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Weekly analytical report June 3 – 9, 2013

1. Losing profits on the European markets, Gazprom is trying to compensate losses in the post-Soviet countries. Gazprom announced price cuts for European consumers, in response to increased competition. According to media reports, the EU Commissioner G.Oettinger had to discuss the gas prices with the Russian Minister of Energy. Media background of the cooperation between Gazprom and its strategic partners in the EU becomes negative – despite the information about E.ON plans to terminate the contract with Gazprom was refuted, the German company is still looking for new sources of gas supply. Against this background, the EU strengthened mechanisms to fight abuses: the European Parliament committee supported a law to fight corruption and tax evasion in the oil and gas sector, and the German energy regulator almost finished the creation of a unit to combat market manipulation. On the post-Soviet space, Gazprom prepared information on possible increase of gas price for Belarus in 2014 and once again refused Ukraine in reducing gas price, calling the cost "European" and recalling the right to get the compensation for not taking gas in 2012. Experts in Ukraine continue to insist on referring the case to the Stockholm arbitration court, predicting success. According to representatives of the Energy Community, Ukraine's debt to Russia is the result of the country’s own decisions.

2. Ukraine continues to develop reverse gas supply from the EU. The address of the President to the parliament called the European deliveries as the most realistic way to diversify gas supply. In addition, the document contains a reference to the White Stream pipeline project, which becomes relevant on the background of the Shah Deniz field development in Azerbaijan. Ukraine announced that it expects to get "reverse gas" via Romania as well as Slovakia and Croatia, which offered Kyiv to join the construction of its LNG terminal. Gazprom called the reverse gas supplies "dangerous" as they are uncoordinated with the Russian monopoly. However, the Energy Minister E.Stavytskyi said that the Russian party is permanently informed.

3. Despite the moderate expert assessments, governments of the EU member states keep the plans of unconventional gas production. Prospects for the development of shale gas in Europe are very cautiously considered by both the officials of the European Commission and the authors of the NATO report. Gazprom also does not hide its scepticism. However, Poland announced plans to import gas from the United States, among potential buyers could be also Italy and Spain. The Prime Minister of the UK (where the shale gas estimates are increasing) D.Cameron opposed the restraining regulations on extraction. In Poland, the government will receive in June a draft law on geology and production, and will DiXi Group, 2013 Energy information ● Analysis ● Consulting

continue to require from state-owned companies to invest in shale gas. Germany has postponed consideration of the draft law on hydraulic fracturing. Even the countries with acting moratorium on this technology – Bulgaria and France – are considering the opportunities to estimate the reserves of shale gas. In Ukraine, discussions are focused on building a dialogue between the government, local communities and companies. The authorities increase attention to the production of hydrocarbons on the Ukrainian part of the Black Sea shelf. In the address to the parliament, the President V.Yanukovych emphasized the need to restore the program to utilize the Black Sea resources, in particular to explore the potential of methane hydrates. The Kyiv Pechersky District Court legalized the settlement agreement between Ukraine and Vanco Prykerchenska for the development of the Prykerchenska area. According to the Minister E.Stavytskyi, the Naftogaz NJSC will buy another 2 jack-up drilling rigs, and the related tender will be announced in August. Maybe, Azerbaijan which aims to increase gas production to 20 bcm in 2015 and therefore signed a 800 mln USD contract for the construction of a new-generation offshore rig, was an inspiring example. However, the Prosecutor General’s Office launched an investigation of 90 mln UAH abuses during the completion of the Odeske and Bezimenne fields.

4. Ukrainian oil market suffers from stagnating domestic production and low standards. World oil prices mainly increased on the background of reduced supplies and increased demand in the U.S. which also increased production. In Ukraine, fuel prices are stable, but – according to the tests of drivers’ association – more than half of the A-95 petroleum does not meet quality standards, and the Prosecutor General’s office in Kyiv fined one of the networks for selling unregistered fuel. Another problem is refining: along with the renewed production at the Shebelynka plant, the prospects of the Odessa refinery remains uncertain. After the presentation of the SYEPEK group in Odessa and plans to attract a 100 mln USD loan, the media indicate reasons for delaying the closure of the transaction to purchase the refinery. Against this background, the market goes in the "shadow": during last 4 months, the excise tax revenues decreased by 30.3%. Imports of oil products will be limited, with increased control of their quality. Text of the President V.Yanukovych appeal to the parliament mentions the introduction of quotas on imports of oil products, and government sources confirmed these intentions in the media On the other hand, the Minister of Income and Tax O.Klymenko is charged to control the quality of imported fuel, whereas retail chains should execute control inside the country. Along with this, the Ministry of Energy and Coal Industry plans to develop a program of testing fuel at the filling stations.

