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Weekly analytical report February 4 – 10, 2013

1. Conditions for unconventional gas development are being discussed in Europe. In Poland, state companies continue to negotiate on cooperation, and private investors point to bureaucracy while obtaining permits and unclear fiscal conditions. Bulgaria is not going to lift the moratorium on shale gas, and the president of Lithuania supported the plans for shale gas exploration and production, despite one of the parliamentary committees opposed. However, the phenomenon of "shale gas revolution" is already recognized by the Russian Energy Minister. In Ukraine, stakeholders are looking for ways to prevent risks while exploring unconventional gas. According to Shell, which has promised to invest in the social programs of Kharkiv and Donetsk regions, Ukraine has the potential to triple gas production. As the investor told, details of the production sharing agreement are not disclosed because the PSA negotiations continue with other companies. It is also known that the document does not describe the tasks of the SPK-Geoservis company. Meanwhile, a draft law introducing a temporary ban on exploration and production of unconventional gas was registered in the Verkhovna Rada, and the head of the Donetsk Regional State Administration insists on conducting an independent assessment to ensure safe production. The issue of minimizing environmental risks was also raised by the Prime Minister M.Azarov. At the same time, the Ministry of Energy and Coal Industry reported that the U.S. is ready to share environmentally friendly technology of production, and experts indicate that hydraulic fracturing was previously used in Ukraine.

2. The government uses the gas transportation szstem as a trump card in relations with both Russia and the EU. Gazprom, which plans to increase exports to Europe and the CIS, said that Ukraine did not use 16.7 bcm of gas. The President V.Yanukovych called the penalties of Gazprom unfair, and the Energy Minister E.Stavytskyi said Ukraine will not pay the bill. Against this background, Ukrainian-Russian gas talks continue: the Deputy Prime Minister Y.Boyko met with the Gazprom’s head A.Miller for the second time in a week, and the Prime Minister M.Azarov promised to review the contract, having offered the Russians to contribute to the GTS modernization, but no new agreement is reached yet. The media and experts point to the risks of selling the GTS under "Belarusian scenario" as well as the involvement of Ukraine in the Customs Union. On the other hand, the modernization of the GTS was mentioned by the EU Commissioner S.Füle among the priorities of bilateral cooperation. The Minister L.Kozhara announced the allocation of EU loans for the reconstruction of the Urengoy-Pomary-Uzhgorod pipeline, but the media report that the project funding is still in question. Meanwhile, the President V.Yanukovych expressed hope that help in the confrontation with Gazprom will come from the DiXi Group, 2013 Energy information ● Analysis ● Consulting

Energy Community. Experts generally supported this position, but also stressed the need to fulfill obligations within the Energy Community. According to the results of an independent expert assessment, most of the EU requirements have not been fully implemented, or have not been implemented at all.

3. Advanced countries use different strategies to deal with dominant gas suppliers. Lithuania is not going to make any concessions in exchange for cheaper Russian gas. German RWE expects to resolve the dispute with Gazprom in the first half of the year, and the Turkish pipeline operator Botas has refused Russian company to import gas. Czech Republic will create a spot market for natural gas in Central and Eastern Europe. According to media reports, Poland will be able to get contracted volumes of gas even if the LNG-terminal will not be launched in time. In the U.S., members of Congress are discussing proposal to simplify LNG exports to the countries-allies. With a more flexible pricing policy, Norwegian Statoil takes over the positions of Gazprom on the markets of Europe. According to preliminary estimates, in 2012 the Russian monopolist received 15% less of net income. Not all directions of diversification of gas supplies to Ukraine are properly developed. The Minister E.Stavytskyi discussed restoring gas supplies with the Ambassador of Turkmenistan and reverse gas supplies with the Ambassador of Poland. According to him, Ukraine receives offers from European companies, and in the first quarter will import gas also via Hungary and Slovakia. This created the ground for other senior official to claim the dominance of Gazprom is overcome. However, the national project "LNG-terminal" remains a problem. Against the background of negotiations with potential investors, the Prime Minister M.Azarov mentioned the position of Turkey on LNG tankers passing through the Black Sea straits and did not rule out the construction of the terminal on Turkish territory. According to experts, Turkey declares its interest in the project, although the head of the State Agency for Investment and National Projects V.Kaskiv does not consider it as a threat. While commenting on the last year's scandal on the signing of the LNG-terminal agreement, Kaskiv initially said about the provocation of Gazprom, but later denied these words.

4. The stakeholders of the Southern Gas Corridor either distanced themselves from support of specific pipeline projects or publicly declared their preferences. Azerbaijan started negotiations with potential buyers of gas in Europe and is going to sign a supply contract with Russia. The algorithm for selecting the Caspian gas transportation route has been determined. According to sources, the European Commission is neutral to both competing pipelines (TAP and Nabucco West). At the same time Turkey, which is turning into an important energy transit hub, complained in the words of its PM Recep Tayyip Erdogan about the lack of progress of the Nabucco West project. Against this background, Azerbaijan and Turkmenistan discuss proposals for the construction of the Trans-Caspian pipeline.

