Keynote points of the discussion and abridged expositions of speaker reports are published below.
Keynote points:
Gas supply from Russia to EU member state continues today but the supply volume has decreased by 30%. Some countries (Finland, Poland, Bulgaria) have been denied transit under the pretext of not paying for it in national currency.
With a view of probability of gas supply cut by Russia, the European Commission issued obligations to fill gas storage facilities to 90% before the start of the heating season.
The EU has imposed embargo on crude oil purchase, which will become mandatory as of late 2022. Some nations have now voluntarily agreed to stop buying russian oil (Germany) while others, on the contrary, increase volumes (Ireland).
Ukraine’s storage facilities have enough energy carriers for heating, NaftoGaz informs. However, there is a problem related to damage inflicted on TPPs, four of them being nearly destroyed and five damaged.
There are three draft laws – No. 7427, No. 7428, and No. 7429 – currently under review by the government. They concern the specifics of the heating season in the wartime period, namely amendments to the national budget and the tax code as well as regulation of relations between market participants.
To solve the gas problem, the central and municipal governments work to implement alternative fuels without raising tariffs. Amendments to the National Budget to earmark UAH38.2 billion compensation of difference between tariffs and production costs have been adopted.
Ukraine is now witnessing a slump in both gas consumption (due to a reduction in industrial use and outward migration) and production (some fields were taken by invaders). Private and public companies continue with extraction as much as possible wherever the security and safety situation allows but Ukraine still has a problem with a natural decrease.
It is necessary to simplify and optimise EIA procedures, introduce preferential tariffs on consumption and large-scale energy modernisation programmes.
Transcript of discussion (for video of full discussion please follow the link)
– What is happening around the change of supplier, Russia replacement in the world energy supply chains? Will Europeans be able to go without russian crude and gas? What will happen if Russia stops its natural gas supply to the EU?
Olena Pavlenko
I will start from gas and we will talk about crude later. Russia continues its gas transit to EU states, which is actually the key source of its supply abroad. The volume of exports via pipelines is decreasing a bit. We see some countries consciously reducing their dependence on russian gas. The exports went down 30% vs. previous year but dependence remains.
Many EU nations are unable to refuse from, or quickly replace, the russian gas just because they would want to. E.g., Germany, some Eastern-European countries continue using the russian gas to fill their storage facilities and that way, prepare for winter.
The European Commission has issued a mandate to have European gas storage facilities at about 90% their capacity by October when the heating season begins. At the moment the dynamics is not that bad with EU Member States coping with their obligation. Many countries have started increasing their imports with liquefied gas supplies: the activity has grown by 60%. Given a possibility of a situation when russia completely stops its gas exports to the European Union, the dynamics is quite positive.
There are some signs of it already as gas supplies stopped to Finland, Poland, Bulgaria and individual companies in EU nations. The official explanation was they did not want to pay for gas in roubles but we actually see russia cutting on its export volumes in a phased and systemic way. Now it has stopped the gas supply via North Stream 1 that Germany had been really counting on. Let us see what happens after 21 July: will russia resume the supply? The current official explanation is the pipeline has been stopped for maintenance. If yes, then the supply will have resumed in ten days; if no then it will be a very clear signal that russia is ready to raise stakes in the gas war against the European Union and that it will have to ready itself for a winter without russian gas. Therefore, 21 July will be an interesting day for us to understand what autumn will hold.
Regarding crude, the EU has imposed an embargo on its purchase. I would like to remind here it will become mandatory as of the end of the year. At this time only individual countries like Germany have voluntarily agreed not to buy the russian crude with some, like Italy, continuing or even increasing purchase volumes with an understanding they will not be able to do it come 2023. Unfortunately, no clear-bright results we would like to see come from the embargo to date. There are voluntary refusals, some countries are not morally prepared to buy crude and it sits idly in tankers, and russia offers discounts on its purchase. That is, there are expectations of russia losing substantially from crude sails – particularly, to EU nations – by the end of the year.
