Ukraine’s Gas Market Reform: Green Light to Investments in Natural Gas Transmission, Production and Energy Efficiency
Andriy Kobolyev, CEO, Naftogaz of Ukraine July 2015 www.naftogaz-europe.com www.naftogaz.com A vertically integrated group: entire supply chain
Naftogaz Gas Business
Upstream, Gas transportation Wholesale gas processing & storage gas trading
15 bcm annual 153 bcm transit capacity 2012 –15 major importer production 62 bcm transit in 2014 till 2012 monopoly 230+ oil, gas, importer condensate 38 bcm transmitted fields domestically major wholesaler 100% supplier to gas processing 31 bcm of underground 39 households, plants gas storage DHCs
Gas business: 90% of earnings 2014-15: Gas market liberalization initiated
Key milestones already reached:
Gas Market Law: compliant with EU Energy Law
Price Reform: gradual liberalization of gas prices
Corporate Governance Reform: OECD standards
EU-UA Gas Network Integration to diversify supply
3 Naftogaz effectively diversified gas imports
Sources of Ukraine’s gas imports
2013 2014 1Q 2015
8% 26% 39% 61% 92% 74%
Russia, single supplier Europe, multiple suppliers
4 2015 and on: building competitive and efficient market
Transmission : Competitive- andunbundle efficient by midgas 2016 market will develop as we: - new players and JV
- enhance interconnectivity with EU Storage: - new players and JVs - potential partial privatization
Production: - increase upstream production - potential partial privatization of upstream
Consumption: improve energy efficiency
5 Critical funding need for strategic gas purchases
Avoiding risk of transit interruptions on political grounds: 21 bcm in storage = no Russian gas required this winter Loans: US$1.8 bn to buy 6.5 bcm of gas from commercial banks, IFIs Political risk guarantees: OPIC, WB/MIGA or commercial institutions Collateral: - Gas in storages; - Operating cash-flows (transmission revenues); - Ukraine Sovereign guarantees Repayment source: borrower’s revenues secured by regulated RAB-based tariffs
6 Opportunity: transmission and storage partnership
Ukraine Ownership unbundling of the transmission system operator rd Cabinet of State (TSO) in compliance with 3 energy Ministers Property Fund package (EU) 100% EU and/or US companies to be invited as partners in gas Naftogaz Controlling interest transmission and gas storage business Controlling interest State will remain the owner of the gas transmission system and Storage Transmission underground gas storages SO SO On-going transparency and Non-controlling interest Non-controlling interest efficiency improvement through stronger corporate governance in US/EU Partner US/EU Partner compliance with OECD principles
7 Potential benefits for Partner in natural gas transmission operations
Natural gas transit via Ukraine, bcm Strategic advantages: 158 Most powerful transit infrastructure 59 54 74 72 in the world with capacity of 96 exit - 158 bcm/Y, entry – 288 bcm/Y 99 104 84 86 Supplies to 18 European countries 62
Crucial role in the European 2010 2011 2012 2013 2014 transit system, accounting for up Transit volumes Excess Capacity to 15 % of total gas import to EU Natural gas domestic supplies, bcm Direct interconnections CAGR: -6% with EU (PL,SK,HU,RO) and with 25 27 24 20 RU, MD, BY 16 Revenues ensured by regulated 27 27 27 26 23 RAB-based tariffs Substantial potential of transit 2010 2011 2012 2013 2014 volumes increase without significant Industry Production and tech. costs investment Households, District Heating, Sole transmission system operator Government financed institutions 8 Potential benefits for Partner in gas storage operations
Natural gas storage volumes, bcm Strategic advantages: 31 7 10 Largest storage capacity in 11 16 14 Europe - 31 bcm (1/3 of EU28) 24 21 20 15 17 Storage capacity of over 25 bcm on border with the EU 2010 2011 2012 2013 2014 Capacities load (end of injection period) Available storage capacity Essential infrastructure for EU gas stock (both security and Huge potential for further commercial) and creation of a development gas hub Strategic geographical location of storages allows gas supply from one point on the Ukraine-EU border to 6 countries A valuable complex of assets with potential privatization of some storages
9 Energy independence: energy efficiency, production growth
Ukrainian gas import requirement
~20 bcm 3-7 bcm
2015 2020F
How will this be achieved? 6-8 7-9 bcm bcm Energy efficiency Domestic production growth Required investment*: US$10-15 bn Required investment*: US$5-6 bn
*Preliminary estimates 10 Opportunity: Energy Efficiency Energy efficiency measures can save ~6 bcm/y by 2020 and ~12 bcm/y by 2025 Gas Invest- Investment Project scope Where What savings, ment, efficiency, and time to bcm/y US$bn cm/US$ capture the effect Alternative fuel boilers 3-5 ~3.0 3.7 0.8 ~7mn HH More efficient gas boilers years
Alternative fuel boilers ~20 ths 3-5 1.1 ~2.0 0.6 More efficient gas boilers boilers years
Pipes replacement and 3-5 ~0.7 ~1.7 0.4 ~250 DHC insulation years
Heat meters with ~100 ths 1-2 ~0.8 ~2.4 0.3 temperature regulators buildings years
Thermo 10 5.5 ~10.3 0.5 ~7 mn HH modernization years
Thermo ~100 ths 10 ~3.4 ~15.9 0.2 modernization buildings years
Total ~12 bcm/y ~US$36bn Impact is calculated for each measure separately. Total gas savings in case of implementation of all measures 11 Opportunity: Upstream Development
70 Projections 60
50
40
30 Bcm 20
10
0 1955 1990 2000 2010 2020 2014 2030 Conventional gas production Unconventional gas production Incremental unconventional gas production
Ambitious plans present opportunities for international gas production companies and companies offering equipment, services and know-how • Conventional resources potential With sufficient investment production 39Tcf = 1.1Tcm 1 could increase by 7-9 bcm by 2020 • Reserves-to-production ratio 34,3 – and more than double by 2030: the largest in continental Europe 2 • Future production depends on application of modern technologies for seismic evaluation, drilling, 1 Source: US Energy Information Administration 2 Source: BP Statistical Review of World Energy, June 2015. completion, well stimulation, and Source: Energy Strategy of Ukraine till 2030, Ministry of Energy and Coal Industry.production management. 12 Other urgent investment opportunities Other urgent investment opportunities
Poland-Ukraine 110 km Complete overhaul of Modernization of gas interconnector with drilling rigs and Shebelinka Refinery to capacity of 8 bcm/y will equipment will allow to: achieve Euro-5 quality allow to: standard will allow to: ▪ Increase current gas import ▪ Expand exploration and ▪ Potentially increase market capacity from EU by 53% production drilling capacity share of the Company up to 300-350 ths. m/Y by 2020 to 15% ▪ Satisfy c. 40% of Ukraine’s total requirement for ▪ Expand drilling equipment ▪ Significantly improve natural gas imports range to meet current operational results after ▪ Provide access for EU complex drilling tasks modernization traders to UA gas storages ▪ Increase the average ▪ Ensure immediate pricing with capacity of 31 bcm drilling depth over 6 ths.m premium for sales through ▪ Contribute to development of own filling stations chain ▪ Wider use high pressure the pan-European “North- Decrease dependency equipment and hydraulic ▪ South Gas Corridor” from imported fuels fracturing techniques
Estimated project cost – Estimated project cost – Estimated project cost – 245 mln USD 356 mln USD 185 mln USD
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