GAS 5 November, 2019 9:00 am   
Editorial staff

Katser-Buchkovska: It is time to determine red lines for Gazprom

An essential stage in the negotiations is to determine the initial positions, to outline the interests of the parties and the red lines beyond which they will never go – says Natalya Katser-Buchkovska in an interview for What is the stage of gas reform in Ukraine? 

Natalya Katser-Buchkovska: Since 2014, Ukraine undertook a strong EU integration course, signed the EU-Ukraine association agreement, joined the WTO, and is a contracting party in the Energy Community. Implementation of the Third Energy Package increased the domestic gas market’s competitiveness. Ukrainian Parliament VIII convocation set the whole frame for new energy market structure, by adopting Gas Market Law, Electricity Market Law, Law on Independent Energy Regulator and bunch of legislation to support renewables and energy efficiency. Now, the critical reform need to be finished is National gas company Naftogas unbandling and creation of new transmission system operator (TSO). The final legislative amendments to finish this complicated process should be voted by the Parliament these days. 

What is the idea behind another gas operator company over MGU? 

TSO (MGU) has to sign new transit contract between Naftogaz and Gazprom which is currently under negotiation.  Critical moment is that future relations between new Ukrainian TSO and Gazprom should be based on European energy law being implemented in Ukraine as an Energy Community member.

Is there a possibility that Ukraine follows Gazprom treat and quits gas reform in exchange for short term gain like attractive gas contract? 

Gas has never been a commodity for Russia; instead, it has been a geopolitics instrument. Therefore, Moscow will prioritize political goals over commercial ones. At the same time, Russia aims to sell gas to the EU, to increase political influence on it through gas and economic expansion, and to weaken Ukraine.

The price of gas is not important for Russia because, as President Putin has stated, offering a 25% discount on gas, “he is willing to pay” and “help,” but the price of this assistance is well known. 

An essential stage in the negotiations is to determine the initial positions, to outline the interests of the parties and the red lines beyond which they will never go.

Ukraine’s initial positions should be the following: prevention of negotiations’ politicization, reprobation of the conditions of retrospective refusal to execute arbitrations lost by Gazprom to Naftogaz, application of the EU law to the contract, minimum contract term, gas volume, and price.

It is also worth thinking of the long-term strategies for maintaining transit and ensuring the liquidity of the Ukrainian gas market.

Understanding the commercial interests of various players in the European and American gas markets, Ukraine can form a stable coalition to support its position. First of all, it is necessary to attract the leading European transit companies into gas transportation or GTS management. This will increase the chances of contracting large volumes of gas and obtaining long-term transit guarantees.

It is also worth thinking about the alternative ways of importing gas, raising the number of interconnectors and their throughput, while increasing the reverse and supply of liquefied gas from the US and the East. This will give us more guarantees of energy security and economic stability that public policy strives for.

What about the goal of energy independence until 2020 from previous government?

On the production side, in July 2019 the Government approved winners of 9 production sharing agreements (PSA) tenders for oil and gas blocks with an area of 11 400 sq. km (7 000 sq. miles) and 3 more blocks tenders are announced.

Ukrainian national company UGV had gained 2 bides alone, and 2 more bides joined with Canadian energy company Vermilion Energy Inc. The American Aspect Energy won 1 bid. Private domestic producers – GeoAlliance, Zakhidnadrosrvise, UNB and DTEK Oil&Gas – won 1 bid each. Now, winners are preparing to sign the contract with the government to start drilling. 

This mix of domestic energy companies, together with capital and experience of western players brings to Ukrainian economy from $430 million to $1.5 billion in exploration in 5 years of project development and up to $4.4 billion in 50 years of a contract life, according to the positive scenario estimations. 

The largest Black Sea offshore hydrocarbon block named Dolphin tender is still waiting for the Government decision and it could not be easy. Dolphin has not only economic but also geopolitical importance for the state. According to State Geological Service, the estimated resource base of hydrocarbons on the Ukrainian continental shelf of the Black Sea is over 300 bcm of gas and almost 200 million tons of oil, therefore, only companies with not only substantial experience and financial recourses but also with political risks guarantees can pretend to be successful in this sea block. 

In addition to PSA tenders, earlier this year first-ever online auctions have taken place for oil and gas concession licenses. As of today, four rounds of e-auctions have already been conducted. As a result of oil and gas auctions and tenders, the minimum investment for the first 5 years of exploration should be $600 million.

Such deals have become possible as Parliament decreased royalty rates for natural gas production to 12% for news wells up to 5,000 meters (16 400 feet) of depth and 6% for new deeper wells. Opening access to geological data in 2018, as well as improving the process of obtaining petroleum licensing, were aimed to significantly simplify decision-making for potential investors in Ukrainian gas production business.

PSA tenders and license e-auctions have been unprecedented measures to increase domestic gas production since Ukrainian independence. As a result of recent policy activity ‘Drilling Info’ defines Ukraine as the top 10 countries in the world conduction license and PSA tenders in 2019. Moreover, industry association and international organisation acknowledge success in energy reforms. 

Is it enough?

But it is not enough to secure Ukraine energy interest in the long term. For instance, the issue of post-2020 natural gas transit remains vital for Ukraine, negotiation with Gazprom is under question, therefore future of gas transit through Ukraine is unclear. The same LNG-terminal idea on the Black Sea coast is still unrealised due to geopolitical circumstances. A new government will have to deal with complex political, energy, security and economic tasks to protect current achievements and move further – transform Ukraine in energy self-sustainable state and regional gas hub. 

Interview by Wojciech Jakóbik

Nataliya Katser-Buchkovska was a member of Ukrainian Parliament and took part in discussions on natural gas reforms in Ukraine. Now she represents Ukrainian Institute for Future.