MAJOR REGULATORY DEVELOPMENTS
Ratification of EU-Ukraine Association Agreement
The association agreement between the European Union and the European Atomic Energy Community and Ukraine (the "Association Agreement") was simultaneously ratified by the European Parliament and Ukraine on 16 September 2014. The political provisions of this treaty were signed on 21 March 2014 and the economic part of the Association Agreement was signed on 27 June 2014. Chapter 11 (Articles 268-280) of the Association Agreement deals with the energy sector and, amongst other provisions, requires that the price for the supply of gas and electricity to industrial consumers be driven solely by supply and demand.
Furthermore, the Association Agreement: (1) introduces requirements regarding transit and transportation of electricity and gas, customs duties and quantitative restrictions, licensing exploration, development and production of oil and gas; (2) prohibits dual pricing; (3) determines the principles for functioning of the regulatory authority in the electricity and gas industries and; (4) establishes the relationship with the Energy Community Treaty. In addition, the relevant Annexes to Chapter 11 set forth an "Early Warning Mechanism" that outlines practical measures aimed at prevention of and rapid reaction to an emergency situation or to a threat of an emergency situation.
Reforms to the gas transportation system
On 14 August 2014 the Ukrainian Parliament voted to implement the reform of Ukraine's gas transportation system ("GTS"). As a member of the European Energy Community, Ukraine has to comply with the European Union's Third Energy Package (specifically, the Third Gas Directive and the New Gas Regulation), which introduces the requirement to separate production, transportation and storage of natural gas into separate companies. Thus, pursuant to these recent legislative changes, the functions of the operational and technological management of Ukraine's GTS should be transferred from the state-owned enterprise to an operating company, to be determined by the Ministry of Ukraine for Energy and Coal Industry. GTS' operator functions may be assigned to the entity, whose founder and owner can be either the state as a single shareholder (acting through the state national joint-stock company "Naftogaz Ukraine") or a group of shareholders consisting of the state (owning at least 51% of equity rights of the GTS operator) and companies located in the European Union, the United States or the European Energy Community. The GTS operator entity is supposed to function as a TSO for the gas-network and be a certified member of the European Network of Transmission System Operators for Gas (ENTSOG).
Simplification of the permit system in the alternative energy sources sector
On 9 April 2014 the Ukrainian Parliament amended the Law of Ukraine "On the Alternative Energy Sources". This law is aimed at eliminating excessive and unjustified regulatory and administrative barriers in the alternative energy sector by abolishing the requirement to obtain permits for:
- production, transportation and distribution of electricity, heat and mechanical energy from alternative sources;
- production of geothermal energy;
- installation of equipment, which uses solar radiation, wind or water-wave energy, to build alternative energy facilities;
- construction or reconstruction of hydro-electric power facilities that use the energy of small rivers; and
- creation of transportation networks for energy produced from alternative sources.
Creation of new regulatory authority for energy
On 27 August 2014, the President of Ukraine decided to dissolve the National Commission of Ukraine for Electric Energy Regulation and the National Commission of Ukraine for State Regulation of Utility Services and to create a new combined regulatory authority for the energy sector: the National Commission of Ukraine for Energy and Utility Services State Regulation ("NCEUSSR"). According to NCEUSSR's charter, approved on 10 September 2014, it is a state collegial body which acts as a regulatory body for energy and utility services, reports to the Ukrainian Parliament and is controlled by the President of Ukraine. In addition to the powers of the two previously existing agencies, NCEUSSR will have new powers under the Governmental Order No. 915-r (see below) regarding implementation of interim emergency measures in order to ensure the reliable and stable operation of Ukraine's integrated electricity system, and to prevent accidents and damage to the electric-power equipment and facilities. Furthermore, on 16 September 2014 the Ukrainian Parliament registered a bill that is supposed to provide a comprehensive legal basis for the operation of NCEUSSR, strengthen its independence and introduce preconditions for ensuring efficient state regulation in the spheres of energy and utility services.
Action plan on implementation of the Renewable Energy Directive in Ukraine
On 3 September 2014, the Cabinet of Ministers of Ukraine approved the action plan on implementation of Renewable Energy Directive. According to this action plan, between 2015 and 2016 the technical specifications for production and utilisation of biomass fuel and bio liquids must be elaborated as a step towards halving greenhouse gas emissions by 1 January 2017. Where facilities producing biomass fuel and bio liquids have become operational after 1 January 2017, their emissions should be reduced by at least 60% by 1 January 2018. In addition, the relevant regulatory authorities are obliged to develop and make public the methodology for calculation of indicators of reduction in greenhouse gas emissions for biomass fuel and bio liquids. Starting from 15 December 2014 and every two years Ukraine will prepare a report on the results of encouragement and utilisation of energy generated from renewable sources, which will be submitted to the Secretariat of the Energy Community.
