Ukraine’s energy relations with the EU: implications for competition

20 March 2012

The European Energy Symposium: New Trends in 2012 was organized on 15 March in Brussels by the EU Ukraine Business Council in partnership with Brodies LLP.

The European Energy Symposium 2012 brought together decision makers from the European Commission and the European Parliament with industry experts from the oil, gas, electricity and renewables sectors, trade associations, interest groups and specialists.

The participants discussed the role of regulation and competition law in the energy sector, the impact on relations with the Eastern Partners under Neighbourhood Agreements; reviewed the reactions to offshore accidents post Macondo and analyzed proposed EU legislation on Health and Safety. The Symposium gave a possibility to explore electricity grid network options to facilitate power exports and the prospects for renewables in 2012.

Report

Oleksii Leshchenko, Gorshenin Institute

In my short report I would like to focus on Ukraine-EU energy relations, specifically in the natural gas sphere, and what implications this have on competition in Ukrainian energy sector.

First of all I would like to give you some figures that characterize Ukraine-EU energy relations.

Ukraine is the largest transit state in Europe. This status predetermines it's energy relations with the EU. Quarter of all gas consumed in the EU goes from Russia through Ukrainian territory. Ukrainian underground storage capacity equals to 1/3 of EU storage and is intensely used to balance demand and supply of NG from Russia to EU in the peak periods.

Russia also heavily depends on Ukraine. First of all, 75% of all Russian gas, exported to Europe goes through Ukrainian territory. Before the launch of North Stream this figure was about 80%. After the launch of South Stream it is anticipated that this figure will be 20-25%.

Second, Ukraine is the largest consumer of Russian gas in terms of volume. Last year Ukraine bought about 50 bcm of Russian natural gas, that accounts for more than a quarter of Russian European exports.

Third, Ukrainian transit tariffs are the lowest in Europe. And, finally, according to the take-or-pay contracts signed in 2009 Ukraine pays European price for NG from Russia. In the last quarter of 2011 it was $416/1000 cm.

These factors together with low energy efficiency (energy capacity of Ukrainian GDP at the level of 40%) predetermine Ukrainian energy strategy. To be precise, absence of the energy strategy.

Without energy strategy Ukraine will be totally dependent from Russia in terms of gas transport infrastructure and gas imports. To attain energy security and to preserve its place as one of the biggest transit state in Europe, Ukraine needs to make determined and willful choices:

- Increase energy efficiency

- Increase volumes of the own gas production; to use all advantages of shale gas E&P

- Diversify sources of energy (LNG, coal)

- Integrate in the EU common gas market

- Promote healthy investment climate and take advantage of competition in the energy sector

- Consortium agreement needs to be accompanied by ship-or-pay contract

Monopolized oil&gas sector in Ukraine threatens energy security, creates conditions for shadow schemes and opaque deals.

In this regard Ukraine-EU relations in the energy sector, first of all I mean Ukraine participation in the European Energy Community and implementation of the Second and the Third energy packet will positively influence Ukrainian and European energy security.

Here (Naftogaz) you can see the direct contrast to the principles and provisions of the Third energy packet, that Ukraine committed itself to implement.

The arguments for Ukraine membership to the European Energy Community and its aspirations were very optimistic.

- Became a member on Feb. 1, 2010

- More competition in the domestic market

- Higher technical standards and regulations

- Better investment climate

- Further integration of Ukrainian energy sector with the EU

- Enhance energy security

- Access to international loans and technical assistance

But in reality we have somewhat different situation:

- Ukraine expected blocking of the “South Stream” and investments in the GTS modernization

- EU expected reforms of the internal market

- Ukrainian government uses membership in the EEC to promote reforms that do not enhance competition but strengthen manual control: law on oil and gas sector reforming entitles the Cabinet of Ministers to unilaterally reorganize the energy sector

- This state of affairs is at hand to third parties

Ukrainian officials (in particular Energy minister Yuriy Boyko) accuse EEC that it does not fulfill obligation undertaken by the Treaty, establishing EEC. Now Russia successfully develops South Stream, building storage capacities in Serbia and Slovakia; Bulgaria nominated the South Stream as national priority project.

Implementation:

- Gas produced in Ukraine should be used to meet the needs of the population and housing and communal complex- Gas produced in Ukraine may not be exported

- Gas produced in Ukraine is sold by regulated tariffs

- Profitability of the state gas production companies is limited to 15%

- Regulations on the access to the GTS of the third parties are postponed until mid-2012

- Law on Naftogas restructuring submitted to the Parliament

It is envisaged in the Third Energy Packet that the energy supply and generation activities of energy companies should be 'unbundled' from their distribution networks to further increase market competition.

To sum it up, Ukraine dramatically needs sound energy strategy, to ensure energy security and preserve the right to be called main transit country. Relations with the EU will contribute to an early formulation of this strategy.

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