.01 9.5 2.2 100.0 Phven + Probb (A+B+Ci) Reseis Est 0.4 24.6 4.4 11.5 17.1 14.6 0.9 0.6 74.1 % |Q5 332 59 1155 23.1 o1.7 1.2 0.8 I 100.0 Poslb (C2)Rerves Eat * 22 0.2 as6 10.5 2.0 0.1 0.2 16.0 % | 136 11.3 |&0 66.6 12.5 OA 1.3 100.0 Nlbled(C3) nmmo Es I . * . . 1__ 1 _- *- -I . .1 1 . Pve + Pr (&+B+Cf)Resevs so1 - 2.6 15.3 261 27.8 15&9 3.1 67. % &232 17.5 258 31.8 1821 3.8 100.0 Omemb . B-mWmouE M 35UftOu1 losMs 3-3I)d-t.t5m3 - 7.2bbl*oB MEa* Mesle IPuaC - L rPouwrUppsrCemboheo me *Mia Cub. a. tOewe8l_. Pea Prsi oml .I 137 - ANNEX3 Tabh3 Page 14 EN UKRAINE Oi. N GA CUMLAIV PROUCiONmANJMANGRSURCES BYSTRATIGRAPHIC ZONES AND RESOURCE CAIC/ORIES GoologWisn pimea.cmurmoNmofJusay .1062 a B a i g P. , 1S92L Cumulateproducton: E 9 S2. 7. . = .b 368 23.6 33.0 5. . 10O. TOTALREMAINED: Em '5Y Sao i7 547."145.20 % 31.1 25. 162 9. 1.6 7.2 a3 100.0 Pmo + Prbablo(A+B+CI) PAmmso 83 W1 'WI *5 11Q! * % 74.9 16.8 5 IA 6.3 . 100.0 Poasibl(C) Reseme ESmS 16.9 4.6 __0.7 _ 2_- S 7 20.7 . . 3.2 . 10Q0 nie4(C) R(esCrPsom3 19.8 16.0 1.0 2.2 3.0 106" 3. 564 l 33.9 30.8 1.7 3 &1 18 6.2 100.0 PrognodaSd (01+02 Rsos EUmS 507 69.4 67. 4.7 7.0 21.0 41.6 354 lb 142 27.9 24A 1389 2.0 59 11.7 100. M-AS8OCIATED Cumuetpodon: Ewa 413 Q1 I _ 41.S l 06.6M 0.2 . _ _ 100.0 WOALARIMANED:03 . seq -- *-wa a % . W94 5.9 3.6 . _ 0.9 100.0 Proven+ Pmbabe (A+B+CI) fAem eint3I _ _3 E -_ _ _ l. 048 5.2 . * . 100.0 Posibe(C2) R3 8 4.0 _ _ _ 4.8 * . 100.0 - 100.0 kdfed (C)Rsoau 8 " . . Ph_ogtoad(DI +02) RPso EBi 32.3 27 2.5 0.6 3B.1 a 84.0 7.1 6.6 _ 1.6 100.0 OIL Cumuliveprodu n: ER 99.1 0i6 99.7 lb 694 0.6 - * 100.0 TOTALRtEMAI: 1st " OM '2WLI."=0; % 0.5 763 a 9.1 . 5.5 100.0 Proven+ Prbable(A+8+Cl) Ramiva Elt _ "M ""3 " . *w b . l88.4 4.7 100I.w o Posenbb(C7fbese ESt 16.S 1a . 18.4 lb 61|9.7 3.3 7.1 . 100.0 Idenmd(C3)Resre ESt 1.5 93.2 19.4 21.3 135.4 lb 1.1 69.6 14.3 15.7 100.0W Progodoad (D1+toPe e ES G6. 2.4 _ 16.0 82.0 lb _ 77.6 2.9 . 19.5 100.0 CONOENSA Cunusvproduaton. ESt 2.4 * * j* 24 l . 100.0 - * 100.0 'TOTAL _ EJte#MRM 4*? _ , *a' - lb 14.3 65S ' * - 10Q0 PRov+ Ptobable(A+B+Ci) PAwv ES -4 I * I *4 Z lb 17 63.3 - *- 10Q0 Poseible(C) Reseiva. Eso Q2 0.6 - -* r s 25.0 70 ' ' * * 100.0 Identiid (C) Rhsouroe ESt 0.0 kbili9(C3i1"6Rb -- - } * * % .M l 1 . Q00O opo d (o1+t Pe s ES 0 2.1 r r ' 6. 91.3 , . * 1000I Nfa NeogensPg a Macgee.m It a sCram$,Ja Jume C -Casbaneufrcum0u DevnaluuU Camnbdan31DEEPER E. .a bfflbnmES - am4-r W0- 3bI3Od _--_ .SAM--4_ .ta- _ . _ ,e,."aZ_44 -138 - ANNEX3 SOUTIERNKR : ELACKVEA REGION OILAND GAS CUMMULATME UTION ANDREMAIIN RESOURCES Y ST oIC ZES ANDRESOURCE CATERIES Sels lnt sevsureesIa,sy 1.11 bbft m4i TOTAL Culprduon: 3 51 61 31 .1 ss 31.3 497 19.0 . 100.0 OTWAL _EE3 z 107.8 41O27 - taLlF-M10 - S1 6.6 1tQ3 42.1 33 G 100.0 Pro.n + Probb (A.+ tC) Resre 83 19.0 % 57.5 35iT 6.6 . 100. Posbl (CM2)PRese E8.3 2. i13 21.3 _8. S 41.0 22.5 36.5 . 100.0 ffod (C) Reou E9.3 53.3 94.9 .7 75 283.5 S 1a8 35 451 t6 100.0 Mprolg,nosdd (01+02)Phewumes Sand 365. 414.0 66.0 64M. V. . * . 43.2 46. 7.8 1o0 OMi _e : . 7att AteR : E911-n , 7. 44; 1A a - 5.4 3.1 10S 10O.0 Pre + Probabe (A+B+C1) vs _ a . . POSlble(C2) PetW E9mO 0.3 10.3 Fi_Dt+ t2- 100.0 - 10".0 ldewtlled(OS) Rasw= rn - .S.4 * 33.6 10. 100.0 OIL~~~~~~~~. Cumupti duoadn: En 0.1 . Qt 100.0tC . _ 100.0 TOAL REMIN 3lOt 3.7 _ 4 2D.4 1.7 %. 41.1 SC. 2Z. 16. 10O.0 Prn + Probable A+B+C) RaeVS E.t IT .3 12 %. 37.5 - .1S. a" 100.0. Pos"b (C2er ES . .3 22 . 22 4.7 S4 . 46.6 . 46. 100.0 IdealDibd (CS)Aesouroes En -2 135 60 21.7 V. 101 62.2 . 27.6 1o0. RO t d (01 +ER en .es 33.0 20.4 6.6 60.0 6 . * 85. 34.0 11.0 10O.0 Cumudv plwduola: 0.3 0.1 0.4 . . 75.0 250 . 1000O 1"^R: ~ ~EM0 Q807 3Q*iO. 9 % 0. 0.8 31.7 6.7 100.0 Prove + Probal (A+84.Ci)Reserve so "" f KI~ "'W S. 186 16.6 65. * 10tQ0 Posble (Ca) PR_ese ER 0.2 062 4.1 . 4S S. 44 4.4 91.1 . 1.OO '.PA . 0.0 P sFhadt(01+14nommesR En . 24.7 65.0 . es7 . . . 2J.5 72.5 10t0 N.uPg-Wogene 1tper Pds4ogse mgaMdl *u lae Piogen K * iOW Y oJurasels*Th usls *t Pahoul 65mm Won. EO mfl lOB _M. * atl - 139 - AIIINEX3 IASIE UKRAMN: o Peg9M_U 16 - -~~~~om SC8tECnALfm UPROShNI ON ON Pow" e. a SIGUV*M OM ow W -_ _ _ 0050 i40 Mesum M= ~~~0400 104 - Hdv -- 0460 tels (0 044 .DCLI206 ______I Mss.som9.13 _ 041 o00414 MOCVA *'.r -smv- "040 1 V 10.0 _ _ ooo I ~~~~~~~~~_ lOM otolI L~~ 046 Iawh LU. .0 I06 t~~~~~~~~~~~~~~~~~~- ne oota _P0661) 0sv~ Lo04) 6040 OANOWAN 1 130.170 U. Eaddm =-46 lIdevmd 64 liE. (045) 140.140 Coman.o 3._ *= U.S 161_ (414)0 070 L EmNids.30400 VSb 33L. (0.15)160456 GOCN St__ Strs 346 _ __ _ NAMUWUN FMI 4- .WUN io.sumolvws~40 UW (C1) lsoawo 35 L_____..S20 - Ksv -010ah LA0 (.13)410.1 NW~ 40 U.8tssI *0mev 16.OO1 U.bo0 Y1200 Nes.uos 30 pig) 604 X~~~~~~~vu L "*At) AUdo.e3w 0 LVI... (0.11) "00.0 assay 0.100 LVI. 0300 t4.asIm a LO 36 ___ __U_Toim ______i 58.) U. T.uMobI 0460 Ui. ems, a- rOiIRAIlM I hums, 0430 OstOO __ ms, 646 ?oAmim 1040 Ramnuumv 0.100 UNMllMv 3.10 ______~345 __ _ _ _ Lme. 0.739______ 4(oddlmv 0.40 PAMENISIA Lehadimi Rewadene 0400 41lat 01400 Y~ ~~0460 UPPER 3e63do 0460 _ _ _ Un- Voofs 340400 DownI 0.86 PPAMNM Akdr 0460 34muIIk 0.21 us ______~ ~ ousev0. KIss 0.76 uW10 ME" NFG 040 Mh~v0.00 _ _ _ _ _ 370 _ _ _ _ Pkami 040 _ _ _ _ CL.ANDMM MD 160ANCO&LASUEMBLAGOWNWAlRHLOWUOERS M~~~~~~~~~~~~~~~~~~~~~u ao- sail ad eesPfs'+ w ,ie,- -0 z @~~~~~~~~~~~~~~~~~~~~iq~.0q.1e - 0ap5pIem6apu - S ~¢_O4+V 64fl601 LI GNu 0491 mgq ps -P._ _ US 6004 #6 #66 V0sW6 ce160 O 8se 658 0a8sn2G at NOe M_CAIAO4I mei so4 Om6 0"a 0 to0 0to at a66sa as d3wo ea 03 0 ON 03 MMOMMUMUP10 via VS 0 U . . . £6 £ 0 . . . s .Lt * _6wN on o 0 g60o 86w 66ta et on 8 toe o . acc0 as 4MWtMOM l a* PWS PU W 60 u let tol _NNA as o P e 9a a ;U a lli so_*W~ 4mb1 4 P6 " a so so e ce an _ea _ OOO *N u168 866 8 * 600 0 e86 *B 6* a;e1 £61 ItIO0_ =W Um 009 on~~01 Om am6 Om8 PPt SM1, am am * CoPt 0am seeSWSO4ssaem so so seo n ou a8 _ L a- .o 6* o4 0 *66 65 -.' . *4 £._06 £USC .5 06GI*Up U*_ on U ogo , . .w . .6. *_ A to o6 .4 .P .a 01 at so asn N 6 . 6 1 . w as0 St no6M o~~~~~~~~0 9 SAIl *61 060 84 * UP$ FwSPS 03Sgjd_O l c 4 ~~~~~~~~am onto4 sw6se gmPU oxPP U gm0 . 9 . aw so. MD_ 684 G666 19h am au o80 AM 61 66of6 _6P6 uI0 _~~~~~~~~~e mg c -- ,._ am mi 980 664 £16 ot29 - S- t- so s oe tmson AISI WAN' ** 8L 66 S CUnCUm6086 gm5 am0 ~0 *ACO . . O . . . _. .v~~a am _, WO lsilllt~ ~~ m me SOP gm . -I= amO - -- .0 SS l sma W W uOm 0n am amn *is a* * a "M Ms Mts PUS P~VW TAM6 TAM USSU 0o Tam1 634 IM 66)TA84aW 8M04 U19_11- 1 ne -- -- N4| Nowsds *1856 *06158*114 65*18 CUP; 066* 68*04 OW 01* ~~~~g 1 - - oe sstmmm as UD 6649ta 0810 mm" SO 0 8A 1 w#*v40#+ W U "O 1 00pw _ __WftAP 30., 10*V 8m an t V - ~~ -1 ~ ~ - _8NlE111B1_ .ORU .IH I . _ _ _, 4A§3^6486008060U0836*WSuuw.5 CODALRS FPTHE MpD- ASSOCIATON EISTINGMNES IN UKRANE OeaI*dbowt.rswm(eA+s+CI*c2) hna eItm.(GOsdJnu .10 REONS COALSEAS NE COALRESER Oub Pm&b E 'S MMOSS Er NET!W OWY1YM THERMAL BY (628 .IP ft 0AL.h p4ym AJsId ManI AGs28TE R SYBOL COKWGANI?40TE gon TOTALET 5.cts% -c2 124 2W54 2S NO. OER En % GM6 ASTM Et Et E a En 6t En Es Eo UKRAINE 10912 7952 73 2972 1676 880 76 "A 516 ME 01" 7 0014E78SASIN 10U5 7833 73 216 167m 800 7885 1517 4900 2216 301 75 I_pos0mkhM 1269 003 76 0.0 dllS ~ - US9 U9 US * * . P Uad 8 2B.4 12 US 78 DOGusb4B - 6 696 -on6 - DonuekUbtst so 40*3 vs 21 M@ 11 4073 1 206 1153 76 U77 V. KSWMd SdUon 12 7.0 196 179 900-0 9%4w In u19sr as *3 K,uagumeI* 8 1t.1 496 4U2 61 0 hBWm 2S2 - ttO 402 7 3862 20 * OfMihnn 10 17S 77 534 so 00 hw4veB 326 - 20w su 6 375 1 -0 VII Domibk * 34 31.4 136 1109 82 WY1o 299 11O 31S 15 25029 12 mul-Am 2 20X1 61 453 740-7 hw86-A 376 78 453 244 2 VAt14 1 VklCird AOl_m 13 &I 434 262 65 A hMA 255 3 24 25t 2W . . . Or ,dmi 13S 7.6 265 165 70 ZhT haSA 43 iS t2r t85 6 ' 5 t80 Dna*uk 7 3S 196 105 540.StwbSv9 1- 105 1to - 23 3 79 St T _ _ 14U t4 S 402 325 81 KA m tO 2tt 0S an25 - m2 I11 2 S 1 13 6.1 1 296 76*7 nw.A - 24 *6 296 -605256 T _rwuiwsab 22 15.2 2713g I5 A A 203 - 20 - 72 11 12 I IJPJUUI96.01st 3746 2W 0 _ 872 97 919 26 557 1098 1053 25 150 X. _Ud* sU 9 7 241 17S 73 Do i ba - - 15 15 0 Ids1s-t 4 W. -WsmDMAwv Is 18 11.0 473 276 So G-AtA 161 1 114 276 13 106 8B s 43 _1win.0ft 12 635 267 soa- bcIvS 1to- t 39 267 so 53 Is? 42 14 xI t.smul St 41. 79? 547 00 DO4 ulbwS ST de 441 547 29 213 3S 30 XHL DC to I2.1 364 259 71 A A 259 - 259 - 143 57 23 SS Ai_it s 8 6.1 205 ii3 SU A A - 113 1t3 - sO so 3 - )ML ft noiftm* K,unads1 17.3 528 396 7S OZhT 1asA 6S 50 no 342 252 64 34 46 XlOto _b f_ n1ksip 0 17 13.0 304 219 72 A A 219 219 t tO 90 t? 2 813 12 449 315 70 A A 315 - 315 - 79 218 IS S OIePERIEON AshmOa 26 23.6 254 149 ' 9 bb ,' 149 149 . 149, - Lt>E-VOUN£REGN West.. Ukxs.ba 23 17.0 2S3 170 65 00-T 1wmA 82 so 170 221 120 S6 as_mst__abtip*4A14 ,suuCt - 142 - ANNEX3 pegs 19 b.~~~~~~~~~~~~~~~~~~~~~~t Bf I, I I, a 8 I a 11111111§!#1 ! 1lZ g m §11 § | SE| f |I 111llRE|| o | iZ~ 1 tS #52| ** :i -a 1j * 33 a a s a i ii I II II '01I I I II1 22 2'4 .o ^NIGURE V6 I ~~ _ _ ~~~~~UKRAINEAND ADJACENT AREAS: REGIONS 62 EPRPOLE >t SEOIMENTARYBASINS ANDOTHER GEOLOGICAL ~~~* lMA SEuhSh 52 50R| *** OF 0EiE'_'* *NA' I' * * 46%,..% %,VO ( . ' '*Z %9't >* ~~~OIIUv ~oLul CIC e E A c K S E A _44 " S 8 24 26 28 30 32 ~I I I I tDNIEPER COMETS 0£PRESSION ?,, \ ~~~~UKRAINIANSHIELD -- o DONBASS * . ~~~~~~SLOPE OF tHE SHIELD ig / b MARGIN;,, DEPRESSIONYf9SEA OF *ASK SAM oz~~~~~~~t.~~P*~STREUCOV YALEN WTNS(IINKEC 9ODRlDA FOR$ EPO CEE I -KUBAN ASIN Co. opKARKINtr BASIN oo~, S.TRMVPM PLATFORM ,_ LEGEND - _ / 90UTH~~~~~~~~~SMENUKRAINE BLA2CK SEARE¢tON \ OF THE BASINS, OIL a A POOLS GAS BA L C S E A REVIEW MAP -MiJOR FAULTS I3O3 D@NSASS COAL OUALtTY ZAP Osa D - ASOERN-. \OS DONASSS LU~~~~~~~~~U LEGEND: CODA DUAUTY CLASSIFICATIONS gm09 APPRoX ASTM t FOLDED D008AS S S- SIRIYR R}N) LIOUt E p A 0. GASOY GAS) J N VOLATL DrfITNN the )UIOVrY IFAT) N-MOU VOLE 8tSJmU K-KOKSOMIYMCOKING) MEDIUM VOL E"BITUINU OSwOTO9HCHENIISPUKAVUSNCONA (POOR COKINGlI LOW VOLOILE SffuNOUS Ta TOSSCHIT(LEAN) 1v - SEO I ANTHRACITE PA*PLOU 1-A RIAE SEMI- ANTHRACIM As AlIRlACH ANTHRACITE get tAULe 5* CU"PAWO@ O Col CLA8PCATQM S S IsomWAsMCA a "I133 SOV5T MIpsLt".IZ no THE LVOV VOLIN COAL FIELD \ \ 'I wASI il ast \%ow\ o "+RAYON OLU9UN %%PART 8 CMALAn]), . CNERVONOSRAD OLAND lOU _ __ \ \ t X~~~NOVVOIN8K |, MIDDLE0 ____ ~~CARS.' CARS.$~ ~ ~ ~~ ~ ~ ~ ~ ~ ~ ~~~~\ CIERVONOGRAD - ASHEIRIAN NRONOA FIELD MANI_ _ Nl* VELIICOMOST .6 *O. FIELD -- LYOVYOLIN COAL FPELO UKRAINE U r LOWER LEGEDF -ARM MS -lMtED OUT _ _- - _- ERPSCOV --- FAULTS soUTH "TERN RAYON . UIERORON mIN - _ -.106-DEPTH Of MASN(N9) SEAM __nuT COALTHICKNESS to5 LOWER CARO. VISE.N - 147 - ANNEX 4 ftoI Ukbn OUand Gas Lglaon Projec Tero of Rderene 1. Ukraineis heavilydependent upon imports of oil and gas, and this depne has been increasingas a resultof declinesin domesticoil and gas production.While Ukraine's level of impoat dependenceis not, in itsef, excessivein internationalcomparison, the lack of diversityin its supply portfoliois a matterof concer. Ukrainerelies upon one aion, Russia,for moretham 90% of its importedfuel requirements.Because Russia is positionedto remainUkrine's least-costsupplier for oil and gas, the prospets for diversification,although not altogethernon-exist, are somewhat limited. Energyimports-mostly oil and gas-were the primaryreason for Ukraine'slarge defickin rube-denominatedtrade during 1991and 1992. If Ukre's 1992imports had beenfor convrible curency at worldmarot prices, the energysector would have produced a tradedeficit of US$10 billion. 2. . Natual gasproduction peaked at 69 billioncubic meters (bcm) in 1975and declinedto 20 bcmin 1992,or under20% of overal domesticgas consumptionwhich was esmated at 114bcm for 1992. Witi regad to crndeoil, domesticproduction makes up an even smallershare of overall consumption.Eated 992production of crude and condensatewas 4.5 milliontons (mt),down froma peakof 14mt in 1972,and less than 10%of ovell 1992consumption. The declinesare attribuedto the depletionof existng fieldsand lackof investmentin fielddevelopment. 3. Investmentruremen in naturalgas exploration,production, and pcen are estimaeod at US$90milion in 1993-95,US$160 million in 1996-2000,and US$150mfllion in 2001-0. lhe cost of necessaryinwestmens in crudeoil productionis expectedto be somewhatsmaller. In order to mobilizesuch levels of investent and gain accessto moderntechnology, Ukraine must not only atimul activityby domesticenterprises, but mustattract forgn vestors. 