– Russia has effectively stopped its gas supplies to certain countries under technical pretext. Are we to see a clearer picture on 21 July or some other options are also possible?
Olena Pavlenko
Yes, on 21 July we will see what strategy russia really has. Conditionally, there are two extreme strategies, the first one of russia interested in continuing its gas supplies to Europe because it will bring money it needs to finance its economy, the war – the one of earning money while the EU is paying; the second one is when the russia threatens to close the tap, the EU gets scared and lets russia go forward with its sanctions-lifting conditions and the proposal to launch NS2. In the second strategy, the gas is a weapon russia will use against the EU. I think russia’s decision to resume supplies via NS1 will be a certain sign of which strategy has russia bet on.
– A natural question of preparations for the heating season: how the situation is standing now? Will we have enough energy carriers or we will rather need to stock on firewood or other such alternative fuels to warm our homes?
Oleksandr Slobozhan
It is summer now but the heating season and winter are coming fast. The first aspect: it will be a unique situation. We have had most of our heating seasons going in rather complex conditions on the backdrop of the standoff with the russian federation. The current wartime circumstances bring rather serious risks and specific nuances to the work of municipalities, heat and energy supplying utility companies, central and local governments.
We at the Association of Cities have actually split the territories into four types: the ones temporarily out of control; the ones with active hostilities; the ones that suffered substantial damage; the rear territories. Each type has specific features of its own, which translate into how it will go through the heating season.
According to NaftoGaz, the storage facilities have enough resource to pass the heating season. I’d like to underscore here however that damage to critical infrastructure and ongoing missile and artillery strikes or subversions might affect the process. E.g., we have four TPPs in Chernihiv, Kremenchuk and Okhtyrka that have been substantially destroyed. The government has already earmarked funds for their restoration this week, UAH100 million in average for each city to prepare for the heating season and eliminate the damage dealt to those TPPs. Besides, five more TPPs have sustained damage, which only adds to the risks. That is, the question is not just about if there is gas in store, the question is about readiness of the already damaged infrastructure that remains under constant strikes from russian troops. With four TPPs substantially destroyed and five more damaged, we will have to restore 331 critical infrastructure facility in total to provide heating and hot water supply, and there is really little time left to prepare.
Recovery resources will be provided by the government; on top of that, we have a substantial international donor assistance, there is an emergency response centre chaired by Regional Development Minister Oleksandr Chernyshov, and we are looking at diversification options. A possibility of using deadwood was discussed at a previous meeting with the Ministry for Environment. Amendments to certain individual Cabinet of Ministers resolutions will be necessary for the option to become available to some communities.
First factor: mayors of Vinnytsia and Zhytomyr in their talks shared experience of switching for alternative fuels to supply citizens with heating energy in the event of strikes and damage to infrastructure. This regards the technical aspects of it.
Second factor: on 18 and 19 July, the Parliament will be granting hearing to three draft laws – No. 7427, 7428, and 7429 – to cover the specifics of going through the heating season in wartime situation.
Bill No. 7429 envisions UAH38.2 billion-worth of compensation for tariff differential, that is, about changes to the national budget. The documents were approved during first hearing and fully supported; we will follow the same scheme we had the last year. Just to remind here: some UAH22 billion were compensated to utility companies under the Memorandum between the Association of Cities and the central government. Bill No. 7428 is about amendments to the Tax Code and specifics of taxation to ease the burden for heat and water-supplying companies. Bill No. 7427 is a framework draft legislation providing for overall regulation of relations between market participants, specifically, gas-supplying and gas-distributing companies and consumers to see the heating season go without problems and our citizens, respectively, supplied with heat.