5. In Europe, there is ongoing debate about renewable energy policy. After the EU introduced anti-dumping duties on imports of Chinese solar panels, Beijing initiated an investigation against European wines and came out with threats. European renewable energy remains the focus of investors: Google has invested in the wind power station in Sweden, Poland has significant opportunities to develop offshore wind energy, while Turkey has poor utilization of its potential. According to the CMS report, the EU has to link and coordinate existing national mechanisms to support renewable energy in order to avoid the outflow of investors. DiXi Group, 2013 Energy information ● Analysis ● Consulting

Market development and intensification of the policies to stimulate "green" energy in Ukraine put legislative changes on the agenda. As part of the commitments within the Energy Community, the State Agency for Energy Efficiency and Energy Saving presented the draft National Renewable Energy Action Plan as well as the main objectives of the document. The head of the State Agency for Investments and National Projects V.Kaskiv presented the "Energy of Nature" national project, and the Minister of Foreign Affairs L.Kozhara urged the OSCE to deal with waste of energy. 850 MW of installed capacity and more than 115 generating facilities indicate the active development of the industry. However, the feed-in tariffs, particularly for electricity from biogas, are considered too low, and a draft law registered in the Verkhovna Rada also aims reducing technical barriers of the "local content" requirements. Bioenergy demonstrates one of the biggest growth potential in Ukraine. A 1.063 MW biogas plant on solid waste landfill, as well as a 6 MW solid biomass TPP are planned to be launched in Kyiv region. In Poltava region, Czech companies plan to build a CHP on straw. The EBRD will finance the construction of the 1.5 MW biogas plant in the Donetsk region and will increase the target renewable energy funding program twice. The Ministry of Agriculture intends to learn from the U.S. experience in the development of biomass and alternative fuels production.

6. Stimulating the development of coal industry is reduced to the increase of public spending. Although the coal production decreased by 6.2% year-to-date, the government notes the growth of losses and is trying to solve the issue of coal surplus. On the one hand, favorable conditions for export were created in favour of private companies, on the other – million-scale budget expenditures are planned to restore the Vuglegirska TPP, which is ambiguously perceived in the media. At the same time, the Cabinet of Ministers set up a council for social support of the workers from the mines in liquidation stage, and the Ministry of Energy and Coal Industry initiated amendments to the state budget, which dramatically increase funding for the coal sector.

7. Absence of systemic reforms in the energy sector is already leading to disruptions in electricity and gas supply to utility companies. The Verkhovna Rada failed to adopt amendments to the state budget in order to compensate the difference in tariffs for heating enterprises. Against this background, Khersonoblenergo disconnected power supply of Kherson water supply, although experts warned about such situation, and Kyivgas limited gas supply of Kyivenergo. The Naftogaz NJSC has confirmed that it took such a step because of increased debts and has filed a lawsuit against the heat supplier. Controversial decisions of the government in electricity sector may complicate the ownership relations. In August, the State Property Fund will put on sale 60.7% of Donbasenergo, and analysts consider DTEK among possible applicants. At the same time, the Cabinet of Ministers approved the feasibility study of the Slovianska TPP (part of Donbasenergo) reconstruction. On the additional issue of the Odesaoblenergo shares, the State Property Fund claimed that the blocking stake will remain state-owned, although the media consider this step as reducing competition. DiXi Group, 2013 Energy information ● Analysis ● Consulting

8. Security issue dominates the global nuclear debates. In Japan, people were protesting against the restart of nuclear reactors, while radiation leakage was detected at the affected "Fukushima-1" NPP. International concerns about the Iran nuclear program are still high: the IAEA criticized the country for the lack of progress in negotiations, the U.S. expanded the scope of sanctions, while Iran's spiritual leader called on politicians to continue defending the nuclear program. Ukraine announced initiatives to integrate into the international market of nuclear and security technologies. In particular, the text of the annual address of the President to the parliament mentions the construction of new non-Russian NPP units to avoid dependence. The Verkhovna Rada ratified the agreement with Norway on cooperation in the field of radiation safety. On the other hand, the progress of works at the Chernobyl NPP will be inspected by the IAEA mission.

DiXi Group, 2013 Energy information â—? Analysis â—? Consulting

Weekly analytical report: June 3 - 9, 2013  

Analysis of last week's key events provided by the "DiXi Group" experts.

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