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© German Advisory Group© Institute for Economic Research and Policy Consulting
Short-term gas supply options for Ukraine
Georg Zachmann, Ricardo Giucci
German Advisory Group Ukraine
Berlin/Kyiv, June 2014
Policy Briefing Series [PB/06/2014]
© German Advisory Group© Institute for Economic Research and Policy Consulting
Issues
2620,4
2,12013 in bcm
Import from/through RussiaDomestic productionImport from/through West
2
� High share of imports from Russia
� Increasing price setting power of Russia (less reliance on GTS)
� Political tensions� Limited capacity of readily-
available alternatives (reverse flows)
© German Advisory Group© Institute for Economic Research and Policy Consulting
Objectives
� Two sometimes competing objectives– Ensure predictable supply volumes – ‘security’– Limit economic and political cost – ‘price’
� Different time-frames:– Short term : ensure supplies in politically volatile times– Medium term : reduce the cost of foreign supplies and
improve the resilience of the system (by developing additional supply routes)
– Long term : achieve a stable and competitive gas supply (by increasing production and reducing consumption ) / maybe even gas exports
3
© German Advisory Group© Institute for Economic Research and Policy Consulting
Reverse flows
� In theory Ukraine can be supplied from the West
� Around 15 bcm/y � A number of issues need
to be settled first;– Technical : enable ‘reverse
flows’– Commercial : enable Naftogaz
to contract with suppliers (→option contract)
– Legal : Assess effect on existing ToP- contracts withGazprom
4
© German Advisory Group© Institute for Economic Research and Policy Consulting
Short-term gas supply without Russia
UK
R g
as c
onsu
mpt
ion
2013
Domestic production
Rev
erse
flow
s (1
5 bc
m/y
; 40
0US
D/tc
m)
100
200
300
400
500
600
10 20 30 40 50 60
Cos
t in
US
D/tc
m
Volume in bcm5
© German Advisory Group© Institute for Economic Research and Policy Consulting
Fill gas storages
� Winter demand is 3-4 times summer demand –production and imports about flat
� 10-15 bcm need to be stored� About 30 bcm of storage
capacity� Buy and store additional gas� Cost=gas price + techn.
storage cost + interest rate + opportunity cost of storage (approx. gas price + 100 USD/tcm)
� Only available if prepared before a crisis
6
Source: Minenergo
Source: gie
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Jan Feb Mrz Apr Mai Jun Jul Aug Sep Okt Nov Dez
consumption
production
imports
© German Advisory Group© Institute for Economic Research and Policy Consulting
Short-term gas supply without Russia
UK
R g
as c
onsu
mpt
ion
2013
Domestic production
Rev
erse
flow
s (1
5 bc
m/y
; 40
0US
D/tc
m)
100
200
300
400
500
600
10 20 30 40 50 60
Cos
t in
US
D/tc
m
Volume in bcm
Sto
rage
(10
bcm
/y; 5
00 U
SD
/tcm
)
7
© German Advisory Group© Institute for Economic Research and Policy Consulting
Adapt gas transport system to changing flow patterns
� Reverse flows and tapping into West Ukrainian storages requires to bring the gas to the East
� In case of continued transit –> swap volumes
� In case of no volumes at theRussian border -> domesticphysical reverse flows– Theoretically
technically feasible– But, requires testing
=> Ukrtransgas needs to prepare
8
+
Source:gie
© German Advisory Group© Institute for Economic Research and Policy Consulting
Ramp-up production
9
• Price for domestic production ~ 50 USD/tcm• Some technologies for ramp-up of existing fields available
• Enhanced gas recovery (nitrogen injection)• End of field life techniques (foam injection, velocity strings, fresh water
injection, jet pumps, plunger lift and mobile well head compressors)• At 400 USD/tcm some 0-5 bcm/ might be deployable
© German Advisory Group© Institute for Economic Research and Policy Consulting
Short-term gas supply without Russia
UK
R g
as c
onsu
mpt
ion
2013
Domestic production
Rev
erse
flow
s (1
5 bc
m/y
; 40
0US
D/tc
m)
100
200
300
400
500
600
10 20 30 40 50 60
Cos
t in
US
D/tc
m
Volume in bcm
Sto
rage
(10
bcm
/y; 5
00 U
SD
/tcm
)
Ram
p-up
(2
bcm
/y; 4
00 U
SD
)10
© German Advisory Group© Institute for Economic Research and Policy Consulting
Prepare efficient rationing plans
� Shortfall of gas not impossible� Emergency plan is important – also to know the own
vulnerability� Some gas-intensive industries (e.g., chemicals ~8
bcm) generate little or no value added at gas prices of > 400 USD/tcm
11
© German Advisory Group© Institute for Economic Research and Policy Consulting
Rat
ioni
ng (?
