weekly analytical report: november 19 - 25, 2012
DESCRIPTION
Analysis of last week's key events provided by the "DiXi Group" experts.TRANSCRIPT
DiXi Group, 2012
Energy information ● Analysis ● Consulting
www.ua-energy.org/en
Weekly analytical report November 19 – 25, 2012
1. Whereas the Southern Gas Corridor progresses to the stage of implementation, discussions on the normative regime are held around the South Stream project. Turkey supports any decision of the Shah Deniz consortium on transportation of the Caspian gas to Europe. The parliament of Azerbaijan ratified all the documents needed for construction of the TANAP pipeline, and received positive reaction from the Nabucco consortium. The latter considers Bulgaria as a reliable partner, even though its president believes the South Stream to be more promising. Italy, which lobbies for Enel participation in the TAP project, also wants to get the expected streams of Azeri gas. Against this background, the progress of the South Stream has faced resistance from the EU: German Chancellor A.Merkel urged Russia to accept the Third Energy Package, but the deputy head of Gazprom O.Medvedev called this position "not constructive". Significance of European intensions is evidenced by the fact that Poland was summoned to the European Court of Justice for incomplete implementation of the Third Energy Package. Warsaw has already announced the start of gas market liberalization in the beginning of the next year.
2. Meanwhile, Gazprom’s policy to conclude long-term contracts is suffering an increasing pressure. The Russian monopoly was forced to prolong gas contract with Moldova, despite previous demands to Chişinău to leave the Energy Community. Generally, in the current year, the price of Russian gas for Europe was reduced by 10%, for Germany – by 19%, for Bulgaria – by 20%. China uses own production of shale gas as an argument in the negotiations with Gazprom. Another factor of pressure became the 10-year contract between Statoil and Wintershall, which is based on spot prices. In response, Gazprom has promised to protect the long-term contracting. 3. Lack of a clear position of the Ukrainian government allows Russia to demand higher volumes of gas imports. The Energy Minister Y.Boyko announced gas imports from Russia will amount 26 bcm in the current year, and the President V.Yanukovych expects imports will decrease to 18 bcm in the following year. However, according to the media, 27.8 bcm have been imported in the last 10 months, and purchases increased by 0.9% in terms of total cost. Against this background, the Russian party expects Ukraine will import at least 27-28 bcm. Such pressure can be explained by the decrease in global demand for Russian gas and Gazprom striving to keep its gas production at sustainable levels.
Numerous bilateral contacts did not contribute to the dynamics of the negotiations, which enabled growing criticism of the government by the opposition. On Monday, the Energy Minister Y.Boyko and the head of Gazprom A.Miller met in Moscow, and simultaneously, Presidents V.Yanukovych and V.Putin had a telephone conversation. On Wednesday, Prime Ministers M.Azarov and D.Medvedev discussed cooperation in the energy
DiXi Group, 2012
Energy information ● Analysis ● Consulting
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sphere, having agreed to continue negotiations. The opposition, which did not expect appearance of unexpected decisions, called leadership’s visits to Moscow "simulation of a dialogue about gas discount".
The issue of possible legal actions, raised by Ukraine, has not continued. The Energy Minister Y.Boyko did not rule out arbitration with Gazprom on reducing volumes of gas imports, but experts emphasize the lack of political will to proceed. Instead, Russian Energy Minister O.Novak said he has no information about the intentions of Gazprom to sue against Ukraine. As a leverage, the Russian party uses the issue of gas transportation to Europe: after transit via Ukraine decreased in October, Gazprom announced its readiness to increase transit via Belarus by 30%.
4. The real solution of gas import dependence is the policy of diversification, which is run by Ukraine in compliance with European principles. According to the Energy Minister Y.Boyko, in 2013 imports of the "reverse" gas, which is 40-70 USD cheaper than the Russian one, will be conducted also via Hungary. First supplies of the Caspian gas are also expected in the end of 2017. Despite risk of information attacks, the State Agency for Investment and National Projects continues to prepare launch of the LNG-terminal: a company to lease the floating plant was defined, tenders on attracting loans and pre-project works totalling 221 mln EUR are planned, and Moldova has expressed interest in the construction. Along with traditional statements about gas stored in the underground facilities, the Cabinet of Ministers took a step towards creation of gas reserves.
At the same time, the process of reforming the internal gas market is being delayed. The Naftogaz NJSC claim against the NERC, demanding to return 4.6 bln UAH, is interpreted by the media as a demand to increase gas prices for households. However, conditions of the tender to develop the reform program for Naftogaz indicate that the process will be delayed for at least six months. The draft law registered in the parliament, which proposes to use the 3% tariff surcharge for the needs of the fuel and energy sector, also indicates that subsidies will remain.
5. Despite political factors, the global oil market is transforming on the basis of real indicators. On the world markets, oil price first increased and later decreased on the background of events in the Middle East. In the long run, according to the IEA, the global "energy map" will change because of increased production in the United States. The country has already hit the 18-year record of average daily production, which has led to cheaper fuel. Members of the Customs Union did not demonstrate solidarity and purse their own interests: Russia changed the method of calculating export duties, and Belarus prepares introduction of a separate export duty. Having not agreed on the volumes of Russian oil supply in 2013, Minsk considers the opportunity to resume processing of Kazakhstan oil at its refineries.
