UKRAINIAN GAS HUB · 6 Ukrainian gas hub a chance for Europe What is a Gas Hub? 1. Gas hub defined...
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Policy Paper UKRAINIAN GAS HUB – A CHANCE FOR EUROPE FINLAN D NORWAY SWEDEN DENMARK North sea Baltic sea ESTONIA LATVIA LITHUANIA GERMANY POLAND CZECH REPUBLIC M O L D O V A S L O VA K IA A U S T R I A B E L G I UM H U N G A R Y U N I T E D K I N G D O M IRELAND ROMANIA SERBIA BULGARIA FRANCE C R O A T IA ITALY GREECE PORTUGAL SPAIN
Transcript of UKRAINIAN GAS HUB · 6 Ukrainian gas hub a chance for Europe What is a Gas Hub? 1. Gas hub defined...
Policy Paper
UKRAINIAN GAS HUB – A CHANCE FOR EUROPE
FINLA
ND
NORWAY
SWEDEN
DENMARK
North sea Baltic sea
ESTONIA
LATVIA
LITHUANIA
GERMANY POLAND
CZECH REPUBLIC
MOLDOVA
SLOVAKIA
A USTRI A
BELGIUM
HUNG ARY
UN
ITED
KIN
GDOM
IRELAND
ROMANIA
SERBIA
BULGARIA
FRANCE
CROA
TIA
ITALY
GREECE
PORTU
GAL
SPAIN
This report has been created under the Ukrainian Think Tank Development Initiative, implemented by the International Renaissance Foundation (IRF) in partnership with the Think Tank Fund (TTF) and funded by the Embassy of Sweden in Ukraine (SIDA).
The views and interpretations expressed in this report are the authors’ and do not necessarily reflect those of the Government of Sweden.
DiXi Group is Ukrainian think tank involved in research and consultations related to information policy, energy, security, and investments.
Our mission is to be a driving force of high-quality changes in the energy sector, in order to achieve good governance and responsible consumption on the way towards sustainable energy. These changes envisage establishment of free and competitive markets with a high level of transparency, efficient regulation and respect for the rule of law principles, effective production and consumption of energy resources, overcoming corruption and other negative phenomena.
DiXi Group does not take any political positions; therefore, the views expressed in this publication are those of the authors.
This publication is available for downloading from the information-analytical resource Ukrainian Energy (www.ua-energy.org).
For additional copies of this document and further information, please contact:
02095, Kyiv, 24 Sribnokilska Street, P.O. Box 68
© NGO DiXi Group, 2016© SIDA, 2016Layout – Taras MosienkoPrinted by SiLa LLC
Prepared by Lukas Kulich, Science Po, DiXi Group Fellow
IntroductionThe current decade is far from being finished but it has already became an important part of modern Ukrainian history. Ukrainian governments were for far too long undecided in what direction to choose for the development of their country: either to align with the European Union or with the Russian Fed-eration. When the former Ukrainian President Viktor Yanukovych refused to sign the Ukraine-European Union Association Agreement in November 2013 and thus decided to comply with the Russian Fed-eration, pro-EU Ukrainians assembled in the Maidan square where violent clashes between police and protesters took place in the early 2014. Yanukovy-ch then fled to Russia in March of the same year. Ukraine consequently started new period in its his-tory with the desire to achieve economic prosperity and to join the European Union.
There is nevertheless a long road ahead for Ukraine in its quest to achieve these objectives. The coun-try’s economy had been for too long dominated by personal interests of oligarchs. Ineffective adminis-tration and corruption continue to reign in Ukraine.
Effective implementation of legislation is hard to achieve and economic growth together with busi-ness creation have fallen considerably since the War in Donbas. Until the Revolution of Dignity, Ukraine’s energy sector had been heavily dependent on Rus-sia due to both Gazprom’s monopolistic position as supplier in the Ukrainian gas market and Kremlin’s influence on Ukrainian officials.
The 2013 rupture with Yanukovych’s ancient régime gave Ukraine a unique opportunity to create a liber-alized and healthy economy. In order to achieve this objective, a stable gas supply is needed. Gas is one of the most important elements in Ukrainian economy: it is not only used for energy-intensive industrial re-gions in the East of Ukraine but it is also an essential fuel for residential heating. This said, gas supply was also Ukraine’s weak spot since the country had been reliant only on the Russian Behemoth - Gazprom. Af-ter the unlawful annexation of Crimea by Russia in March 2014, the need to drift away from Russian gas and to diversify gas supply became more important than ever before in Ukraine.
4Ukrainian gas hub – a chance for Europe
52,6
26,8
36,5
44,8
32,9
25
14,5
6,1
66,3
51,957,6 59,3
54,850,4
42,6
33,3
79,34%
51,64%
63,37%
75,55%
60,04%
49,60%
34,04%
18,32%
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
70,00%
80,00%
90,00%
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013 2014 2015
Gas v
olum
e (in
bcm
)
Russian Gas import (bcm) Ukraine’s gas consumption (bcm) Dependence Ratio
4
Creation of a gas hub in Ukraine plays an impor-tant role in achieving gas supply diversification and liberalization of Ukrainian gas market. Gas hubs concentrate large quantity of gas supply that as-sures long-term energy security for the country, as well as gas-on-gas competition, which pushes the prices of blue fuel down. Gas hub will furthermore contribute to the improvement of overall business environment in Ukraine and to further Ukrainian in-tegration into the European Union. In the first part
of this report (‘What is a Gas Hub?’), the report will present the theory behind functioning of a gas hub and associated energy exchanges. In its second part, (‘Creating Gas Hub’), the report will list all the necessary elements for its design and hub creation in Ukraine. In the third part (‘Threats and Opportu-nities to Gas Hub Project’), the report will present potential opportunities and obstacles to the gas hub launch. The report will then finish with a series of recommendations.
UKRAINIAN DEPENDENCE ON RUSSIAN GAS PIPELINE IMPORTS 2008-2015*
* Dependence ratio is calculated as the division of Russian gas imports by Ukraine’s overall gas consumption for a specific year. Data retrieved from http://naftogaz-europe.com/article/en/NaturalGasSuppliestoUkraine and http://www.naftogaz.com/files/Zvity/Naftogaz_Annual_Report_2015_engl.pdf, p. 86
5Policy Brief
3330,3
27,5 29,7 31,534,3 33,1 34,1 34,2
29,7 29,6 28,9 29,2 27,9 28 2724,2
18,9
75,6 75,7 73,470,5 69,8
76,3 75,8 76,4 73,969,8
66,3
51,957,6 59,3
54,850,4
42,6
33,8
44%
40%
37%
42%
45% 45%44% 45%
46%
43%45%
56%
51%
47%
51%
54%
57% 56%
0%
10%
20%
30%
40%
50%
60%
0
10
20
30
40
50
60
70
80
90
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Gas v
olum
e (in
bcm
)
Ukraine's Non-Industrial Gas Consumption 1998-2015
Gas Consumption in Household, DNCs, Government Financed Institutions Total Gas Consumption Gas Consumption Ratio
UKRAINIAN DEPENDENCE ON RUSSIAN GAS PIPELINE IMPORTS 2008-2015*
* Gas Consumption Ratio is calculated as the division of non-industrial consumption (households, district heating companies and governmental institutions) by Ukraine’s total gas consumption for a specific year. Data retrieved from http://naftogaz-europe.com/article/en/GasConsumptioninUkraineeng.
FINLA
ND
NORWAY
SWEDEN
DENMARK
North sea Baltic sea
ESTONIA
LATVIA
LITHUANIA
GERMANY POLAND
CZECH REPUBLIC
MOLDOVA
SLOVAKIA
A USTRI A
BELGIUM
HUNG ARY
UN
ITED
KIN
GDOM
IRELAND
ROMANIA
SERBIA
BULGARIA
FRANCE
CROATIA
ITALY
GREECE
PORTU
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SPAIN
6Ukrainian gas hub – a chance for Europe
What is a Gas Hub?
1. Gas hub defined
Simply speaking, a gas hub is a location where sev-
eral gas pipelines interconnect. The interconnection
of several supply pipelines represents an opportu-
nity to trade and physically exchange gas between
a large number of buyers and suppliers. Whilst the
first gas hubs were established in the United States
as early as in the 1950s (e.g. the Henry Hub in Loui-
siana), the concept of gas hubs came to Europe sig-
nificantly later except the United Kingdom which
established its National Balancing Point (NBP) in
1990s. The majority of gas hubs in continental Eu-
rope have been created only in the last 10 years and
their development was catalyzed with the arrival of
Liquid Natural Gas (LNG) into European gas market.
Among the most important gas hubs in Europe are
the Title Transfer Facility (TTF) in the Netherlands,
GASPOOL in Germany, PEG Nord in France and Cen-
tral European Gas Hub (CEGH) in Baumgarten, Aus-
tria, which was created just in 2013.
A gas hub can be either physical or virtual. Physical
hubs are placed in a specific geographical location
where pipelines physically interconnect and where
the entire gas transmission system is located; they
therefore operate as a single system. Physical gas
hubs are used more in the United States (e.g. the
Henry Hub) than in Europe where virtual gas hubs
are used more extensively.
