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Weekly analytical report April 15 – 21, 2013

1. The EU aims to reduce tensions between competing pipelines of the Southern Gas Corridor. Before the decision on the final route of the Southern Corridor, the Commissioner G.Oettinger urged the EU ministers to avoid discussions about the prospects of competing projects. According to experts, both projects – TAP and Nabucco West – will be built in the long run. The latter received another political support, changed the composition of shareholders and looks forward to new entrants. Meanwhile, Turkey is actively promoting the TANAP project, calling it an energy Silk Road and talking about interest from both the EU and Asia. Given the strategic role of Turkey, the Commissioner S.Füle called to open energy chapter in the negotiations on the country’s accession to the EU.

2. Ukrainian energy policy is reducing its dependence on Russia. The Energy Minister E.Stavytskyi expressed hope that Ukraine will become a net exporter of natural gas by 2025. According to the State Statistics Service, gas imports in monetary terms decreased by 23% in the first two months of the year, and Naftogaz purchased only 200 mcm of Russian gas in March. According to the Prime Minister M.Azarov, the holding reduced purchases from Gazprom 8 times year-to-date. At the same time, the possibility of building another bypassing pipeline significantly decreased: as the result of the signed memorandum on the "YamalEurope II" project, the Polish president B.Komorowski said the nation was "spoofed a bit" by Russia and the prime minister D.Tusk dismissed the minister responsible for the control of energy companies.

3. Government actions in the diversification of gas supply sources may result in a new monopoly. In March, Ostchem Group has imported 92% of all gas purchased by Ukraine abroad. Meanwhile, reverse supply from private companies in Europe also started in March, and the media reported that gas from Hungary is purchased to LLC Ukranian Oil Gas Company, which is considered as a part of the group of the businessman S.Kurchenko. Noteworthy, the head of Ukrainian government has expressed dissatisfaction with cases of monopoly abuse in the gas sector, while the Energy Minister E.Stavytskyi promised to use appropriate leverages.

4. In the gas sector, Ukraine demonstrates steps to meet the EU rules but some issues remain unresolved. On the eve of the round table on the GTS modernization, which will take place in Brussels on May 3, the Cabinet of Ministers adopted the action plan to facilitate cooperation between Ukraine and the EU in the energy sector. According to experts, a detailed action plan to reform the GTS should be presented at the event. At the same time, the interest in using the Ukrainian gas pipelines was expressed by Germany, and the Energy Minister DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org


E.Stavytskyi told about the European interest in the gas storage facilities. The National Energy Regulatory Commission approved new standard contracts for the use of the GTS elements as well as fees for standard connection to gas networks.

5. Despite the negative statistics, operations with assets confirm the strategic attractiveness of the extractive industry of Ukraine. According to unofficial data, gas production declined by 0.01% in Q1, oil production – by 7.5%. According to the State Statistics Service, in the same period Ukraine reduced gas production by 2%. However, the largest private energy holding DTEK has reached an agreement to acquire the controlling stake in Naftogazvydobuvannia. According to experts, the new asset is needed to diversify the DTEK business and the holding will continue buying extractive companies. It is also known that Ariana Business Ltd and Ares Systems Ltd form the UK have concentrated almost 45% of Ukrnaftoburinnia. In the field of unconventional gas exploration, the attention is being focuses on the signing of production sharing agreement with Chevron, while Shell goes on with preparatory works. In mid-May, Chevron intends to meet with the members of the IvanoFrankivsk Regional Council to discuss shale gas production. The U.S. Embassy announced that the PSA will be signed in the near future. At the same time, Shell plans to use at least 60% of Ukrainian personnel in the development of the Yuzivska filed and reports on negotiations with local producers of pipes. In addition, the company explained the tasks of the Ukrainian Unconventional Gas Institute to be created in the first year of the PSA. Moreover, the project’ partner – SPK-GeoService company – expressed its hope that the first exploration well has a good chances for success. On the state level, the Deputy Prime Minister Y.Boyko noted that shale gas production is safe for the environment and creates new jobs, provided that technologically correct way for extraction is secured.

6. Despite the favorable external conditions, Ukrainian market of oil products remains vulnerable. The price of crude futures was mostly decreasing, restoring growth at the end of the week, while the price of the OPEC Reference Basket decreased. Price decline may be a reason for the producers’ cartel to held an extraordinary meeting due to the statements of Iran and Venezuela. For Ukraine, where prices for petroleum are constant and liquefied gas became a bit cheaper, significant factors are the reduction of export duties on Russian oil and the growth of petroleum production in Belarus. Against the background of seasonal increase of sales, the government does not plan to raise the excise duties, but proposes legislative changes for the anti-subsidiary investigation. At the same time, experts suggest an alternative solution for raising revenue of the state budget: restoring public inspections of the filling stations. The efforts to revive stagnant oil refining, which decreased by 55% in Q1, continue. According to media reports, the Cabinet of Ministers has signed an agreement with Lukoil to launch the Karpatnaftokhim plant, while Cyprus-based Empson Ltd announced its intention to purchase the Odessa refinery which belongs to SEPEK of businessman S.Kurchenko.

7. Despite the reduced interest of investors in renewable energy globally, Ukraine may use the sector to transform the balance of energy production. According to the IEA, the average unit of energy produced has the same impact on the environment as 20 years ago, DiXi Group, 2013 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org


and Bloomberg New Energy Finance showed an 11% decline of investment in the "green" projects. In the EU, the negative decision of the European Parliament can lead to even lower prices of quotas for carbon emissions. According to the Vice Prime Minister Y.Boyko, Ukraine should find a balance among different energy sources, while the State Agency on Energy Efficiency and Energy Saving continues to lobby the development of renewable energy sector. After visiting the plant producing pellets, the President V.Yanukovych instructed to develop a program of energy efficienct consumption in housing and industrial sectors. In the Donetsk region, measures are planned to reduce gas consumption, and the Kharkiv CHP-3 and CHP-4 should be converted to synthesized gas. However, experts talk about the possibility to replace natural gas with alternative fuels, such as straw. The Prime Minister M.Azarov announced plans to increase electricity production from hydropower to 15% in the total generation. However, the media also raised issues of the affordability of solar panels for households, and experts point to the limited mechanisms of promoting the use of "green" energy.

8. Ukraine's economy continues to suffer from surplus on the coal market. According to media, the Lviv-Volyn basin is threatened with environmental disaster due to the accumulation of coal in warehouses. According to analysts, the balance of the coal market may recover by Q3 subject to reduced production, and the media report about the necessity to modernize the industry. The government has not yet formed a vision of reconstructing generating capacities after the Vuglegirska TPP accident. The Ministry of Energy and Coal Industry called depressurization of the coal dust supply system as the reason of the fire, while the State Service of Mining Supervision and Industrial Safety discovered violations of the technical process. According to the Energy Minister E.Stavytskyi, time for the overhaul of the facility will be determined in June. Meanwhile, the Cabinet of Ministers approved a feasibility study for the reconstruction of the Starobeshivska TPP unit and established preferential electricity tariffs for the residents of Svitlodarsk. Experts point out that the budget has no funds for restoring the Vuglegirska TPP, and the next accident of such scale could turn Ukraine into an importer of electricity. Against this background, there was a blackout in Sevastopol and an accident in Vyshneve (Kyiv region) which is being investigated.

DiXi Group, 2013 Energy information â—? Analysis â—? Consulting www.ua-energy.org/en author@dixigroup.org


Weekly analytical report: April 15 - 21, 2013