4. In its effortto sdmulatepetroleum investment, Ukraine is in a muchmore difficultsituation th neighboringcountries in the region,such as Russiaand Kazakhst Iterest by freign inest in thse countriesis high, despiteserious concerns about political and economicrisks. This is becase investorsforesee the possibilityof truly majoroil and gas discoveries,technically superior tD the reservoirsthey could expect to find in safer, morefamiliar e iromes elsewher in the world. Ukaine, on the oher hand, is perceivedas offeringsmall- to medium-sized,deep, and/or lespduie resenroirs,expensie to find and developand ofieringonly margn economic rewards. Giventhe eistence of tnclly-similar opportnitiesin stable,well-known ivte environments-suchas, for exatple, Texasin the UnitedStates-it willpose a challengeto psuade instors to do businessin an unfamiliarinvestment environment such as Ukraine. O0-eld- S. It mustbe recognizedthat the legislativeapproaches taken in nighboringnations may not be saitd to the pardt feaur of the Ukrainianinvestmaet environment, and may not succeedin - 148 - ANNEX 4 Page 2 att the desred leves of investm. To succeed,an innovativeand carefully-ae program needsto be fashionedaround the followingobjectves: A. mplent legislationthat will addressspcfic concernsforign investo are likelyto have aboutUkraine, when they compareworld-wide and regionalhestment opportunities. B. Developthe capabilityto educatepotentW investor aboutopportnite within Ukaine and to competesuccessfully for their investmentsthrough an aggrsive programof marketinglocal nvestmentopportniies. C. Strngthen Uae's domesticupstream peoleum inhusy throu a co on and resturing programand througha foreigpinvstmt programthat encoues localparticipation. PetroleumLegslation 6. The consutantwill idenify issueslikely to be of paricularconcern to iNvtors n atin projets in Ukraineand developdralt legislationto addresste concerns. The first step wll be to ppraie the existg frameworkof gener legislation,as it affectspetoleum investo. This icludes, for example,such areasas taxaton, exportcontrol, encyopations, and rulesaffectig the choiceof corporateform for erationsin Ukraine. It is expectedthat, in order to atact Petroleuminvestors, the draftpackage of oil and gas legislationwill needto supenredportoDs of this genal backgroundlaw withrespect to petroleumoperatons. The secondstep wil be to draft a compreensve pacage of legislationcovering all phasesof upstreampetoleum licensing and operaions. is packag shoud includedraft legislativetet and, whereapplicable, model contact and licens _eelt. 7. The drt legislationshould addres th full rangeof isse thatwill shae the attactvens and risklc1 r:sf of Ukaines petroleuminm envment. Theseinclude such factors as: A. BackgoundLegal Issues - Definitionsof resourcesbe coveredby the law. - Resourceownership. - Prcdence of applicablelaws andthe abilityof privae contrat to derogatefrom the provisionsof generallaw. - Disputeresolution. B. Licesing Prcedures and the Natureof the Licens eement - Clearidentification of govenmentauthorities involved in licensingand regulatngresource use. - Non-discriminationbased on naionaity and formsof corporateowneship. - Juridicaldacter of the licemeagreement (contracul or administidve license). - 149 - ANNEX 4 Page3 - Methodsfor issuinglicemes. - Formand duration of the lice. C. Oil and Gas Opeons - Ihe investor'sright of owneshipin producedoil and gas, includingthe right to use and exportproduction. - Limitsto governmentalauthority to requisitionsupplies and terms for compensationin the eventof requisitioning. - Ownershipand confidentialityof geologicaldate. - The investor'sobligation to conductdiliget exuporation. - Ihe lnvestor'sright to deaelopdisoveies. - Proceduresfor dedaringcommerciality and sunag approvalof develo plans. - Adjutmt of the developmentarea and _ to operatiDgplans and budgets. - Uniizationand joint operations. - Transfrabiity of t invests rits andobligan. - Stabilityof safetyand envi regulaoryrequiemes overtime. - Regulatoyreportng requirements. D. Taxationand Fisal Issues - Importand expt of capitalequipm and supplies. - Cueny operationsand contols. - Stabilityof taxationapplicable to oil and gas projects. E. lhnspor Issueswith Direct Effect upon Upstm Operations - Non-dsrimnatory transportationaccess and equitablerate provisions. - Abilityof investorto contractfor firm (high-reliability)transporttion service. - lle investor'sright to connectsupplies to main linesof oil and gas transportation. - The investor'sright to constuct, own, and opeate gatheringand comectig facilities. F. Host-CountyBefts of ForeignIvestment - Accessto investrprovided .inuure. - Local hiring and purchase requirements. - Projectparticipation by domesticentprises. 8. In araiing investorincentives and concerns,it is importa to recognizeta the target groupof foreig investorsmay be somewhatdiferent for Ukrainetm for its neighborsin the region. Specifically,the sizeof explorationprospects in Ukrainemay not be attractiveto the major intnatonl petroleumcomp that are plays in key producingregions of the world. Instead, Uains target investorgroup may be madeup of mid-sizedand Idependentpetreum opeatrs who cary out muchof the developmentof smallerexploration propects in the world. Suchinvests - ISO - ANNEX 4 Ple 4 are oten hilby sensitiveto the pay-o peiod of thei invmes, and less able to tolert project deda. tha their larg and bettor-capitalizedcompetits. erefo, e d alow for imely grantingof neededlicenseo and regtlatoy approvalsare importnt. In addiion, smallerIveatos typicallyhave fer hnteal persol resourcesto devoteto hitrational risk analysisand resolutionof complexissues in host-governmenrelatons. lhaefore, legiation needs to be highly taparet so thoenumber of iues requing timelycae-by- resolutionb mimized. A coordinatedlicening and regulatoryahority, that mnmizes the numberof agencies dth tho iesor has to dealwith, willbe crucial. 9. The liceng programneeds to allowfor the fact that invesor int in Ukrain may not alwaysbe sufcient for competitveallocation procedures, such as auctions,to fion effecdvely. Tbhrfoe, procedus shotddbe providedwhich allow inested Investo to negotatedirectly with the licensingauthoriqt or witi domesticjoint-venture partners concning parcular inestment opportunities. 10. In addressingissues related to inestr incentives,it shouldbe recognizedtat the ms and conditionsof Ukine's oil and gas law needto be comparableto thoseof othernations at offer smay-sizd exploron prospects. ho reevant comparsn may not be neighboringnations at have larg exploratio prospectsbut, rater, mate producingregions of the worldthat offerhighly stableand wellknowninvestment evronens. In orderto competewith ese regin for investor Intrest, Uraine's leg codemay needto offera deg of stabilkyand investor icentivebeyond what Is beingofered i immediately-neigboringnations. Ukrane can successfillyattract foregn imuomtif it positionsitsdelf as offeringsmaller exploration prospects, but in a stableand less-risy Investmentenvironment. MariraUngluwusnmit In U 1l. Implemondnga packageof legiation that is highlyresponsive to ivestor concernswill only be tho first step in atratig inrs. In addition,Ukre needsan innovativeand aggressive programfOr mrketing its investMentoppouniies to te inte ional investorcommunity. 12. The consutantwill provide recommendans for establishingan agencyto serveas the centrol for iomation aboutivestment oprunies in Ukraine. Theresponsibilities of this agcy wouldinclude: (a) maintanig informationabout oil and gas prospectspotentially avaiablefor investit,t (b) brnging intsted ivestors in contactwith potei joint-venue paters; (c) informingthe investorcommunity about the applicableprovisions of Ukrainianoil and gas l; (d) conductinginvestment seminars and trining sessionsfor investorsinrst in doing busine in Ukraine. nmdCP'aga P i for the DomesticIdmutry 13. he consuln will: (a) prepar an iemizationand valuationof assetsand liabilitiesof Ukais upstram oil and gas industry;(b) dewmine a methodfor allocatingthese intoa nmbD of corporatizedentities; (c) evduatethe advisabilityof movingtoward combined exploration and produton compa, as opposedto centrization of the explorationfunction; (d) developplans for foming the corporatzedeties as joint stockcompanies and proposeownership, control, and fhmdd arn_amem; and (e) ppose intera organizaionstructures, business practices, and - 151 - ANNEX 4 PageS colnua g withsuliers and coms tat wouldbe neededin orderfor the corporeed entitiesto conductbusinss on a ndependenbasis. Sd_edule,L*vd of We1 and Fadnte Costs 14. Tho te tas ouind abovewil be carriedout in paraiel. All the componentswHI be completedwithin ten mouthsof contractsigtue and a draft final reportwill be submittedno more hn thity daystheaft. rTh draft fal repottwill be reviewedand the fid reportsubmibted withinlth daysatr comm are receivedby the consultat 15. lbe f task, devdopig petoleumlegislation, is to be phasedinto tsegea . This is to allowfor cdrulation,-view, and commenton intrmediae packes of draft legislon. It is expcted that at last two intermediatedaft wfllbe prepared,to be dlivered at duee and six months followingconact signature. 16. Thetotal cost of te projectis esmated to be $650,000. 17. Ten copiesof a finaldraft report,in Ukrainianor Russian,will be submittedto the Governmentof Ukraineand fve copies,in English,will be submittedto the WorldBank. After review,the finaldraft and fifty copieswill be submittedto the Governm of Ukrine and ten wil be submittedto the Wodd Bank. 18. Followingreview and commentupon the Inteim draft of the petroleum legiation packae, ten copiesof the comolidatedcomments, n Ukrainia or Russian,will be submittedto th Governme of Ukaine, and five copies,in English,wi be submittd to the World Bank. Asds_m to be Provided by UreGovernust of Ukraine 19. ITe Gova mentof Ukrine will providethe followingsavices to the consultantwithout cost: A. Providea counterpartteam to work withthe consultanton the legislaivedrafing B. Assistin obtinig visas,customs clearances, and all other Iive pmits requiredby te consultantfor pefomance of te assignments. C. A relevat dat for Je tuctuing and corporatiaon study. D. Liaisonwit Ukan governent officialsand oil, gas, andtranspor e prises. - 152 - ANNEX 5 Page 1 Ukrain Oil Rdlnlng and Maketng Jnudsui Tens of Relereon 1. The refinindustry b not a naturalmowpoly. his moansthat high Industrydficienc and low ovel operatingcot canbest be achievedby strcuring the industryfor decentralized, compitve oprins. Providedtdat the numberof competitorsis aiequate,maret pressurescan be expectedto force refinersto sr theseeficien gainswit consume, in th formof lower productpries hn wouldothrwise result. Competitivemarket prices would of coursebe somewhat hhr ftheatificial, subsidizedprices currently in effct. However,they will be lowertham altenativepricing , in the absenceof subsidies.Thus, the harshconsumer impacts of eliming subsidiescan be sofenedby itoducing a competitivestucure for the refnig idustry. 2. In restuctuing the industry,the mostimportant task is to ensurethat the numberof compettorswill be 'adequate.' In pratico, tis meansthreo things: (-1) First,the aggrgate refiningstock of Ukre mustbe dividedinto separa, corp-rtzed packages,each of whichis a viablebusiness entity. It servesno purpose to createone hundredcorporaized "competrs if nnety-nineof themare endowed withtoo few assetsto survive. Qi) Second,die divisionmust be caried out in a waythat leavesevery regional consming maret In Ukrainewith mea_ngfol access to morset one supplier.This require lookingnot onlyat the numberof refieies, sad wherethey are loceed, but also lookingat the modesof prodt taportaton whichare available,and the terms,conditions, and cost of tran.-tation service. In a nationwhere there are onlya fewrefineries, competition may stfll be adequateif the transportationnetwork is managedin a way th maximiz the refiners'reach into each others' market areas. (i) Third,if tee are isolatedregions of the outry that do not havemeaningfu access to morethan one refier, a localmonopoly exists and a regulatoryapproach must be developedto p consumersin thoseregions from monopolyabuses. Thecrucial pointhere is that an overal programof industryrestructuring need not be abandoned merelybecause local monopoly problems exist in certainregional markets. Thereare a vaiety of reguatorymechnm tat caneffectively and fily addresslocal monopolyproblems, while still allowingthe industryas a wholeto gainthe enormous benefitsasociated withcompetiive operations. 3. Duringthe eady yearsof a resructug program,the adequacyof competitionin the Ukraiian refing industrywill, at best, be onlyborderline. Tbis means tha the restucuring programmust be designedwith extreme care, in orderto takemaximum advanage of the competition whichdoes exist. - 153 - ANNEX 5 Page 2 4. In reoentyear, the demandfor oil productshas docinedIn Ukrane, from54 milliontons in 1991 to 34 milliontons durig the frst 11 mnKts of 1992. Availablerefinig capacityis about60 million tons per year. A resumptin in enr demandgowth tha wouldabsorb thi excesscapaciy is not. expectedin the foreseeablefture. Thusit I extmey unlikelythat comption willbe enaced ftroughthe Installationof ne refiningcapacity duig the nextdecade. Th arrayof potentia competitorsis limitedto the rinery stockcurrendy installed. 