Shippers meeting

UTG shippers’ meeting
11 Oct 2016
Sergiy Makogon
Director Executive
Strategy and Business Development
Ukrtransgaz

Agenda
Key points
1. Key indicators
2. Recent changes in legislation
3. New business rules of the TSO and SSO
4. Areas of development
5. New business opportunities for international traders and shippers
6. Q&A session
2

Technical characteristics of GTS and UGS facilities
Slovak Republic
13,2
5,4
Hungary
Poland
92,6
14,5
5,0
1,5
Romania
4,5
28,9
Gas transit through the
territory of Ukraine to
Europe:142,5 bcm per year.
Gas delivery from Europe to
Ukraine: 21,4 bcm
Belarus
Length of pipelines, total
Quantity of compressing stations
Capacity of compressing stations
3,5
Moldova
26,8
6,0 5,5
38 046 km
72 (110)
5442.9 MW
Quantity of UGS facilities
Total active volume of UGS
facilities
Quantity of gas distribution
stations
107,5
Gas delivery from Russia and
Belarus to Ukraine: 287 bcm
per year.
12
25,5
31 bcm
1473
13,0
32,5
Russia
48,5
6,0
Entry
Exit
-
46
3

Peer-to-peer comparison
Transportation volume for 2015 (bcm)
Storage volume at the end of 2015 (bcm)
31
Maximum storage capacity
101,4
67,3 60,4 53,4 49,5
16,5 16,2
11,4
15,8
12,8
8
Volume of stored gas as of 31.12.2015
6,6
2,7 1,9
Ukrtransgas Snam Rete
Gas
GRTgaz Eustream NET4GAS TRANSGAZ
S.A.
*Snam Rete Gas – part of SNAM Group; GRTgas – part of Engie Group; Net4Gas – part of RWE Group
Source: ENTSOG, Naftogaz, official web-sites of companies
GAZ-SYSTEM
S.A.
Ukrtransgaz Stogit Storengy RWE Gas Storage
Source: GSE, Main activity – gas transportation
Length of pipelines, 2014 (thousands of km)
38,6
32,3 32,1
13,2 10,3
3,8
2,2
Ukrtransgas Snam Rete Gas GRTgaz TRANSGAZ S.A. GAZ-SYSTEM
S.A.
Source: official web-sites of companies
NET4GAS
Eustream
4

Natural gas transit through territory of Ukraine
bcm
98,6
104,2
84,2 86,1
62,2
67,1 70,0
Russian gas accounted for 61% of EU
pipeline imports in September*:
It’s the biggest since at least 2012. Total increase
for nine months comparing to prior year – 14%
Gas receipts from Russia, Norway and North
Africa in September– 21.3 bcm
2010 2011 2012 2013 2014 2015 2016
actual transit 2010-2015 forecast for 2016
Transit to the EU via Ukraine – 6,6 bcm or 51% of Russian
flow to the EU. Average daily transit – nearly 221 mcm
Total increase of transit to the EU via Ukraine for
nine months comparing to prior year – nearly 17%
bcm
2 042
1 981
Transit flow to Slovakia and Poland posted year on
year growth - nearly 22% and 5% respectively
46 981
+16%
54 977
CIS
EU
Main threats for CEE countries:
Nord Stream - 2
9m 2015 9m 2016
Turkish Stream
Source: Gas Balance in GTS of PJSC “UKRTRANSGAZ”
* ESGM 22.193 | 5 October 2016
5

Natural gas consumption and imports in Ukraine
bcm
70
60
50
40
30
20
10
0
66,3
52,6 51,9
57,6 59,3
54,8
50,4
44,8
42,6
36,6
32,9
27,0
28,0
33,8 31,9 31,2 29,6 28,7
19,5
16,4
12,7 12,5
11,1 8,6
2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Gas consumption, bcm (left axis) Gas imports, bcm (left axis) Imports share, % (right axis)
Notes: data for 2015-2019 does not include consumption on the temporarily occupied territory of Ukraine
6

Natural gas consumption dynamics in Ukraine, 2004 - 2015
bcm
40
35
30
25
20
15
10
-65%
-1%
-31% -55%
-60%
5
-
Industry Households District heating
and electricity
enterprises
Factors of consumption reduction:
Fuel gas
- Increase of gas price
- RF aggression at the East & occupation of Crimea
- Deterioration of economic environment => decrease of industry production
- Natural condition: temperature in heating season
- Regulatory factor (change in standard consumption rates for householders without heat meters)
Further reduction of gas consumption is possible due to energy efficiency measurements in
commercial and residential sectors.
7