Virtual (also known as balancing) hubs cover wider
geographical area, represented by a national or a
transnational gas network. In a virtual gas hub, the
authority operating the gas transmission network
hub may accept gas at any point of the geographical
zone covered by the hub; a virtual hub is thus a bal-
ancing point inside a pipeline system. Whilst physi-
cal hubs permit larger volume trading, more partici-
pants may entry gas trading in virtual hubs. Contrary
to physical hubs, participants in virtual gas hubs can
choose among various exit/entry points within the
gas grid and have no obligation to arrange transpor-
tation of gas; the transportation of gas within the
grid is the obligation of an independent Transmis-
sion System Operator (TSO).
The presence of multiple supply gas pipelines in
gas hubs will create gas-on-gas competition, which
will push gas prices down. Moreover, the interplay
of supply and demand in gas hub trading will allow
for the discovery of gas market price. Gas hubs thus
7Policy Brief
What is a Gas Hub?
BOX 1: WHAT IS HENRY HUB?
Henry Hub is a physical gas hub located in Erath, Louisiana. It was indirectly named by William Henry, a
German national who immigrated to the United States in 1840s. Henry Hub is owned by Sabine Pipe Line
LLC (a subsidiary of Chevron) and interconnects four intrastate and nine interstate gas pipelines owned
by private and public operators. Its futures contracts have been traded at the New York Mercantile
Exchange (NYMEX) since 1990s.
The hub as such does not transport big quantities of gas (only 1.8 billion cubic feet, i.e. 50.97 mcm, per
day) despite large number of associated exchange trading: most of futures contracts are actually not
physically delivered but cleared at the NYMEX exchange. With 400 000 contracts being traded every
day, Henry Hub is very liquid and became the benchmark for other gas prices.
Henry Hub is nevertheless not a 100% physical hub. There are significant distances between entry
and exit points and compressor stations; Henry Hub should be thus imagined as a ‘bowl of spaghetti’.*
Nevertheless, due to the tight concentration of pipelines at one space, Henry Hub may be imagined as
a gas exchange point and therefore to be classified as a physical hub.
* Rusty Braziel, “Henry The Hub, I Am I Am – Understanding Henry Hub: How Changing Natural Gas Flows Will Impact The Benchmark“, RBN Energy LLC, published on 23 September 2012, https://rbnenergy.com/henry-the-hub-i-am-i-am-understanding-henry-hub
** Rusty Braziel, “Henry The Hub, I Am I Am – Understanding Henry Hub: How Changing Natural Gas Flows Will Impact The Benchmark“
Trunkline
Texas Gas Columbia Gulf
Sonat
Gulf South
Bridgeline
Acadian
Trunkline
Sabine
NGPL
Sea RobinJefferson island
Henry Hub
Location of Henry Hub and Respective Pipelines in Erath, Louisiana**
8Ukrainian gas hub – a chance for Europe
TYPES OF SERVICES OFFERED AT GAS HUBS
Below is the list of the most common services at gas hubs (the services offered may vary from one gas
hub to another):*
• Transportation: gas transportation within the hub, gas transportation from one pipeline to
another, hub-to-hub transportation
• Storage: short-term (so called ‘parking’) or long-term
• Peaking: selling additional gas in the case of unexpected increases in demand
• Title transfer: changes in ownership of a specific volume of gas present in a hub
• Gas loaning: an advance of natural gas repaid later by the shipper within a short-term period
• Gas management: compression, balancing, pooling/volume aggregation
* Adapted from “Conceptual design for a virtual gas hub(s) for the east coast of Australia”, FTI Consulting, December 2015, http://www.aemc.gov.au/getattachment/98035b44-a513-4d34-a5a0-9048b7166db3/FTI-Consulting-%E2%80%93-Conceptual-design-for-a-virtual-g.aspx, p. 37, 38
help significantly improving overall efficiency of
gas markets.1 The gas-on-gas competition in gas
hubs offers significantly lower market prices than
those in long-term contracts (LTCs) signed with ma-
jor gas suppliers2 and eliminates to a large extent
political motivations behind gas supply. While the
oil-indexed LTCs are still present in Europe, they are
progressively fading off: major gas suppliers such as
Gazprom are unwillingly moving to a price area iden-
tic or at least comparable to spot gas prices by offer-
ing significant discounts in order to secure demand
for their products. Gas hubs promote also futures
exchange trading, hedging against eventual price
risks and financial speculation.
Gas hubs are important in assuring short-term en-
ergy security: gas can be purchased from hubs to
cover short-term hikes in demand (especially dur-
ing heating seasons) or unexpected supply disrup-
tions. They play nevertheless a key role in gaining
long-term energy security too: thanks to the stored
volumes of gas from a large number of suppliers, a
1 Several gas hubs (e.g. the Henry Hub in the United States or National Balancing Point in the United Kingdom and Title Transfer Facility in the Netherlands) have already reached a significant level of maturity defined by a high churn rate and thus offer a benchmark gas price. This is not the case of gas hubs in Central and Eastern Europe which, contrary to the North-Western Europe are yet to reach maturity. For more information, see Heather (2015)
2 After the creation of NBP in the United Kingdom, the gas-on-gas prices were as low as 30% compared to LCSs in late 1990s. Heather (2010), p. 12
country dispose of a sufficiently high gas storage
and is no longer dependent of one major provider. In
addition to energy security, gas hubs highly increase
political and economic importance of the country in
which they are located. They favour integration of
regional gas markets into a transnational or even
the world gas market. In order to succeed with this
integration, it is beneficial that several already func-
tioning hubs exist within the geographical space of
a planned transnational gas market and that these
hubs can trade between themselves without any
economic or technical barriers (for this purpose, a
sufficiently developed gas interconnection is need-
ed to assure that gas molecules may flow in any
direction).3 Gas hubs thus represent the key ingre-
dient for development of further energy integration
into a transnational gas market.4
2. Pre-requisites for gas hub creation and functioning
In order to establish a gas hub, several require-
ments are to be met. Firstly, a fully liberalized gas
market is crucial in order to create competition be-3 The Energy Community, created in 2006, is an example of such effort: it
comprises EU states, Albania, Bosnia and Herzegovina, Kosovo, Republic of Macedonia, Moldova, Montenegro, Serbia, Georgia and Ukraine. The non-EU states of the Energy Community are committed to implement EU’s acquis communautaire in the fields of energy what promotes their integration to the Energy Community and finally to the European Union.
4 Heather (2015), p. 12
9Policy Brief
FIVE MAIN REQUIREMENTS THAT LEAD TO SUCCESSFUL TRADING
Heather (2015) mentions in his paper on the evolution of European traded gas hubs 5 main elements
necessary for creation of a successful gas exchange:*
• Liquidity: how quickly it is possible to convert an investment portfolio to cash without
affecting the asset’s price (standardization of traded contracts leads to increased liquidity)
• Volatility: energy markets tend to be very volatile and also very liquid, they are also very
sensitive to external information
• Anonymity: clearing houses allow for trade between both ‘big’ and ‘small participants on
unbiased basis
• Market Transparency: openness of public information increases traders’ confidence in
markets
• Traded volumes: the importance of gas hub increases with the increase of traded volumes of gas
* Adapted from Heather (2015), p. 7-8
tween suppliers needed for market price discovery
and for the consequent pushing of gas prices down.
Secondly, a gas hub must attract a large number
of suppliers and buyers in order to assure efficient
competition and to have a sufficiently high gas in-
flow. High level of transparency in gas trading is
one of the necessary elements how to attract gas
suppliers and buyers. Exchanges in gas hubs must
be carefully controlled and regulated and the data
from hub trading must be made accessible to pub-
lic to ensure transparency and the trust of traders.
Thirdly, the Third Party Access (TPA) is necessary for
a gas hub creation. The gas grid must be unbundled;
that is the transmission network operator becomes
independent of gas producers and suppliers in or-
der to eliminate any commercial or political abuse
done to gas purchase. However, unbundling of the
gas network and establishing an independent TSO
can represent a complicated process, as it requires
substantial changes in energy legislation and regu-
lation.
Furthermore, both virtual and physical hubs need
an authority which will manage and oversee them.
This process is nevertheless more complicated in
virtual hubs where the TSO is responsible for all
the transport, storage and balancing of gas within
the grid’s large pipeline system. Establishing a set
of legal and administrative rules for gas transmis-
sion, trading and associated responsibilities is indis-
pensable for setting both legal and technical basis
of both gas hub functioning and the associated gas
exchange.5 The TSO is also responsible for balancing
the amounts of linepack (gas currently ‘squeezed’ in
pipeline) and in order to prevent any gas shortages
on a daily basis.
Next, the entry to the gas hub must be made on a
non-discriminatory basis. While both entry and exit
to physical hubs are limited to interconnected gas
supply pipelines, virtual hubs dispose of multiple
geographically-dispersed entry points (e.g. storage
or production sites, pipelines from foreign gas sup-
pliers, LNG re-gasification terminals) as well as exit
points (LNG compression terminals, transportation
pipelines, district heating companies, power plants
or industrial sites). Entry and exit tariffs for gas flows
are nevertheless necessary to sustain activities of
TSOs linked to management of gas transportation
and pipeline maintenance (in Continental Europe,
suppliers are obliged to book the capacity which
shall be used for entry and exit of their gas supply
and the capacity booked can be traded on a second-
ary market). A postage stamp tariff model is used 5 An example of such code is the Uniform Network Code for the National
Balancing Point in the United Kingdom, see https://www.ofgem.gov.uk/licences-codes-and-standards/codes/gas-codes/uniform-network-code.
