UKRAINIAN GAS HUB – A CHANCE FOR EUROPE Policy Paper D N A L IN F NORWAY ESTONIA SWEDEN M O D LATVIA G N MARK I DEN IRELAND K LITHUANIA D North sea Baltic sea E T I N U B E L GERMANY G POLAND IUM CZECH REPUBLIC SLOVAKIA M O L I A D A USTR O Y V R A HUNG A FRANCE ROMANIA CR O L A A G T IA IT SERBIA AL ORTU P Y BULGARIA SPAIN GREECE Prepared by Lukas Kulich, Science Po, DiXi Group Fellow This report has been created under the Ukrainian Think Tank Development Initiative, implemented by the International Renaissance Foundation (IRF) in partnership with the Think Tank Fund (TTF) and funded by the Embassy of Sweden in Ukraine (SIDA). The views and interpretations expressed in this report are the authors’ and do not necessarily reflect those of the Government of Sweden. DiXi Group is Ukrainian think tank involved in research and consultations related to information policy, energy, security, and investments. Our mission is to be a driving force of high-quality changes in the energy sector, in order to achieve good governance and responsible consumption on the way towards sustainable energy. These changes envisage establishment of free and competitive markets with a high level of transparency, efficient regulation and respect for the rule of law principles, effective production and consumption of energy resources, overcoming corruption and other negative phenomena. DiXi Group does not take any political positions; therefore, the views expressed in this publication are those of the authors. This publication is available for downloading from the information-analytical resource Ukrainian Energy (www.ua-energy.org). For additional copies of this document and further information, please contact: 02095, Kyiv, 24 Sribnokilska Street, P.O. Box 68 [email protected] © NGO DiXi Group, 2016 © SIDA, 2016 Layout – Taras Mosienko Printed by SiLa LLC Introduction The current decade is far from being finished but it Effective implementation of legislation is hard to has already became an important part of modern achieve and economic growth together with busi- Ukrainian history. Ukrainian governments were for ness creation have fallen considerably since the War far too long undecided in what direction to choose in Donbas. Until the Revolution of Dignity, Ukraine’s for the development of their country: either to align energy sector had been heavily dependent on Rus- with the European Union or with the Russian Fed- sia due to both Gazprom’s monopolistic position as eration. When the former Ukrainian President Viktor supplier in the Ukrainian gas market and Kremlin’s Yanukovych refused to sign the Ukraine-European influence on Ukrainian officials. Union Association Agreement in November 2013 and thus decided to comply with the Russian Fed- The 2013 rupture with Yanukovych’s ancient régime eration, pro-EU Ukrainians assembled in the Maidan gave Ukraine a unique opportunity to create a liber- square where violent clashes between police and alized and healthy economy. In order to achieve this protesters took place in the early 2014. Yanukovy- objective, a stable gas supply is needed. Gas is one of ch then fled to Russia in March of the same year. the most important elements in Ukrainian economy: Ukraine consequently started new period in its his- it is not only used for energy-intensive industrial re- tory with the desire to achieve economic prosperity gions in the East of Ukraine but it is also an essential and to join the European Union. fuel for residential heating. This said, gas supply was also Ukraine’s weak spot since the country had been There is nevertheless a long road ahead for Ukraine reliant only on the Russian Behemoth - Gazprom. Af- in its quest to achieve these objectives. The coun- ter the unlawful annexation of Crimea by Russia in try’s economy had been for too long dominated by March 2014, the need to drift away from Russian gas personal interests of oligarchs. Ineffective adminis- and to diversify gas supply became more important tration and corruption continue to reign in Ukraine. than ever before in Ukraine. 