5. Basedon the expectedlevels of dea for oil products,the two largestrefineries (Lysychanskand Kremenchuk)have sufficientcapacity to supplythe domesticmarket. Twoof the other reeries (IChersonand Nadvirna)are favorablylocaed and havea prospectof competingon the basis of low deliveredproduct prices into certin marketareas. The log-term viabilityof the Odea and Drohobychrineries is quesionable.The onlyother source of potea compedtionis refinedproducts imported from surrounding nations, some of whichhave excess capacity located witin reaonabledistac of Ukraia marketare. For example,the Mozyr reiey in Belaus has exces capacityand is withinpenetaion diste of th Kievregional market. Objeeives 6. The principa objecdvesof the proposedwor are to: (a) Identifya set of viablecorporated en"titiethat couldbe formedout of th ostinge aegate assetsof the Ukrainianrefining industry; (b) evaluatethe adequacyof competin that wouldexist in Ukraine'sreional marketareas folowing separationand corporaizatonof ths entities;(c) propo operatingprace and neededregulatory meaures for the oil-product masporionand distribuon indusry, in ordertop e maximal compeitionfrom the corporaqed refin companie in each of Ukraines regionalmarket areas; and (d)propose targeted regulaory approaches for mangg local monopolyproblems that may existin particularregional market areas. scope of Work 7. Theproject consists of four components: A. An accountingof oil refiningtransporion and mareting industryassets and liabilites and evaluationof how hes can be allocatedto formviable corporaized enddes. B. A regionaloil-products market analysis, Identfying regional demad patoemsfor the variouspetoleum products and Nvigng the possiblesupply patterns from existg refinersand prodct imports. C. A producttanspion study,identlifing curren pracices and the res needed to enhanceregional market access for tho avalablesuppliers. D. A localmonopoly stdy, propWingreguay mechism for protectngconumers in thoseregions which will face Iaequa competition. 8. It is epected that work on thesefour componen canproceed simuteouly, thoughthis Willrequire phasing, as dicussed below,inmuch as preliminetyoutputs from some of the componenswil be requitedas inputsto the ohs. - 154 - ANNEX 5 Page3 Atcodnt andAsset Alocaton Analysis 9. The firt stp willbe for the consultts: (a) to prpare an iemizationand valuationof oil refining,transpration and marketugindustry asset and liabiities;(b) to detmine a methodfor allocatingthe intoa numberof corporatizedentitles; (c) to developplans for formingthese as joint stockcompanies and to proposeowneship, control, and fiancial aangemen; and (d) to propose inte organiional st and businesspratices that the corporadzedentities will need to adoptin order to conductbusiness on an independentbasis, direct with their supplier and customers, in the absenceof a centralizedsystem of stateorders. 10. It is expectd that someof the refinerystock in Ukrainemay not be viableunder the expecwd marketconditions. lhis capacitywill be determinedon the basisof the sepate refinery modenizationstudy (se Annex7 of this report). Withrespect to this caacity, the cosultt will proposea plan for allocatingthe costsof retirig the capacityand retraiig and redeployingthe associatedwork force. Thisplan will addressthe issueof allocatingsuch costs,as wel as debtsand other liabilitiesof the industryas a whole,among the remainingcorporized entties andthe Ukainian governme. Thegoal of this allocationwould be for the industryto bea as large a portionof suchliabilities as is possible,without jeopardizing the busimssviability of the remaining crporized refineries. Re a Maret Analysis 11. On a regon-by-regionbads, the consultantwill (a) analyzeand forecastdemand for each categoryof petroleumproduct; (b) idenify the miber of sepaate suppliersthat can reasonably pmenratethe marketand their supplycapacities. Inputs to the supplyanalysis wil includesupply caaite for the corporatizedentities identified as viablein the Accountigand AssetAllocation Analysis,avalble transporion capacitiesand costs identifiedin the Transportion Analysis,as well as potentialimport supplies. 'Reasonable"potenti to penetate a parAtlar marketwill be detmined in accordancewith whether the suppliercan deliverproducts tO the marketat delivered pricesrougly comparableto thoseof altemativesuppliers in that market. 12. For each distinctcategory of petroleumproduct (i.e., for eachproduct that is not subjectto inter-productsubstitution, or for eachgroup of productsthat are inter-substitable),the consultant will carry out a competitiveanalysis of suppliersfor eachof the regionalmarket areas. In additionto roughcompetitve _me suchas the mumberof suppliersand their respectivecapacities and industryconcentration ratios, one of the morerefined mieasur of martetconcenation, such as the Hifindahl-HirshmanIndex, will be calcuatedfor eachproduct/regional submaret. 13. In appraisingsuch indices,it is recognizedthat the measuredlevel of competitionin an embryonicmarket can be expectedto be somewhatless than wouldbe requiredunder the anti-trust standardsof a fuly-developedmarket economy. Therefore,the consultanwill develop a transition planfor monitoringcompetition during the years followingthe industy restr g. This planwill includerecommendations regarding the intpr on of competitivindices, specificaly identfying the rangeof valuesthat willbe considked'acceptably' compeitve at variousphases of the long-termreg rng process. For example,two equal-sizedcompetitors might be treaed as a workably-competitivemarket durng the init transitionalperiod, even though such a situationwould genelly be consideredinffcienly competitiveon a long-termbasis. During he transitional period,liberalized, decelized pricingarraments wouldbe allowedto operate,widt rgulatory -S955- ANNEX 5 Page 4 oversightlimited to measuresaimed at preveting collusionbetween the twocompetits. Longer tem, the mart woud be monitoredin the hopethat inra comp on wouldevolve. Only if such competton failedto evolvein a specifiedperiod of time,or if specificactual price abuseswere deected, woulda moresigent regolatorypgm be mosed. The consultantwill provide recomendations as to the lengthof the transitionperiod and the acceptablerelatory measure to applyat each phase. Thegoal is to providetransitionat angem that willnot chokethe evolving maret, whil stil providingfor adequateresponse if atual abusesshoud occur. Ptod TDrauartadon Anli 14. In a mariet witha limitednumber of suppliefs,non-dbcriminatoty access to transporaton is essentalin order to maximizethe peneation of suppliersinto various regional makets. The consultantwill evaluateall conduitsfor transportingpetroleum products within Ukraine, dermining cuet operatingpractices, cost, andbottlenecks. Specific access and tariff provisis and contract mechanismswil be proposed,in order to ensuremaximal supply competiton on a reglony-regicn basis. in the eventspecific bottlenecks are ien , the comultantwill outline specificfllow-up projectsaimed at evaluin waysto resole tm. The consultt willprovide transportationc ti and cost figuresas inputto the RegionalMarket Analysis. Thesefigues will deerminehow muchof each typeof productthe respectiv corporatizedrefiig entitiescould po=te y deliverinto each regionalmarket. R_gUatio Of LAlr Mbopoly ProbleMS 15. In caseswhere the RegionalMarket Analysis has identifieda regionthat is bely competitive,the consultat will proposea targetedregulatoy response. The aim is to addrss the localmonopoly problem in a fair and efbctive manner,while sill allowingcompetitive, non-regulated pricingmehn sms to operatefor the nationas a whole. 16. For example,if one regionis sole-supplied,so thatonly one refineryis capableof delivering productsinto the region,a numberof responsesare possible. One suchsoluion wouldbe to impose a serviceobligation upon that refiner,compeing It to supplythe regionat regulatedrates reflecting the aver deliveredprice of productsfor the nationas a whole. Altnatively, the service obligationcould be sharedmore fairly among the variouscorqoaized entities,so that no singleone of them wouldbe forcedto bear the entireburden of conumer protcton. Thiscould be accomplishedby compellingeach corpora zed refineryto set asidea portionof its overl output-at reguatedprices-to supplythe regionstroubled by localmonopoly problems. Each refinerywould bear a pro-ratashae of the totalrequired volume for supplyingthe nation'slocal-monopoly regions. However,to avoidthe transpoontonineffciency of forcingrefin s to shipsupplies to far-distant local-monopolyregions, the refiner'sservice obligations should be tradableamong themselves. That is, thre sould be a marketmechanism that allowsone refiry to contractwith anoer refiery, that is locatedcloser to the localmonopoly region, to meetits serviceobligation on its bhalf. In this way, the favorablylocated refinery would sell productsat regulatedprices to consumersin the local-monpolyregion, but couldstill sharethe benefitsof unregulatedpricing, through collection of fees paidto it by other refinersin returnfor meetingtheir serviceobligations for them. lhe constant willevaluate each local-monopolyproblem and proposea specificmecaism suitablefor resolvingthat problem in a fair and effxctivemanner. - 156- ANNEX5 Page5 Sdd% " d BEmr =d Wdhd Cot 17. Th wok effortfor eah of the prjec componen wil be completd withinsix month of the contact signatu and a drft final reportwill be submttedno moreth thrty days theaft. Mhmdraft find reportwill be reviewedand the fia reportwill be submittedwithin thirty days after commentsar eceivedby the consulML 18. Eah componentof the studywill focu duringthe fis two monts upon developingiputs neededfbr the other componenw.At the end of sixtydays, the Accountigand AssetAllocation Analysisand theTranportation Analysis wi deiver neededinputs for the Ronal Ma Anlyis. Ihe RegiondMarket Analysis, while it is awaitig theseInputs, wil cary out its regionaldemand anlis, whichis not deeden uponiputs fromthe other studies. MmeReation of Local MonopolyProblem willbe evaluatedas such problemsare idenifiedby the RegionalMaket Analysis. 19. Ine totallevd of effortis estimt_edto be approximaely34 to 36 man-mots. The levelof effot is somewhatdependent upon the outcomeof preliminy phasesof the study. For example,if the RegionalMarket Andalysi reves numerouslocal monopoly problems, then propordonally more effortwill be requird to devlop regulatorystrategies for addressingsuch problems. Simiy, idenificationof o tn bottleks will requireadditional effort. The estimatedoverall cost of the studyis $600,000. 20. Tencopies of a fin draft report, in Ukrainianor Russian,will be submittedto the Goverm of UkrWaimeand five copies,in English,will be subitted to the WorldBank. After review,the fina draf and fifty copieswill be submitedto the Govement of Ukraineand ten will be submittedto the WorldBank. Assistace to be Providedby the Govmunet of Ukan 21. 'Te Govemnt of Ukrine will providethe followingservices to the consultantwithout cost: A. Asistn in obtning visas,customs clearances, and all otheradministrative permits reqired by the consltatmtfor performanceof the aignments, and officespace while the consultantis in Kiev. B. All reevant data on rfiig industy assets,liabilities, and cost; regionalproduct consumptionpatterns; refiy supplycapability and supplycost structure;and transportin capacie, opating policies,and costs. C. Liaisonwit Ukrainiangovernme agencies,refining enterprises, transportation entpri, and localmarket distribution channels. 22. The consultnt willprovie all equipmentand translationand inepreting services. Such costsshall be allowableproject epes. - 157 - ANNEX 6 Page1 of the NectuiciyIudut*7 1. During1992, Mlnenero developed a detalled prposa for a marketbased rtutring of the powerindustry. The purpose of therstr is to: (t) adaptUkine's ectricity dusatyto the coong marketenvonment and make maximum use of marketmeanisms for theinal opeation of theelectricity industry itslf; (ii)prepare the electicity industry for future pvaioson in accordae withGovenmnt policy. At th. e of theyear, the proposa woa submitted to the Councilof Ministrswhich decided to dfer considationof sucha resructin untilUluaine's economywas stabilized.The followingpaWp brieflysummadi the curret statusof this efort and offir som commen to assistMinenergo in the processof eoraization whenthe Goverment decides a the time is rightfor Implementation. Proposl for 2. The iblatI proposa wereprented to the managementof the Miisty, the regional companies,and systemoperators in Apdl. The key fur of theseproposals are an eua completesepaation of geneatio, transmission,network and retailsupply functions. It was reommendedto createat leastfive genraion companiescompetig in the marketwith (as far u can be achieved)a bWancedplant portfolio. Eachstation would bid the day-head pricesito a trading 'pool' on an hour-by-hourbasis. ITe poolwould be operatedby an ibdepedenttramion company(Transco) that wouldconne to operatethe dispach and systemoperation fumcdon. It wouldpurchae the chepest suppliesto meetI demandat any one time (suject to system consr ) and sellthe dectricit to competingsupply companies, including eight region supply companies pondig to the aresuserved by the eisting udlities. All of the resuctrd companis wouldbe gradualysplit off fromtheir Gover sponsorsand corporaized. Any qualifiedcompany would be ableto competein the retil supplymarket. Franchisesto supp.yheat wouldbe splitoff at the locallevd. Ther are no proposalsto uctmue the nmdr company, thoughthey too wouldbe corporaizedand placedat an arm's lengthbasis from Government Nine basicsteps in thee stageswere envisaged to completethe process. t wasproposed thathe newpool stucture wouldbe fuilyopeonal by 1 January1994. 