10Ukrainian gas hub – a chance for Europe
to apply the same tariff for a uniform gas unit when
entering or leaving the market but other models of
tariff pricing are also used e.g. matrix approach, dis-
tance to the virtual point etc.6
Other gas hub requirements are of financial na-
ture: a large number of buyers is needed to secure
a sufficient level of liquidity in the market. Stand-
ardization of contracts helps to achieve simplicity
in gas trading and offers possibility to contract gas
on spot and future basis. This opens space for fu-
tures market, financial hedging and speculation. Fi-
nancial speculation shall not be nevertheless seen
as a threat to gas markets: financial actors are im-
portant as they increase market’s liquidity needed
for sustaining the market. Creation of an online-
trading platform based on a bidding system with a
low transaction cost is thus absolutely crucial for an
efficient functioning of a gas hub. For this purpose,
a clearing house processing matching bits between
suppliers and traders on the basis of anonymity has
to be equally established (the clearing house would
increase the confidence of traders by removing
counter-party risk and thus allow investors to op-
timize their portfolios). At the same time, gas hubs
still allow to exchange gas in gas on a bilateral or
over-the-counter (OTC) basis.
6 For different pricing entry-exit tariffs, see paper by Maurice Vos, Bert Kiewiet and Konstantin Petrov, “Gas Transmission Pricing Models For Entry-Exit Systems and Implementation Options“, http://crninet.com/2013/2b.%20Kiewiet-Paper.pdf
The process of gas hub construction is nevertheless
very lengthy and it takes generally 10-15 years to
achieve a mature gas hub.7 Different actors (state,
suppliers, traders etc.) with different interests and
different degree of commitment to the project have
to participate together. As it has been already seen
above, some actors involved in the allocation of en-
ergy resources will not agree with a fully liberalized
gas market, as their rent from activities associated
with gas will decrease with the rise of market trans-
parency. Moreover, the nature of gas hub is equally
determined by states’ cultural attitude towards
trade: in Central and Eastern Europe, we may wit-
ness more regulated gas hubs trading than e.g. in
the United Kingdom what is a country traditionally
oriented towards free trade. The cultural and politi-
cal attitude towards the establishment of gas hubs is
especially important in the case of post-communist
countries in transition, such as the case of Ukraine.
7 Heather (2015), p 6
TRADE IN ENERGY MARKETS
There are two ways for trading in energy markets:
1. Over-the-counter (OTC) trading: bilateral trading between a buyer and a seller, which may
be dealt directly or mediated via brokers. Forwards are OTC contracts, mandating delivery of
a commodity on a specified date. Forwards are settled only after the delivery of gas, there is
therefore a full counter-party risk throughout all the delivery period.
2. Energy exchanges: matching bids of buyers and sellers on anonymous basis (clearing). Futures
contracts are traded in energy markets which, like in the case of forwards, mandate a delivery
of commodity. However, futures contracts are processed by a Clearing House, which requires
from buyers and sellers a “margin” in order to cover associated counter-party risk.
Contracts traded may be either spot (Intra Day, Day Ahead), prompt (Balance of Week, Weekend,
Balance of Month), or near/mid-far/curves (3 months, 6 months, 1 year…).
11Policy Brief
DEVELOPMENT OF A GAS HUB TO MATURITY
Heather (2015) describes ‘the path of maturity’ of a gas hub as follows:*
“The process usually starts with a move to Third Party Access (TPA) to the network infrastructure,
often requiring legislative changes to force incumbents to release infrastructure capacity and gas
supply volumes thus incentivizing independents to enter the market. There is a requirement for the
adoption of rules and regulations governing the physical side of the business, whilst the emergence of
standardized contracts will favour the commercial aspects. This will then be followed by bilateral trading,
often aided by the first brokers, helping to create trading opportunities between counterparties. These
trades start to be reported in the trade press, thus creating the beginnings of a transparent market.
With price disclosure comes price discovery which in turn attracts more players to the market, often at
this stage smaller physical traders and the first tentative moves by financial players too. The creation
of exchange products (futures), based on the underlying physical contracts, offers greater access to
the market, especially by non-physical players (who will always close out their trading positions before
maturity).
Gradually, as increasing numbers of varied participants come to trade in a particular market, a forward
curve will develop and this will be used for risk management purposes. The final stage of maturity is
when the hub develops sufficient liquidity for traders to use specific traded products (such as the Day
Ahead or the Month Ahead) as indices on which to price their physical transactions.”
* Heather (2015), p 6-7
Indices derived for LT Contracts
Liquid Forward Curve Develops
Futures Exchange
Non-Physical Players enter
OTC Brokered Trading
Balancing Rules&Standardised Trading Contracts
Price Discovery and Disclosure
Bi-Lateral Trades
Third Party Access to Pipelines/Regas Terminal
10+years?
Source: H.Rogers (OIES)
HUBS‘ PATH TO MATURITY**
** Heather (2015), с. 7
12Ukrainian gas hub – a chance for Europe
Creating Gas Hub in Ukraine
3. Why to create a gas hub in Ukraine?
The annexation of Crimean Peninsula and the war in
the Donbass Region harmed the Russian-Ukrainian
relations for years to come. Ukraine alone can no
longer rely on Gazprom as a sole supplier for gas
and the country must undertake a very thorny but
important path to achieve energy security on a long
term. Of the several ways of achieving energy secu-
rity, diversification of gas supply is by far the most
efficient way of securing gas inflow. Gas hubs permit
gas trade between a substantial number of gas sup-
pliers and buyers. Since an important concentration
of gas can be stored on long term; gas hubs repre-
sent therefore the key element in Ukraine’s energy
diversification efforts. Establishing a new gas hub
does not mean a complete end of Russia-originated
gas in Ukraine but it is nevertheless an important
limitation to Russia’s influence over Ukraine’s en-
ergy sector.
A large volume of gas traded in the hub will assure
that there will be a sufficient amount of gas supply
for Ukraine’s domestic consumption and that there
shall not be any additional worries whether the
country will have a sufficient amount of gas for win-
ter heating seasons. Moreover, the withdrawal from
LTCs and the implementation of gas-on-gas com-
petition policies will push gas prices further down
and thus alleviate the financial burden bestowed
over the country.1 However, there is a long road to
go. Ukraine did not undergo any major reforms on
gas market liberalization before the Revolution of
Dignity and it has to cope with the liberalization of
gas market only now. Ukraine has therefore to push
itself towards the completion of substantial reforms
on liberalizing its energy sector and must create a
competitive business environment for gas produc-
tion, transport and trading.
Besides the economic advantage, establishing a
new gas hub will have a very important political im-
pact. Ukraine showed after the tumultuous events
of 2013-2014 its determination to end with the till-
then reigning status quo, based on the constant
switching of its favour between the European Un-
ion and the Russian Federation. Ukraine finally reaf-
firmed itself as a country willing to join the EU and
1 In 2015, then-Prime Minister Arseniy Yatsenyuk stated that despite Gazprom had offered a discounted price of $212 per thousand cubic me-ters, supplies from Europe were even cheaper and cost $200 per tcm. Leonid Bershidsky, “How Ukraine Weaned Itself Off Russian Gas”, Bloomb-erg View, published 12 Jan 2016, https://www.bloomberg.com/view/arti-cles/2016-01-12/how-ukraine-weaned-itself-off-russian-gas
13Policy Brief
to commit itself to adopting reforms in accordance
with the EU acquis communautaire. The creation of
a gas hub would not only create a Ukrainian regional
gas market but would also allow for Ukraine’s fur-
ther integration into the European Energy Commu-
nity. The gas hub will be beneficial for the European
Union too: a successful development of the gas hub
will not only further weaken Gazprom’s still-lasting
commercial power over the European gas market
but will assure energy security for the neighbouring
EU countries (Hungary, Poland, Slovakia, and Roma-
nia) on a long term. Creating a new gas hub will thus
help progressively establish Ukraine as an important
political power in the region and will strengthen its
image as a politically responsible country willing to
achieve stability and prosperity.
Finally, a further liberalization of Ukraine’s gas mar-
ket will help in achieving even more transparency in
the energy sector. Despite the fact that Ukraine has
done already a lot in order to diminish the corruption
and power of pro-Russian Ukrainian oligarchs in the
energy sector, some space for political and economic
manipulation unfortunately still exists. However, the
Ukrainian government must show its willingness to
implement the necessary measures to achieve im-
portant levels of transparency if it wants the gas
hub project succeed, even despite the objections
of pro-Russian officials still present in the Ukrainian
government and ministries. The creation of the gas
hub will therefore greatly help in efforts to increase
transparency in Ukrainian gas market.
4. Where to create a new gas hub?
The most important question to be raised about gas
hub launch in Ukraine is whether the new gas hub
should be physical or virtual and where it shall be
created. This report argues that due to the specific
allocation of Ukrainian gas pipelines and gas stor-
ages, the new gas hub shall work as a physical hub
and shall be located in the west of Ukraine.
Currently, Ukraine disposes of 12 gas storages in its
territory (one additional storage facility is located in
the occupied Crimea) with a total current storage ca-
pacity of 31.3 bcm.2 Five storages are concentrated
in the western Ukraine (Bilche-Volytsko Uherske,
Uherske XIV-XV, Oparske, Dashavske, Bohorod-
chanske) with a total capacity of 25.32 bcm what
represents 84% of the country’s storage capacity.
