Ukraine’s Gas Market Reform: Green Light to Investments in Natural Gas Transmission, Production and Energy Efficiency Andriy Kobolyev, CEO, Naftogaz of Ukraine July 2015 www.naftogaz-europe.com www.naftogaz.com
A vertically integrated group: entire supply chain Naftogaz ogaz Gas Busin iness ess Upstream, Gas transportation Wholesale gas processing & storage gas trading 2012 – 15 major importer annual 153 bcm transit capacity 15 bcm production till 2012 monopoly 62 bcm transit in 2014 importer oil, gas, 230+ 38 bcm transmitted condensate major wholesaler domestically fields supplier to 100% 31 bcm of underground gas processing 39 households, gas storage plants DHCs Gas business ess: : 90% of earnings ings
2014-15: Gas market liberalization initiated Key milestones already reached: Gas Market Law: compliant with EU Energy Law Price Reform: gradual liberalization of gas prices Corporate Governance Reform: OECD standards EU-UA Gas Network Integration to diversify supply 3
Naftogaz effectively diversified gas imports Sources of Ukraine’s gas imports 2013 2014 1Q 2015 8% 26% 39% 61% 92% 74% Russia, single supplier Europe, multiple suppliers 4
2015 and on: building competitive and efficient market Transmission : Competitive and efficient gas market will develop as we: - unbundle by mid 2016 - new players and JV - enhance interconnectivity with EU Storage: - new players and JVs - potential partial privatization Production: - increase upstream production - potential partial privatization of upstream Consumption: improve energy efficiency 5
Critical funding need for strategic gas purchases Avoiding risk of transit interruptions on political grounds: 21 bcm in storage = no Russian gas required this winter Loans : US$1.8 bn to buy 6.5 bcm of gas from commercial banks, IFIs Political risk guarantees: OPIC, WB/MIGA or commercial institutions Collateral: - Gas in storages; - Operating cash-flows (transmission revenues); - Ukraine Sovereign guarantees Repayment source: borrower’s revenues secured by regulated RAB-based tariffs 6
Opportunity: transmission and storage partnership Ukraine Ownership unbundling of the transmission system operator (TSO) in compliance with 3 rd energy State Cabinet of package (EU) Property Fund Ministers 100% EU and/or US companies to be invited as partners in gas transmission and gas storage Naftogaz Controlling interest business Controlling interest State will remain the owner of the gas transmission system and Storage Transmission underground gas storages SO SO On-going transparency and efficiency improvement through Non-controlling interest Non-controlling interest stronger corporate governance in compliance with OECD principles US/EU Partner US/EU Partner 7
Potential benefits for Partner in natural gas transmission operations Natural gas transit via Ukraine, bcm Strategic advantages: 158 Most powerful transit infrastructure 54 59 72 74 in the world with capacity of 96 exit - 158 bcm/Y, entry – 288 bcm/Y 104 99 86 84 Supplies to 18 European countries 62 Crucial role in the European 2010 2011 2012 2013 2014 transit system, accounting for up Transit volumes Excess Capacity to 15 % of total gas import to EU Natural gas domestic supplies, bcm Direct interconnections CAGR: -6% with EU (PL,SK,HU,RO) and with 27 25 24 20 RU, MD, BY 16 Revenues ensured by regulated 27 27 27 26 23 RAB-based tariffs Substantial potential of transit 2010 2011 2012 2013 2014 volumes increase without significant Industry Production and tech. costs investment Households, District Heating, Sole transmission system operator Government financed institutions 8
Potential benefits for Partner in gas storage operations Natural gas storage volumes, bcm Strategic advantages: 31 7 10 11 Largest storage capacity in 14 16 Europe - 31 bcm (1/3 of EU28) 24 21 20 17 15 Storage capacity of over 2010 2011 2012 2013 2014 25 bcm on border with the EU Capacities load (end of injection period) Available storage capacity Essential infrastructure for EU gas stock (both security and Huge potential for further commercial) and creation of a development gas hub Strategic geographical location of storages allows gas supply from one point on the Ukraine-EU border to 6 countries A valuable complex of assets with potential privatization of some storages 9
Energy independence: energy efficiency, production growth Ukrainian gas import requirement ~20 bcm 3-7 bcm 2015 2020F How will this be achieved? 6-8 7-9 bcm bcm Energy efficiency Domestic production growth Required investment*: US$10-15 bn Required investment*: US$5-6 bn *Preliminary estimates 10
Opportunity: Energy Efficiency Energy efficiency measures can save ~6 bcm/y by 2020 and ~12 bcm/y by 2025 Gas Invest- Investment Project scope savings, ment, efficiency, Where What and time to bcm/y US$bn cm/US$ capture the effect Alternative fuel boilers 3-5 ~3.0 3.7 0.8 ~7mn HH More efficient gas boilers years Alternative fuel boilers 3-5 ~20 ths 1.1 ~2.0 0.6 More efficient gas boilers boilers years Pipes replacement and 3-5 ~0.7 ~1.7 0.4 ~250 DHC insulation years Heat meters with 1-2 ~100 ths ~0.8 ~2.4 0.3 buildings temperature regulators years Thermo 10 5.5 ~10.3 0.5 ~7 mn HH modernization years Thermo 10 ~100 ths ~3.4 ~15.9 0.2 modernization buildings years ~12 bcm/y ~US$36bn Total 11 Impact is calculated for each measure separately. Total gas savings in case of implementation of all measures
Opportunity: Upstream Development 70 Projections 60 50 40 Bcm 30 20 10 0 1955 1990 2000 2010 2020 2014 2030 Conventional gas production Unconventional gas production Incremental unconventional gas production Ambitious plans present opportunities for international gas production companies and companies offering equipment, services and know-how • Conventional resources potential With sufficient investment production 39Tcf = 1.1Tcm 1 could increase by 7-9 bcm by 2020 • Reserves-to-production ratio 34,3 – and more than double by 2030: • Future production depends on the largest in continental Europe 2 application of modern technologies for seismic evaluation, drilling, 1 Source: US Energy Information Administration completion, well stimulation, and 2 Source: BP Statistical Review of World Energy, June 2015. production management. Source: Energy Strategy of Ukraine till 2030, Ministry of Energy and Coal Industry. 12
Other urgent investment opportunities
Other urgent investment opportunities Poland-Ukraine 110 km Modernization of Complete overhaul of gas interconnector with Shebelinka Refinery to drilling rigs and capacity of 8 bcm/y will achieve Euro-5 quality equipment will allow to: allow to: standard will allow to: ▪ Increase current gas import ▪ Expand exploration and ▪ Potentially increase market capacity from EU by 53% production drilling capacity share of the Company up to 300-350 ths. m/Y by 2020 to 15% ▪ Satisfy c. 40% of Ukraine’s ▪ Significantly improve ▪ Expand drilling equipment total requirement for natural gas imports operational results after range to meet current modernization ▪ Provide access for EU complex drilling tasks ▪ Ensure immediate pricing ▪ Increase the average traders to UA gas storages with capacity of 31 bcm premium for sales through drilling depth over 6 ths.m own filling stations chain ▪ Contribute to development of ▪ Wider use high pressure the pan- European “North - ▪ Decrease dependency equipment and hydraulic South Gas Corridor” from imported fuels fracturing techniques Estimated project cost – Estimated project cost – Estimated project cost – 245 mln USD 356 mln USD 185 mln USD 14
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