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Weekly analytical report November 5 – 11, 2012

1. Positions of nuclear energy in the world remain strong mainly due to developing countries, while developed countries focus on safety. The UN General Assembly expressed support for nuclear sector as one of the drivers to fight energy poverty. According to the IAEA, the number of NPPs will increase in the next 20 years. China discovered large deposits of uranium ore, which will become a basis for its nuclear industry. At the same time, security issues appear to be a top priority for Germany which has to shut down all NPPs, for South Korea which initiated inspection of all 23 NPPs after discovering one used equipment of doubtful origin, for Czech Republic which hosts regular IAEA inspection, and for Japan which estimated the total cost of post-Fukushima disaster management at 125 bln USD.

2. Poland succeeded in reducing the price of Russian gas through reasonable position and legal actions. Gazprom announced the agreement on new gas prices, while PGNiG said it received 10% discount and agreed on Russian participation in domestic energy projects, including the construction of gas-fired power plant. At the same time, media reported about 16% discount in exchange for withdrawing the claim against Gazprom in the Stockholm arbitration court. Reactions to this compromise was ambiguous: Polish opposition demanded to publish details of the agreement, and the Minister of Finance M.Budzanowski opposed any energy projects for the benefit of Russian gas. Bulgaria, instead, continues a kind of blackmail policy which brought no results so far. The local officials connected their decision on the South Stream project to the Russian decision to provide 11% discount on gas price. Non-transparent character of the negotiations has already met criticism from the opposition. Meanwhile, Bulgaria is also active on another playground, running environmental assessment of the competing pipeline project – Nabucco. Against this background, the Russians continue to compete with European projects. The construction cost of the South Stream, which can concentrate 2/3 of current Gazprom contracts, has increased to 16 bln EUR. Croatia, after being rejected as a route for the pipeline, held talks with alternative supplier – Azerbaijan. The chances of the TANAP project increased significantly: partners in the Shah Deniz consortium expressed their intention to purchase part of the shares currently owned by SOCAR, and Turkey has supported the process. At the same time, the struggle develops also for the Mediterranean link of the Southern Gas Corridor. Russian Gazprom and Sintez as well as Azerbaijani SOCAR became main competitors for the purchase of Greek company DEPA, which is key participant of the ITGI project. According to diplomats, Cyprus could be a promising source of gas supply, but also DiXi Group, 2012 Energy information ● Analysis ● Consulting

complicated one because of the conflict with Turkey. The latter threatened to terminate contracts with all the companies which will develop offshore gas in Greek Cyprus.

3. In Ukraine, almost all projects to diversify gas supplies demostrate some progress, which happens on the background of Gazprom unwilling to review the prices. The Russian party once again invited Ukraine to join the Customs Union as a solution, and did not specify when the agreements on access to transit pipelines within the CIS Free Trade Area could be signed. According to media reports, Ukraine received first 3.3 mcm of gas from Europe which the government counts upon. Overall, according to the European press, RWE can deliver up to 5 bcm in the next six months. It was confirmed by the Energy Minister Y.Boyko, who said about purchasing larger volumes of "reverse flow gas" in 2013. The price of alternative gas, experts say, is about 380-390 USD/tcm. Ukraine is also developing projects of hydrocarbons production on new fields. The State Service of Geology and Mineral Resources has put on tender the rights on 6 oil&gas fields, and the Nadra Ukrayny NJSC sells the rights on Mizhrichynska field. However, the development of unconventional gas reserves could be stopped by certain politicians in the new parliament. Closer to the start of construction, the LNG-terminal also gets some of its configuration. According to the State Agency for Investment and National Projects which is going to attract a 165 mln EUR loan, the first phase will be completed in three years and its main investor will be Spanish company Enagas.