Gas storages at the east of the country are aimed
primarily to secure Kyiv’s domestic consumption,
to provide gas inflow to regions focused on heavy
industry, or they are located closer to the unstable
conflict zone. In order to decrease any costs linked
to the gas transportation and avoid the unstable
Eastern region of Ukraine, it is desirable to establish
a new gas hub in the western Ukraine at the proxim-
ity of EU member states.
The Bilche-Volytsko-Uherske gas underground
storage facility represents an optimal spot for the
creation of a new gas hub. With 17 bcm of storage
capacity and being the westernmost among all of
Ukrainian facilities, it is the largest underground gas
storage in Europe3 and offers the best possibility for
the concentration of multiple sources of gas. Gas
pipeline infrastructure is well-developed in this re-
gion thanks to the presence of the
interconnection of several pipelines (Soyuz, Prog-
ress, Urengoy-Pomary-Uzhgorod, Kyiv-Zakhidnyi
Kordon I/II, Dolyna-Uzhgorod, Ivatsevychi-Dolyna
I/II/III). The Bilche-Volytsko-Uherske gas under-
ground storage has therefore a big potential to
become an important European crossroad through
which gas will be able to flow into and from the Eu-
ropean Union. It will play an important role in sup-
plying gas to over all the territory of Ukraine thanks
to the gas interconnection points with Poland (with
capacity of up to 1.5 bcm per annum), Hungary (up to
5.5 bcm per annum), and Slovakia (up to 15 bcm per
annum).4
2 “Gas Storage”, utg.ua, http://utg.ua/en/utg/gas-transportation-system/underground-gas-storage.html, accessed 8 October 2016.
3 Pyotr Vorobyov, “Ukraine’s Gas Transmission System: Problems and Pros-pects”, strategic-culture.org, published on 2 July 2015, http://www.stra-tegic-culture.org/news/2015/07/02/ukraine-gas-transmission-system-
problems-and-prospects.html 4 “Ukraine’s Gas Sector Reform: A Future Win-Win for Ukraine and Europe“,
Policy Brief by DiXi Group, published 10 May 2016, http://dixigroup.org/eng/publications/ukraines-gas-sector-reform-a-future-win-win-for-ukraine-and-europe/
14Ukrainian gas hub – a chance for Europe
Since this gas storage facility is big enough to ac-
commodate substantial amount of gas and other gas
storage facilities in Ukraine are not full even during
the winter season, a physical hub is preferable to a
virtual gas hub since the latter would have to cope
with complex administrative rules over a large terri-
tory. Creating virtual hub is equally not desirable for
the reason that Ukraine does not need any gas entry/
exit points on the north and east of the country (Rus-
sia and Belarus being dominated by Gazprom) as the
gas market will focus to the west of the country.
The other four gas storages located in the Western
Ukraine will be used mainly for supplying domestic
demand in Ukraine, especially for the winter heating
season, but may be used as the storages of last re-
sort in extreme cases if the Ukrainian domestic gas
demand permits so. So far, there has been no im-
pediments to pipelines in the areas currently under
state of hybrid war. It is highly improbable that pro-
Russian separatists would attack these pipelines as
it is in the Russian interest to keep flows of gas to
Europe safe and unharmed; doing otherwise would
constitute a setback for Moscow. However, in this
highly unstable region, this possibility cannot be to-
tally excluded.
The new gas hub could operate on a basis compa-
rable to the Henry Hub in the US: it will function as
a physical hub where several gas supply pipelines
physically interconnect themselves and where buy-
ers are allowed to purchase gas. For this reason, a
completely new pipeline infrastructure shall be con-
structed in order to assure an appropriate intercon-
nectedness between the supply pipelines and the
pipelines used to distribute the gas after the deal.
The Bilche-Volytsko-Uherske storage disposes of
excellent interconnection capability with 291 gath-
ering wells in Bilche-Volytske and 50 wells in Uher-
ske deposit5, which would – in the case of a high
5 N. Prytula, R. Boroviy, M. Prytula, O. Khymko, “Matematichna model Bilche-Volitskoho Pidzemnoho Skhovyshcha Hazu (Mathematic Model of the Bilche-Volytsko-Uherske storage, own translation), 2010, accessed on October 12, http://www.nbuv.gov.ua/old_jrn/natural/Vnulp/Komp-nauky/2010_686/27.pdf
UKRAINE’S GAS STORAGES AND THEIR BALANCE*
* Image taken from http://naftogaz-europe.com/article/en/englstorage, accessed 16 October 2016
15Policy Brief
diversity of gas supply inflows – offer the capacity
needed to accommodate gas of all the different ori-
gins. The construction of additional infrastructure
for interconnection may prove as costly but it can
nevertheless help in achieving significant decrease
on gas purchase on a long-term basis.
The gas hub must assure to acquire a sufficient
number of compressor stations in order to assure
that any gas purchased by Ukrainian suppliers will
be able to flow anywhere in the country. Since the
target audience of the gas hub is both Ukrainian do-
mestic market and the countries of the European
Union, the gas hub must assure that there will be
enough pipeline capacity to deliver gas to both the
East and West, pipelines with bi-directional flow
would be therefore more than desirable. It is nev-
ertheless important to underline the fact that gas
pipelines and gas storages in Ukraine must be kept
in best condition; Ukrtransgaz together with the au-
thority managing the new gas hub must assure that
both pipelines and gas storages are well maintained
and regularly tested for any potential flaws. Any dis-
ruption in gas inflows or outflows would severely
damage gas trading and would harm the confidence
of traders in Ukrainian gas trade.
5. Creating a Network Code for new gas hub
It is necessary to create a Network Code for the
new gas hub that shall be applied only to the ju-
risdiction of the hub. This code shall contain all the
necessary provisions for the transmission of traded
gas in compliance with the Law “On the Natural Gas
Market”, mainly the non-discriminatory access to the
local grid of interconnected pipelines and provisions
in alignment with the rules presented in the Third
Energy Package on balancing gas volumes in un-
derground storage facilities. This Code should also
establish an overseeing Authority responsible for
a good of management of the grid. It is preferable
that this Authority will be independent from Nafto-
gaz (if possible, it should be independent even from
Ukrtransgaz which should not have more than 49%
stake in order not to interfere in any way with the
functioning of the hub). Should not the new gas hub
authority be independent, any non-transparent gas
flows will create space for manipulations and thus
decrease the hub’s credibility. However, cooperation
with Ukrtransgaz should not be excluded since the
hub will serve also as an important gas supply for
Ukrainian domestic gas and Ukrtransgaz shall be
responsible for managing transport of gas into and
out of the gas hub.
The gas in the Bilche-Volytsko-Uherske storage fa-
cility will have two main objectives: to serve as gas
supply for the consumption in Ukraine and to serve
also as an emergency “package” in the case of high
gas demand. For this reason, the Resolution “On
Approval of the Code of Gas Transmission System”6
should introduce new provisions concerning the co-
operation with the gas hub Authority in which new
inter-storage balancing mechanism will be intro-
duced. In the period of high gas demand (e.g. heat-
ing season), the balancing mechanism will activate
independently of the Gas Hub Authority the pur-
chases of gas for the Ukrainian hinterland to cover
any eventual gas shortages without disrupting gas
trades already made or trades being dealt with (the
main idea is that suppliers will purchase gas without
any disruption of the market but will take use of the
existing gas in the hub for domestic purposes).
Further additions shall equally be made to the
NEPURC resolutions “On Approval of the Code of
Gas Storage Facilities”7 and “On Approval of the Code
of Gas Distribution Systems” 8. These additions shall
introduce provisions on the separation of the hub’s
gas storage facilities from Naftogaz or the future
storage operator, as the new gas hub will represent
a new independent jurisdiction. In order not to hin-
der interests of foreign customers in storing their
gas in Ukraine, a non-discriminatory access of third
parties to the gas storage facilities within the gas
hub should be introduced into the resolution. The
modified resolutions should also contain new provi-
sions linked to the technical aspects of the gas hub,
such as the functioning of long and short term gas
storage, gas pooling, title transfer etc.
6 The resolution can be found in Ukrainian language here: http://zakon5.rada.gov.ua/laws/show/z1378-15
7 The resolution can be found in Ukrainian language here: http://zakon3.rada.gov.ua/laws/show/z1380-15
8 The resolution can be found in Ukrainian language here: http://zakon0.rada.gov.ua/laws/show/z1379-15
16Ukrainian gas hub – a chance for Europe
6. Trading in Gas Hub
So far, two energy exchanges involved in natural gas
trading exist in Ukraine. The Commodity Exchange
Ukrainian Energy Exchange (CE UEEX) trades in all
energy commodities available in Ukraine (coal, gas,
oil, electricity, biomass). 9 UEEX was created in 2010
and it is an open trading platform pricing the prod-
ucts on the basis of fair price discovery between
supply and demand using “BETS” private electronic
system for trading. Over 360 companies are mem-
bers on the exchange, are the market of oil products
is considered as the liquid one. As for the gas mar-
ket, according to UEEX, it is not liquid in Ukraine.
Another exchange is Ukrainian Gas Exchange (UGX),
created by Ukraine’s investment bank Dragon Capi-
tal which started gas futures trading on 4 August
2016. However, the Ukrainian Gas Exchange website
offers very little information on its trading.10
Among the issues in the gas market for foreign
traders are problems with payments and booked
capacities of gas transmission system. Currently,
it is one of profound obstacles to expanding the
number of gas traders in the Ukrainian market. In
9 CE UEEX’ website: https://www.ueex.com.ua/eng/ueex/ 10 UGX’s wevsite: http://www.ugx.com.ua/
addition, barriers include the flow of documents,
as there is still no transition to EDI (electronic data
interchange) system, which would simplify market
access to international traders who used to work
with this system. Despite these concerns, the ex-
change representatives are interested in the crea-
tion of gas hub and expressed willingness to par-
ticipate in the activity11.