3. Theseinitial proposals drw healy on the UK modelfor restructuringin Englandand Wales, witha handfulof modifications: (J) varioustransionalao wereadded to the UK a gement-the levy, the wind-downof the supplyfncisd8e, te fix on fuelsupply disegarded; (i) the prposed opeation of the poolhas boensimplified by Woptig unifiedwholsale pricingIn order to eliminate problemsexpernced in the UK withthe pricingof geation capacityand highvoltage tranmission evice. I Mit uim Pa_ iS, Hayes & DBdP) prvidddvisy sos to_dhmr in d pn. - 158 - ANNEX 6 Page 2 The transitional a in the UK wer adoptedwell into the restrucuringprocess, to solve practia problemsta trae the succs of the exercise: one wouldnot expectsimilar fxs m the Ukrain modelat this stage. Ino modificationsto the poolingmechanism were made becau it wasclear tha fAllblown UK-style trading arrangements ar simplytoo complexfor Immediate implemnaI in the embryonicUkanian market. 4. Giventhe complxdtiesof the transitionprocess, several facets of the reorg on program willpesen speciald ltis, namely: 1) the abilityto opera five genating companieswith balanced plant portfoliosacross the demandcurve, since: * Utkrainianutiliies haveno gastrbine capabilityan, in pracce, hydro productioni beig inra ly consained due to concernsrelated to water allocatonissue; 0 die implem-a of plansto reabiliate or mplaceobsolete plants or cpcity approachingthe end of its operationallife will affectthe geneating compa' abilityto compmewith thermal plants; 01) the deg of _ n as impliedby the propos, sincein manycases, electricityand heat supplyare complemnltary,therefore complete separation of heat and deicity supplyis not fasible; (lii) the bnefit from cuttig across xting reonal organizatons,which are strongly (iv) the timetablefor achevingthe rstuuing. S. The revbed preposal: Followingdiscusions of the Initialproposa in Apri, a decisionwas takento revisethe proposalso tht it adheredmore to exsdng regionand mamagrl stutures. Mmrevised proposals therefore use the eiht regiona utilitiesas a fraework. For each regionl utiity, h es lh tof a holdingcompany is envisaged.Each of the discretefunctions of the utilitywould be execised by a separatelyaountable subsidiarycompany. To helpstimulate the competive geneaton market somestations (about 15,000 MW in total- Minenagoconsiders Uglegorsk,Kurakhiv, Lady7bynsk, Zmiiv and KryvyiRih) would be separatedand givento one (paps mo than one)ind genron company.Ihe hydrosions too wouldbe divided betwoeenthe gation companiesto sdmulatecompetion at tmes of peakdemand. Operational cool overtasmission asset wouldbe held by the Pool but though a lease;foral ownershipof asets wouldreman with Ie eight regionalutiliis. 2 6. The revisedscheme implies that: Q) conrtul wouldneed to be carfully scutnized to ensurefair purh ae n betweengeneraor, networkand supply ubsidiies withinthe _It is s_uumdio toa ofou ndl *d di. Na wtIs. sysm is _nud inat. Mmheft magAft a duaWs..to ovrameodoe isgium cosgeauuss.ppaitam to Urnremoval of donsasses. - 159 - ANNEX 6 Page3 sameregional holding company; therefore a more intrusiveregulatory regime could be requiredto ensurevisibility between finctions and to preventcross-subsidies; (i) the gemrationsubsidiaries thinthe regionalholdiog companies would have diffeing capacitiesto participatein the generationmarket; for exampleDonbargo woud have 10-12,000MW capacityversus Krimenergo with about 400 MW; (iii) there couldbe somewhatdiminished supply competition, although, similar to the originalproposal, the creationof unregulatedNational Supply Companies is envisaged to fil this gap. 7. Certainproblems ta wouldneed addressing under either the originalor modifiedproposas, include: (i) exiing of-use meteringis limitedto the 1,500largest cusomers and would graduallybe extendedto smallercusomers; (i) fe availabilityconstrai, at les in the short-ru, willcontne to affec genraton choicesand mayrestrict competiion; Qij) the establishmentof an effective, dependentregulatory auhrit to issuelicences, ourae competitonand representcm ers' interest; (iv) longer-ermoptions for th corporaizedbodies. The rstrut will work if the ;autoritiesare willingto makethe corporaqzedbodies attractive to privateinvestnt at an early stage. Underthe modifiedproposal, is shouldtranslate into taking the genraton compaies out of the holdingcompanies as soon as practcal so that the needfor tighterregulation will be diminished; (v) desmad/gerion senros and approvedinvtment plansshould be takeninto accountin the allocationof plantsbetween genertors and in considerig the possibilityhat regionscould be merged; (vi) overte longer-term,however, it willbe portantto go futhertbaneisting proposa to isole geneationfrom network and regionalsupply companies. Once this is achieved,the supplyCmpaies willbe more wiling to lookfor the best geration soluions. It willalso alow a less intrusiveregulaty agency; (vii) morethought needs to be givento the rulesdetermining the operationof the pool, setlment procers_ and meteringreqirments (andcosts) to allowthe newmarket to operate. ad R 8. Theproposed reorganization will bring very significantbenefts. Decisionsabout geneation capacitydwodnt willbe more solideconomically and f cly. lhere willbe clear incentives and pr _u to reduceoperation costs. Transparenprces, whichbetter reflect costs and reducethe - 160 - ANNEX 6 Page4 extsive cross-subsidiationwill send the right signs to electcity consumers. Te needsof the CUStoe8swill be in the focusof sevice ie ort. 9. In the nextfew yers, due to decling electricitydemand, there wHibe a surplusof ge on apacityand reducedopaonal presr on the tasmission and disbution systems. Tbis providesUkraine wih a windowof opportunitywhereby the trUanitionto a competitivepower supplysystem can be implementedwith less difficut than in a capacityconstained period. Therefore,it is advisablethat a decisionon a timetablefor implmtation is mde in the nearfitmre. The implemet ion of the fll reformwill reqire severalyears and shouldbe carriedout gradually. A start couldbe madeby xper ng witha simplifiedpool on a shadow/trialbasis. In addition, the budgetpation and control,financial portig, accounting,strategic planng, contra negotiationsand customerrelations fions shouldbe stengened boti at the regonal utilitiesand at nationaldespatch. Finally,Minero shouldstart the dispositionof non-coreactivities. One optionto be consderedis thatagricuurl and other activities,which are onlyremotely related to the businessof elecicity upply,would be splk off fromthe reional utiities and transferredto regional and localgo_n*w - 161 - ANNEX7 Page 1 I n'p W-11o R _rls nd theOdea 0Tenal: Tema ofReferene 1. At prment,the six rdeeries at Lysycoask, Kremechuk,Kherson, Nadvirna, Odessa and Drohobychpossess approximately 61 milliontons of anna refiningcapacity. Demandfor primarypetoleum products-gasoline,jet keose, dieseland fuel oil-has beendeaing steadily since 1990,when annual consumtMion stood at 56 milliontons. By 1991,consumption had dropped to 45 million tons; in the firstsix mont of 1992,it hadfallen to 1Smillion tons. Durlngthe first elevenmonths of 1992,the six refineis processedonly 34 milliontos of crudeoil. Owingto the movementof domesticcrude oil pricesto ineional levels,product consumption is not expectedto raise abovethe 1992level for the nextfive to sevn years. 2. Thecapacity and typicalproduction patrn of cunmy availableprocessing units in 1991are presentedin the atachedTable (see Table4 of Annx 1). No significantchange in the coniguraton of the refineriesis expectedin the nea futureexcept for the Lysycauk refiy, wherea catalyticcracker (annual capaciqty: 2.2 milliontons) is presendyunder constuction. Althoughinstalled capacity can meet the currentlevel of productconsumption, the plantand machineryin all six refineriesrequire sbstantil technologicalimprovement and modenization. In particular,cracking capacity (cur y five pen of totalrefining capacity) needs to be increasedin order to meetdemand for changingproduct mixes. Theserefineries also requiresubstantial overhauls to improveenergy conservation, safety stards, and pollutioncontrol. 3. Oil handlingfacilities at Odesa harborconsist of fiveoil behs, pipelines,and storage ns. Two berthscan receive tnrs up to 50,000DWT; the remiingree canreceive only 15,000DWT tamkers. Altoh tee are smalltanmks tht receivewater from the tkers, there are no facilitiesto cleanoil conId ballastwater. As in any worldclass import-export opeion, the Odessafacility will require substan upgrang to inr the capacityfor quait auditing,safety and reliability.Accordingly, the oil jettieswill require: reconion for receiving largertankers; additional toage ta to unloadsuch ans; additionalpipe lines;and metern and ballastwater cleaning facilities. 4. The StateOil and GasCommttee ivites techi and commercialprposals from experiencedEgineering companies to conducta detad enginwing inspectionof all faciitiesin the six refineriesand the oil-handlingfacilities at Odess harborand, thereafter,prepae sepaate feasibilityreports for each faciity. hes reportswill detal the variousoptidons studied and the economicjustfcion for selecdngthe mostcost-effective option in eachcase. Speciists from engineeringcompanies are invitedto inspectaU facilities at ther owncost, in order becomefamiliar withthe conditionof physicalplant and to colict the releat data befor preparngtheir proposas. Coninge uponthe fundsavailable, the Stte Oil and Gas Committeeretains the optionto includeor deleteany facilityfrom the proposedscope of work. For th reason,thnal and commercia proposalsshould be structuredto pst the scopeof workand remunetion separatelyfor each facility. - 162 - ANNEX 7 Page 2 Oljaecdvu S. Ihe principalobjectives of the proposedwork are to: (a) to esalish the mechani integrityof the plant and machiey throughan engineeringin on of eah fcility; (b) to idenfy obsolte and uneconomicalequipment that should be discarded; (c) to evaluate the opdon availabe for modenizinguswl facilitesin a lew-cost manner;and (d) to deteme th needfor adition facilities requted to meet Ukrai changingpattern of products requiment. he tasfer of knowledgeto the localcounterparts will be an essenal part of this poject. Th. consultantw work cosely withcounterpart personnel in Ukraine. scope of We,* 6. Thisproject coDsists of two componentsto be conductedst y: * An engineing studyof six refinedesin Ukraine; * A feasibflitystudy for modenizatin and upgradingof the Odesa oil p ,1. 7. Tho first step willbe for the consultant(s)to conducta detail edl4 iwpecX of each refinry, to itemizethe mechanicalcondition of each plantad maciey, and to m hat shouldbe discardedand thosethat could be modenied at reasonablecoat Afterthe initi engineeingsurvey, ot consultant(s)should pay heed to the conditonof the physicalplnt and to the companyhealth, safety, onvironmentpolicies as detailedbelow: Phyds Pla:t the consultantwill: Q)determine an economialy-efficiet cnde distilain cacity, withsuiable modificationsto columnintns in each refiy, if necessay, by replacingsome existingold and infficint units; (ii) esate the optimm beat and materidbalance arund the crudedistillaon column,ugesti witablemodifications to the furnace,heat-echag syslemn,con and coolers; (Mi)reviw the opertion of the catalyticreomer, reao suiable modificaionsto obtainthe optimumoctne ratingand rebrmateyield; (iv) investigate the opation of all the crackingunib (wherepresent), and sumimble modificationsand/or additionsto improve highor value product recovery; (v) msess tho optionsfor increasingcracking capacity, recommedng the mostcost efficiet cackg procss to mah the ditilation capacityand productrequiement; (vi) evaluatethe hydifor aoand vacuumdisfoar, and evauate the additionalcapacity required to meotimproved product specifications (0.2 percen sulfurin diese and lesstha 1.0 prcet In fuel oil); (vii)obsenre the mercapansulfur removal facilities for gasoline,suggeng additionalteating facilitis required;(vili) review the productblending operation, improvementswer and if necesary; (cix)assess the ey efficencyin the refinery (steam,electric power, and fuelconsmed), suggetig modiicatio and or addiions required;(x) Inveigate the facilitiesavailale for the _ of bulkproducts and udlitles,assessing the needfor addiionalfiites requiredto carry out technical and quanhtyauditing of eachprcess unit and the wholerefinery; - 163 - ANNEX7 Pge3 ealth saety, and environment poliies: the consultantwil: () revOe saety procdures and practces; (Hi)evaluate mintnanc practie and inentoy conto syste; (ii) assessthe treatmentof wastewater and fu gas; (l) investigat product dispatchfaiities; (v) apprais the productquaity controlfaclities. In each cas, t consultanst()will recommeadthe necessa chags and modfficationsrequired. Specl alses: In the casesof the Odessarefinery and Drohobychrefiny, the consultantsshould recommend the mostcost effectiveoptis for closingthe facilities, if the nmcanicalcondition of the existingfacilities cannot be moderized at a reasonablecost. In the caseof Odes refiey, the studyshould also identifythe usefWfacilities-storage taks, piping,boilers, power distribution networks, air compressors,product-loading failities, and safetyequipment-that could be utilizedin ordr to convet it to a productimport teminal in Odessaharbor. 