First steps in gas reform: French gas for Ukraine

10:36 Nov. 2, 2016

French gas for Ukraine

A row of gas pipes with pressure gauges sit at the Dashava underground gas storage facility operated by UkrTransGaz in Lviv region, Ukraine (Vincent Mundy/Bloomberg via Getty Images)

France's Engie will supply gas and store it in Ukraine's facilities, Russia's Gazprom is annoyed

Nana Chornaya for UNIAN

A large European company decided to enter the Ukrainian gas market, not only to supply gas but also to use the country's underground storage facilities. Experts admit the Russian Gazprom may respond as it still can't get over losing Ukraine.

One of Europe's major energy companies, France's Engie (GDF Suez) with an annual turnover of around EUR 60 billion, will be the official supplier of natural gas to Ukraine from the European market, where the main players are Norway, Russia, and Algeria. And most importantly – it will be the first European company to be allowed to store gas in Ukraine's underground storage facilities (USF). A preliminary agreement was signed in the presence of Prime Minister of Ukraine Volodymyr Groysman and Minister of Economy and Finance of France Michel Sapin within a framework of a business forum held in Paris October 28. Engie has already opened its subsidiary in Ukraine.

The news on the European gas pioneer on the Ukrainian market has caused quite a stir. However, Naftogaz had already reported on negotiations on the matter earlier this summer. In June, Naftogaz CEO Andriy Kobolev said that a large international company from France is planning to take a loan from the IFC to buy gas and then sell it to Naftogaz at market price. However, he had not specified the name of the company at the time. And now, in October, a preliminary agreement was signed off, which after a series of technical procedures within two to three months will start being implemented.

After the signing in Paris, Kobolev said: "The entry of a powerful European player to the Ukrainian market is a good signal for other European companies. We are pleased to see that the reform of Naftogaz and the [gas] market is working."

The experts agree with him but at the same time, they note that Ukraine already has a dozen of other European gas suppliers, some of them no less powerful than Engie: Germany's Uniper Global, U.S.-based Noble, Italy's Eni, and Swiss Axpo Trading. The main thing is not the exclusivity of the preliminary deal but the fact that foreign companies are beginning to cooperate more actively with Ukraine due to the implementation of the gas market reform, the implementation of the European energy strategy that provides for free competition in the fuel supply market.

"If we discard the pathos of the news, the first steps in gas reform have already been made. Engie is among the pioneers, as it happened with the reverse flow supplies four years ago, when on November 4 2012, the first small reverse flow supply of gas to Ukraine was made by the largest German company RWE. Today, some half a dozen companies of all sizes and origins supply gas to Ukraine in reverse flows. And further steps in the context of the gas market reform is the arrival of new players," president of the Strategy XXI Center Mykhailo Honchar said in his comments to UNIAN.

Director of the Center for Energy Research Oleksandr Kharchenko shares his opinion. "I would not overestimate the incoming preliminary document signed with another major Western company. There are plenty of companies selling gas on the Ukrainian market, including the major European ones, who work here either directly or through their traders. It is important that we see the first results of the reform of the national gas market and that our European partners are beginning to see the opportunity to work in our market, so this is an absolutely positive thing," he said.

However, Ukraine shouldn't expect a considerable number of those wishing to enter the gas market with direct fuel supplies: a common strategy for the western companies is to look into the actions of a pioneer and then make a decision, said Honchar. The situation was similar with the reverse flow supplies.

According to the expert, the Ukrainian gas market is now very attractive after the unification of prices, setting conditionally market prices on the national market. "The volume of gas supplies to Ukraine will remain a meaningful share for European companies: a few billion dollars is a large sum which will be fought for. Everything that Gazprom has lost as a result of a reckless government and corporate policy, has been gained by its European partners," said Honchar.

In this context, Gazprom's reaction to what is happening in the Ukrainian gas market is quite predictable. Therefore, Ukraine should be prepared.

Annoying Gazprom

It shouldn't be forgotten that the largest European companies, including Engie (it has been working with Gazprom for 40 years) are long-time business partners with the Russian gas monopoly. Meanwhile, as we see, their cooperation with respect of Ukraine is of a special nature.

For example, Engie is one of the five Western European companies that joined Gazprom's plans for the construction of the Nord Stream-2 pipeline. Such friendship with the Russian gas monopoly has played in its hands. In 2015, the company filed a lawsuit with an international arbitration demanding that Gazprom revise the gas price. After weighing all the pros and cons, Gazprom has met the requirements of the French company and the dispute was resolved in a pretrial manner. And now, despite all the efforts of Gazprom to minimize gas supplies to Ukraine, Engie decided to cooperate directly with Kyiv.