Bill on specific functioning of the fuel and energy sector in the special period of time
On 4 July 2014 the Ukrainian Parliament considered, in a first reading, the draft Law "On the Special Period in the Fuel and Energy Sector", which empowers the Cabinet of Ministers of Ukraine and the Ministry of Ukraine for Energy and Coal Industry to operate and control directly the pipeline transportation of fuel and energy in a "special period", defined by the law as a time in which limited or no energy supply from outside Ukraine is available. In addition, during such a "special period", the Cabinet of Ministers of Ukraine will have the power to establish a special regime of operation in the fuel and energy sector; determine the functioning of a central supervisory (operational and process-enabled) control system of Ukraine's integrated electricity system and the GTS; and define the conditions for a possible termination or limitation of the electricity and/or gas supply to consumers.
PRIVATISATION IN THE ENERGY SECTOR
Government action to sell the state-owned shares in energy companies
On 17 July 2014, the Cabinet of Ministers of Ukraine approved a list of state-owned assets to be privatised in 2014. The list of 164 enterprises has a total market value equal to UAH 15 billion (US$1.3 billion) and includes state owned shares in 18 regional energy companies, four combined heat and power plants, 38 gas supply and gas infrastructure development companies, two oil trading companies, one coal company, and one coal mine. Authorities responsible for managing state-owned shares in these companies were obliged to transfer the state-owned shares to the State Property Fund of Ukraine within one month, in order to be offered for sale in the bidding process. Privatisation of the state-owned assets will be carried out pursuant to the schedule prepared by the State Property Fund of Ukraine. According to the Prime Minister of Ukraine, the privatisation of these assets will be considered on the basis of consultations with international partners. As reported by the Institute of Economics and Forecasting of the Ukrainian National Science Academy, the annual funding needed for modification of thermoelectric power stations is about US$1 billion. Ukraine can only get this amount from strategic investors by selling state-owned assets in the energy sector.
Liquidation of state joint-stock company "Energy Company of Ukraine"
On 3 September 2014 the Cabinet of Ministers of Ukraine made a decision to liquidate state joint-stock company "Energy Company of Ukraine" and to place the state-owned share package of joint-stock companies in the energy sector, namely "Centerenergo (78.29% of shares), "Luganskoblenergo" (60.06% of shares), "Dnistrovska GAES" (87.4% of shares), under management of the Ministry of Ukraine for Energy and Coal Industry. Considering the fact that after this transfer state joint-stock company "Energy Company of Ukraine" will not own or manage any share, the governmental decision on the liquidation appears to be justified.
OIL AND GAS SECTOR
Termination of Russian gas supplies to Ukraine
In April 2014, the Russian Federation raised the price for supplying gas to Ukraine from US$268.5 to US$485.5 per thousand m3 and stopped unilaterally to apply the gas cost allowance in the amount of US$100 per thousand m3. Ukraine refused to accept this price. On 16 June 2014, the Russian state monopoly gas supplier Gazprom introduced a prepayment requirement for gas deliveries to Ukraine and stopped supplying gas to Ukraine as both sides failed to reach a compromise on price. On the same date, Gazprom submitted a claim against the Ukrainian state energy company Naftogaz to the Arbitration Institute of the Stockholm Chamber of Commerce, seeking US$4.5 billion for the supplied gas. Naftogaz also filed a claim in Stockholm, requesting the arbitral tribunal to establish a fair market price for the imported Russian gas. The claim includes a recovery from Gazprom of overpayment, which is estimated at US$6 billion. In addition, in October 2014 Naftogaz also appealed to the Arbitration Institute in Stockholm to review its contract with Gazprom for gas transit through Ukraine, to award compensation and to bring the contract into compliance with the Third Energy Package of the European Union.
Reverse gas flow from other countries
Due to the suspension of Russian gas supplies to Ukraine, Ukraine negotiated reverse gas flows from Poland, Slovakia and Hungary.
While trying to negotiate a solution with Russia, Ukraine continues to search for alternative suppliers. For example, Naftogaz signed an agreement with Norwegian energy company Statoil to supply 11 million m3 of gas per day starting from 1 October 2014. According to recent official reports, Ukraine imported about 310 million m3 of gas during the first 10 days of October and about 2 billion m3 since the beginning of 2014.
New agreement on main terms for Russian gas supply
Several rounds of lengthy and tough negotiations between Ukraine and Russia led, at the end of October 2014, to an agreement on the main terms on which Russia would resume the gas supply to Ukraine. According to this agreement, Ukraine will pay USD365 per 1,000 cubic meters of gas in the first quarter of 2015. The parties also agreed that the price for the gas would be defined based on the formula specified in the gas supply contract, according to which the gas price depends on the oil price.