8. Odeka Hbor Termnal ModmIiz"n Stuy: Theconsultant wil conduct: i) a detailedengineerig inspecdon of all thefacilities at the oil jety, providinga rcoemmedatoof the kiem thatshould be discardedor moderizedat reasonablecost; (i) a reviewof existig dataon undea cUt andsea bW condiio, md addiionaltests, as necessay,to evaluatetheoptimum optionfor increasingjett capabilities;(ii) a reviewof thecondidons of theoce chanel r tanker pproach,and the seabW conditions at thetker turm-ablearea; reco for themost cost efive desig for nrsing the jety capabilitiesto receive50,0O0 DWT or arg tankersin at las at twoberths; (lv) an inestgaon of thesafety and navigational facilit avaiableand recmmendationsfor therequd improrements;(v) an evaluationof thequantty facilitiesa ablead recom modificatiosand additions required; (vi) an _ of the exting pipein layoutad an evaluationof thepossibilities for comnecting pipes to theOdesa riny tank-farmand omm ans forthe modifications and additions reuired to mah the modrnid Jettycapcitq; (vii) a reviewof th estng fcilidesfor collectingbllast waer fm tankersand *onsfor theadditiond fiities reied to collectand treat to o standards. Sdhedde of wk 9. Theproposed endgrin inspectionwork should be tar within15 days ar the contrct is fcdve. Theeninrg isection workand report should be completedwitin 30 days. TM Intion reportwill be reviewedIn order to prepa anoudine of theprposed fusiblt report TnodraRt fuibility reportswill be madeavalable for joint review within four mont tereafter. Final reportswUi be submitd, aking into accountmodifications and additionsaeed ponduring th joint review,within six months from the date of contacteffctiveness. 10. All rdevantdata collected in connectionwith die inspeci andits reult wfllbe recordedwith comments and son for futurerefrce. Assum ns usedfor calculations willbe anote. Seletion juswficationas wellas rejectd optionswill be indicated. Ecomic viabilityof optiS studiedwill be basedon FOBprices for crde andproducts in the indod makt e operatingcost of therefiny willbe comped on thebasis of salais nd co actualyincurred in the meiny. Inspectionreslts andfasibility reports will be IK430ted in - 164 - ANNEX7 Page 4 separatevolumes for each refineryand Odessahabor, so that recommendedactos couldbe implementedsepary. 11. A detailedlist of equipment,rAterWs, and a descriptionof facilitieswith diam andsketches should be presentedfor eachrcommeon made. Costestmates with 15 percent accuracyshould be prepae indicatingbrak-down for designand engieit, equipmentand materials,construction, project magement andsupervision, commissionin and stat-up. The cost of sparepatt for one year andspecized trainingrequired, if any,should be indicated. Ciet's 12. TbeSta Oiland Gas Commitee will provide all exist dataand eng ing drawingsrequired for te engineeringispection and preparaton of theproposed feasibility reports. he engieng inspectionwill be conductedin cooperationwith efineryspeciists and supervised by specialistsfrom the engineeringcompany: a requirednumber of specialistswill be providedby therfinery for thispurpose. The refineries will provide laboratory facilities in orderto arry out testsin connectionwith te proposed.Reasonable facilites for translon, secretarialassistance, telephone,telex and fax Unsmittals will be provided by therefiy. -165- ANNEX 8 Page 1 GasDr{butioxn and PricingStudy: Tem of Rdaee 1. Ukrainedpends heavilyon naturalgas as a sourceof energyfor powergeneration, industrial productionand for domesdcheating and cooking. In 1991,a toal of 115(bcm) billion cubic meters wasconsumed and provided39 percentof all de energyrequements. M of the gaswas used for powergmenraon (29 pern) and industrialproduction (47 peren), but 17 percentwas used for residentialheating and cooking. In the mid-1970s,Ukrine was largelyself-sufficient m natual gas but due to lack of investmentin explorationand developmt, productionhas declinedand the countrynow depends on Russiaand T s an for thue-fourthsof its needs. Naturalgas is a cleanerfuel than coal or fuel oil, and, ideally,natural gas use will increase,particularly in mral regionswhere traditional fuels such as highlypolluting coal and firewoodwill be displaced. 2. Ukaine imors abouteigty percentof its naturalgas requrements. Domesticgas prices havebee beldvery low, a situationthat is no longerviable. Importprices are movingtoward world price levels. iter pricingstrutwe is also severelydistorted, and unlessdrastic changes are madein the tariff suus , distortionswill rapidly increase. Eventhough bulk tariffs for salesto powerplants and idusi users ostensiblyrecover the borderpnce plus the cost of delivery,they are stdlldisorted to someextent. Resiential tariffsare more severelydistorted and the local distnibutionenterprises are reportedlyheavily subsidized. 3. Approximately60,000 km of naturalgas distributionnetworks have been constucted in the lg citiesand adjacentareas. The networksare ownedby the goverment and are operatedby morethan 20 regionalauhiorities as semt- pent eries. Overallsystem dispatching and coordintionis providedby Ukrgaz. Thisstucture has resultedin duplicationof manyactivities, operationaland managerl inefficiencies,and fiurter distortionin the pricingstructure at the local level. As the distributionenterprises make the transitionfrom a commandeconomy to a market econmy, the insutiona str3ctue and managementtechnques will haveto be drasticallymodified to promoteefficiency. A programfor restruct managementand financialcontrol of gas distribution activitiesis an essentialfirst step in improvingoperational 2nd managerial efficiency. 4. The regionalenerprises operate on a cost plus fixedprofit basis,and any lossesare subsidizedby the Ukrainegovernent. Therefore,the regionalenterprises have had little incentiveto reducenatual gas lossesor to improveoperadng efficiency. The price of gas to bulk consumers,i.e. powergeneration and industialproduion, has beencontroll d at priceswell below world prices, offig Ule or no hicentiveto conservegas. Thegas used by domesticconsumers is even more severelyundetpriced; despite a seriesof price inreases overthe past year, the consumerpays onlya smallfction of the economiccost. The lack of gas metersmakes it vialy impossibleto create cost-basedcatons t effortssolely twough pricing policies. S. Preliminaryestimates indicate that methanelosses from the highpessure transmission pipelinesand compresso stationsare comparableto, or onlyslightly higher than, thoseencoutered in NorthAmerica but there have beenno reliableinvestigations of the lose fromthe lowerpressure distributionnetworks. Residentialgas use is not metered,and evenwhere meters are installedfor bulkmeasument, their acgrcy and reliabilityare questionable.This makes it impossibleto check the reliabilityof estimatesof gas losses. 166- ANNEX 8 Page 2 ObjectIve 6. Tb. objectivesof the projectare: (i) to identifyand plan impl ion of measureswich wil edce ga8 loss; (il) to promoteconservation of gasthrough introduction of a tariff suure coveringdifferent dasses of customers;and, (iu) to assistUkrgaz and the regionaldistribution enterpriseto put hemselveson a soundcommercial and financialbasis. The asfer of Imowledge to theloca cuntepartswill be an essentialpart of thisproject. The consultantwil work closely withcountp peroel in Ukraineand providetraing prognms in Ukraineas part of the work Plan ScP OfWork 7. Thisproject consists of threecomponents that are infterelatd and that willbe conducted 3 A diagnostcstudy of thedistibution system, i.e. fromthe inletof the city gatestation toe consumers'equipme, to identifythe principalsouwes of naural gas lossesand to p a oss-reductionprogram; X A gas tariff stdy to developa tariff structurethat wouldencurage all coumers to conerve natualgas and put the gas distributionenterprises on a financiallyself-susainig basis;and * A studyto devrelopa strategyfor usinggas metersin the residentialmarket. 8. D _akti stud*. The first step willbe for the consultantto reviewthe sandard designand pt practicesof the distibutionnetworks to ident possiblesources of gas lossand thecause of the losses. Thesources to be invesigatedwill include, among otr: the gas that is ventedfrom at oal condontrol valvesor eqpment;gas that is ventedwhen lquids are removedfrom pipelines(blowdown losse); ventig and purgingoperations prior to pipelinerepairs; and leakage frompipelines, valves and othereqipme. The consultant,working closely with local its countepart,will then develop a detailedwork plan for the diaostic study: * /Actvitiesunder the diagostic studywill include:a reviewof the methodsused by Ulrgaz to calcuate the volumeof gaslost to the atmosphereand the methodsused to reducegas losses. TheConsultant will carry outfield invetigationsof at least four sitesto corroboratethe informationprovided by Ukrg and the distributionenterprises and to evaluatethe pottial *effetiveness of lossmitigation efforts. * Basedon the informationobtained from the operatorsand durig the field investigations,a estimationof the totalquantity of naual gas lostdirecdy from the distributionnetworks; identificationsof the sources of the losses,and the causesof the losses. Theconsultant will reviewthe design,consuction and opeatingstandards and identifychanges which would reducegas lossesin fime i tions. * Identificationof prioritytargets for reducingdirect natural gas lossesfrom the distnbution networkand epment. Prqpaai of a programto redce theloss of methanefrom the prioritytargets. The -167 - ANNEX 8 Page3 prom shouldinclude a workplan, an estimateof the timerequired, the cost of the proposedprogram and the benefitsto be achieved. The Consltant will also conducta traiing coursein Ukraineon the idenficationof sourcesof gas losses,metods for ebm-atg the vohme of lossesand techniquesfor eucing losses. 9. Gs taf stu*. The first step for the consultantwill be to reviewthe en tadrffsfor bulkcoumers and reside conmers and the basis for seting taiffs to deerminethe amountof cross-subsidizationof domesicconsumers by the bulkconsumers, if any, and the amountof direct subsidiztionof the residenialconsumers. Based on thisreview the consultantand the counterpart porsonel willjoitly developa workplan to carry autthe followingtasks in conjunctionwith Ukrgaz and the regionaldiibuton companies: * Developlow demad and highdemand growth projections that willbe used as the basis to preparecost of servicestudies. The demandprojections should include etension of gas sevice to rural arams. Ident and evalute th effectand potendalsavings of improvingoperatonal and mangeal fficiencythrough Intiional rructrg and use of marketeconomy orientd management methods;provide local authorities with informationabout different models for reorgation Ofthe stor. * Preparean estmate of the projectedtotal financial cost of servicefor bulkconumer and domesticconsumers for the next ten yearperiod for each of the scenarios,taking into account the cost reductionswhich could be realizedthrough institutionalresucing. Standard WorldBank financial nlysis guidelineswill be used to estimatethe futurecost of service. * Basedon the projectedcost of service,evaluate alternative tariff stuctr and recommend one whichwill encouragecomervation and ensurethat all costswill be recoveredby the gas distributionenteprs so that all subsidiescan eventually be eliminated. * Devlop a plan for replacingthe exitig tariffsand phasingm the new tariffstucture. The plan will includea timetablefor intoduction;an assessmentof the impactof the new tariff on naturalgas consewration;and an estimateof the levelof subsidizationof natual gas customers duringthe trasition period. The Consult wil aso providetraining on methodsused in countrieswith market economies for prparing costs of servicestudies and for designingtariffs for naural gas enterprises. 