Privately produced Ukrainian gas may now be sold abroad: how this will work
14 October 19:18
ANALYSIS
The process of partially opening up exports of privately produced Ukrainian natural gas has gotten underway. The relevant government resolution, which approves the Procedure for Organizing and Conducting Exports of Domestically Produced Natural Gas, has been published. Meanwhile, the Ukrainian Energy Exchange has already announced its readiness to hold specialized trading sessions for the sale of domestically produced natural gas intended for export. "Komersant Ukrainian" investigated how this will work.
It took the government several months of deliberation and weighing the pros and cons to reach a decision on launching quota-based exports of domestically produced Ukrainian gas. The desire to support private gas production companies and secure additional foreign currency for the country prevailed.
However, the conditions for selling gas abroad are far from ideal: the export limit is set at 15% of the volume of gas produced by companies in the previous month, and the export concessions are valid from March 1 through November 30. In other words, private gas producers have less than two months this year to earn a little extra at European prices. This likely explains the rather reserved reaction to this government decision. Here is how Olga Buslavets, Ukraine’s Minister of Energy in 2020, assesses it.
“The mechanism allows private producers to export up to 15% of the previous month’s production, which, at current production levels, amounts to about 50 million cubic meters per month in October and November. This is a logical step to support private production and partially reduce the surplus in the domestic market. However, the potential export volumes from private production are insufficient to significantly reduce excess supply, so the domestic market remains structurally in surplus for now.”
According to Olga Buslavets, the key issue remains the practical implementation of the mechanism: the launch timeline, demand at exchange auctions, and actual export volumes.
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Trading Details
The sale of domestically produced natural gas for export will take place through the Ukrainian Energy Exchange. From March 1 to November 30, gas producers will be able to sell up to 15% of the gas they delivered to entry points into Ukraine’s gas transmission system during the previous month. The Ministry of Energy will determine specific limits based on data from the Gas Transmission System Operator by the 12th of the current month. The Ministry will also approve the list of specific companies that will be authorized to sell domestically produced gas for export. A company will acquire seller status on the date the list is approved and only for the volume specified for it for the current month. However, not all gas-producing companies will be able to export gas. Mykhailo Svyshcho, an analyst at the ExPro agency, explains who exactly will have the right to sell and purchase Ukrainian gas.
“All production companies can be sellers, except for those that produce gas under production-sharing agreements. In principle, we have only one such agreement in effect. This involves the company ‘WellCo,’ which is part of the ‘Zakhidnadraservice’ group of companies. Companies subject to special obligations under Resolution No. 222 are also prohibited from exporting gas. These are the state-owned companies “Ukrgazvydobuvannya,” “Ukrnafta,” and “Chornomornaftogaz.” This leaves only private companies to export gas. For each company that exports gas, a separate limit will be set, which must not exceed 15 percent of each company’s production. Non-resident companies are entitled to purchase gas. That is, foreign companies that may or may not be registered in Ukraine—but the key requirement is that they be legal entities established in accordance with the laws of other countries,” the analyst notes.
According to him, the volume permitted for export will be calculated on a monthly basis.
“This volume is currently estimated at approximately 50 million cubic meters per month. And if, for example, we take October and November, the total volume allocated for export sales is 100 million cubic meters by the end of the year. These are small volumes relative to the country’s overall balance. But for private production companies, this could be a decent additional source of revenue that can be used to restore damaged facilities or for new investments in production,” the expert explains.
The sale of domestically produced natural gas and its purchase by a non-resident company will take place during specialized trading sessions on the Ukrainian Energy Exchange. Mykhailo Svyshcho explains how this will work:
“To put it simply, the selling company will list a certain volume and a starting price in euros per megawatt-hour on the exchange. Buyers then come in and compete for the resource. Accordingly, whoever offers the highest price wins, and then the selling company—that is, the private production company—and the buyer—that is, the non-resident—enter into a purchase and sale agreement, and this gas is effectively exported.”
Decisive Arguments
The current gap between Ukrainian and European natural gas prices—with gas in Europe currently more than twice as expensive as in Ukraine—convincingly demonstrates the financial profitability of the export deal. And these price advantages, combined with the realization that there is an oversupply of gas on the market, appear to have been the main arguments in favor of allowing exports. Mykhailo Svyshcho, an analyst at the ExPro agency, explains.
“On the Ukrainian market, the price of gas is currently about 24,000 hryvnias per thousand cubic meters. In Europe, the price is currently 86 euros per megawatt-hour; if we convert our price to the European standard, that works out to about 37 euros per megawatt-hour for Ukraine. In other words, the difference is quite significant. Gas in Europe is trading at more than twice the price. And in fact, natural gas prices in Europe have risen over the last few days. So now is probably a good time to export this gas, since prices in Europe are high. Moreover, the fill levels of European gas storage facilities are currently low compared to previous years—about 74%—which, combined with the approaching cold weather, could lead to prices continuing to rise,” the analyst notes.
At the same time, unlike European storage facilities, Ukrainian storage facilities currently have sufficient gas. At the very least, there is much more gas there than was planned at the start of preparations for the current heating season. They say that over the past five years, they have never managed to accumulate this much gas on the eve of winter. And this is also an argument in favor of allowing exports. Mykhailo Svytsho continues.
“Ukrainian storage facilities currently hold nearly 15.9 billion cubic meters of natural gas, which is more than enough to get through the heating season, and these 100 million cubic meters of gas for potential export will not significantly affect Ukraine’s gas balance. Even if there are 15.8 or 15.7 billion cubic meters—that’s still 1 billion more than was planned to be stored in the facilities by the start of the heating season, and according to the government’s calculations, this should be enough to get through the winter under various scenarios.”
Furthermore, the government has not forgotten about contingency measures in case of emergencies: in the event of any threat to energy security, Naftogaz of Ukraine or the Gas Transmission System Operator may contact the Ministry of Energy, and gas exports will be promptly suspended.
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