The key aspect, the basic objective here is not to raise tariffs on services – it will be quite a challenge in these conditions. Because of this, the government jointly with local self-government proposes the mechanisms I have described. We do hope the government will approve it. NaftoGaz is working on storage facilities; statutory norms from the Ministry for Environment will be established accordingly to allow for alternatives, not just firewood, but also processing approvals. There are technical aspects related to changes to Resolution No. 590 that envisions a specific clearing procedure via State Treasury system. Yesterday we had a meeting with first Vice Prime Minister, Economy Minister Yuliya Svyrydenko, deputy Head of Presidential Office Kyrylo Tymoshenko and 800 village, town and city mayors on a conference call. Respective amendments to Resolution No. 169 on procurement, exceptions for the heating season, simplification of respective procedures and amendments to Resolution No 590 on specific features of transfer of payments to procure works and services on preparation for the heating season were reviewed.
That is, the situation is as follows: we understand the big risks but the municipal and the central governments are preparing. This one is going to be one of the most challenging heating seasons because of the war, destruction, cynical and intended flattening of critical infrastructure.
The financial resource to provide for the heating season (UAH38.2 billion) has been found, there is a reinforcement – the question is how fast the Finance Ministry, the State Treasury Service, also respectively municipalities and Oblast military administrations will act under the prepared legal-regulatory bylaws to process the money. It is also necessary to perform, in accordance with government-prepared dedicated programmes and grant assistance available, the respective infrastructural works to restore critical infrastructure facilities. These are the two important components related to money, not just to their availability but also to its transfer and immediate disbursement for heating season needs.
– What is the current situation with natural gas transit across Ukraine? What is happening to our reserves?
Olena Pavlenko
The transit across the territory of Ukraine continues as the EU is buying the russian gas. Still, with Gazprom-booked more than 100 mln m3 a day, only about a third of that volume is used, that is, around 40 million m3. It is not because the EU is unwilling to buy gas but rather because of Gazprom’s reluctance to sell it or its manipulations with supply volumes. That is, the volume of transit across the territory of Ukraine is rather low.
We have the opportunity of buying and importing gas from the EU but at rather steep price of about USD2,000/1000m3 – hard-to-imagine amounts that need to be paid not because of the war but because the EU was so dependent on russia that now it is extremely difficult for it to refuse and re-orient.
The country has its domestic production of about 20 bcm. The government imposed a decision to ban export, so the gas we produce goes for internal consumption or storage to prepare for winter. I can tell there is a drop in consumption because of industries stopping and lots of people relocating to the west. The gas consumption has dropped by about 30% but the production has also slumped.
Artyom Petrenko
Yes, sad as it is the production figures are now going down in Ukraine. The previous year closed with positive figures, with private companies growing and some 5 bcm extracted. Early this year, in January and February, we had 5%-6% production growth, and the trend among private companies was looking positive. It all completely changed on 24 February when russians started attacks on Oblasts that, among other things, were also important crude- and gas-producing regions – primarily, the Kharkiv and Poltava Oblasts – that accounted for more than 90% resource production. Unfortunately, some fields were taken by invaders and certain facilities have seen substantial damage. Unfortunately, because of the martial law and the legislation in force, I cannot provide more details as to the companies and facilities.
As regards production figures and the situation in general, the regulator issued a decision to close all the data starting in April, so the data are non-public, non-official. Consequently, while we collect all the information, we cannot disclose it. At the same time, we see a decline of both consumption and production. In spite of it, both public and private companies continue producing as much as possible wherever the security situation allows; moreover, they do everything to continue producing even in dangerous circumstances. Russians are using the gas as a weapon. I hope the Europeans have already understood it and will wean off russian resources at some point, though the process will not be fast.
A decrease in late February – early March was exactly because of the security situation and shock when companies had nowhere to store natural gas liquids, an associate natural reserve extracted together with natural gas and stored on the production field for a week or two. If you cannot transport it anywhere, you have to kill the well. There were problems with methanol, with staff: we all remember and understand what happened in late February – early March. We saw a rather steep 10–15% decline vs. the pre-war period. After the Armed Forces of Ukraine were able to retake some of the territory and prevent russians from advancing, the situation with gas extraction somewhat improved. According to the preliminary data, we are going to lose at least 7–8% a year but, please heed it, every forecast changes week to week, month to month, and the situation may go for better or worse.