4. World oil prices fluctuate depending on events in the United States and China. Despite the decline in fuel prices, the U.S. continue to struggle with shortages, with sales being limited in the New York City. Analysts do not forecast further oil price increases despite the fact that Iran threatens to completely stop its exports and Azerbaijan expects to reduce its production by 6% this year. Meanwhile, in Russia, the Ministry of Finance and the AntiMonopoly Committee demand to postpone the ban on Euro-2 fuels, giving threat of shortages as a reason. In Belarus, there was an accident on the Druzhba oil pipeline, and the excise duties on fuel will increase in 2013. Petroleum prices in Ukraine are stable, slightly rising at the end of the week, unlike the cost of diesel fuel which continues to grow. Against this background, companies stated another delay in the processing of oil products at the customs, which can affect the price levels in the future. The State Inspection on Consumer Rights Protection identified filling stations with poor fuel quality, but experts are skeptical about the chances to adopt the new technical regulation on fuel by the end of this year. During the week, it was decided to introduce excise duties on benzene and methanol – beginning with the proposal of the Cabinet of Ministers and ending with the President's signature on the law adopted by the Verkhovna Rada. Meanwhile, the government also announced its readiness to complete the Odessa-Brody-Plock oil pipeline on the Ukrainian territory.

5. Understanding of the economic benefits of renewable energy allows Europe to develop the market and protect it from non-competitive actions. Research indicates that "green" electricity is cheaper than those produced from nuclear or coal-fired power plants. The DiXi Group, 2012 Energy information ● Analysis ● Consulting

leading EU nation – Germany – increased the RES share in energy production to 26%. In response to China's appeal to the WTO, the European Commission intensified its antidumping investigation against Chinese manufacturers of solar panels. In Ukraine, the industry does not have such a strong growth despite its attractiveness and high priority. According to the State Agency on Energy Efficicency and Energy Saving, the share of renewables in the updated Energy Strategy of Ukraine by 2030 should be set at 11% target. Market players believe that the industry is interesting for investment, particularly foreign banks. For example, 240 MW of solar energy capacities should be installed in the Dnipropetrovsk region. However, according to experts, potential investors fear political instability and frequent changes in legislation.

6. With great opportunities in energy saving, Ukraine uses not all of them. According to the EU Delegation, the potential of saving energy resources accounts at least 7 bln EUR. Despite the fact that energy consumption is reduced due to the high gas price, the main responsible agency did not use the 31 mln EUR of European aid and only promises to publish the draft National Energy Efficiency Action Plan. Therefore, other direct support mechanisms are used. GIZ has announced a tender to purchase energy efficient equipment for 3 plants in the Donetsk region. The court ordered the State Environmental Investment Agency to disclose agreements with Spain and Japan, signed in the framework of GHG emissions trading scheme. According to the agency, which plans to create a carbon market in Ukraine, most of the Japanese funds will be spent by the end of the year within 544 projects. The Ministry of Regional Development, Construction and Housing presented new, more efficient state standards for buildings, and will provide a 40 mln UAH loan to condominiums for thermomodernization projects. At the same time, such measures will have much weaker effect without the tariff reform. According to the minister A.Blyznyuk, the government does not plan and does not even consider the issue of raising prices for utility services. Meanwhile, the Verkhovna Rada supported the proposal of the Cabinet of Ministers to allocate 7.68 bln UAH of subventions to local budgets in order to cover the price difference in heating tariffs. Inconsistency of the government policy is also demonstrated by privatization of thermal power generation, whereas the Kharkiv 5th CHP plant was sold to the Ukreastgas company at a price, considered by the media as understated.

7. Coal production remains a life-threatening job, despite the government's intentions to reform the industry. The Cabinet of Ministers published a list of 67 state mining companies to be privatized in 2012-2014. The Ministry of Energy and Coal Industry proposes to liquidate the SE "Coal of Ukraine" by 2016 and also ordered a study on assets in coal mining. At the same time, 1 worker was killed in accident at the Zasiadko mine, and the Partyzanska mine was temporarily closed because of smoke formation.

DiXi Group, 2012 Energy information ● Analysis ● Consulting

Weekly analytical report: November 5 - 11, 2012  

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