4 Ukrainian gas hub – a chance for Europe Creation of a gas hub in Ukraine plays an impor- of this report (‘What is a Gas Hub?’), the report will tant role in achieving gas supply diversification and present the theory behind functioning of a gas hub liberalization of Ukrainian gas market. Gas hubs and associated energy exchanges. In its second concentrate large quantity of gas supply that as- part, (‘Creating Gas Hub’), the report will list all the sures long-term energy security for the country, as necessary elements for its design and hub creation well as gas-on-gas competition, which pushes the in Ukraine. In the third part (‘Threats and Opportu- prices of blue fuel down. Gas hub will furthermore nities to Gas Hub Project’), the report will present contribute to the improvement of overall business potential opportunities and obstacles to the gas environment in Ukraine and to further Ukrainian in- hub launch. The report will then finish with a series tegration into the European Union. In the first part of recommendations. UKRAINIAN DEPENDENCE ON RUSSIAN GAS PIPELINE IMPORTS 2008-2015* 70 90,00% 79,34% 80,00% 60 75,55% 70,00% 50 63,37% 60,04% 60,00% 40 51,64% 49,60% 50,00% 66,3 30 40,00% 57,6 59,3 54,8 52,6 51,9 50,4 34,04% Gas volume (inbcm) 44,8 30,00% 20 42,6 36,5 32,9 33,3 20,00% 18,32% 26,8 25 10 14,5 10,00% 6,1 0 0,00% 2008 2009 2010 2011 2012 2013 2014 2015 Russian Gas import (bcm) Ukraine’s gas consumption (bcm) Dependence Ratio * Dependence ratio is calculated as the division of Russian gas imports by Ukraine’s overall gas consumption for a specific year. Data retrieved from http://naftogaz-europe.com/article/en/NaturalGasSuppliestoUkraine and http://www.naftogaz.com/files/Zvity/Naftogaz_Annual_ Report_2015_engl.pdf, p. 86 UKRAINIAN DEPENDENCE ON RUSSIAN GAS PIPELINE IMPORTS 2008-2015* Ukraine's Non-Industrial Gas Consumption 1998-2015 90 60% 57% 56% 56% 54% 80 51% 51% 50% 47% 46% 70 45% 45% 45% 45% 44% 44% 42% 43% 40% 60 40% 37% 50 30% 40 75,6 75,7 76,3 75,8 76,4 Gas volume (inbcm) 73,4 73,9 70,5 69,8 69,8 66,3 30 20% 57,6 59,3 54,8 51,9 50,4 42,6 20 34,3 34,1 34,2 33,8 33 31,5 33,1 30,3 29,7 29,7 29,6 29,2 10% 27,5 28,9 27,9 28 27 24,2 10 18,9 0 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Gas Consumption in Household, DNCs, Government Financed Institutions Total Gas Consumption Gas Consumption Ratio * Gas Consumption Ratio is calculated as the division of non-industrial consumption (households, district heating companies and governmental institutions) by Ukraine’s total gas consumption for a specific year. Data retrieved from http://naftogaz-europe.com/article/en/GasConsumptioninUkraineeng. D N A L IN F NORWAY ESTONIA SWEDEN M O D LATVIA G N MARK I DEN K IRELAND Baltic sea LITHUANIA D North sea E T I N U B E L GERMANY POLAND G IUM CZECH REPUBLIC SLOVAKIA M O L A D A USTRI O Y V R A HUNG A FRANCE ROMANIA CR O L A A T G I A SERBIA IT AL ORTU P Y BULGARIA SPAIN GREECE 5 Policy Brief 6 Ukrainian gas hub – a chance for Europe What is a Gas Hub? 1. Gas hub defined therefore operate as a single system. Physical gas hubs are used more in the United States (e.g. the Simply speaking, a gas hub is a location where sev- Henry Hub) than in Europe where virtual gas hubs eral gas pipelines interconnect. The interconnection are used more extensively. of several supply pipelines represents an opportu- nity to trade and physically exchange gas between Virtual (also known as balancing) hubs cover wider a large number of buyers and suppliers. Whilst the geographical area, represented by a national or a first gas hubs were established in the United States transnational gas network. In a virtual gas hub, the as early as in the 1950s (e.g. the Henry Hub in Loui- authority operating the gas transmission network siana), the concept of gas hubs came to Europe sig- hub may accept gas at any point of the geographical nificantly later except the United Kingdom which zone covered by the hub; a virtual hub is thus a bal- established its National Balancing Point (NBP) in ancing point inside a pipeline system. Whilst physi- 1990s. The majority of gas hubs in continental Eu- cal hubs permit larger volume trading, more partici- rope have been created only in the last 10 years and pants may entry gas trading in virtual hubs. Contrary their development was catalyzed with the arrival of to physical hubs, participants in virtual gas hubs can Liquid Natural Gas (LNG) into European gas market. choose among various exit/entry points within the Among the most important gas hubs in Europe are gas grid and have no obligation to arrange transpor- the Title Transfer Facility (TTF) in the Netherlands, tation of gas; the transportation of gas within the GASPOOL in Germany, PEG Nord in France and Cen- grid is the obligation of an independent Transmis- tral European Gas Hub (CEGH) in Baumgarten, Aus- sion System Operator (TSO).