This report argues that trades done at the new gas
hub should be indexed to the existing exchange(s).
Such linkage will bring several benefits: 1) there
will be no additional need to create new exchange
unique only to the gas hub trading; 2) there are
established exchanges with a good credibility, 3)
no additional on-line trading platforms will not be
needed for the trading. However, it is desirable to
create similarly to the Network Code a document
on short term trading in the gas hub. The document
shall contain all the necessary provisions which es-
tablish a proper functioning of the gas hub within
the exchange and all the procedures and informa-
tion necessary for traders, such as the confirmations
on purchase, proceeding on billing and payment,
pricing, termination of contracts, liabilities, warran-
ties and force majeure.
11 Interview with CE UEEX representatives
17Policy Brief
Moreover, a special clearing house within the ex-
change shall be created and shall cooperate with
the new gas hub transmission authority in gas bal-
ancing. The exchange shall equally create standard-
ized gas trade contracts to be traded on the spot
market with futures with a specified delivery date.
The creation of the gas hub exchange is thus cru-
cial for a fully liberalized Ukrainian gas market: not
only it will greatly enhance the transparency of the
Ukrainian gas sector but it will inject the liquidity
needed to gas trading.
FINLA
ND
NORWAY
SWEDEN
DENMARK
North sea Baltic sea
ESTONIA
LATVIA
LITHUANIA
GERMANY POLAND
CZECH REPUBLIC
MOLDOVA
SLOVAKIA
A USTRI A
BELGIUM
HUNG ARY
UN
ITED
KIN
GDOM
IRELAND
ROMANIA
SERBIA
BULGARIA
FRANCE
CROATIA
ITALY
GREECE
PORTU
GAL
SPAIN
18Ukrainian gas hub – a chance for Europe
THREATS & OPPORTUNITIES TO GAS HUB PROJECT
1. Legislation on Ukrainian TSO unbundling is still ineffective
Ukraine already did a great leap forward by adopting
the Law No. 2250 “On the Natural Gas Market”, rati-
fied by Verkhovna Rada on 9 April 2015 and signed
by President Petro Poroshenko on 5 May 2015, with
most of the legislation taking effect from 1 October
2015. By early 2016, about 50 bylaws were adopted
in order to make the Law on the Natural Gas effec-
tive1. The primary objective of this law is clear: to lib-
eralize Ukrainian gas market, previously ultimately
dominated by Naftogaz and DSOs, and to harmonize
it with existing European energy legislation in order
to promote further energy integration of Ukraine
into the European Union. It thus follows the Energy
Community’s Third Energy Package and notably the
EU directives on functioning of natural gas inter-
nal market and conditions for access to natural gas
transmission networks. The law calls for TSO un-
bundling, gas market operation and regulation, non-
1 “Ukraine’s Gas Sector Reform: A Future Win-Win for Ukraine and Europe“, Policy Brief by DiXi Group, p. 3
discriminatory third party access to the gas network,
market gas pricing and energy security.2 Among oth-
er things, the law creates a viable legal environment
for introducing a foreign investor to the gas TSO, as
well as sets strict requirements effectively preclud-
ing Russian companies from such partaking.
The law did not impose any concrete measure how
to unbundle Ukrainian gas supply and transmission.
Instead of this, two alternatives for unbundling were
proposed: 1) Ownership Unbundling (OU) where pro-
ducing and supply companies are not allowed to
own majority stake in Ukrainian gas transmission
networks and vice-versa (the law stipulated that OU
would be applied by default) and 2) the Independ-
ent System Operator (ISO) model where Ukrainian
gas transmission network will remain in possession
of Naftogaz but being operated by a third party in-
dependent of Naftogaz.3 Only on 01 July 2016, Cabi-2 The Law on the Natural Gas Market may be found in English version at:
http://www.naftogaz.com/files/Information/Ukraine%60s%20Natu-ral%20Gas%20Market%20Law_engl.pdf
3 The option for Independent Transmission Operator which could be in pos-session of energy groups but would have to exist as a separated legal entity, was not mentioned in the law.
19Policy Brief
net of Ministers of Ukraine published the Resolution
No. 496, which endorsed the ownership unbundling
model, though with specific reservations necessary
for substantial distinguishing of powers between
two Ministries as much as alienation of the gas pipe-
line system from the state ownership remain legally
prohibited 4. Prior to the publication, the resolution
had been reviewed by the Energy Community Secre-
tariat.5 The ownership unbundling is done in accord-
ance to the Energy Community’s Directive 2009/73/
EC, which states that
“Under ownership unbundling, to ensure full inde-
pendence of network operation from supply and
production interests and to prevent exchanges
of any confidential information, the same person
should not be a member of the managing boards of
both a transmission system operator or a transmis-
sion system and an undertaking performing any of
the functions of production or supply. For the same
reason, the same person should not be entitled
to appoint members of the managing boards of a
transmission system operator or a transmission sys-
tem and to exercise control or any right over a pro-
duction or supply undertaking.“6
The factual implementation of the chosen unbun-
dling model is materially complicated by the ongo-
ing arbitral proceedings between Naftogaz and
Gazprom since terms and implementation of the
current gas transportation contract is in the mid-
dle of the parties’ claims. Nevertheless, both the
Energy Community Secretariat and the Ukrainian
government have provided for appropriate meas-
ures in the unbundling model. However, the Ministry
of Economic Development and Trade of Ukraine did
a controversial move in subordinating Ukrtransgaz
without any discussion what is a direct breach of
4 Unofficial English translation of this resolution can be found at http://www.naftogaz.com/files/official_documents/CMU-unbundling-resolu-tion-No496-ukr-eng.pdf.
5 The text of this review can be found at https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/4140379/32675252E16C57A6E053C92FA8C0B902.pdf
6 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:211:0094:0136:en:PDF
the rules presented in the Third Energy Package
since both Naftogaz and Ukrtransgaz would be un-
der control of a single ministry what consequently
makes unbundling void. It was revealed that this
decision is linked with 4 bn UAH tender for the fa-
vour of scandalous businessman Konstantin Grigo-
rishyn.7 The Energy Community, along with multiple
other stakeholders and donors, expressed its dis-
satisfaction with this order and the current Ukrain-
ian Prime Minister Volodymyr Groysman pledged for
a personal handling of this situation and maintained
that a full vertical unbundling of Ukrainian TSO will
take place. Although this decision has been finally
recalled, Naftogaz was unprecedently subordinated
to the Cabinet of Ministers directly.
Moreover, on September 22, 2016, Verkhovna Rada
adopted the long-waited Law No 1540 “On the Na-
tional Energy and Public Utilities Regulatory Com-
mission”. The key objective of this law is clear: to
establish an independent state Regulatory Author-
ity which will monitor and control energy and public
utilities sector. This Authority will be responsible for
a fair competition in energy markets and the correct
implementation of reforms in the energy sector. The
members of the Authority shall be chosen by an ad
hoc Selection Committee, which shall consist of 5
people (2 appointed by the President, 2 by the Par-
liament and 1 by the Government upon the recom-
mendation of the Ministry of Energy).8
Even if Ukraine’s gas market is currently in the state
of transition towards a liberalized gas market, there
is still a long way to go and as it was shown above,
the road is way too bumpy. The Ukrainian gas mar-
ket legislation is still under heavy influence of po-
litical and economic actors interested in acquiring
personal gains from the efforts for liberalization.
7 ”ANALYSIS OF SITUATION OCCURRED WITH REGARD TO THE MINISTRY OF ECONOMY’S DECISION TO AMEND THE CHARTER OF NJSC “NAFTOGAZ OF UKRAINE” RELATING TO THE CONTROL OVER PJSC “UKRTRANSGAZ”, Dixi Group, published on 16 September 2016, http://www.slideshare.net/uaen-ergy/dixi-groups-comment-regarding-the-situation-with-ukrtrasgaz.
8 ”Ukraine: Law on Energy Regulator Finally Adopted”, cms-lawnow.com, published on 7 October 2016, http://www.cms-lawnow.com/ealerts/2016/10/ukraine-law-on-energy-regulator-finally-adopted
20Ukrainian gas hub – a chance for Europe
Although the above-mentioned laws are significant
efforts, their successful implementation and avoid-
ance of particular interests is indispensable for a
creation of fully liberalized gas with a high level of
transparency without which the confidence of trad-
ers – and thus the new gas hub project – will fail. It
is thus in the interest of competent ministries and
authorities to speed up this project and make it as
transparent as possible.
2. Nord Stream 2 and Turkish Stream may represent threat to Ukrainian gas system
Russia pushes further for the diversification of its
gas supply routes in order to achieve complete de-
tour of the Ukrainian territory and to secure its gas
supply for European market. Bypassing Ukraine is
based purely on political interest without any eco-
nomic rationale: Russia wants to deprive Ukraine of
its leverage over the Russian gas flowing through
her territory, to eliminate her revenues from the gas
transport and thus to diminish its political power. In
order to mask political motivations behind these ef-
forts for the detour, Russia invokes forecasts for the
growth of gas demand in Europe.9 However, as more
renewable sources are being used, the real growth
for gas in Europe remains questionable.
