The participants of the gas market have created a working group to complete the legislation

February 25, 2016

On February 23 the gas market participants have united in a working group in Kiev to develop suggestions on changing the relevant legislation in the gas sector. This decision was taken as a part of the practical seminar, organized by the Kiev Institute of Energy Research (KERI) together with the law company “Asters”,  Gas Traders of Ukraine association and Subsoil users of Ukraine association  with the sponsorship of the largest natural gas producer Burisma Holdings, Ukrainian group of companies “Geo Alians “,  Energy Resources of Ukraine company  and one of the largest consumers – PJSC “Odessa Port Factory. “

The gas traders representatives, members of mining companies, distribution companies and major consumers of natural gas, NKREKU, PJSC “Ukrtransgaz”, the National Bank of Ukraine participated in the discussion of the problematic issues.

The first of the most controversial issues the participants called a high level of safety stock and its duplicating mechanism – the financial security. The essence consists of two aspects:

  • high requirements to the safety stock volume that has no analogues in the EU,
  • sole responsibility of the supplier to the operator. In this case, the supplier acts as the transport services customer and is responsible for the imbalance.

According to the head of PJSC “Ukrtransgaz” Sergei Makogon the existing algorithm for creating the safety stock is not effective because it does not solve the operator problem in case of unbalance or the provider’s default, because from a legal point of view, the natural gas owned by a commercial organization, may not be used by the operator on its discretion. Implementing the practice of the European natural gas market a few days earlier “Naftogaz Ukraine” suggested applying the safety stock requirement to suppliers of natural gas for socially vulnerable categories. For the other suppliers the requirement for insurance stocks will be reviewed, although today there is no understanding concerning conformity to any model. It might be one mechanism left  – the financial security. According to the TCU Code, the provision can be both as an advance payment and as the bank guarantee and in-kind as well. Herewith the amount of financial support, fixed by the Code, is within the requirements to European suppliers – 10-20%. “The suppliers should have the right to choose a supplying tool, whether it’s a bank guarantee or a gas in its natural form, or any other effective mechanism. If talking about natural gas supplying to the population, there may be a higher requirement both to supply ensuring and the qualification of the supplier “, – the KERI president Alexander Narbut said. The current requirement for  Ukrainian suppliers concerning the safety stock establishing, according to participants of the gas market, only strengthens the monopoly of individual players on the market and helps to limit the consumer in the free choice of supplier.

According to the president of the Gas Traders of Ukraine association  Andriy Mizovets, most of the transactions occur outside of the gas transport system, as for trading on a virtual trading point (VTP), which is equal to the allocation nomination, the financial guarantee is still necessary. Before the 31st December 2015 any GTS operator could see and confirm the selling transaction of the mining company to one or more traders, and then to the consumer, and now the operator receives data only from a mining company and a supplier who gets this gas into the system for supplying to the final consumer. The gas President  of the gas traders association suggested to eliminate the financial support for trading at the VTP. “For example, a trader has gas in his UGS, and sells it to another supplier at a virtual trading point. In this case, the financial support is not necessary, even according to the logic “, – Andrey Mizovets said. As a result, the gas trader is confident that it will make the market more transparent as the transactions that are taking place outside the system, will take place on the VTP and the operator will be able to control them. According to the president of the Subsoil users of Ukraine association Roman Storozhev, the requirement to establish safety stock together with rule to provide the financial support imposes a significant financial burden on providers, who are not only traders but also some of the mining companies, and in addition it leads to UGS resource “freezing” during the peak demand period. Ultimately, according to Roman Storozhev, the financial expenses of the provider will eventually have impact on consumers.

Along with safety stock creating algorithm changing, which will be run over by the members of the working group, the representatives of the energy market expressed the need for a speedy transition to daily balancing. This standard is stated in the bylaws, this balancing model has been successfully used by the operators of gas transporting systems of the EU countries, and it can eliminate the need for insuring contracts by significant additional volumes of natural gas. In addition, the transition to daily balancing will eliminate another problem, namely, to provide the consumer’s right to buy gas from multiple suppliers, and today it is impossible because of the applicable balancing period – a month.

According to the commercial director of “Energy Resources of Ukraine” Yaroslav Mudriy, the tools adopted to ensure the system balancing are not effective. At the same time, this have led to “freezing” a large amount of hryvnia mass and additional financial costs of natural gas suppliers.

At the same time, Yaroslav Mudriy suggested not to restrict traders in using financial instruments at Ukraine territory and  give them an opportunity to provide a bank guarantee of Western banks. The expert recalled about the export of natural gas as an option of the energy market. “We understand that it will not be export in fact. It is necessary not for exporting gas out of the country, but it will provide normal “hedges” and  will help to present exit strategy to Western companies “, – Yaroslav Mudriy declared. The idea of opening export in the gas sector was supported by the commercial director of  Geo-Alliance group  Tengiz Mustafayev. “We all talk about the market, but we should remember the constituent elements of the market. We do not have the important component – the export ability. Psychologically no one is ready that someone will make export. But in fact no one will do this, because natural gas prices are lower in Europe than on the Ukrainian market. But we need to have this opportunity. Because talking about market prices formation is possible only  if all the components of the market are available,” – Mr. Tengiz Mustafayev said.

Besides, as natural gas importing companies told, there is a problem with paying for natural gas import contracts, caused by the changes in the list of critical import goods from 1 January 2016. According to Deputy Head of the Department – Head of the open markets division of the department of the National Bank of Ukraine Andrei Patenko, understanding the importance of natural gas import to Ukraine, the National Bank made an exception in retaining control measures for natural gas as a critical import good in due time. Prior to January 1, 2016 the Law of Ukraine on measures for stabilizing and improving the balance of payments was effective , which identified a list of critical import goods, including natural gas as well. For its part, the National Bank applied to the Cabinet of Ministers of Ukraine in advance to ensure that the new list was approved. Appealing to the authority was also received from the participants of the gas market, but the updating of the list of critical import goods including the natural gas is still under consideration and development of the draft resolution.

According to the participants of practical discussions, a question of natural gas suppliers licensing  requires settlement. Today the corresponding bill is submitted to the Supreme Council of Ukraine, but it has not been considered by parliamentarians yet.

The dialogue ongoing by the participants of the gas market initiated the implementation of changes into the current legislation governing the scope of supply of natural gas in order to bring the market to its effective state. In the nearest future the working group members plan to complete the achievements and present them to other participants in the natural gas market.