10. DeIng a statq for inthdufng gas meters In the resIdetal sedor. TheConsultant Wi cary out the followingtask: * Determinethe tecical and economictargets for residentalgas meters. Thesewill include, amongother factors,metering accuracy; operational life and/orrepair costs; and _n g or purcased costs. * Evaluat the optionsfor obtaing metersin terms of the initil investmentcosts, opeaonal costs,reliability of supplysources and effect on the balanceof trade. Theseoptions may - 168 - ANNEX 8 Page 4 Itle, but POtbe limitedto, imporaon fromCIS countries;importation from non-CIS counr; manuacturwithin Ukrine; md asemblyof importedoonn in Ukraine; * Developa planfor providIg mters. If it is d_emind that localmanu is the p ed option,poteni sourcesof techology willbe identifiedand therequirements for licesing technologywill be demined. Possibleforeig partnes and/orsources of financingwill be identfied. * Evaluatethe optionsfor Intcig metersfor use by residentialconsmers. Thisnay includedevdelopiga pilot fieldtest to detrmine theeffectveness in conservignatural gas, meteraccacy and durbility. * Supervisethe prepaationand implementationof a pilot projectto test the effectivenessof residentialmeters in conser nural gas. Thescope, venue and struure ofdte pilot .:ojectwiU be deuelopedin conjwndonwih coueparts bu it shouddinclde a large enoh sampleto provi datawilch an be extrapolatedto the nationallevel. * Prepae a buiness plan for introducingmeters to residenialgas consume. The business plan will: a) identifythe itional and organizationastructre for sWplyingmeters to the distibuttonentprise; b) providea benedits/costalsis of implementigthe program;c) ident poteial sourcesof financing;d) providea marketingplan and schedle for introducingthe mets intothe domestcmadet; e) evaluatethe poteni for foreignsales; andf inveigate other salientissues which will affectthe aceptabit and profitabilityof the program. Sid e and Lv ofEffort 11. The workeffort for each of the projectcomponen willbe completedwithi 5 monthsafter te contractsignature and the draft final reportwill be sumittedno more than 30 days thereafter. Thedraft final reportwill be reviewedand the final reportwill be submittedwitiin 30 days after commentsare receivedby the cosltant. 12. Thetotl levelof efort is estimatedto be approximaely34 to 36 man-mondu.The levelof efort for each studyIs set out in the Cost Estimatesection Repng 13. Tencopies of a draft finalreport, in Ukrainianor Russianwill be submitedto Ukrgazand the Govermet of Ukraineand fivecopies, in EnglishwiUl be submittedto the WorldBank and the (Govermt of the Netherlands.After review, the drft final reportwiUl be revisedand fifty copies of the finalreport (in Uainian) will be submittedto Ukrgazand the Govermmentof Ukraine. Ten copies,in English,will be submittedto theWorld Bank and the Govenmentof the Netherlands. - 169 - ANNEX 8 Page5 As_staum to be Provied by the GOUV d Vkrga 14. Ugaz and the GOUwl providethe folowingservices to the Costan wihoutcost: * Assitancein obtning visas,customs clea s and all other e permitsrequired by theConsultnt for pefmdan of the ass_s; officespace while Consultant Is in Kiev. * AUrelevant data on thedistribution systm opratim, aslosses, costs and financia inforation relatingto the distibon enteaprisesand Ukrgaz. * Liaisonwith Ukaine governent agencies,regional gas distiuon entepris andloca 15. The Consultantwill provide all equpn and tranaon ad i etingservices. Such costs will be allowableprojec expenses. Cost Esdmate 1. Diagostic studyof gas distributionsystem: 8 man-monthsat $13,000 $$120,000 Travel,etc. - 20,000 Equpnme 15,000 Traiing IS Total $170,000 2. Gastariff study: 15man-months at $15,000 $225,000 Travel 25,000 Traing = 20 Toal = $270,000 3. Developmenof meting strategy: 6 man-monthsat $15,000 $90,000 Travel,etc. - 15,000 Traiing 15,000 Equment IQ Total = $130,000 Totalproject cost: - S70 Manpowerm $435,000 Travel/Trning = $135,000 - 170 - ANNEX 9 Page 1 Donbass- Coal Romce andOpwatois 1. Resources.Tot ervesaof the Donbss are saidto be inthe orderof lOObillion tons, whileminable reeves mnexisting mines amount to about 10 billiontons, or 75 yearsat the prest exuractionrate. For about0.5 billiontons, the nWormine development work in rockhas been completed.Minable raerves are about45 percentcoking cod and 55 percentstem coal. The average ash contnt of the coal sold is about25 pct, and the averagesulphur conten is 2.5 perc. 'Me averageprese depthof miningis about700 m; about15 percn of tbe mina havealready exceeded a depthof 1,000m. The averageannual depth progression is about 13 m. About85 percentof the coaloccurs in seamsof up to 1.2 m thickness;only 15 percentare thicker.About 65 percenthave low inclinationsuitable for mechaniion; 35 percentare steeplyinclined. Tectonic fracuring is relativelymoderate; face lengthsof 200 m and panellengths of 1000m are common. In aboutone third of the mines hereis a risk of gas eruptions. The averagemine pumps about 6 cubicmeters of waterper ton of coal. Minetemperature is high in the deepermines. 2. Thewestem and eatr partsof the basinare relativelyshallow, in genea suitablefor mechanizationand producemostly steam coal, highvolatile in the west and low volatile(semi- ahracite and anthrcite) in the east. he centra aad southernbasin is deep and producesmainly cokingcoal: in th northernextesion, fromsteeply inclined cod seams;and in the soudh,from deep sem. Whilethe wholecetr basinappears to haveunusally diffxlt _mgconditions, the wwest and easternparts appearto be quitecomparable with major West European coal deposits. At Donbass,however, the seamthicknss is lower(on averageonly about60 perenatof typWaWest Europea mines),which makes extraction of coal significandymore difficult and, assumingsame inpt costs,more expensive.Considering that WestEuropean undergound coal minig is uneconomic,even at the prevailinghigh technical and managerialefficiency, the comparisonof geologicalconditions may illustrae the great economicdiffities whichDonbass coal is likelyto fce in the fute, as price adjustmentto internationalevels are progressing.In fact, miningof the centralbasin and deepIvels mustbe consideredclearly uneconomic in suchcomparison. Conentrationof miningin the best geologicalconditions will be veryimportant in the fire. 3. 0 _er . Theproduitlon of run-of-minecoal was 180milion tons in 1989,165 million tonsin 1990,and 136million tons in 1991(sold production is about30 pereu lower,due to washing plantrejects). Basedon productionfigures in the first six mondhof 1992,annual production is expectedto be closeto the 1991level. The 199I resultwas influenced by an industry-widestrike of one monthduration and acuteshortage of materialsimported from Russia, such as fimber,wire ropes, fir retardt belts,pipes and valves. The minesengaged trWaing companies to organizemulti-party dealswhich included exports of coal in order to securethe supplyof criticalingredients to the manufacturers(sometimes outside Ukraine) of the scarcemateris neededfor mineoperaions. For example,contracts for pipesand belts weresigned based on that method. Despitethese efforts, shortagesof lmportedmaterials contied to affectmines in 1992. 4. Thereare 300 undergoundcoal mines. Thepresent average output per mineis small:less than0.5 milliontons per year, comparedto about2 milliontons per year in WesternEurope and Poland. WhileUkrinian minesare compactand, on avrage, not as deep as WestEuropean mines, their geologicalcondiions are moredifficult. About60 percentof the productionis suppliedby mechanizedlongwalls, without stowing (ackflilling with rock). Thereare about70 coaltreatment (washing)plants in the coal industry(another 10 are in the steel industry).About half of the washing plantsin ihecoal industryproduco a pa of cokingcoal (13percent ash); the otherhalf is - 171 - ANNEX 9 Pe"g2 equippodto washcoafse seam coal. A reviewof the washingplat appear advisableto a s capaciy utilion, mass baance and reovery ats In order to Idfy possibilitiesfof effiiency Incras gandmore finestm coal washing. Thereae cental worksops at each miningassociation. In addidio, ther ar about30 specializedworshops in the two associationsfor cntra repaik workhops. lhere are also 17 mning equipmentmanufacturg plan whichbelong to theCoal Commiee. -172 - ANNEX 10 Page1 P ~~Proga for dw Donas Cod Mg Opwa_w Ta of Referec I-tductionl 1. For the past cenuy, the Donbasscoal mineshave servedas a pilar of the Uktainin economy. Eventoday, the minespresently still provide56 percentof the locallyproduced primary energ and employabout 1.2 millionpeople. Giventhe currentpoor geologicalconditions at the mines,most pits wouldbe considerednon-competitve in a fre marketenvironmen. Privataion is feasiblonly for a fewmines, and probablycanmot be euted fast enouh for the vast majorityof mines. Owingto the considerablesocial and polit dislocationsthat couldresult from a quick closingof all uneconomicmines in tbe Donbass,it is improbabletat such a path wUibe takn. Coupledwith thbis sizable impediment is the strongcase for mantning, at least in the medium-run,a certin shareof securedomestic coal supplyfor powergeneration, in partictdarwitb a viewto the safetyand longrun cost issuesconncted withnuclear power. 2. The Govenmet of Ukrainehas statedits goalto adjustthe industry-as fast as economically and soially feasibleand at the lowet possiblecost-to a significandyhigher level of productivityby ncng on uproved operationof the geologicailymost favorable mines: in particular,those mine whih are Importanfor supplyingpower pla coa. The Govenmet I awarethat this path will requiresubstantial restuctuing, yet it wishesto start the processas soonas possiblewith a well- preparedinit program.Innational modelsand expenns, aspeciallythose from West European counries, cangive idea and directions,but theywill eachhave to be adaptedto the Donbasscase. A teamof Ukraima xper fromgovernment, idustry andtrade unwions(the Tem) wouldbe assined to elaboratea initialrestucurig prga, and the Governmentwould assign a consultant (te Consultant)to assit the Team in prepatingsuch progm. Objecves 3. The objectivesof the Consultant'sassigm ent are to assistthe Teamto: (a) becomeacquanted with coal idustry resuctring programsof othercountries; (b) anayz the economic,social and regionaldevelopment issues of the Donbassmines; (c) daboratethe mainfatres of an initialrestucturing program for the Donbassmines; and (d) establishan apprpriate insttutionalframework for implementationof the resr Migprogram. Scopeo Work 4. CoadI_usb R PnrogramsOther Counties: The Consultantshould present to theTeam the main feames, resultsand costsof completedand on-goingrestrucring programsfor hmportat bardcoal mig industis i Burope.This should include the importanton-going - 173 - ANNEX 10 Page 2 resturing programsfor the largehard coal industriesof the UK and Germany,and mayindclude the almost-shutdowncoa industryof France,as well as the previouscoal industiesof Hollandand Belgium.It mayalso includethe hard coal industryof the CzechRepublic, provided that sufficient progressin rstucring has beenmade in that country. Focusshould be directedon how social problemsare solved,how regionaldevelopment of non-coalmining activities is promoted,and how subsidiesare detrmind, administredand tied in withprogrs of the restucturing.In relationto subsidies,there is also the importantquestion of how the levolof invmn is beiAgJustified and controlled.To collectinformstion, the Consultantshould conduct discussions with involved high-level stafffrom govenm and industryin the countriesconcerned and fromthe Commissionof European Countries. 5. On the basis of findingsand discussionwith the Team,the Consultantshould elaborae a programfor a stdy tour of Ukrainianexper to selectedimporta foreigncoal miningareas which haveundergone or are stIllundergoing successful reucuring. lhe mainpurpose of the stdy tour to impressupon that teamhow socialand regionaldevelopment problems are beingsolved. The Consultantshould assist in angin the studytor and provde gidance and asstac duringthe tour. Ecnomic,Socialan Regiona Devdloput Jum of the Donb_ Mie 6. The Consultantsboutd guie the Teamand aigned Ukrainianexperts to conductan economicevaluation and comparisonof all Donbassmines. Te purposeof the evaluationand comparisonis to providea basis for a programto concetrte productionin the mostfavorable mines, coal sems and sectionsof mninsand seams,and an initialprogram to close the worstmines. Emphasisshould be primarilyon cashproduction costs, but fos a rankingof the minesother factors willhave to be takeninto account,such as coal rserves, coal quality,transport disanme to me*or consumers,and nvestme neededto complywith the minimumrequreme of operational reliability,efficiency, safty and envir standards.Based on inational praces, the Consltat shoiuddevelop a p meodology for conductnga concluiveeconomic euation and comparisonof mines. 7. TheConstant shouldguide the Teamand assigne Ukraina exerts to analyz the soci aspectswhich will stronglyinfluence the extentand the speedof the inWitiarestuctring. The analysis shouldexnd to compositionof the workforce by ageand skills,the mobilityof the work force,the needfor retraining,m relations,the role of the trade unions,pension, helth and uemlployment benefits,and any other aspe which may be important. Basedon international restrucing experienceand discussionwith the Team,the Consultantshould determine the scopeof the analysisand demonstae, on the samplecase of a minesdected for closure,how the resultsof the analysisare beingapplied to the designof a sociallyacceptable retucuring program. For the samplecase, a compree socialplan for all staffshould be workedout, whichshould include, amongother masures, tmporay employmentfor cleaningup the environmentaround the mine, repairingand improvinghousing and other socialinfsuctue belongingto the mine,and possibly, regionalpublic infasc . 