Also, as regards gas extraction, there is a so-called natural production decline that compels us to drill new gas wells all the time to produce more. Without this, the production volumes will, at any rate, go down 10% to 15%. Surely, this creates a rather challenging situation, primarily, from the security standpoint.
Another issue gas production companies are facing now is the slump in demand. That is, private companies have always worked with commercial consumers, free market and industrialists. According to the most recent open data, the industrial decline is currently at 60%. When the private producers would extract 5 million m3, it was not enough for the industry and some gas had to be imported. Now we are in a situation when companies are generally able to sell 50–60% gas and have to send the rest to underground storage facilities as exports have been stopped by the government. There is a lot of surplus gas on the territory of Ukraine and the situation is only made worse by the lack of demand for it.
The second issue we have found is a change in the taxation system and rent increase. There was a discussion on that even before the war when the taxation base, that, is the price to which rent is tied, was changed. Before it had been about import parity, then the surplus ruined it. The North Stream is on hold in Europe because of russians’ actions and the probability of it remaining shut down after 21 July is high, and we have to pay a rent of price percentage with all European price corrections. An analysis shows 20% private gas production will be loss-making starting from August. If the situation continues, some 30–40–50% production may become loss-making simply because the sales price on the territory of Ukraine is 2.5 times higher than the base tax rate.
That is, we will have our production as each cubic meter of gas that we have extracted is about energy security and taxes. Surely, there should be a compromise to regulate all these matters. The government took an important step when it allowed flat rental rate for those who, rather than sell gas, pump it into the underground storage facilities. At the same time, someone who has calculated a price-based tax of, e.g., UAH70 thousand, and sells for UAH25, is going in the red.
Concerning gas transport: Gazprom has booked 109 million m3 a day from 2020. Then it was actively reducing the transported volume before the war to an average of daily 75–80 million m3; then, according to operators’ open data, increased it since the beginning of the war, which is quite interesting.
Russian gas transit across the territory of Ukraine goes through the two transit points, Sudzha and Sokhranivka, with a joint throughput of 109 million m3. Russians actually captured the area at the entry to Sokhranivka point and declared they would neither pay any TPP operator or transit gas. There was an immediate reaction to this when the act-of-god circumstances were called in and the need to regulate transit volumes from Sokhranivka towards Sudzha, which is a huge transit point used to handle the most of russian gas transit. The current transit volume is 40–42 million m3 a day in average. Just to comprehend the situation: the Ukrainian gas transit system capable of pumping almost 150 bcm/year is now used to pump 40 mln m3 russian gas a day. A situation has emerged when the daily extraction volume is more than that of transit across the territory of Ukraine.
We see the russians using gas as a weapon. They in Europe are preparing: if Russia is going to up the ante even higher, then, theoretically, it may stop its gas supplies to Europe, particularly, the Ukrainian transit this autumn. Given high production volumes and the lack of sufficient storage facilities, the russians will not be able to do it for quite some time. That is, they will either collapse their production or aim for a shock situation to compel Ukraine to negotiate – this is a political security matter. We are working, producing gas, providing heat and energy safety but the situation is really rather challenging.
– Let us switch to reforms: what decisions will be needed to improve the production situation in the energy sector?
Artyom Petrenko
Simply boosting production in a snap would be a challenge. Back in 70ies, Ukraine produced 68 bcm; however, our fields are depleted now, that is, the gas found at depths of up to 5 km in the east of Ukraine, it is a complex and scarce one. Companies have to increasingly invest more, drill deeper wells to find more gas. With a bit of geological lack big reserves can be prospected but this will require some serious investments. E.g., shallower well in the Western Ukraine may cost from 3 to 5 mln. US Dollars; meanwhile, a well in the east of Ukraine will have a tag of around USD10 mln., and a super-deep one will set you back by USD30 million. Surely, a successful drilling would bring lots of gas but the average success ratio in Ukraine is around 40%, that is, only every third well is productive.