Structure of imports to Ukraine
2013 2014 2015
2016 (forecast)
Reduction of Import
Reduction of Import
Reduction of Import
Russia
Russia
Russia
Europe
Europe
Europe
Europe
Import for 9m 2016
TOTAL
from Europe
from Russia
27.9 bcm
2.1 bcm
25.8 bcm
TOTAL
from Europe
from Russia
19.5 bcm
5.0 bcm
14.5 bcm
TOTAL
from Europe
from Russia
16.4 bcm
10.3 bcm
6.1 bcm
TOTAL
from Europe
from Russia
12.7 bcm
12.7 bcm
0 bcm
7,5%
25.6%
37.2%
37.2%
92.5% 74.4%
62.8%
100%
8

Utilization of entry capacities to Ukraine at EU border
Annual capacity at EU borders vs Annual demand of import gas
bcm 28,0
21,4
19,5
16,6
18,2
16,4
12,7
6,9
EU country
Total possible capacity to EU neighboring countries
bcm / year
Physical
capacity
Virtual
capacity*
Utilization of exit capacity from
Ukraine to EU country
Poland 1,5 3,7 74%
Hungary 5,4 5,9 45%
Slovakia 14,5 37,7 41%
January 2014 September 2014 January 2015 September 2016
Annual demand for import gas
Annual entry capacity from EU
Total 21,4 47,3
Notes: * estimates based on actual physical gas flows from Ukraine to Poland, Hungary, Slovakia
in 2015
Gas in storage, Hungary mcm
Capacity utilization of physical capacity at EU borders
Poland
mcm mcm mcm
Slovakia
Monthly capacity
Used capacity
500
450
400
350
300
250
200
150
100
50
-
450 140
125
1 400
120
1 200
100
1 000
80
800
60
600
40
400
20
200
-
January - September January - September January - September
-
1 200
9

Structure of imports to Ukraine
Import of natural gas to Ukraine, mcm
RU
HU
PL
SK
12 months 2015
9 months 2016
6 140
RU 0
464
HU 508
149
PL 599
9 702 SK
5 220
TOTAL 16 455 mcm TOTAL 6 327 mcm
Number of counterparties for importers
Gas in storage, mcm
36
Number importers at EU borders
18
18
19
3
22
2015 2016
2015 2016
10

Agenda
Key points
1. Key indicators
2. Recent changes in legislation
3. New business rules of the TSO and SSO
4. Areas of development
5. New business opportunities for international traders and shippers
6. Q&A session
11

Market liberalization: ultimate goal until 2018
Key milestones achieved on the way to the open and integrated market
2015: Increase of physical reverse flow form EU by 20% and now amounts 20 bcm/y => entry capacities at the
western border exceed import needs
Apr ’15:
Oct ’15:
Oct ’15:
Nov – Dec’15:
Nov ’15:
Adoption of the primary legislation which compliant with the Third Energy Package
Implementation of OECD Principles for state-owned enterprises is launched at Naftogaz. Independent
Supervisory Board in place.
Ukrtransgaz offered to private companies capacities at cross-border points to import gas from Europe
Adoption of the secondary legislation which is compliant with the Third Energy Package (Network Codes
(CAM, CMP, INT), Rules of Supply, tariffs, Security of supply rules and action plan, etc.)
Naftogaz ceased gas imports from RF => procurement of 100% of imported gas from the EU
May ’16 Gas price increase in 4 times for households, district heating and budget organizations. Goal pursued =>
import parity price.
Jul ’16:
Adoption of the plan of unbundling of the TSO from the incumbent “Naftogaz”
Dec ’16: Plans to decrease security gas stock from 50% to 10%
12

Independent
Regulator
Independent
TSO
Regulation
based on EU
rules
Market liberalization: ultimate goal until 2018
To be achieved
Q4 ’16 - Q1 ’17:
Q1-Q2 ’17:
Q2 ’17:
Q1-Q3 ’17:
Q2 ’17:
Q1-Q3 ’17:
Jan ’20:
New law on the independent Regulator (EU complaint)
Complete the unbundling of the TSO & certification
Free market gas pricing for all customers of natural gas
Bring relations with Gazprom to the EU market standards via negotiations or Stockholm arbitration
procedure
Improvement of secondary legislation, including transition from monthly balancing to daily balancing.
Opening of a daily balancing market
Transition from m3 to energy measurement units - kWh
Decrease total import needs to 0-5 bcm/y due to increase
of local production & energy efficiency measurements
Efficient gas market
3