8. The Constant shouldfamiiaze himselfthrough site visits and discussionwith regional authris and variousinterest groups with the pottid and constis for devopmt of non-coal miningactivities in the Donbassarea. He shouldpay particularatteotion to idticaon of - 174 - ANNEX10 Ple 3 constraintsand ways of remog them.He should try to elaboratea likDelydeveopment scenuio, basedon the regio's Infftuc and humanresou. MaltsFeatres ef an lmidmRIatNut Pig Nop . for the Do_ha Mim 9. TheConulta shouldasist theTem to preparea initWrestuctring program.ScWo and tme frme of the hntal proa shouldbe sect realitically, basedon expeienc In other countiesand speciflc Ukri conni. lboeanua productiongoals shoud be set sepately for mal steam8and al (metllu coalproduction should decline significany (based on a retlatissmc of the tl induty's pose), whileproducion of stm co shoud rema constant). Mmmain project for eliminati surplusand dicoomic metallurgl coal producto andfor cooceuwft coalproductio in dthmost economic mines shod be idenified.The mostimportant min mtgers andtheir ecoomic beneits should be idntifie. Necessatybv for assuringa reliable,sao and r ly acceptableproduction ftom the best stam coal mines shouldbe Idfied andecoomically jusfied. 10. Ihe worstmines to be losedshould be identified,and socily acceptableplans for executon of thedosing shoudbe prepared.The most mon m masureto betk forpromotion of ional developmntand rening and rdocatonof mineword shouldbe idetified.A prposa shouldbe daboatedas to howcoal pric adjus wouldbe mad to reachand maintain ineana pricelevels. As es_mateshould be madeof therequired subsidies, based on the proposedca picig andproducton costs, which should tae intoacct costsvings whichmay be reaonablyeptd thoug produvit iceas andmanaga iove , andthe costs of wesunve_and social m m. A proedureshould be proposedas to howthe vedof thesubsidies wouldbe perodicalyreviewed, how they would be funded,how they would be disused, andhow theywould be controlled. lek-IFraeworkfor - _S~ of te ft qrut 11. MmConsultat should propose a modifiedor noworgaIzatIonal structue of theindustry, whichis best suitedto iplent theGavemes goals. Th princp guielinuesfor the desig of tho --- 8structu shouldbe comefficiency of thecore busiess of coalpduction meeting marketquality demads, chling a minimumamount of subsidiesIn a transpare wayto the economicallymost jusWfi applications,and fcllltation of priatzationof partor wholeof th industryat anytime. 12. Ihe Consultantshould propose h futr roleand the main or ru of the mie, the stingproduction o i and y iarchial stucture.The sure dsod be omptiblewith _l y provencomnmci modelsIn heavy idustdes. t shoiudbe eWplanedhow best use can be mad of h existinge exrts andhow the most valuable andnrast mangia reou in patcar formarket, financialad strategicplann functons)cn aiv g*east impacLtAttention shoudd ao be givenas to ho impoant opeanl unis suchas centl washingpla and workshopswould fit intothe nw or I structure,and whatcod be don. to spinoff non-essentialservie or non-codav , and to make hommore effit. Th opfionof tansfin theseactivities to the regionalor local ful N 1should be analyed. On basisof Visito seltDecdmines, proposas s d bemade as to howdto efcienc of co prducton canbe improvedthrough org r _atioa w" - 175 - ANNEX 10 Page4 changeswhich would address key problems at the mines,such as lack of motivation,poor labor/ managementrelations, and inefficientsupervision and varol. 13. The Consutamtshould identify the steps requiredto establishas fast as possiblereliable and transparencost andprofit wacntng systemsfor the individualmines, and to introduceefficient intema and ext audting proceur. Job descriptions,training and recruitmentplans should be developedfor keyfinncia staff. 14. The Consultantshould propose in detailthe role of the industry,the Govermnent,the regional adninistratonand the trade unionsin preparingand excut comprehensiverestructuring plans, witha particularview to the reductionof employmentin the coal indstry, temporaryemployment for clean-upand if r imprement asks,and regionaldevelopment for other economic activities.It shouldbe explainedto whatdegree and howthese functions would be integratedino the neworgantional strucur of the indusay, and howthe Government,regional adminiion and trade unionswould be best set up insitutionallyto cope withthe tasksand achievethe consensusand cooperationrequired for successfulimplementon. In this regard,the Consulta shouldalso identify the needfor any new legWationor reguation,based on successfulintrnationd models. Wok PIan 15. It is the Consultant'sresponsibility to proposea workplan for his assignment.The qualityof the work plan wilibe an importantcriteria for the evaluationof offersand awardof the contract.In preparingthe workplan, the Consultantshould consider the followingprincipal requrements: access to internationalexperence and essedal informationregarding the restuctrng of coal idusties, cooperationwith the Teamand enggementof localexpts, planningof visits,stucturing of the work intophases with intermediate decision points. 16. The Teamwill provide to the selectedConsultant all relevantinformation regarding the Uk i oad sector,including any informationavailable on geology,marketg, productioncosts, pricing,subsidies and copiesof reent sector scuaried out by Ukrainianand international insDtiu and constants, includig the WorldBank. Whenever required and feasible,the Team wiUlprovide additional information and analysisof specificproblems through local experts. 17. The Consultantshould provide, as a relt of his assignment,the followingtwo reports: (a) at an eady stageof his assignment,a reporton the coal industryrestuctuing programsof othr counties, containg ail mainfeatures, results and costs of completedand on-going restru i programsfor Iporta hoardcoa ming industies in Eurpe; and (b) at the end of his assignment,a reportwhich describes the main features,scope and timefrae of an iniial restcturig programfor dte Donbassmines, and whichprsents concrete proposalsfor the esblihment of a proposedinstion frameworkfor implementtion. - 176 - ANNEX 10 Pae 5 18. It is expectedta the Consultan'sassignment becomes fcthve by SepMber 1993,and that it willbe compleedby Octobe 31, 1994. 19. Thebudget for th Consult's assigmn is estimatd at US$800,000 equivalent. (a) US$600,000toover te costsof 40 man month of foreig consultan at an averageCst of $ 15,000per manmoth, Includingoverhads (the40 ma monts providefor an averagetam of 6 foeg expertsallocating on average bou 50% of their timeto th asgnme durin its Imp! in periodof 13 months);and (b) USS200,000to cover (I) the costs of traveling,including subsistence, for the foreignexpes, as well as for Ukr n epes ousde Ukrc, and Qi)any contingencies.CMh budget allows for averageperiods by each forign exper in Ubaine of not longerdmn 2-3 week). Noteon o,fCeuudandgt 20. The Comultat shouldhave a recordof importanassignments in succsol resrucrig of heavyindusw s. If he has hnufRcientcoal miningexpetise, it is essentialhat he obtains Ihe opeation of o miningenpes or epe wih strongexprience in reuumring. ) - 177 - ANNEX 11 Page 1 WeectrictySuppy and Deinand 1. The communiqueof the 1992 G-7 sununit meeting in Munich includeda number of proposals related to the safety of nuclearpower plants in the countriesof the fbrmer Soviet Union and Central and Eastern Europe. The G-7 commuique suggestedthat "the scopefor replacingless s*fe Inucearl pnts by the developmentof alternativeenergy sources and the moreeffcient use of energy"should be studied,and, 'togetherwith the competentinternational organizations, in particularthe IEA, the WorldBank shouldprepare the requiredenergy studies including replacement sources of energyand the cost plications." This annex is extracted from the joint World Bank-lEAstudy prepared in response to the request from the G-7.1 2. After growing at 2.1 percent per year in the 1980s, Ukraine's electricityconsumption peaked at 271 TWh in 1990. It took a downturn in 1991 (-2.2 percent) and in 1992 (-6.2 percent). While in 1991 both supply rationing and demand side effects played a considerablerole in pullingdown consumption(with a greater weight atached to supply limitations),the decline in 1992 has been driven predominantlyby the slumpingeconomy. 3. A new long-termprojection of electricity consumptionfor Ukraine has been prepared recendy under the direction of the Ministry of Power and Electrificationin the context of a program for the developmentof the power industry.2 This projection(called the official forecast in this annex) expects that electricityconsumption will rise from 262.5 TWh in 1991to 285 TWh in 2000, and 315 TWh in 2010. Thus, an average growth rate of 1.2 percent is forecastedfor the projectionperiod as a whole (0.9 percent until 2000 and 1.4 percent between2000 and 2010). Among the key assumptions,the official forecast assumesfor the 1991-2010period an average4.2 percent rate of GDP growth (3.2 percent for 1991-2000and 5.1 percent for 2001-2010). 4. In addition, three electricitydemand scenarioswere prepared by the World Bank. The scenariostook into accountthe impact of the followingfactors: (i) Rate of growth of GDP. Scenario A assumesa deep decline in GDP until 1994-95, followedby a relativelyquick recovery thereafter, while Scenario B assumes a slower slide in GDP until 1995-96,followed by a relativelymoderate recovery afteward. Scenario C differs from Scenario B in that it assumes a shallowerdip in GDP for the years 1993-94and a relativelyfaster recovery during 1995-97(see Figure 1). (ii) Structuralshifts in total output away from heavy industrytoward consumerindustries and services. Under Scenario A, the structuraltransformation is assumedto take place faster than under ScenariosB and C; J/ See "Ukraine - Non-nuclearPower Supply Alternatives",Joint Report of the InternationalEnergy Agencyand the World Bank. Report No. I 1561-UA,Febray, 1993. 2/ Ihe projectionwas publishedin the document"Kompleksnaya programma modernizatii i razvitiya tcplivno-energeticheskoipromnyshlennosti Ubrainy na period do 2010 'g(A ComprehensiveProgram for the Modemizationand Developmentof the Fuel- and Energy Industry of Ukraine until the Year 2010), Ministry of Power and Electrification,1992. - 178 - ANNEX 11 Page 2 (Mi) A fivefold increase of domestic io...... elecicity riffs Atue Projcted real tems to achieve ..-- economiclevels 150...... proxied by ...... internationalborder prices. aheshift ...... happensgradually ...... over dme under alll 0 ...... scenarios. The differenis that u w t9 2 .. o 1890 SO2 under Scenario A, theshift is complete -Jsenarh A -4-toerIo 5*-64oWtrf ¢ 9-0f"blJ bythe end of 1995, Fig.1: Ukraine- Offcial andBank Projectionsof GDP, 199Q2 while under 2010(1990= 100) ScenariosB and C It takes five years longer; ,iv) Consumersensitivity to changes in electricityprices in a reformed semi-market economy using Hungary as an approximation. Under Scenario A, the assumedshort- run price elasticityis -0.08 and the long-runelasticity is -0.16, while under Scenarios B and C the respective numbersare -0.04 and -0.08. 5. Based on these assumptions,a straightforwarddynamic electricity consumptionmodel was specifiedto explore the effects of changes in GDP growth, the changingrelationship between electricityuse and overall economicactivity, structuralshifts in total output, and price changes (includinglagged effects).$ The long-termelectricity demand projectionsare shown in Figure 2), together with the Government'sofficial forecast. The differencebetween the official projectionand the Bank's scenariosworks out to be especiallylarge for the mediumrun (i.e., until about the year 2000). The difference becomes much smaller toward the end of the period in the case of Scenario B (mediumdemand) and Scenario A Oowdemand), while under Scenario C (high demand)the Bank's forecast exceeds the official one by a small margin. The pre-crisis (1990) level of electricity use is predicted to be attained only around 2003 under the high demand scenario, in 2005 under the medium demand scenario, and only by about the end of the projectionperiod under the low denasndscenario. ;/ Thegeneral form of the modelis: C, =AY 1bfiPt'21.l (i) 5=1 where C is electricityconsumption, Y is real GDP, P is the real price of electricity,b is the electricity/GDPelasticity, ci's rqpesent the structure of the simultaneousand lagged price elaticity coefficients,A is a contant, t denotes year, and u is the error term. - 179 - ANNEX 11 Page 3 Actukal Projo ited 120 ...... -- _sib 31 1001640 _fl-t7 so ...... <¢ so ...... I...... i 40 I*l, l I , II | 1990 1992 18994 19SII 19958 2 0 00 20 02 2 0 04 20 0E 2 0 08 2010 -Hir9h I-+-Medium --*-L Iow - -3-official Fi4g.2:. U k3aibl-0Wd fitan ud BkaIkPhroqee#*ic odfElZecrickly UseslSW2-2010 (19960= lCPD) 6. A system expansionanalysis has been carried out based on the requiement that futre demand for electricityand generafingcapacity should be met at the least cost The analysisrelied on a mathematicalmodel of the Ukrainian power system based on the automaticgeation planning program ASPLAN (a micro-computerversion of the well-knownWASP program). The model was a slightlymodified version of a model developedby EwbankPreece Ltd. for the purpose of a study fianced by the European Bank for Reconstuction and Development(EBRD). 