November 26, 2020 (10:42)

Release of Naftogaz’s gas is the key for continuation of gas market reforms in Ukraine

Ukraine has achieved significant milestones towards gas market liberalization and the development of a stable gas hub in the last years. However, certain elements remain that hinder full market liberalization and competition and even threaten to reverse the progress achieved.

The Secretariat’s Position Paper on Gas Market Design in Ukraine, sent to Ukrainian stakeholders, analyses the current situation and provides market design options that would ensure fair competition in the Ukrainian gas market and provide the needed liquidity in the future gas exchange.

While the abolishment of the public service obligation (PSO) for households was a major step towards market liberalization, the country’s gas incumbent Naftogaz has absorbed the “unlocked’’ nationally produced gas volumes without other market participants having access to the national gas production.

According to the document, JSC NJSC Naftogaz of Ukraine and its subsidiary JSC Ukrgasvydobuvannya in 2019 – 2020 occupied / occupy a monopoly (dominant) position in the wholesale and retail markets of natural gas due to the high market shares and privileged access to the national gas production.

Andriy Kobolyev – Chief Executive Officer (Chairman of the executive board) of JSC NJSC Naftogaz of Ukraine since 25 March 2014. Image of

On August 1, 2020, the statutory obligation of JSC Ukrgasvydobuvannya and JSC Chornomornaftogaz to sell natural gas to JSC NJSC Naftogaz of Ukraine to form a natural gas resource for household consumers was abolished.

As a result of the abolition of the PSO, JSC Ukrgasvydobuvannya potentially has 6,21 bcm of natural gas per year at its disposal, which can be sold on the free market. Thus, starting from August 1, 2020, Ukraine should have had a natural gas market that provides an opportunity for domestic consumers to choose any natural gas supplier on competitive terms and based on best price offers.

After the PSO resolution regarding gas supplies to the population has expired, JSC Ukrgasvydobuvannya and JSC Chornomornaftogaz continued to supply gas exclusively to their parent company JSC NJSC Naftogaz of Ukraine without providing natural gas to the free market. Natural gas suppliers can still not directly (without intermediaries) purchase natural gas from JSC Ukrgasvydobuvannya. Natural gas suppliers repeatedly asked JSC Ukrgasvydobuvannya to consider concluding contracts for the sale and purchase of natural gas, however, they did not receive a positive response.

JSC NJSC Naftogaz of Ukraine, in addition to the status of importer, wholesaler and owner of state gas producers, is currently also a licensed supplier of natural gas, which is a competitor to other independent suppliers in the retail market. JSC NJSC Naftogaz of Ukraine, has de facto exclusive access to the state gas resource and is at the same time a supplier of natural gas, including end consumers.

LLC GSC Naftogaz Trading (subsidiary company of JSC NJSC Naftogaz of Ukraine) sells gas to industrial consumers through the Ukrainian Energy Exchange (UEEX), and also offers to sell natural gas to natural gas suppliers for the needs of the population (household consumers).

According to official information, the prices at which companies of Naftogaz sells gas on UEEX are much higher than those at which the company offers gas to its direct consumers and some traders, which does not encourage buyers to trade on the exchange. There are concerns that discrimination and pricing abuse took place for two months, which started to increase after the Secretariat of the Energy Community became interested in this issue.

The concept proposed by the Secretariat outlines a gas release programme which would allow all market participants to have access to the gas volumes by ensuring that it is traded on equal and transparent market segments, which are operated by the Ukrainian Energy Exchange (UEEX). These volumes would provide the crucial liquidity needed on the gas market to create a stable Ukrainian gas index.

This is not about fair treatment of private gas suppliers but about increasing benefits of Ukrainian gas consumers. Due to the fact that the country’s own production will be traded on transparent terms on the market and will be accordingly taken into account in the price formation mechanisms, the Ukrainian gas price could be lower than the TTF or NCG index price to which Ukraine is pegged to at the moment.  Besides this, the Ukrainian gas hub could, due to its size, become one of the top European reference hubs.

Additionally, the paper proposes a concept which could bring more transparency in the district heating segment, which is still covered by the PSO. In this sector, auctions in combination with a clear separation between indebted and profitable district heating companies could provide a first step towards market mechanisms.

The Energy Community Secretariat has continuously advised the Ukrainian government in the past in order to ensure that the PSO is compliant with the gas acquis and thus does not cause distortion of competition and market monopolization.

In particular, the Energy Community Secretariat proposes to implement the following steps under the “Gas Release Program – National Gas Production”:

1. JSC Ukrgasvydobuvannya could provide up to 6,21 bcm (as indicated on page 5) per year to be traded in a transparent manner with equal access rights for all market participants which are competing in the supply segment. These volumes would allow to create an indexation which is as stable as TTF or NCG, and it would allow to form and reveal the real Ukrainian gas market price. The benefits could be spread to all Ukrainian customers. There is no reason why Ukraine, while having own gas production, should be pegged to TTF or NCG. The index will be representative enough, even if only a portion of these volumes would be traded on Segment II.

2. JSC Ukrgasvydobuvannya should have free access to the short-term market of UEEX and can act as a powerful market maker for this market, which will form stable price signals in Ukraine, support the formation of real market margin prices (solving problems with balancing), and finally will help with its liquidity to strengthen the integration process with European gas markets and create a well-functioning gas hub in Ukraine.

3. Carry out a careful segmentation of debtors, highlighting the problems that caused the debt. If it is caused by the Regulator’s policy on tariffs, it may be a question of compensation by the state. Debts in the part of the difference in accrual of fines and penalties can be written off by Naftogaz.

Debts caused by non-payment of the population can be separated into a separate category of DHCs. At the same time, the state must clearly distinguish between the truly insolvent parts of the population and protect them with subsidies or a PSO, while for the solvent part of the population severe sanctions in case of poor payment discipline should be applied.

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