By the way, over the last two or three years, fearing the loss of its market share in Europe, which has been constantly decreasing with the advent of new players on the background of increasing competition in the European gas market, Gazprom resorted to price discounts in long-term contracts with many companies – Slovakia's SPP, Italy's Sinergie Italiane and Eni, Austria's Econgas, and Germany's E.On / Uniper.

Gazprom has also learned its lesson when it tried to punish its European partners, minimize supplies to them in the first quarter of 2015 so that they didn't have an opportunity carry out reverse flow supplies to Ukraine. In the end, Gazprom suffered USD 5 bln-  USD 6 bln in lost revenue, according to various estimates, while reverse gas flows to Ukraine never stopped. That is why Gazprom took a more flexible position, even adjusting its contracts.

Meanwhile, according to Honchar, it is possible that under certain conditions the European companies coming to the Ukrainian gas market may wag their tails if Gazprom gives them a sweet offer. Although it has not too much space for maneuver at the moment - the market is not at its peak, so the Russian gas monopolist is forced to behave gently. "But this does not mean that in a change of market conditions, which is already happening – after five years of decreasing consumption volumes the market is seeing the rise in purchases amid low prices -- the situation will not change either. With this ascending dynamics, Gazprom starts to behave more brazenly," said Honchar.

Kharchenko does not rule out Gazprom's resistance to the arrival of European gas companies in Ukraine, either. "Some offensive action on the part of Gazprom will continue, and it is natural - we are at war with Russia. And it never hesitates to use gas as an additional weapon," said the expert.

To take full advantage of the situation, Ukraine has to attract new European companies to its gas market as quickly as possible, to accelerate the reform of the gas market, while strictly respecting the EU regulations.

The ball is in Cabinet, Naftogaz's court

The reform's priority is the implementation of the EU's second and third energy packages, which imply the separation of suppliers and manufacturers, the access to pipeline systems and storages, as well as transparent fiscal conditions. All arrangements are written down in the Ukraine-EU Association Agreement. However, Ukraine has not yet fulfilled all of its obligations.

Experts believe that all problems can be overcome. "It's an ongoing process, and it will not take nine months, it will rather take five years. Of course, there will be failures and setbacks, but this is a real living process. Besides, the war in Ukraine continues, and the European players do not enjoy such conditions, requiring to take them beyond brackets. But Ukraine can't do it, realizing what its enemy is like. Besides, the Cabinet likes to accompany the gas business with a package of conditions – all sorts of fiscal and quasi-fiscal burdens that may discourage many players, especially small companies. In fact, they will be deprived of any benefit, if aggravating conditions are put forward on insurance gas reserves."

Kharchenko also said that, in order to increase the flow of European companies into Ukraine, the country needs to continue the reform of the gas market, according to a clear plan. He believes Naftogaz is a driver of this reform.

"I would like to see the government join the reform. Unfortunately, it has been doing it not in the most effective way. For example, plans approved by the Cabinet of Ministers were disrupted almost completely by the Ministry of Energy in the part of setting up a new enterprise for the Ukrainian gas transportation system, in order to talk with European partners to establish a joint consortium and move on to the practical implementation of this idea. Now the Cabinet is thinking of a new plan, which of course makes us and our European partners unhappy," said the expert.

According to him, it is also necessary to resolve the problem of non-payment on thermal power companies market, a judicial reform is needed as well as an effective fight against corruption - these are the key parameters for attracting Europeans to Ukraine.

Reform is underway, and hopefully, it will be fully implemented. At least the Europeans are already interested in the Ukrainian market. However, the greatest achievement of the past two years is that Ukraine was able to break the Russian gas chains, Moscow's main lever of influence on Kyiv. But this does not mean that the enemy has been defeated. Therefore, the gas market reform should be a priority, and its promotion needs acceleration like nothing else.

comments powered by Disqus

RELATED NEWS

Business19:08 Nov. 29, 2016
Three reasons to invest in Poland to reach the EU market
Business16:49 Nov. 25, 2016
EBRD willing to take stake in Ukraine's largest state bank
Business15:36 Nov. 24, 2016
Ukraine-IMF cooperation is at risk
Business12:01 Nov. 24, 2016
How Dutch business benefits from EU-Ukraine deal
Business21:21 Nov. 21, 2016
Naftogaz vs Gazprom: millions at stake
Ukraine Today WEEKLY DIGEST
Subscribe to receive regular email updates about Ukraine and Eastern Europe
vk154998