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Weekly analytical report June 10 – 16, 2013

1. The EU member states strengthen independence from Gazprom both on European and national levels. Lithuania where the special service – according to the media – considers the dependence on Gazprom as a threat to energy independence, continues market reform and plans to reduce dependence on Russia by 2015. According to media reports, Gazprom failed to agree with the EU Commission on the exemption of the OPAL pipeline from the Third Energy Package, while the European ministers agreed to further strengthen the internal energy market. Also, the Third Energy Package could be among the reasons for Gazprom’s rejection to participate in the privatization of DEPA – Greek authorities refuted the official reason for the rejection, and the European Commission announced it is not complicit in Gazprom’s decision and called for resumed privatization of DEPA, with the Greek party having agreed. The rapprochement between Ukraine and the EU on energy issues continues. According to media reports, the German RWE did not agree to the proposal of Gazprom to reduce gas cost in exchange for the termination of reverse gas supply to Ukraine, and plans to start deliveries through the Slovak-Ukrainian border while increasing the supply via Poland. The EU also supports the initiative to establish a gas hub in Ukraine. Meanwhile, gas purchases from Gazprom continue to decrease, and the Energy Minister E.Stavytskyi announces the emergence of new importers of Russian gas. The projects to supply gas via the Black Sea remain immature. The Ambassador of Turkey to Ukraine said that his country will not allow the passage of tankers for the Ukrainian LNG-terminal through the Bosporus, while the head of the State Agency for Investment and National Projects V.Kaskiv called the situation a "normal dialogue" and suggested finding a compromise. The again mentioned White Stream pipeline project – despite still the subject of stakeholders’ attention – also requires more working out.

2. The practice of setting more strict conditions for extractive companies spreads internationally. The EU Council adopted stricter rules for offshore drilling and the European Parliament supported the draft laws on disclosure of detailed payments to national governments by the extractive companies, with the Commissioner M.Barnier urging to proceed in matters of transparency. Similar reporting standards are being implemented in Canada. New forecasts of unconventional reserves stimulated wider debate among market players. The U.S. Energy Information Administration released a new study that raised the estimates of global shale gas reserves by 10%, and has identified world reserves of shale oil. According to other players, in the next few years shale gas will remain a regional resource, and many fields still need further study. The EIA has reduced the estimate of shale gas DiXi Group, 2013 Energy information ● Analysis ● Consulting

potential of Poland and France, but increased those of Romania and the UK. In Poland and the UK, the industry is considered by investors as one of the most attractive, while in Turkey and Lithuania exploration works have started. The results of public discussion on shale gas in the EU showed the need for the development of relevant regulation. Against the background of Chevron meetings with the President V.Yanukovych and the Prime Minister M.Azarov, who also proposed Chevron to rehabilitate Ukrainian old oil and gas fields, as well as the Energy Minister E.Stavytskyi announcing quick signing of the production sharing agreement, the media have published the draft PSA on Oleska field, calling it less profitable than the PSA with Shell. Meanwhile, Shell and Ukrgazvydobuvannia postponed drilling of the second well for two months, while the media report on the "Russian trace" in the development of anti-shale movement in Donbass. Cooperation with other investors continues – ENI expressed readiness to invest 60 mln EUR in extractive projects in Ukraine, and signing of the PSA with ExxonMobil by August was announced.

3. Non-transparency and lack of systematic approach to the energy market reform stimulate critical assessments and forecasts. According to Standard&Poor's, the government's refusal to increase gas tariffs will boost the budget deficit to 5%, and the Minister of Finance Y.Kolobov said the energy reform will increase inflation. Meanwhile, the court suspended the proceedings of Naftogaz (which reduced its deficit) against Gas of Ukraine. The announced results of the competition to select the exchange to sell hydrocarbons of stateowned companies caused dissatisfaction and may be challenged by other players.

4. Despite concerns, many European countries do not reject the development of coal sector. The IEA warned the EU of constructing inefficient coal plants, but it is not considered in practice so far – according to BP, coal consumption in Europe is growing. In Poland, the government decided to build the units of the Opole coal power plant, and Turkey plans to generate on coal up to two thirds of electricity. In Ukraine, the government follows this trend. The Ministry of Energy and Coal Industry created an interagency group on gas-for-coal substitution, and the Cabinet of Ministers proposes legislative changes to stimulate the production of peat and lignite. At the same time, the policy in this area remains non-transparent and inconsistent: despite the Ministry of Economy warned importers on exhausting quotas on coking coal imports by a third, the District Court of Kyiv declared the government quotas illegal; the Ministry of Energy could not get back the shares of five processing plants as the state budget received the payment for them, and it is planned to sell even the minority stakes. 5. Government initiatives can negatively affect the development of oil products’ market in Ukraine. Global oil prices initially declined, but then started to increase, reaching some highs. However, the IEA predicts lower demand for OPEC production, and the World Bank expects a fall in prices. In Ukraine, the price of petroleum and diesel fuel decrease, and experts do not expect the increase of excise duties in the nearest future. At the same time, the negative statistics and some actions of the government can significantly influence the price dynamics. From January to May this year, oil imports declined 3.4 times, as the supply of DiXi Group, 2013 Energy information ● Analysis ● Consulting