5. On the global oil market, the countries are looking for secure and long-term supply. World oil prices increase on the background of reduced production in the OPEC and the introduction of new U.S. sanctions against buyers of Iranian oil. Poland, which contracted longterm supplies of Russian oil via the Druzhba pipeline, does not hurry with the construction of the Brody–Adamovo-Zastawa pipeline which is the Ukrainian interest. DiXi Group, 2013 Energy information � Analysis � Consulting

In Ukraine, where fuel prices are also increasing, the situation is influenced by a number of factors. First, the "Gaz Ukraina" group plans expansion, namely to present its own fuel brand and to achieve the LPG market share of 20%, although it remains in the focus of the Antimonopoly Committee. Second, refining continues to stagnate, having decreased 2.9 times in January. Third, politicians say about the dominance of smuggling: according to the chairman of the parliamentary committee M.Martynenko, the market share of smuggled fuel exceeds 50%, and according to the Finance Ministry, losses of the state budget amounted to more than 4 bln UAH. Another alarming signal, according to media reports, is the preparation for an antisubsidiary investigation on imports of oil products from Belarus.

6. Ukraine continues to be a place, attractive for investments in renewable energy. Megawatt-class solar power stations were constructed in Kherson and Kirovograd regions. According to the Agriculture Minister M.Prysiazhniuk, 24 distilleries will be converted to the production of biofuels. Wind energy is being actively developed: 2 wind farms with total capacity of 445 MW are planned to be built in Zaporizhzhya region, and the developers are seeking suppliers of wind turbines. Ukraine demonstrated its wind power developments on the EWEA annual exhibition and conference in Vienna, where experts and market participants enjoyed a strong interest from foreign investors. However, the political risks remain high and the framework conditions – unpredictable. According to the State Agency for Energy Efficiency and Energy Saving, the National Renewable Energy Action Plan will be developed and adopted by the end of the year – a little later than the same document on energy efficiency, which will be presented in the first half of the year. Discussions continue on the "local content" requirements: the media call them an obstacle to market development, government officials argue they create equal conditions for investors.

7. Crisis of the Ukrainian coal market is not yet being solved by the relevant government agencies. Reacting to the coal oversupply, extractive enterprises reduced coal production by 7.7% in January of this year. Five state mining companies addressed the Ministry of Energy and Coal Industry to help them with sales, but the private holding DTEK does not need additional volumes of coal for its thermal power plants. The Ministry of Economic Development has proposed to allocate 9.8 bln UAH for optimization of the state mining assets, revision of subsidies and increased efficiency of the industry. According to experts, the crisis was caused by illegal coal mining.

8. Planning to increase price for utility services and gas, the government should control not only the level of payments but also for their feasibility. According to media reports, despite preparations for increasing the tariffs, Ukrainians actually overpay for heating and hot water supply. The Presidential Administration admits higher gas tariffs for households, although the trade unions do not see any grounds for such measures, and economists believe such talks are mere speculations. Meanwhile, the Deputy Prime Minister Y.Boyko instructed to create a working group to analyze the unsatisfactory situation of payments for gas by the DiXi Group, 2013 Energy information ● Analysis ● Consulting

district heating companies. Against this background, the media argue the antitrust agencies do nothing on the issue of budgetary organizations purchasing gas at overcharged prices.

9. While security of electricity networks is being strengthened in the EU, the Ukrainian energy market faces redistribution of ownership. A new draft EU directive provides for reporting of cyber attacks by the energy companies. Romania is looking for opportunities to reduce grid losses, Bulgaria will introduce seasonal electricity prices, and the Baltic states continue integration into the Nordic Power Exchange. Against this background, U.S.-American AES Corporation announced it reached an agreement to sell its Ukrainian assets to VS Energy International, which in turn sold 50% of Zakarpattiaoblenergo. According to media reports, the investor’s decision could be caused by a conflict over electricity supply shutdown near Kyiv. Attention of media also focuses on the benefits for electrometallurgy which will be paid by other consumers.

10. The government should take into account the position of the public while planning the development of nuclear energy. The Russian party expects to start construction of the Khmelnytskyi NPP units 3 and 4 this year, and the state commission recognized the station suitable for safe operation. The State Nuclear Regulatory Inspectorate sees no problems with continued operation of the South Ukrainian NPP unit 1. The Energy Minister E.Stavytskyi expects to sign by the end of March agreements with the EBRD on the NPP safety improvement project, although environmental organizations are asking for refusal of funding.

DiXi Group, 2013 Energy information ● Analysis ● Consulting

Weekly analytical report: February 4 - 10, 2013  

Weekly analytical report: February 4 - 10, 2013