Energy Ministry: Key task for next year is to de-monopolize gas market and stop market participants from abusing their position


Kyiv, December 18, 2015. A key task for the next year is to de-monopolize the gas market and stop market participants from abusing their monopoly position. “To meet the requirements of the Third Energy Package, it is necessary to separate the function of transportation from production and supply,” said Mykhailo Bno-Airiian, Head of the European Integration Department at the Ministry of Energy and Coal Industry of Ukraine during the discussion “Building the gas market in Ukraine: year two” at Ukraine Crisis Media Center. So next year, the ministry will work on restructuring the gas market and, in particular, Naftogaz of Ukraine and creating an appropriate regulatory framework. According to Mr. Bno-Airiian, now Naftogaz controls about 75% of Ukrainian gas production, purchases 100% of natural gas from Russia, owns shares in 40 regional gas distribution companies in Ukraine, and is one of the largest suppliers of natural gas – about 74% for end consumers. “The company is a powerful monster, which in good or bad sense, has so many assets, and this should be got rid of,” said Mr. Bno-Airiian.

Therefore, the ministry supports the idea of transferring public companies-monopolies in the market of energy resources transportation under its control.  The rest will be controlled by the Ministry of Economic Development. “We are ready to assume political responsibility for the transformation of inflexible and inefficient state monopolies to independent and transparent companies- operators,” said Mr. Bno-Airiian. That is, the ministry should retain control over transportation and storage of natural gas through Ukrtransgaz, transportation of oil through Ukrtransnafta and transportation of electricity through Ukrenergo. Generation of electricity will become the responsibility of the Ministry of Economic Development and Trade and it is necessary to create a state holding company, which will include companies engaged in gas extraction, electricity and oil production, according to Bno-Airiian. Naftogaz of Ukraine should only play a role of state trader. Underground storage facilities should become part of gas transportation system and Ukrgasvydobuvannya should go to the state holding and be independent of Naftogaz of Ukraine, he said, adding that it will ensure transparency of the gas transportation system.

Naftogaz is firmly against the fact that PJSC Ukrtransgaz remain the operator of the gas transmission system if we are talking about a new transparent market,” stated Elizaveta Badanova, Senior Legal Officer at Naftogaz of Ukraine. Following the European model, it should be an independently acting subject which will conduct all business processes, she said. Therefore, Naftogaz offers to establish a separate company “Trunk Gas Pipelines of Ukraine”, which will be within the State Property Fund structure, and will serve as operator of the gas transmission system. According to the Senior Legal Officer at Naftogaz, gas storage facilities with no strategic importance should be privatized. Director of Center for Economic Strategy Andriy Boytsun supported Naftogaz’s position, emphasizing minimal government interference in managing enterprises. In his view, the public holding company should not be within the Ministry of Economic Development. It should be independent, otherwise there is the risk of political influence and corruption. “But the ultimate goal is to insulate these companies from political influence,” said Andriy Boytsun.

Oleksandr Vovk, Adviser to the Minister of Energy and Coal Industry, thinks that insufficient domestic gas production is one of the obstacles to the development of the gas market. “Last year gas production amounted to 20.5 billion cubic meters; this year it will be less than 20” he said and added that to increase gas production the tax policy should be changed and the rate of rent should be reduced. We should move to “tax on result” in the future. According to Oleksandr Vovk, another obstacle is the lack of liquidity in the gas market, “this issue should be settled through establishing a gas “hub” in Ukraine.” The Adviser to the Minister considers that secondary legislation is the third aspect that influences the development of the gas market, “because the devil is in the details.” In particular, we have to do with the GTS codes, distribution networks, storage facilities, gas supply regulations, etc., which govern the market operation.

Roman Nitsovych, Coordinator of DiXi Group Projects, stressed the need for transparency, and the fact that the process should be regulated by the National Commission for State Regulation of Energy and Public Utilities  and not by the Ministry. The NKREKP will monitor the market and control the players. “It is this Commission that will intervene when necessary, punish any abuses, and will uphold competition in the market,” said the expert. According to Roman Nitsovych, it is very important to remember the goal of the reforms, that is, is to ensure a choice for the consumer. “All players should calculate what will be the final price to the consumer in certain cases, how the wholesale  market will operate, what price will be under the new contracts,” the expert informed about the logic of the transition period actions.

According to Mykhailo Bno-Airiian, late in January next year a political decision should be made to restructure the gas sector, taking into account the findings of the World Bank and the Energy Community.