)
Short-term gas supply without Russia
UKR gas consumption 2013
Domestic production
Rev
erse
flow
s (1
5 bc
m/y
; 40
0US
D/tc
m)
100
200
300
400
500
600
10 20 30 40 50 60
Cos
t in
US
D/tc
m
Volume in bcm
Sto
rage
(10
bcm
/y; 5
00 U
SD
/tcm
)
Ram
p-up
(2
bcm
/y; 4
00 U
SD
)
The more one has to save, the more painful it becomes
12
© German Advisory Group© Institute for Economic Research and Policy Consulting
But what about Russian gas?
� If Russia agrees to deliver at 380 USD/tcm, many options are not commercial
� But Russia would only accept such a price if the options are available
� UKR should invest in the options, but not necessarily use them
13
© German Advisory Group© Institute for Economic Research and Policy Consulting
Short-term gas supply with RussiaC
ost i
n U
SD
/tcm
Rat
ioni
ng (?
)
UKR gas consumption 2013
Domestic production
Rev
erse
flow
s (1
5 bc
m/y
; 40
0US
D/tc
m)
100
200
300
400
500
600
10 20 30 40 50 60
Volume in bcm
Sto
rage
(10
bcm
/y; 5
00 U
SD
/tcm
)
Ram
p-up
(2
bcm
/y; 4
00 U
SD
)
Com
petit
ive
Rus
sian
gas
(2
5 bc
m/y
; 380
US
D/tc
m)
14
© German Advisory Group© Institute for Economic Research and Policy Consulting
Digression: Option contracts
� If Russian gas price is sufficiently low, reverse flows make no commercial sense
� But, Ukraine will only get low prices if it can show it has alternatives
� Ukraine might need guarantees from Western suppliers that, they would deliver a certain volume at a certain price in certain circumstances (e.g., 10 bcm/y at 400 $/tcm if Russian price >450$/tcm)
� This might involve to pay the potential supplier an option premium for keeping supplies available
� Such option contracts can be competitively tendered
15
© German Advisory Group© Institute for Economic Research and Policy Consulting
Conclusion
� If properly prepared , Ukraine can get over the winter without Russian gas
� Cheapest approach: importing from Russia at a good price – but maintaining sufficient alternative options at a tolerable price -> Paying for insurance!
� In the medium to long-term additional cheaper options can be made available
� Questions:� Is provoking a gas-transit-stop a good idea?
� A recent study on the supply options is available at: www.beratergruppe-ukraine.de/download/Beraterpapiere/2014/PP_01_2014_en.pdf
16
© German Advisory Group17
Contacts
Dr. Georg Zachmannzachmann@berlin-economics.com
Dr. Ricardo Giuccigiucci@berlin-economics.com
German Advisory Groupc/o BE Berlin Economics GmbHSchillerstr. 59, D-10627 BerlinTel: +49 30 / 20 61 34 64 0 Fax: +49 30 / 20 61 34 64 9 E-mail: info@beratergruppe-ukraine.dewww.beratergruppe-ukraine.deFollow us on Twitter @BerlinEconomics
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