Regarding investors: surely, it is exclusively about Ukraine’s unconditional victory on the battlefield, this is the only key factor that is possible. I cannot see big players taking risks and coming to us without this. Everyone understands the security and the economic situations, so the story is a complex one.
The state has to create conditions for companies staying clear from investors and abstaining from changing the rules of the game every three, six or twelve months. There must be a system of incentives with as simplified as possible land management option – this is a rather challenging moment related to political considerations.
The EIA procedure must be simplified and optimised: it is about environmental safety regulations and before one is allowed to start drilling, he has to spend six to eight months to go get EIA clearance. A large draft legislation, No.4187, was designed for that; however, they found no time for it before the war. Now the bill is being prepared for the second hearing and, if voted, will provide a maximum simplification of the procedure.
Ukraine desperately needs success stories as examples of domestic and overseas companies that have come and succeeded. The secret of success for Ukraine is to rely on domestic investors, partly on cooperation with public companies and foreign investors to develop land resources via exactly these mechanisms. After the victory, a big company will have to be attracted to work offshore in the Black Sea at plays currently leased for use by NaftoGaz. This will boost our production. With a view of reduced consumption, potential projects and after all the issues are resolved, I would imagine a situation with us becoming independent in 3 to 5 years and able to provide for our own energy security – and even export gas to Europe. For the next 10 to 20 years, in spite of green economy transition, it is the natural gas that will remain the key transitional fuel on the way towards a clean and green economy.
Oleksandr Slobozhan
Talking about reforms: municipal governments nowadays have lots of initiatives on switching to alternative fuels. It is a certain way out for us given there is never enough time or money; meanwhile, every crisis opens the way towards reforms: to change format, introduce certain changes to then reach another level. In which case it will be the matter of public municipal governance.
As regards environmental impact assessment, this is our European commitment though, taking into account the existing crisis, I would expect the European partners to come forward in order to support also the energy security of their own and ensure our development (if the procedures are simplified). Specifically on the heating season: with regard to the war in Ukraine, we have asked to put the norms on hold and provide us with an opportunity of starting respective infrastructure facilities without having to go through the procedures. I do like it they envisage the sector development through the streamlining of procedures. I think we need to jointly generate ideas and do reforms because the targets we have committed to were identified in entirely another circumstances and our growth now requires simplification of the procedures.
We have requests from municipalities regarding simplification of the legal frameworks of some of the reforms. Matters related to land management, infrastructural projects, grid maintenance and transition to alternative fuels have been raised, In our view, this all is about risk diversification and Europe will move in this direction.
Another yet factor related to energy sector reform. We are learning from the experience of European municipalities with their preferential tariffs on electricity consumed for outdoor lighting of residential areas at night. This also helps our utility companies that will have to provide heating.
The parliament adopted a bill No. 6485 on energy efficiency, which is yet to be signed into law. I would like to stress on it because we started working on it jointly with the Office of President already before the war. We will not be able to go on without a great thermal modernisation programme, without setting the consumption right anyway. A great deal of consumers of the resource cannot afford themselves an economically feasible tariff. When we consume the resources uneconomically, this, in my view, is « squandering ». The municipal government will not be able to cope with it on its own, without assistance from the government. The citizens will not be able to do it without an energy modernisation programme, the primary factor of which is residential stock audits.
The time for reforms is now; all the four components can be launched right away. There will be money, and we have time for it because of our experience with modernisation in such circumstances.
Olena Pavlenko
I’d comment on the situation with EIA: colleagues from the Association of Producers can confirm it we truly support growth of domestic natural gas production. At the same time, we would like to underscore that all the procedures related to environment protection are the ones enshrined in EU directives. Obviously, in war conditions everything can happen – but it surely should not mean the commissioning of a project without proper EIA procedure because then the war ends and we have forgotten about everything and a whole range of projects will be quietly launched beyond. We need to avoid a situation when we launch and industry and, at the same time, destroy the environment or public health to harmful emissions or other such issues. Yes, we all are in force majeure circumstances at wartime but this should not mean we can forget about right procedures and public safety.