One of the major Russian efforts for gas supply diver-
sification was the South Stream project. The South
Stream pipeline was projected to flow through an un-
dersea pipeline located in the Black Sea and to enter
the European continent in Bulgaria, offering gas sup-
ply to all the Balkans. However, this project was met
with a disapproval from the European Union, which
argued that the construction of this pipeline would
have resulted into the increase of Russian gas mo-
nopoly position in the region. The project was then
halted in 2014 on the basis of breach of existing Euro-
pean energy regulatory measures. South Stream be-
ing abandoned, Russia pushed for several other pro-
jects aimed on re-routing its gas despite the fact that
the pipelines supplying gas to Central Europe offered
9 Mariia Melnyk, ”Opal rozbratu. Navisho Yevrosoyuz pidihrav antiukrayin-skym planam ”Gazpromu“, Yevropeyska Pravda, published 4 November 2016, http://www.eurointegration.com.ua/articles/2016/11/4/7056945/
* Source: http://www.gazprom.com/about/production/projects/pipelines/built/nord-stream2/
NORD STREAM 2*
21Policy Brief
the shortest way to do so. Gazprom bet on two cards:
the Nord Stream 2 and the Turkish Stream.
The already existing Nord Stream 1 gas pipeline with
a capacity of 55 bcm of annual transport originates
in the Russian town of Vyborg near the Finish bor-
der, crosses the Baltic Sea and ends in Greifswald,
Northern Germany. The Nord Stream 2 pipeline
would only twin the existing Nord Stream 1 pipeline,
doubling the capacity to 110 bcm. The political moti-
vation between Nord Stream 2 is to end transits of
Russian gas through Ukraine and to use Germany as
the main point for further distribution of Russian gas
in Central Europe. Even if several European coun-
tries called for the implementation of the project
(with the strongest voice for the project from Ger-
many), the EU Vice-Commissioner for Energy, Maroš
Šefčovič, expressed his dissatisfaction with the
project, arguing that construction of Nord Stream 2
would go directly against the principles of European
gas supply diversification mentioned in the Third En-
ergy Package.10
The position of the European Commission became
shadier with the decision of the EU Commissioner for
Regulation, Margrethe Vestager, to allow Gazprom
to use more capacity in the adjacent OPAL pipeline,
which is vital for the distribution of gas in Germany
and Central Europe11 (Nord Stream 1 has been trans-
porting until now only a slightly more than it is the
half of its capacity12). The Nord Stream 2 project did
10 Georgi Gotev, ”Sefcovic embarks on third trilateral gas talks on Ukraine”, euractiv.com, published on 31 August 2016, accessed 30 September 2016, https://www.euractiv.com/section/energy/news/sefcovic-embarks-on-third-trilateral-gas-talks-on-ukraine/
11 Rachelle Toplensky, Jack Farchy, Henry Foy, ”Gazprom and Brussels agree to settle long-running dispute”, ft.com, published 26 October 2016, htt-ps://www.ft.com/content/9467b568-9b85-11e6-8f9b-70e3cabccfae
12 ”Estonia, 7 other countries send letter to Juncker on Nord Stream 2”, news-postimees.ee, published 17 March 2016, accessed on 8 October 2016, http://news.postimees.ee/3622797/estonia-7-other-countries-send-letter-to-juncker-on-nord-stream-2
*Source: http://www.gazprom.ru/about/production/projects/pipelines/built/turk-stream/
TURKISH STREAM
*
22Ukrainian gas hub – a chance for Europe
not seem to be viable but doubts about the firmness
of the EU Commission’s commitment to Ukraine’s
energy security arise after this decision. However, it
is possible to expect that the countries of Central
Europe will object the OPAL. The countries of Cen-
tral Europe (Slovakia, Hungary, and Poland) will fight
for further transit of Russian gas through their terri-
tory in order to keep their transit fee revenues; they
would also sue the European Commission for any
further decisions favouring Nord Stream 2. Moreo-
ver, Polish regulator has made already a serious
blow to the Nord Stream 2 project by arguing that
the new pipeline would be in breach with the Polish
competition law.13
Gas will nevertheless continue to flow through
Ukraine. Several countries of Central Europe have
still long-term ship-or-pay contracts with Gazprom
(Slovakia until 2028 and Poland until 2022) and
failures with delivery would prove too costly for
Gazprom.14 It is thus possible to argue that despite
the stated Gazprom’s rejection to continue to trans-
port its gas via Ukraine, gas will continue to flow,
albeit possibly in diminished volumes.
Turkish Stream aims to replace the cancelled South
Stream project: the South Stream pipelines will not
flow to Bulgaria but to Turkey which is not a member
of the European Union. Consequently, the Russian
gas in Turkey is planned to be dispatched over the
countries in the Balkans via Greece. The project was
announced by the Russian President Vladimir Putin
on 1 December 2014 but was temporally halted dur-
ing the Turkish shoot-down of a Russian aircraft al-
legedly on Turkish territory in November 2015 but it
was nevertheless resumed on 10 October 2016.15
Turkish Stream as such does not aim to completely
detour Ukraine: its target countries are located in
13 Henry Foy, Jack Farchy, “Nord Stream 2 pipeline risks delays due to Pol-ish hurdle”, ft.com, published 28 July 2016, https://www.ft.com/content/e2cf7602-5411-11e6-befd-2fc0c26b3c60
14 Ladka Bauerova, “Gas-Tranit Deal Shows Cost to Russia of Bypassing Ukraine”, bloomberg.com, published on 5 June 2015, http://www.bloomb-erg.com/news/articles/2015-06-05/slovak-gas-transit-deal-shows-by-passing-ukraine-will-cost-russia
15 Andrew Ward and Laura Pitel, “Russia and Turkey agree gas pipeline deal”, ft.com, published on 10 October, 2016, accessed on 10 October 2016, https://www.ft.com/content/52c05b6e-8f1f-11e6-a72e-b428cb934b78
the Balkans and not in the Central and Western
Europe, which constitutes the key market area for
Gazprom. However, the project leaves back-doors
opened for Gazprom: the fully built Turkish Stream
pipeline would have capacity of 60 bcm what
would give Gazprom in the case of need the pos-
sibility to detour Ukraine completely and still reach
the Central and Western European gas market. Fur-
thermore, Ukraine would lose with the construc-
tion of Turkish Stream gas flows over Ananiev-
Tiraspol-Ismail and Shebelynka-Ismail pipelines
(with total capacity of 26 bcm), supplying Romania,
Bulgaria, Greece, Turkey and Macedonia. The Eu-
ropean Commission has not pronounced itself on
Turkish Stream as it is still in the stage of studying
the case.16 Turkish Stream thus represents rather
an indirect threat to Ukraine’s energy security com-
pared to Nord Stream 2, which represents a direct
threat. However, if combined with Nord Stream 2,
Ukraine’s importance as gas transit country would
be diminished. It is therefore in Ukraine’s interest
to fight against both Nord Stream 2 and Turkish
Stream if it wishes to maintain its long-term energy
security and to keep Russian gas flowing through
its territory, the necessary condition for functioning
of the gas hub.
Establishing a new gas hub does not mean to put
end to flows of Russia-originated gas to Ukraine but
it nevertheless represent an important limitation
to Russia’s influence over Ukraine’s energy sector.
However, in order to assure gas-on-gas competi-
tion in the new gas hub, Ukraine will have to pur-
sue negotiations with the Russian Federation since
absence of Russian gas transit would decrease the
competition and cause serious damage to the gas
hub project. The negotiations between Russia and
Ukraine would be difficult, especially after the an-
nexation of Crimea and the war in Donbas. They are
nevertheless two options available for Ukraine: 1) to
convince the EU to force Gazprom to accept selling
its gas on the Ukraine’s Eastern border and in this
case, no further negotiations with Gazprom over its
16 Kostis Geropoulos, “Šefčovič : EU wants Russia’s Gazprom, Ukraine’s Nafto-gaz to honour winter protocol“, neweuope.eu, published 1 November 2016, https://www.neweurope.eu/article/sefcovic-eu-wants-russias-gazprom-ukraines-naftogaz-honour-winter-protocol/
23Policy Brief
gas in the new gas hub would be needed; 2) to start
negotiations with German officials and business-
men, since modernization of Ukraine’s gas trans-
mission network is less costly than constructing a
brand-new pipeline.
3. Gas storage is unprofitable under current market conditions
Ukrainian gas storage will play crucial role in the
liberalization of Ukrainian gas market and in the
creation of the new gas hub. Ukraine disposes of 32
bcm of storage facilities which may be upgraded to
50 bcm17 and in addition, Ukrtransgaz has capacity
transportation of 140 bcm annually.18
However, the prospect for a liquid Ukrainian gas
storage markets looks currently grim on both macro
and micro level. On macro level, the demand for gas
is currently falling in Europe. Despite the fact that
gas storage business was once very lucrative in Eu-
rope, many investments in gas storages were made
all over Europe in last years and there is currently a
surplus of gas storage facilities. The over-supply of
gas in Europe significantly narrowed the spread be-
tween summer and winter prices for gas, therefore
making the gas storage business much less compel-
ling.19 The closest EU neighbours of Ukraine - coun-
tries of Central Europe (Hungary, Slovakia, Czech Re-
public and Austria) - already have a sufficient level
of their domestic gas storage facilities. These coun-
tries are located near Germany which has the high-
est level of gas storage capacity just after Ukraine.