Government imposed limits on gas consumption
On 9 July 2014, the Cabinet of Ministers of Ukraine set the maximum quantity of gas that can be consumed before the end of the 2014 to 2015 heating season at 14.011 billion m3. This limit was set following the suspension of Russian gas supplies to Ukraine, in order to reduce gas consumption, to ensure the continuing gas supply to the population and industries, and to maintain stable functioning of GTS and the gas distribution system. Specific limits in gas consumption are fixed at up to 0.626 billion m3 for public offices, up to 7.532 billion m3 for enterprises, and up to 5.853 billion m3 for heat generating and heat distributing companies.
Government intends to reduce the "green tariff"
On 18 June 2014 the Cabinet of Ministers of Ukraine recommended that NCEUSSR reduce the peak time ratio from 1.8 to 1.01 when calculating the feed-in tariff (known as the "green tariff") for producers of energy from alternative sources, with the exception of micro, mini or small water power plants. As a result, the overall payments of the "green tariff" guaranteed by the Law of Ukraine "On the Electricity" would be reduced by about half. However, some experts expressed doubts on the legality of this recommendation. One of the solar energy investors, "TEKT" Company, has filed a lawsuit against the governmental recommendation. NCEUSSR has not implemented the recommendations of the Cabinet of Ministers of Ukraine. According to the recent Resolution of NCEUSSR No. 1072, dated 31 July 2014 and amended on 7 August 2014, the "green tariff" was reduced by 2.86% simply to reflect the change in the euro exchange rate.
Ratification of Guarantee Agreements
On 15 May 2014 the Ukrainian Parliament ratified the Guarantee Agreements in relation to the loan facilities that the European Bank for Reconstruction and Development (EBRD) and the European Atomic Energy Community (Euratom) will provide to Energoatom, the Ukrainian state company that operates all nuclear power stations in the country. The Loan Agreements and the Guarantees Agreements relating to the EBRD's and Euratom's loan facilities in the total amount of €600 million to be provided to Energoatom were signed on 25 March and 7 August 2013 respectively. The loan facilities will be used for safety improvements of Ukrainian nuclear power plants.
Ukraine diversifies sources of nuclear fuel supply
Westinghouse Electric Company and Energoatom agreed a contract extension for fuel deliveries to Ukrainian nuclear power plants through to 2020. The contract continues the companies' long-standing partnership to provide competitive and secure nuclear fuel supplies for Ukraine's reactor fleet. Westinghouse originally signed a contract for nuclear fuel in 2008 and postponed its fulfilment in 2011 while Ukraine preferred to purchase Russian nuclear fuel. Under the terms of the extended contract executed with Westinghouse Electric Sweden, Westinghouse will produce the fuel at its fabrication facility in Sweden. The first supplies will be shipped to Pivdennoukrainska nuclear power plant. Supplies to other Ukrainian nuclear reactors currently burning fuel from Russia's TVEL will follow. However, the contract will allow the Ukrainian nuclear energy sector to promote diversification of fuel supplies.
GENERAL ENERGY SECTOR ISSUES
Energy losses due to conflict
Following the Russian Federation's annexation of Crimea in March 2014, losses in Ukraine's energy sector are continuously increasing. Official data include not only assets of energy enterprises that were seized, but also the loss of potential revenues and state budget incomes. On 28 July 2014 the Minister for Energy and Coal Industry announced that such damage (including offshore hydrocarbon reserves) was estimated at about US$300 billion, including the loss of: 15 oil and gas fields; three upside fields of oil and gas; underground gas storage; more than 1200km of gas transportation lines; 43 gas stations; two gas filling compressor stations; 15 marine gas producing platforms and conductors; and four floating self-lifting drilling rigs. With regard to the hydrocarbon deposits, Ukraine no longer has access to production fields of about 50 billion m3 of gas, about 3.5 million tons of oil, and about 1 million tons of natural gas liquids.
In addition, coal mines with a combined output of about 300 thousand tons of coal per month have been destroyed during the military operations in the territory of Donetsk and Lugansk Regions (the "Donbass Region"). As of beginning of October 2014, 83 of a total of 155 Ukrainian coal mines are located within territory that is not under the control of Ukrainian Government. Accordingly, about 30% of all coal that was supposed to be used for production of electricity is not available. The volume of coal extraction decreased by 3.1 times in Donetsk Region and by 2.7 times in Lugansk Region in comparison to September 2013. To resolve this problem at least partially, Ukraine signed an agreement with the Republic of South Africa to purchase 1 million tons of coal.
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