– Can the power grid survive when 50% capacity is lost (TPPs/NPPs captured/destroyed)? Can this capacity be substituted with imports from the EU?
Olena Pavlenko
Actually, a lot of information on how the sustainability and resilience of our power grid system are modelled is classified. Even the Europeans were surprised to see how resilient our power system is during the wartime conditions. We are not just carrying out military action; we have worked for three weeks in the isolated mode and joined the European grid. With this in mind, even if something happens, we will be able to import electricity from the European Union. I think our system is resilient enough.
– Will the grid handle double consumption levels in the event of, e.g., the following scenarios: gas supply lines/storage facilities destroyed in bombings; TPPs out of operation; the public stocks on water boilers and electric indoor heaters?
Olena Pavlenko
There is a decrease in electricity consumption now so, even with a demand hike, we will still be over-producing. Ukraine wants to export electricity exactly because of excess generation. I think, this can also lead to some rather complex – catastrophic – situation.
– Are cities preparing now for gas or electricity supply cuts in a certain territory (village/town) by procuring mobile boiler plants and modular power generators?
Oleksandr Slobozhan
It was among the first matters that we looked into in our emergency hub. Some cities with critically damaged infrastructure have been already given some of the funds. We are also helped by donor structures: I would even give names of those municipalities that requested such assistance. The matter is currently in the focus of our hub attention; as regards municipalities, some official decisions have been made and first disbursements to tap the most critical areas launched.
The second aspect: we are right now promoting amendments to Resolution No. 590 on transfer of payments via the Treasury. We have local budgets financially capable to finance the procurement of such equipment, and we have got proposals from them. For the most part it is about money from various grant projects, preferential loans under contracts with different international organisations, but the money is there. We would want MinFin to amend the Resolution and allow appropriation of the money via reserve funds and state support.
Just to draw your attention: the parliament voted for UAH1.6 billion for regions, and the matter was included there. On top of that, certain individual government decisions have been made to make UAH100 million available via the reserve fund for the most critical areas. We visited these municipalities personally, together with government representatives. That is, we are working in this direction.
The second point is about reforms in the power sector. We are talking about preferential outdoor lighting of residential areas, like the one they have in European countries, not in order to save money – the question is whether the system is able to withstand. There is a notion of peak loads. Time ago Ukrainian municipalities had preferential treatments, so they would introduce energy-saving outdoor lighting systems to help reduce peak loads. When there is a peak in energy consumption, the load grows to a certain point, then there is a complete slump at night, then another peak load next morning. This is why there is a preferential tariff on outdoor lighting, which also assists our utility companies, the water and heat-supplying ones. This yet another reform that needs to be brought to its logical completion, and the rights of municipalities must be expanded for that purpose. It will help to save the system from peak loads and enhance the security level of our residential areas.
I would like to continue with Olena’s idea in which she made a focus on energy consumption. It is all related to, and will affect the preparation for, and handling of, the heating season. Regarding the EIA, we do understand it as our EU commitment. We are not talking about fully denouncing these procedures. We rather talk about particular features in wartime conditions: it is necessary not only to our own security and comfort of our consumers but also for the security of Europe and the comfort of European consumers. The procedures need to be reviewed and simplified with due regard to consequences caused by the war. The four types of territories de facto emerged with completely different economic, social, even environmental processes because of the war.
– Does Russia honour the ‘take or pay’ principle? That is, the transit volumes are unimpressive but do they pay for the mandatory contractual volume?
Olena Pavlenko
Yes, Russia paid for the capacities last year. There may be a situation this year when it says it is not going to pay in full because of the situation with Sokhranivka. We have already heard NaftoGaz’s position: we are going to the arbitration court to demand compensation in full for what we should have received under the contract.