crude to Ukrainian refineries, while the processing decreased by 45%. Despite the government's intention to privatize the MASMA research institute and negotiations on the construction of a new refinery (which have not been confirmed), experts are sceptical about the perspectives of modernization and restart of existing refining capacities. Intentions to increase the control of fuel quality can lead to opposite result. The Ministry of Energy and Coal Industry proposes to approve a technical regulation which continues the use of Euro-3 petroleum and diesel to the end of 2015. According to media reports, the draft document is being negotiated with the Ministry of Justice and is designed to secure the interests of the Shebelynka refinery. However, the Ministry of Revenues and Charges increased competences to control the quality of imported fuel was opposed by the Ministry of Justice and the experts, which argue on the expected destabilization and the fact that problems at the customs are for the benefit of certain players and can increase the share of counterfeit fuel.

6. Security issues make the EU countries to approach the development of nuclear energy in a balanced way. France has agreed to cooperate with Japan in exporting the reactor technology, but also had to fight the fire at the Cattenom NPP. Bulgaria took a break in the decision to build the Belene NPP, despite the proposal of Rosatom to withdraw a lawsuit against Bulgarian company in exchange for the restored construction of the plant. Against this background, the European Commission initiated mandatory inspections of NPPs every 6 years. In Ukraine, the nuclear energy sector remains a priority. As the National Security and Defence Council Secretary A.Klyuyev emphasized, Ukraine has no real alternatives to nuclear power in the mid-term perspective. The concept of construction of the Khmelnytskyi NPP units 3 and 4 was presented to the State Nuclear Regulatory Inspectorate, and the new research unit in Kharkiv will be launched in April 2014. The works on the Chernobyl site continue: the IAEA mission inspected the structures and the NOVARKA consortium began the second rise of the New Safe Confinement arch. At the same time, the media write about delays in the decommissioning of the Chornobyl NPP. The scandal surrounding the change of Energoatom management is an evidence of the governance crisis in the sector. The former acting president V.Kim was removed from his office by the court, and the Ministry of Interior reported on suspected abuse of authority. Investigation of the allegations – over 1 mln UAH embezzlement and violation of procurement rules – is being conducted by the police, and the defendant in the case was not allowed to enter his office. The media suggest that fuel suppliers to the Ukrainian NPPs could benefit from the scandal, and the attorney of Mr. Kim said that the MP D.Zhvania was the interested person. The court decided to release the former head of Energoatom under the cash collateral, and the appointment of a new CEO has not been without inconsistencies: the Energy Minister E.Stavytskyi announced the appointment, but the Cabinet of Ministers decided to wait. Among reasons, the media called unwillingness of the Prime Minister M.Azarov to appoint the candidate proposed by the Vice Prime Minister Y.Boyko, and the next day M.Konstantinov became the acting president.

DiXi Group, 2013 Energy information ● Analysis ● Consulting

At the same time, the state holding is a subject of high expectations to solve existing problems. In particular, the media reported on the Ministry of Energy and Coal Industry hopes of Energoatom’s profitability, although the experts do not believe in such possibility, arguing that the company could become "de facto bankrupt". Energoatom reported on its intention to sue Westinghouse to get reimbursement for 4 damaged fuel assemblies, although the Energy Minister E.Stavytskyi said that the sutiation should be further analyzed.

7. The EU continues to discuss targets in renewable energy. In particular, discussions are held on the role of electric vehicles and biofuels in achieving the target for transport (10% RES). Against this background, analysts predict growth of renewables’ share in the energy balances. Meanwhile, a record level of solar energy production was reported in Germany, and the chancellor A.Merkel promises to change the policy to secure the development of electricity infrastructure. In Ukraine, renewables and potential benefits of energy saving are not considered seriously, as the components of energy balance. In Ukraine, increased electricity production from wind and solar as well as the commissioning of new objects – small hydro and solar power plants – is being reported. However, the parliamentary Committee on Environmental Policy recommended to reject the draft law on the development of alternative energy sources, including energy from biomass. Experts point at various barriers and the need to set binding targets for the biomass share in final consumption. The progress in energy efficiency policy in Ukraine is also measured by number of projects and spent funds. Meanwhile, the new head of the State Environmental Investment Agency was appointed, which is considered by some experts as preparation for the liquidation of the agency.

DiXi Group, 2013 Energy information ● Analysis ● Consulting

Weekly analytical report: June 10 - 16, 2013  
Weekly analytical report: June 10 - 16, 2013  

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