Q Club

GTS: seeking ways for efficient use

Issues related to the future of gas transportation system continue to be a matter of concern in the Ukrainian society. Thus, the roundtable discussion “Ways of the effective exploitation of gas transportation system of Ukraine, reverse, transit, East European gas hub construction” has attracted plenty of audience. The Expert Council on the development of the gas industry and the natural gas market, together with the International NGO Kyiv International Energy Club “Q-Club” have been the ones to organize it.

During the roundtable the following reports were presented: “Modernization of Ukrainian GTS. Prospects and Opportunities”, “Ukrainian GTS — between Russia and the European Union”, “Ukraine’s accession to the European gas market. “Development Programme”, “EU energy directives and their impact on the reform of the gas market of Ukraine”, “Gas metamorphosis of EU and Russia: Conclusions for Ukraine”. The reports were followed by the discussion of challenges stated in them.
It was noted that nowadays Ukrainian gas transportation system is an important part of the Ukrainian gas industry and gas market. It is one of the largest systems in Europe. GTS flow efficiency at the input is 292 bcm, at the output — 178 bcm, including to Europe — 146 bcm.

There are 12 underground gas storage facilities (hereinafter- UGSFs) within the territory of Ukraine; their total active volume exceeds 30 bcm. GTS plays an important role in the supplying of domestic gas market of Ukraine: in 2012 it provided Ukrainian consumers with 50.9 bcm of gas. But its transit importance has been decreasing gradually. In 2005 the transit through the GTS of Ukraine amounted to 121.4 bcm of natural gas, while it fell to 82 bcm in 2012. This situation has resulted from the policy establishment of alternate transport capacities as opposed to Ukrainian ones carried by JSC “Gazprom”, on the one hand, and from the reduction in demand for gas of Russian origin that we have been witnessing in European countries in recent years, on the other hand. If this trend holds, then the exploitation of whole GTS shall become unprofitable with the decline of transit volumes to less than 60 bcm per year at current tariff levels. While if the transit amounts to less than 40 bcm per year the problems with the gas supply to the Eastern regions of Ukraine will emerge. Besides, such being the case one or two “transit” pipelines shall be put out of operation entailing a large amount of investment for re-establishing the entire GTS.

Given these conditions the GTS modernization is as relevant as ever as far as its economic performance (in particular — efficiency ratio of compressor units) does not comply with the international standards for the moment. This modernization shall require raising funds in the amount of USD 5.3 bln and shall enable to support the design parameters of the gas pipeline operation, to increase in the reliability of natural gas transportation to consumers, to reduce the consumption of energy resources, to mitigate its environmental impact.

However, the issue of Ukrainian gas market and in particular Ukrainian GTS may be settled in a fundamental way only by reorganizing it in accordance with the European standards with further integration into the European markets. Liberalization launched in mid-1990ies has been underway since. The applicable European legislation has been established in several stages on the basis of three Energy Packages.

Against this background the important issue is the completion of separation of vertically integrated companies. The main legal conflict of the first two Energy Packages between the requirement of differentiation of production, supply and transportation functions, on the one hand, and the property rights, on the other, has found its compromise solution in the third Energy Package.

It allows for vertically integrated companies to be reformed according to one of three schemes. The first option suggests mandatory separation of the property of vertically integrated holdings: energy companies are expected to sell their transportation networks to the independent operator and shall not hold a control package therein.

The second option enables the companies to own the transportation networks. However, the networks will be managed and controlled by an “independent system operator” (hereinafter — ISO). ISO appointed by a national government shall be entitled to make decisions on commercial and investment issues following an approval of such a decision by the European Commission.

The third option as in the case with ISO also stipulates for keeping vertically integrated companies. However, their activities shall be subject to monitoring of a specific “supervision body” established for this purpose, while network management shall be an obligation of a separate entity so called an independent subsidiary, “independent transmission operator” (hereinafter — ITO).

In the context of gas markets liberalization of the majority of the EU Member States carry on with gradual addition (replacement) of its gas pricing traditional method based on the cost of replacement of alternative fuels in end-user consumption by the model based on market competition that balances supply and demand.
In this process, along with such important segment of free pricing as an exchange trade, a network of specialized market platforms of liquid gas trading (hubs) operates in addition for implementation of the second option. As of end of 2011 physical spot volumes at all European hubs exceeded 240 bcm in total, representing 54% of total gas consumption of the EU. “Virtual” gas sales on hubs amounted to 1,680 bcm in 2011.

