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

Oleksii Leshchenko, Gorshenin InstituteBrussels, Belgium

15 March 2012

Ukraine-EU: Energy• 25% of annually consumed in the EU gas

passes through Ukrainian territory (120 bcm/a)

• 75% of all exported gas from Russia to Europe goes through Ukrainian territory

• The lowest transit rates in Europe (2.84 $)• Underground gas storage capacity – 1/3 of EU

gas storage capacity (32 bcm)• Largest consumer of Russian gas in the world

(25% of Gazprom European exports)

Major Russian Gas PipelinesSo

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• The 10-th largest gas consumer in the world and the 30-th gas producer in the world

• Ukraine gas consumption equals to the Czech Republic, Hungary, Poland, and Slovakia combined

• Energy capacity of Ukrainian GDP – 40% (World - 19%, Europe – 17%)

Energy efficiency in Ukraine

Energy capacity of GDP of Ukraine & other countries

Source: IEA, 2008 (PPP USD 2000)

Assets and Vulnerabilities

GTS capacity 180 bcm/a/ “Metal scrap” if not utilized by

Gazprom

1/3 of the EU gas storage

capacity/”Empty hole” if not

integrated in the EU infra.

Direct access to 4 EU MS/

No common market

Naftogaz - Oil&Gas Monopoly

Production & Refinery

Transportation Sales & Distribution

SC Ukrgas production

SJSC Chornomor naftogas

OJSC Ukrnafta (50%+1 share)

SC Ukrtransgaz

OJSC Ukrtransnafta

SJSC Ukrspetstransgaz

SC Gas of Ukraine

SE Ukravtogaz

Heat power generating companies

97% of oil & gas production

100% of oil & gas transportation

100% of gas distribution

Ukraine and the European Energy Community

• 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

• 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

Ukraine and the European Energy Community - reality

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

Implementation

Third Energy Packet

• National Electricity Regulatory Commission is directly subordinated to the President, and this fact can influence independence of the regulator

• Property unbundling: restructuring of Naftogaz is not transparent

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