Ukraine Energy Sector Review
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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