Agenda
Key points
1. Key indicators
2. Recent changes in legislation
3. New business rules of the TSO and SSO
4. Areas of development
5. New business opportunities for international traders and shippers
6. Q&A session
14

New business model of the TSO
Key elements
1. Full entry/exit system and RAB tariffs: decoupling Entry/Exit (but no tariffs at the internal points)
2. VTP (but no trading platform)
3. Monthly balancing, balancing services from Naftogaz
4. Standard transportation contract (no tariffs an internal points)
Products:
- Firm
- Interruptible
- RF/ Conditional Capacity
5. Standard storage contract (but no tariffs)
Products:
- SBU
- Monthly products
- Individual products
Temporary storage contract
- No capacities, just physical volumes
- 112 UAH per 1000 cm per storage cycle
15

New business model of the TSO
Key elements
1. Financial guarantees
- 100% prepayment for capacities at borders
- 20% financial guarantee based on the monthly nomination
- 50% security gas stock for suppliers
2. Capacity allocation
entry/exit at the border -> shippers
entry/exit to UGS -> SSO
Exit to DSO -> DSO
Entry from production -> production company
Exit to direct consumer -> direct consumer
3. Capacities (yearly, quarterly, monthly, day ahead)
- Firm
- Interruptible
- Reverse flow\ conditional
4. Auctions for cross border points
16

New business model of the TSO
Key elements
1. Nominations
- Monthly (from 15 th till 20 th M-1)
- Daily (by 13:00 UTC)
2. Renominations
From 16:00 UTC D-1 till 02:00 UTC D
3. Allocations
VTP, UGS, cross-border IP (with OBA): allocation = nomination
4. Commercial balancing - monthly
Imbalance = inputs – offtakes
By 10 th – initial imbalance calculation
By 12 th - self balancing
By 14 th - invoice for balancing services
- Positive imbalance -> injection into UGS
- Negative imbalance -> 1,2 * basis price on gas
http://utg.ua/en/utg/business-info/documents.html
17

Agenda
Key points
1. Key indicators
2. Recent changes in legislation
3. New business rules of the TSO and SSO
4. Areas of development
5. New business opportunities for international traders and shippers
6. Q&A session
18

Areas of development
Key areas
1. Legislation
- Full adoption of EU regulations and codes
- Implementation of daily balancing (BAL code)
- TSO unbundling & certification
2. Infrastructure
- IT system implementation (Capacity allocation and commercial dispatching)
- Signing direct interconnection agreements with neighboring TSOs (nominations, matching etc)
- Network modernization (UPU, CS BAR)
- Network optimization
- PL-UA interconnector
3. Business
- Trading platform and gas exchange
- New services
19

Agenda
Key points
1. Key indicators
2. Recent changes in legislation
3. New business rules of the TSO and SSO
4. Areas of development
5. New business opportunities for international traders and shippers
6. Q&A session
20

New opportunities for Western shippers
1. Open gas market for industry segment
• nearly 11 bcm/y, Naftogaz’s share – only 7%
• since Q2 2017 open gas market for all consumers of natural gas => 33,8 bcm/y
2. Short-haul services
• transportation services between PL, SK, HU, RO via Ukraine
• transportation services from border to UGS and vise verse
1200 km
3. Huge available storage capacity
• as for now storages are filled at 46% (14,4 bcm/30,8 bcm)
16,8 17,1
1200 km vs 60 km
7,7 8,5
2014/2015 2015/2016
Gas in UGS at the end of injection season
Gas in UGS at the end of withdrwal season
21

Naftogaz’s share in the non-regulated segment
Structure of consumption
Naftogaz’s share in industry consumption
Budget organization
Other
Naftogaz
Fuel gas
7,6%
30%
Other suppliers
District heating
21%
11% 1% 34%
8m 2016
19,7 bcm
Industry
92,4%
8m 2016
6,0 bcm
36%
Households
18%
10%
4% 1%
2015
33,8 bcm
20,7%
2015
10,9 bcm
33%
79,3%
22