Russia poses a problem too: Alexei Miller expressed
himself that Russia will never use Ukrainian gas
storage again due to an incident.20 It is, however,
questionable whether this statement is based on
truth but the lack of Russian gas could potentially 17 Vitalii Rybak, “Alan Riley: «Ukraine could be the main gas storage facilita-
tor for the East-Central Europe», ukrainianweek.com, published 14 March 2016, http://ukrainianweek.com/World/160497
18 http://utg.ua/en/utg/gas-transportation-system/characteristic.html, ac-cessed 14 October 2016
19 “Analysis of the Restructuring Options of NJSC Naftogaz“, World Bank, published 9 February 2016, p. 95. http://documents.worldbank.org/cu-rated/pt/928071468185344153/Analysis-of-the-restructuring-options-of-NJSC-Naftogaz
20 “Gazprom tries to discourage Europe to use Ukrainian underground gas storage facilities”, europeandialogue.eu published 3 July 2013, http://www.eurodialogue.eu/Gazprom-Tries-to-Discourage-Europe-to-Use-Ukrainian-Underground-Gas-Storage-Facilities
represent a threat to the Ukrainian gas hub where
large volumes of gas will be needed.
On micro level, the already-mentioned unbundling
of TSO will be crucial to assure transparent, reliable
and efficient gas transport over the Ukrainian terri-
tory. Ukrainian gas storages are operating on a very
low level of their technical capacity, which makes
them unprofitable, and some of the facilities might
be closed. Ukraine also lacks of quick-cycle storage
facilities, as it is too expensive to inject and with-
draw the gas in storage facilities technically difficult
and also expensive. In order to increase the profit-
ability of its storage facilities, Ukrtransgaz has risen
the entry tariffs for gas from abroad, however this
move did not help to increase their profitability and
might well even deter some investors in booking the
capacity for gas storage facilities.21 Moreover, there
is a general complain to Ukrainian gas that even
if entry tariffs for gas from abroad have been set,
there are no exit tariffs for stored gas what greatly
hinders interests of investors in Ukraine’s under-
ground gas storage.22 The entry tariffs being already
high enough, it is advisable that with the construc-
tion of new gas hub, the entry and exit tariffs will be
lowered in order to increase the competitiveness of
Ukrainian gas transmission system and thus attract
new buyers.
Ukrainian underground storage facilities do not cur-
rently offer any competitive advantage over their
European rivals but with lower gas storage market
prices, transparent rules for transmission and a di-
versified supply of gas, they could become attrac-
tive for players in the energy field. Moreover, the
EU Vice-Commissioner for Energy Maroš Šefčovič
has already stated that Ukraine’s gas storage facili-
ties will play an important role in the integration of
Ukraine into the Energy Community.
Nevertheless, even if the short term prospects for
underground gas storage in Europe look grim, a
21 Analysis of the Restructuring Options of NJSC Naftogaz“, World Bank, published 9 February 2016, p. 98
22 “EU shippers avoid Ukrainian gas storage as no exit tariffs set“, icis.com, published 19 July 2015, http://www.icis.com/resources/news/2016/07/19/10017297/eu-shippers-avoid-ukrainian-gas-storage-as-no-exit-tariffs-set/
24Ukrainian gas hub – a chance for Europe
study by company Naftogazbudinformatyka shows
that in longer run, the outlook for gas storage is
positive and encouraging (Paul Bieniawski, expert of
the company Zechstein Energy Storage argues that
there will be even a shortage of these facilities in 5
years23). If Ukraine wishes to monetize upon her gas
storage facilities, developing a viable gas hub will be
a positive spill-over for the attraction of buyers.
Ukraine thus still has to search for new opportuni-
ties how to take use of her gas storage facilities and
there are several options, how to do that. Ukraine
can still take advantage of storage-poor countries
(Poland, Romania) or even with far-distance coun-
tries, e.g. Turkey24. Other possible option for Ukraine
is to develop LNG re-gasification terminals in the
Black Sea and to store this gas for LNG producers
from abroad, notably the United States.
4. Opportunities for gas supply diversification remain limited for now
The Nabucco project with an ambitious capacity of
31 bcm, connecting the Caspian region with central
Europe via Turkey and the Balkans in which Ukraine
could have participated, was halted by the Europe-
an Commission. In 2005, the White Stream pipeline
sparked hopes for Ukrainian gas supply diversifica-
tion. White Stream aimed to transport Azerbaijani
gas through Georgia to either Ukraine or Romania
via a sub-sea pipeline with capacity of 32 bcm. De-
spite the fact that the European Commission or-
dered a feasibility study, no major steps to imple-
ment the project were taken since then.
The development of Liquefied Natural Gas (LNG) rep-
resents an important turn in Ukraine’s gas supply di-
versification efforts. Global gas market is becoming
truly ‘global’ with the arrival of affordable LNG which
can be – as it is in the case of crude oil - freighted to
any country with re-gasification terminals. Ukraine 23 Alla Eremenko, Leonid Unigovskiy, Evgenij Andranov “Nuzhny li evrope-
ytsam ukrainskie podzemnye khranilishcha gaza?” (Do Europeans need Ukrainian underground gas storage facilities? Own translation), gazeta.zn.ua, published 20 November 2015, http://gazeta.zn.ua/energy_market/nuzhny-li-evropeycam-ukrainskie-podzemnye-hranilischa-gaza-analiz-potencialnoy-potrebnosti-evrosoyuza-v-phg-ukrainy-_.html
24 “Ukrainian envoy: Natural gas storage at Turkey‘s disposal“, dailysabah.com, published 16 May 2016, http://www.dailysabah.com/energy/2016/05/17/ukrainian-envoy-natural-gas-storage-at-turkeys-disposal
should take advantage of the ever-developing LNG
market in order to diversify its gas supply. This could
be done by importing LNG from major global play-
ers in the field, such as the United States or Qatar.
However, Ukraine lacks any re-gasification terminals
and the prospect for building an LNG re-gasification
terminal in Odessa near the Black Sea is still too far
away, mainly due to the fact that Turkey will not al-
low LNG cargos pass through Bosporus.
For this reason, the most pragmatic solution for tak-
ing benefits of global LNG seems to use re-gasifi-
cation terminals in Poland and to transport the US
LNG into Ukraine; Ukraine is already planning con-
struction of a 99 km interconnector of 5 bcm/year
capacity (may be further updated to 8 bcm/year),
which will give Ukraine the possibility to reach the
LNG terminal in the Polish town of Świnoujście.25
This pipeline will operate in dual mode so, in the
case when Ukraine optimizes its gas balance and
increases production, or receives delivery points for
Russian gas at the eastern borders, Ukrainian gas
may be exported to Poland.
The other option is taking use of the LNG terminal in
Klaipeda, Lithuania, constructed in 2014. 26 However,
in order to get the re-gasified LNG to Ukraine, gas
molecules would have to be transported via either
Belarus or Poland. Since Belarus’ gas transmission
network is owned by Gazprom, this route does not
seem to be feasible unless some concessions (such
as for example attractive transit fees) are proposed
to Gazprom. The route through Poland is more desir-
able politically speaking though the interconnector
between Poland and Lithuania is yet to be build.27
Despite the fact that LNG supply from the Western
part of the Black Sea is quasi-locked, LNG could play
a role of Ukrainian linkage with the Caspian region if
25 “Ukraine plans to start 5 bcm/year natural gas pipeline project to Po-land”, platts.com, published 17 Jun 2016, http://www.platts.com/latest-news/natural-gas/kiev/ukraine-plans-to-start-5-bcmyear-natural-gas-26473057
26 “Ukraine asks Belarus to “Explore” Lithuanian LNG Import Possibilites, “ naturalgasworld.com, published 6 August 2015, http://www.naturalgas-world.com/ukraine-belarus-to-explore-lithuanian-lng-import-possibili-ties-24876
27 “Lithuania Extends Polish Link Bid Period”, naturalgasworld.com, pub-lished 8 July 2015 http://www.naturalgasworld.com/lithuania-extends-polish-link-bid-period-30497
25Policy Brief
additional infrastructure is constructed. A construc-
tion of an LNG re-gasification terminal near Odessa
would help Ukraine to take advantage of developing
gas production in Caucasus (notably in Georgia and in
Azerbaijan) with natural gas being liquefied in Georgia
and then shipped through the Black Sea what would
recall the spirit of the White Stream project. 28 This
means that a liquefaction terminal would have to be
constructed in Georgia too what would necessitate
additional investment. This said, Georgia constitutes
an important part of the South Caucasus Pipeline
(SCP) that links directly to the Trans Anatolian Pipe-
line (TANAP). With a total capacity of 25 bcm per year,
abundant gas supply from the SCP could increase the
attractivity of the Ukrainian-Georgian LNG Project.
Another option how to get the Caspian gas to
Ukraine would be to negotiate with Turkmenistan
(which has the fourth largest natural gas reserves
28 Andy Tully, “Can LNG Help Ukraine?”, oilprice.com, published 16 July 2015, http://oilprice.com/Latest-Energy-News/World-News/Can-LNG- Help-Ukraine.html
in the world) and Gazprom about the eventual re-
sumption of Turkmen gas supply to Ukraine. The
eventual construction of the sub-sea Trans-Caspian
Gas pipeline with a capacity of 30 bcm linking Turk-
menistan and Azerbaijan would significantly ease
Ukraine’s access to the Turkmen gas on the condi-
tion that an LNG terminal is built in Georgia. Building
LNG terminal in the Georgian town of Kulevi is a part
of the Azerbaijan–Georgia–Romania Interconnector
(AGRI) project to deliver Caspian gas to Europe via
LNG shipping but for now, not more than a feasibility
study has been made.29
The Turkmen gas option combined with the LNG
supply from Northern Europe could thus represent
the most realistic ways to achieve abundant gas
supply and gas-on-gas competition in the planned
hub. Ukraine should not stand idle and start its dip-
lomatic and business initiative as soon as possible.