The long-term target model of a single EU gas market stipulates for a system of “gas” economic regions, each having a volume of natural gas consumption at least 20 bcm per year. This trade area, which could cover the territory of several Member States, shall be established on the basis of “input-output” principle and shall have one virtual hub taking in all the gas to be supplied. Input power is set regardless of an output power while the infrastructure allows freely delivering gas to any consumer within the area.

September 17, 2012 the European Commission presented a draft law that obliges its Member States to unite their gas transportation systems in a single network based on the Third Energy Package by the end of 2014 in order to reduce dependence on “non-European” suppliers. The draft law has been designed to ensure the implementation of three objectives: the real integration of the gas sector, reduction of dependence on supplies from Russia and improvement of the environment.
Combining gas pipelines of 27 European Member States into a single network and a free circulation of gas through it will enable countries to forgo coal, which is detrimental to the environment. After accession to the Energy Community, Ukraine has received a system-oriented basis for reforming the gas market in compliance with the European principles. As of now some steps have been taken. In 2010 a core law “On the principles of the functioning of the natural gas market” was adopted. A number of laws were also adopted. For example, “Naftogaz of Ukraine” no longer enjoys its monopoly for the sales of imported gas.

NERC approved the procedure for access to the network and adopted the decision on granting the status of eligible consumers. The subsidiaries of NJSC “Naftogaz of Ukraine” have undergone reorganization. However the main task i.e. establishment of gas competitive market yet remains unsolved. It is obvious that abolishment of monopoly of NJSC “Naftogaz of Ukraine” is not enough to solve the main issue. It shall be accompanied by the structural pricing reform, diversification of sources of gas supply to Ukraine and renegotiation of the Agreement of NJSC “Naftogaz of Ukraine” with JSC “Gazprom”, particularly in terms of waiver of “take or pay” principle.
Other measures aimed at future accession of Ukrainian domestic market into European Framework of gas markets are as follows: Improving access rules, their approximation to the European Network Codes. Transition to the tariff system “input-output” according to Regulation 715/2009, understanding that the distance rate for the transit will remain. Development and application of methods for determining available transfer capacities, the rules of their order (sale) and resale.

Modernization of Western UGSFs with a view to enhance their capacities on current gas yield. Establishment of flexible tariff system of gas storage in UGSF s. Transition to the energy indexes of gas accounting. The idea of establishing a physical hub on the basis of the Ukrainian UGSFs looks also attractive. To implement this, one may create a separate public company, involving operators of Polish, Hungarian and Slovak gas transportation systems and, possibly, OJSC “Gazprom” in addition to PJSC “Ukrtransgaz”.

Further reorganization of NJSC “Naftogaz of Ukraine” is another key issue. On the background of current political and economic situation of Ukraine it should involve the scheme stipulated by the Third Energy Package, when “Ukrtransgaz” is an Independent Transmission Operator similar to Polish GAZ System. If the vertically integrated structure of NJSC “Naftogaz of Ukraine” persists the Company will have to fundamentally rethink the system of relations and responsibilities between with its subsidiaries in the context of optimizing financial performance and control and management functions to comply with European law and the introduction of European administrative culture. Reform of the gas market of Ukraine in line with the described scenario shall be accompanied by establishment of technical capacities of gas supply from alternative sources.

Following the diversification of sources of supply and integration into the European markets it will be possible to introduce a more flexible differentiation. An important role in the diversification of gas supply to Ukraine may play its GTS, which may provide supplies in reverse mode to the country from Europe in the long term up to 30 bcm. Obviously, there are many political, economic and corporate motives that can direct transformation of NJSC “Naftogaz of Ukraine” in other ways, including through a complete disintegration in the nearest future. It should be borne in mind that the latter is exposed to a number of risks.

Nontransparent privatization of “Ukrtransgaz” or TS and establishment of a consortium for its management may result in significant losses due to its possible underestimation. Disintegration and / or elimination of NJSC “Naftogaz of Ukraine” made in a hurry instead of in the framework of a comprehensive program of the gas sector reform can defragment gas market, and even destroy it under certain circumstances. In the meantime, the measures on reform of the gas sector of Ukraine according to European principles proposed above could bring Ukraine’s GTS for projected operating conditions and projected level of load after 2030 on the background of positive trend in European gas markets predicted by the majority of key global analytic institutions.

Source: «Oil-gas-energy»