7. Assumptionshave been made regarding availablenuclear genertion capacity, the availability of existingtherma and hydro plants, capital cost of fture thermal plants, and performanceindicators and fuel costs for candidate technologies. It was agreed with the Ukrainian authorities(Ministry of Power, Ukratomenergopromand the Nuclear Safety Commission)that the followingtbree nuclear scenarios shouldbe considered: Nuclear Scenario A: retire Chernobylunits 1 and 3, operatethe remainingmnclear units (VVER-1000and VVER-440/213)until the end of their design life, and do not bring any new nuclear units on line. In this scenario, installednuclear capacity is 10.8 GW tiroughout the study period, though the existingunits are removed from servce one at a time for necessary safety upgrades. Nuclear Scen&rioB: Scenario A plus completionof the constuction of three additional nuclear units for commercialoperation in 1994 (Zaporizhzhia6), 1995 (Rivne 4), and 1996 (Khmelnyusyi2). Installednuclear capacity accordinglygrows to 13.8 GW in 1996. - 180 - ANNEX 11 Page4 NuclearScenario C: ScenarioB plus constructionof two additionalnuclear units for commercialoperation in 1999and 2000 (Khmelnytskyi3 and 4). Installednuclear capacity growsto 13.8GW in 1996and 15.8GW in 2000. 8. Othermain assumptionsof the anlysis include: (a) the RivneVVER40 nuclearunits and all VVER-1000units are takenout of service for safetyupgrading, each for one year, in differentyears beginningwith 1994,until aUlare upgraded; (b) existingthermal plants continue to burntheir preferredfuels; (c) out of the 4.7 GW of installedhydroelectric capacity, the dependablecapacity for planningpurposes is assumedto be 3.3 GW; (d) the fullthermal and hydro rehabilitation programs of the Ministryof Poweris asumed to be implemented; (e) the Dnistrovskyipumped storage project adds one 324 MW unitper yearbetween 1995and 2001; (f) there are no fixed-systemadditions or reiements after 2005; (g) the discountrte is 10 percent;and (h) newplant investmentcosts are: - for 450-MWunits of combinedcycle gas turbine(CCGT) plant, US$ 770/kW including20 percentinterest during construction (IDC; - for 500-MWpulverized coal units,US$ 1500/kWincluding 25 perent IDC; - for 120-MWgas turbine/singlecycle, US$ 357/kW including 10 percentIDC; and - for Integred GasificationCombined Cycle (IGCC) plant, $2200/kW including20 percentIDC. (J) the systemload factor gradually declines to 62, 65 and 67 percen by the end of the studyperiod under the low, mediumand highdemand scenarios (respectively) and there is a minimumrequirement of 15 percentreserve margin. 9. On the one hand,no quantityconstraints on fuelavailaility werespecified. On the other hand, it wasassumed that fuel costsreflect international prices. Sincenew generationoptions have a constructionperiod of three to five years,these simplifying assumptions have no effiecton the outcome(asuming that fuelcosts will indeedreflect inernational prices after 1995). It wasasumed that the cost of fuel oil willbe US$68/tonat the powerplant (m constant1992 dollars) in 1993-95, wifl graduallyincrease by 15 percen in real termsbetween 1995 and 2000,decrease 6 perent - 181 - ANtNEX tt Page 5 between2000 and 2005and wiUlbe constantthereafter. Thecost of coal (US$38.7/ton)was assumed to stay constantuntil 1996,incrase 10 perct between1996 and 2000,and stay constantagain after 2000. For the cost of gas, two scenarioshave been considered: in the basecase it remainsconstant duringthe studyperiod, while in the altemativescenario the cost of gas is assumedto increase steadilyover the studyperiod from US$3.5/million Btu (or aboutUS$1 10/tcm at the powerplant) to US$8/millionBtu (or US$250/tcm)by the year 2010. The cost of nuclearfuel was set at US$2.2per MWhelectricity produced. 10. The scenariosevaluated cover the followingpossibilities: (i) high, mediumand lowdemand forecasts;(ii) the three nuclearscenios describedabove; (iii) flat and increasinggas costs;(iv) no net electricityexports and 20 TWh/yearnet electricityexports; and (v) full and partal implementation of the proposedthermal rehabilitation program. Withthree scenarios for demandand nuclear development,two for the cost of gas, two for exports,and two for the thermalreLabilitation program, a totalof 72 scenariosare possible. Onlynine of the scenarioshave been modelled: Case 1. Mediumdemand, nuclear scenario A, flat gas costs,no exports,full rehabilitationof thermalstations. Case2. As Case 1 but lowdemand. Case3. As Case I but highdemand. Case4. As Case 1 but nuclearscenario B (additionof 3x1000MW). Case5. As Case 1 but nuclearscenario C (additionof 5x1000MW) Case 6. As Case3 but nuclearscenario B. Case 7. As Case 1 but 20 TWh/yearselectricity export. Case 8. As Case 1 but increasinggas cost. Case9. As Case8 but someof the thermalstations being retired instead of rehabilitated. 11. First, the choiceof tedmologiesfor capacityadditions was evaluated based on the assumed capitalcosts, fuel costs, O&M costs, load factors, plant lives,and thermalefficiencies, among other variables. The screeningof technologieswas undertaken for both low ($3.5/millionBtu) and high ($8.0/millionBtu) gas costs. The calculationsshow that, at a gas cost of $3.5/millionBtu and loadinggreater than 25 percent,CCGT is the leastcost option. Hence,in scemnrioswith constant gas cost, all newcapacity additions will be combined-cyclegas turbines. However,in the scenarioswith increasinggas cost, combined-cyclegas turbinesand coal-firedplants are competitiveat certainload -factors. Specifically,at a gas cost of $8.0/millionBtu, pulverized coal units have lower total costs per MWhthan gas-fired plants at loadfactors of 30 percentor higher. 12. Second,the needfor capacityadditons was analyzed. Themain conclusionof the analysisis thatclosing the remainingChernobyl units at the end of 1993poses no threatof capacityshortages in mostpossible scenaios. Case3 (highdemand wthot the aition of nearlycompleted nuclear units) -182 - ANNEX11 Pag 6 and Case 7 (mediumdemand with 20 TWh exports) are the only scenarios where the constructionof new thermal capacity should start in 1993. In Case I (mediumdemand, no electricityexport), no additionalthermal capacity is needed before 2000. Low demand or increases in nuclear capacity defer the need for new capacitybeyond the year 2000. Basedon a comparisonof Case 1 and Case 4, completionof the three VVER-100 units (with an estimatedcost of US$S00-700million) saves US$1.62 billion in investmentsin thermal generationbetween 1996 and 2005. 13. Withflat gas costs, all capacityadditions in all casemare combined-cyclegas turbines(with the exceptiorof one or two simple-cyclegas turbines). With increasinggas costs,the technology choiceis less clear- the generationplanning model initially selects gas combined-cycleunits, but the units selectedin lateryears are coal-fired.4The use of natral gas for powergeneration shows an increasein all scenaios. However,the real increaseis overstated,since natural gas use in the model stats froma very lowbasis comparedto the actualuse in 1992.5In Case 1, coaluse flucues around38 mt throughoutthe wholeperiod. In Case8, withincreasing gas costs,coal use beginsto grow in 1998and reaches55 mt in 2005and 70 mt in 2010. In all scenarios,fuel oil consumption staysclose to 14 mt/year. 14. The resultssuggest that there is adequatetime to carryout a full evaluationof all optionsfor newcapacity additions. In the short term,priority should be givento the rehabilitationof existing non-nuclearunits to maintaincapacity levels and improvethe efficiencyof production.Some of that workis alreadyongoing witht local resources and utilizingequipment from the originalsuppliers. However,the rehabilitationprogram of the Ministryof Powerhas not beenbased on the application of cost-benefitcriteria and the economicviability of someprogram components is in doubt. In addition,imported equipment will be neededfor certaincritical parts of the installations(such as i'srumentationand control). Therefore,financial assistance from international and bilateral organizationsis likelyto be essenti for boththe prioritizationand implementationof the rehabilitationprogram. 15. On the demandside, firstpriority should be givento the increaseof electricityprices to keep pace withrising fuel costs. In addition,an acceleratedeffort of energyconservation would be an importantand possiblyeconomic option in lieu of additionalgeneration capacity, as manyelectric utilitiesin WesternEurope and NorthAmerica are discovering.Expenditures on improvingdemand- side efficiencyare likelyto be a cost-effectiveway of avoidingmajor capital expenditures on plant rehabilitationand new plantconstruction. A comparisonbetween Case 1 and 2 showsthat measures whichensure that the low demandscenario is followe& permitthe postponementof investmentin 5,400 MWgenerating capacity between 2000 and 2010. In addition,there are significantcost savings due to lowerfuel and otheroperating costs. Basedon this comparison,the potel savingsin the i/ Themodel switches to coal firedunits in 2003(im Case 9) or 2005(in Case8), whenthe costof gas increass to US$5.8-6.4per millionBtu, or aboutUS$180-200 per thousand cubic meters. ~/ Ihisis due to (i) the highercost of gas in the modelthan the actual cost in 1992(gas and fueloil coss in the modelare basedon worldmarket prices, while the domestcgas price in 1992reflected the extmly low cost of Importedgas, encouragingpower plants to use as muchgas as possibleand rey less on fueloil and coal), (ii) the fill avaihbilityof the two rmainingblocks at Chernobylin 1992and l993 (the modeldoes not take intoaccount Ihat, for safetyreasons, the Govermmentdecided to restrict the operationof the plantto the winter);and (iii)that the supplyof heatby cogenerationunits and heat only boilers is not takn into account. - 183 - ANNEX 11 Page 7 power industry due to the implementationof a more rapiu reform program add up to US$8.2 billion equivalent.' 16. The Ministry of Power shouldclosely monitor the evolutionof electricitydemand in 1993. It is expectedto be between the medium and low demand scenarios. However, if demand develops accordingto the high demand scenario and lifting the nuclear moratoriumis not on the agenda (or mutually advantageouslong term electricity export agreementsare signed with nearby countries), a feasibility study for the addition of new thermal generationcapacity shouldbe started during the second half of 1993. 17. Jf long-termgas supply agreementscan be negotiatedwith Russiaand Irurkmenistan,the option of installingsingle- or combined-cyclegas generatingunits shouldbe seriouslyconsidered. Such plans already exist for projects at Tschigirin,Odessa and Burshtyn. This technologyhas made great progress in recent years and presents manifoldadvantages to such a degree that the majorityof the new generationbeing constructedin most countries today is of this type. The advantagesinclude (a) low investmentcost per installed kW; (b) short constructiontime (rangingfrom 18 to 36 months, dependingon size and type); (c) high thermal efficiency, as high as 40% in single and 52 % in combinedcycle; (d) environmentalcompatibility, and (e) modular designs allowingchoice of size and flexibilityof planning to meet changingdemand at short lead time. 18. The option of new coal-firedplants should also be considered. This option must be closely linked to the restructuringof coal mining. A streamlinedcoal miningindustry with a renewed focus on the provision of low cost, high quality steam coal for power generationhas a better chance for surviving in the long run (withoutcont'iuing subsidiesfrom the budget)than the coal mines of ,to which consider the supply of coal for domesticpower generationresidual. j/ Ibe above figure is equal to the present value of the difference(between Case 1 and 2) in operation and investmentcosts over the 1993-2010operiod, calculatedwith a discountrate of 10 perce'- BRt 24693 20' \ ; ' 3cr 4(r- } ~~~BE;ARUS RUSSIANFEDERATN POLAND__ o o sa!c1ThTAk~~~~~~~oTrw ENERGYSECTOR REVIEW g > VE , 9 koM F g A DOMESnCENERGY RESOURCES AND \4>0 1 5 MAINPRODUCON SITES {6>8 F S~~~~~~~ BULGARIA- ^ ;a-.- :X; s . ° -150 °IC $ AL 'O3 IBRD24694 I...d I-&I J BEIARUS RUSSIANFEDERATION FEDERATlCaN~~~~~~~~~~~KnoofAze#\ _EXISlla;XPDEINES n t Fp SEAN _ POLRACD NSK . - S9CTWTOK4SA - S~~~~~~~~~~~~~~~~~~~~REENCU # oEUU | - . 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