Ukrainian market of oil products remains a place of high internal risks. Prices of petroleum at the filling stations did not change, confirming the opinion of experts about the low impact of the Middle East events on the Ukrainian market. The Verkhovna Rada refused to review excise rates for oil products, but imposed excise duty for biodiesel and its compounds. However, uncertainty remains high because of high credit burden. In addition, the State Inspection on Price Control obliged oil traders to regularly monitor the prices, de facto refusing from its functions. Meanwhile, the State Customs Service is not aware of establishing a single
DiXi Group, 2012
Energy information ● Analysis ● Consulting
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state oil importer and explained the delays in processing oil imports by lack of testing equipment. The State Inspection for Cosumer Rights Protection plans to tighten control over the quality of fuel, having received strong support from traders which want to reduce the share of counterfeit oil products. Meanwhile, shadow market grows: another smuggling channel was discovered in Lugansk region, a group of criminals who stole oil from wells was arrested in Sumy region, the media revealed dubious schemes of petroleum exports.
6. Strengthening of state regulation on the market of renewable energy is not justified. The Verkhovna Rada adopted the draft law which substantially changes the conditions of granting the FiT, in particular as regards the calculation of the "local content". In addition, the NERC has approved the requirement for solar cells to have 30% share of Ukrainian goods and services. According to media reports, the new rules significantly limit the number of FiT beneficiaries to two key market players. At the same time, according to the IEA, in the previous year global subsidies for traditional energy sources were six times higher than state support for renewables.
7. Implementation of energy efficiency projects by the state actually nullifies all attempts to establish favorable conditions for them. The Resolution of the Cabinet of Ministers exempted foreign energy saving equipment from VAT, and the State Agency for Energy Efficiency and Energy Saving discussed introduction of white certificates. However, the program of social infrastructure thermomodernization collapsed because of large-scale corruption, and it was decided to sell the unused "Kyoto money" on the interbank market. It is difficult to call the reduction of natural gas calorific value or the conversion of heat generation to synthetic gas as energy efficient practices, especially if they accompany the start of CHP facilities’ privatization. Local projects are developed mostly without government involvement: an agreement to create the first energy cluster was signed in Khmelnytskyi region, and the GIZ supports pilot thermomodernization projects in four cities of Ukraine.
8. While the EU countries are concerned with nuclear safety issues in the broadest sense, Ukraine ignores them, becoming even more dependent on the Russian supplier. According to the EU Commissioner for Energy G.Oettinger, without nuclear energy it will be difficult for Lithuania to secure energy supply. Czech Republic temporarily suspended tender for the construction of two nuclear reactors because of a lawsuit from the French company Areva. Bulgaria has converted part of the Kozloduy NPP into the nuclear waste management facility. Meanwhile, in Ukraine environmentalists oppose further exploitation of the South Ukraine NPP-1, and the operator – Energoatom NNEGC – purchased nuclear fuel on 466 mln USD but, according to media reports, decreased the share of alternative supplier Westinghouse in favor of Russian TVEL .
9. Measures to reform the electricity market are implemented mainly in favor for the benefit of one market player. The Verkhovna Rada adopted in the first reading the draft law "On the fundamentals of electricity market functioning", and the Energy Minister Y.Boyko promises to finalize the document by the end of the year. However, the Fund of cost imbalance distribution (to be created by the draft law) discriminates nuclear energy in favor of coal-fired generation. For these reasons, Energoatom NNEGC proposed to complete the draft law with participation of experts. Against this background, the private holding DTEK remained the
DiXi Group, 2012
Energy information ● Analysis ● Consulting
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monopolist exporter of electricity, having bought access to internstate sections in 2013. In the last 10 months, Ukraine’s electricity exports increased by 62%. The USTDA grant for conducting the feasibility study for the Burshtyn TPS modernization also contributed to strengthened positions of DTEK. 10. EU countries strengthens its loyality to unconventional gas, putting emphasis on strong regulation. Members of the European Parliament adopted two resulutions on shale gas, putting emphasis on careful extraction, but did not call to ban its production. The European companies also stressed the importance of strong regulation, naming shale gas a necessary part of the European energy balance. Meanshile, Poland announced the first successful test drilling – counry is planning to double gas production by 2020, investing 24 bln. euro in its energy sector.
In Ukraine, on the background of active policy and activity in in extraction sphere, its shadow component is also increasing, The Government stays away from community policing in the regions concerning extraction of unconventional gas, passing the initiative to companies and academics (both in Kharkiv and Ivano-Frankivsk oblast), and focusing its activity on co-operation with Civic Councils. Meanshile, private and public companies are increasing their activities in gas extraction and transportation – a new gas pipeline construction completed, Kulczyk Oil plans to double gas production in Ukraine, an application for development of Mizhrichynska field was submitted, Azerbaijan declared its readiness to participate in the development of Ukrainian Black Sea shelf. However, such activity has not yet shown results in production volumes – for 10 monthes in 2012 gas production was increased only on 0,6%, in comparison to the same period in 2011. At the same time, a number of facts showing untransparent extraction energy policy appear – Cypriot companies continue to buy Uirainian extraction companies, mass-media emphasis on maintaining of gas production assets in the current Security Council member M.Zlochevskyi.