Russian gas price for Naftogaz and market prices
600
USD / ’000 m 3 0
500
400
300
200
100
Контрактна Russian gas ціна price Газпрому for Ukraine (according to the contact with Gazprom)*
Ціна Russian Газпрому gas price з урахуванням for Ukraine погоджених with agreed discounts знижок (в(including т.ч. по "зимовим “winter packages”)*
пакетам")
Ціна NCG на price рівні netted "хаб мінус back транспорт"*
to Eastern Ukrainian border
Ціна NCG на price рівні plus "хаб cost плюс of транспорт"
transportation to Western Ukrainian border
Source: Bloomberg. Energy conversion for NCG as 1 tcm = 10,41 MWh (GCV) - for calorific parity with Gazprom's price for Naftogaz
* – Gazprom’s price for Naftogaz doesn’t include transportation cost of entry to Ukraine (USD 12,47/1000 m 3 )
23

Natural gas price for Naftogaz and Ukrainian population
USD/1000 m3
424,5
397,0
293,8
277,1
210,5
188
96 97
64
81
188
43 43 40 57
2012 2013 2014 2015 September 2016*
Heating Households Average іmport price for Naftogaz
Average import price include entry tariff to Ukrainian GTS (12 USD/1000 m3)
*Average import price for September is equal to the average import price for 1Q 2016 (there was not import of natural gas in 2Q, for 3Q
information is not available as for now)
24

New opportunities for Western shippers
1. Open gas market for industry segment
• nearly 11 bcm/y, Naftogaz’s share – only 7%
• since Q2 2017 open gas market for all consumers of natural gas => 33,8 bcm/y
2. Short-haul services
• transportation services between PL, SK, HU, RO via Ukraine
• transportation services from border to UGS and vise verse
1200 km
3. Huge available storage capacity
• as for now storages are filled at 46% (14,4 bcm/30,8 bcm)
16,8 17,1
1200 km vs 60 km
7,7 8,5
2014/2015 2015/2016
Gas in UGS at the end of injection season
Gas in UGS at the end of withdrwal season
25

Technical characteristics of GTS and UGS facilities
28,9
Belarus
6,0 5,5
Gas delivery from Russia and
Belarus to Ukraine: 287 bcm
per year.
Poland
5,0
1,5
107,5
25,5
13,0
Russia
48,5
46
Slovak Republic
92,6
14,5
13,2
5,4
Hungary
Romania
4,5
Gas transit through the
territory of Ukraine to
Europe:142,5 bcm per year.
Gas delivery from Europe to
Ukraine: 21,4 bcm
3,5
Moldova
26,8
32,5
6,0
Entry
Exit
-
26

New opportunities for Western shippers
Short-haul routes under assessment
• HU-SK 65 km
• HU-RO 56 km
• PL-SK 146 km
• PL-RO 204 km
• PL-HU 191 km
• SK-RO 96 km
• PL – UGS 42 km
• SK – UGS 128 km
• HU – UGS 158 km
• RO - UGS 143 km
27

New opportunities for Western shippers
Trans-Balkan Pipeline
• GR-BG-RO-UA
• Capacities available at T-1 pipeline (~2 bcm)
• Reverse flow will be available soon
• Bi-directional from 2019 (up to 5.3 bcm)
• Technically UTG can execute bi-directional
flow between Western borders (SK, PL, HU)
and Southern borders (RO, BG*, GR*, TR*) up
to 20 bcm
28

New opportunities for Western shippers
1. Open gas market for industry segment
• nearly 11 bcm/y, Naftogaz’s share – only 7%
• since Q2 2017 open gas market for all consumers of natural gas => 33,8 bcm/y
2. Short-haul services
• transportation services between PL, SK, HU, RO via Ukraine
• transportation services from border to UGS and vise verse
1200 km
3. Huge available storage capacity
• as for now storages are filled at 46% (14,4 bcm/30,8 bcm)
16,8 17,1
1200 km vs 60 km
7,7 8,5
2014/2015 2015/2016
Gas in UGS at the end of injection season
Gas in UGS at the end of withdrwal season
29

Underground gas storages
30.8bcm
technical capacity
260mln|day
max withdrawal rate
252mln|day
max injection rate
30

Thank you very much for your attention!