29 http://www.roconsulboston.com/Pages/InfoPages/Commentary/OilEmp/AzerbaijanGas09.html
Baltic sea
North sea
RUSSIA
NORWAY
KALININGRAD
GERMANY POLAND
BELARUS
UKRAINE
LATVIASWEDEN
DENMARK
LITHUANIA
БЕЛЬГІЯ
ESTONIA
LNG IMPORTTERMINAL:KLAIPEDA,LITHUANIA
LNG IMPORTTERMINAL:
ŚWINOUJŚCIE,POLAND
* Source: https://www.stratfor.com/sample/analysis/poland-and-baltics-find-new-energy-options
LNG IMPORT TERMINALS IN THE BALTIC SEA*
26Ukrainian gas hub – a chance for Europe
5. Domestic consumption must be curbed to achieve energy sufficiency
Due to the Soviet legacy of abundance of natural gas
combined with the lack of innovation in the energy
sector, Ukraine is one of the most energy-inten-
sive countries in the world with the lowest energy
efficiency of households in Europe. Gas constitutes
31% of Ukraine’s primary energy consumption from
which only 3% are used for the electricity genera-
tion – the remaining 97% is used for heat genera-
tion. Rozwalka and Tongendren argue in their report
(2016) that “gas accounts for almost three-quarters
of fuel consumed by both district heating compa-
nies (DHCs) and households with private heating
systems.”30 The district heating systems remain un-
reformed since the fall of Soviet Union with only
minimal investments in energy efficiency.
However, Ukraine’s gas market diminished consid-
erably in last years. Whilst the Ukrainian gas con-
sumption reached 70-75 bcm in 2005, it plummeted
to 50 bcm in 2013 to 42.6 bcm in 2014, 33.8 bcm in
2015 and it is expected that this fall in consumption
will continue even further.31. The fall in domestic
consumption is due to the fact that Ukrainian gov-
ernment partly diminished gas subsidies32 what re-
sulted in bigger gas prices for households and con-
sequently the fall in consumption, combined with
the military conflict on the East of Ukraine, where
Gazprom supplies the conflict areas by 2-2.5 bcm
annually, and which accounted for 20% of Ukrainian
gas consumption before the war33 and the annexa-
tion of Crimea. The plummeting gas consumption is
also linked to the overall drop in Ukrainian economic
output.
Regarding future trends in domestic consumption
in Ukraine, Pirani and Yafimava argue in their report
that if an economic recovery of Ukraine starts in
2016-2017, the consumption will rise to 40-45 bcm
in the early 2020s.34 For this reason, investing into
30 Rozwalka & Tordengren (2016) p. 431 Rozwalka & Tordengren (2016) p. 1232 Rozwalka & Tordengren (2016), p. 3533 Pirani & Yafimava (2016), p. 4034 Pirani & Yafimava (2016), p. 50
Ukrainian energy efficiency is crucial in order to
curb domestic gas consumption and to reach a state
of gas self-sufficiency and eventually the state of
gas exports.
The diminishment in gas subsidies was equally im-
portant in order to increase transparency of Ukrain-
ian gas sector since these subsidies represented a
large space for political manipulation and shady con-
tracts.35 The removal of this cross-subsidization of
Ukrainian residential gas prices by cutting subsidies
of Naftogaz hoped for adding more incentives to
the development of energy efficiency measures in
Ukraine. Even if diminishing state gas subsidies will
help in economizing gas and alleviating the burden
to which the state treasury is exposed, it remains
however questionable whether they will really in-
centivize further promotion of energy efficiency. The
consumption habits have already changed and fur-
ther cuts in subsidies could result in a state where
households will be unable to pay for their bills.36
This report urges Ukraine to curb its gas consump-
tion as much as it can be promoting energy efficien-
cy measures, full commercial metering, implementa-
tion of renewable sources, and increasing public’s
awareness on wasting energy. If Ukraine’s domestic
gas consumption is decreased to a substantial level,
Ukraine will get free from import dependence and
will even start exporting its own gas. For this pur-
pose, it is equally important to raise domestic gas
production as it is discussed below.
6. Domestic gas production must be increased to a sufficient level
Increasing Ukraine’s gas production to a sufficient
level is important for two reasons: Ukraine would be
less and reliant on foreign gas and eventual Ukrain-
ian gas exports could in turn provide additional sup-
ply for the planned gas hub. Ukraine’s potential for
gas production is huge: proven gas reserves are es-
timated at 924 bcm and potential reserves around
35 Rozwalka & Tordengren (2016),p. 3736 “Gas Production in Ukraine decreased by 3% in 2015”, Naftogaz.com, pub-
lished 2 February 2016, http://www.naftogaz.com/www/3/nakweben.nsf/0/970478E2A71A6B0FC2257F4C00580C55?OpenDocument
27Policy Brief
5.6 Tcm.37 Yet, for almost a decade, the Ukrainian
annual natural gas production has been oscillating
only around 20 bcm (19.9 bcm in 2015, even after the
annexation of Crimea by the Russian Federation).38
Several factors hindered the growth in gas produc-
tion, such as changing fiscal regime in 2015 by in-
creasing royalties to 55% for wells above 5 km and
28% for wells below 5 km what effectively ham-
pered any investments from abroad (these royalties
were decreased in 2016 again into the previous lev-
els, 29% and 14%)39, corruption, and lack of transpar-
ency in energy deals, restricted generally to compa-
nies linked to oligarchs.
In order to become totally independent of foreign
gas import, Ukrainian Energy and Coal Minister Ihor
Nasalyk at the Energy Spring 2016 Congress in Kiev
to raise gas production to 27 bcm by 2020 (the esti-
mated gas consumption volume for that year) what
became the main strategy of state-owned gas com-
pany Ukrgazvydobuvannya (UGV).40
However, substantial investments are needed in or-
der to effectively raise Ukraine’s gas production to
desired levels. Most of the Ukrainian gas reserves
are either depleted, small-scale or high-depth fields.
Ninety percent of the proven reserves are fields
with no more than 5 bcm of natural gas.41 Further-
more, projects to produce 4 bcm of natural gas
would necessitate investments of around 300 mil-
lion USD.42 Ukrgazvydobuvannya has already started
with modernization and purchase of new equipment
for exploration and development drilling thanks to
Chinese loans.43 Additional foreign investment is
needed though.
37 “Serhiy Golovnyov, “Why Ukraine is not energy independent?“, Business Censor, published on 13 September 2016
38 “Ukraine seeks to stop importing gas by 2020 - energy minister”, In-terfax.com.ua, published 27 May 2016, http://en.interfax.com.ua/news/economic/346178.html
39 Tax Code (02.12.2010 No. 2755-VI), Verkhovna Rada of Ukraine40 “Ukraine seeks to stop importing gas by 2020 - energy minister”, Inter-
fax.com.ua, published 27 May 201641 “How much largest oil and gas companies in Ukraine earn?“, Khvylia, 19
September 201642 “Is it possible to reanimate the capacity of gas production in Ukraine?“,
ICPS, 9 September 201543 “Success in Ukrgazvydobuvannya reforming process“, National Reform
Council, 18 February 2016
Ukraine should push now for strengthening coop-
eration between foreign leading production compa-
nies and favour creating joint ventures with domes-
tic producers. Ukraine has already done some effort
in order to attract foreign investors such as the Cab-
inet of Ministers decision to increase the transpar-
ency of actions for production licenses.44 It is just up
to Ukraine to continue in such efforts in attracting
investors: is estimated that with a proper level of in-
vestment, Ukrainian gas production may increase in
ten years up to 40 bcm per year.45
44 “Cabinet of Ministers adopted a reform resolution at the initiative of the State Service of Geology and Mineral Resources“, The State Service for Geology and Mineral Resources, 18 April 2016
45 Philip Vorobyov, “Making Ukraine Europe’s new gas supplier“, Petroleum Economist, 31 August 2016
Ukrainian gas hub – a chance for Europe
28
1. A detailed study comprising design of the gas hub from the technical view should be made by the government as well as a report on cost of construction of additional infrastructure and pipelines with bi-directional flow.
2. The Gas Hub Network Code complying with laws mentioned in the report and the Third Energy Package should be developed. An Authority responsible for the gas hub management shall be established with its duties and responsibilities described in the Network Code. TSO should cooperate in the Network Code creation, as it will be important to determine duties and responsibilities of both gas hub and TSO in gas transmission.
3. Ukraine should start negotiations with exchanges on gas trading, establishment of a Clearing House for the gas hub and the possible cooperation between exchange(s) and the hub for gas balancing.
4. Ukraine should start raising awareness of countries of Central and Eastern Europe (especially Slovakia, Hungary, Poland and Czech Republic) about the benefits of gas hub and its associated trading and gas storage services. Ukraine should support all the voices and measures raised from these countries against Gazprom’s actions threatening the implementation of the Third Energy Package. Ukraine should con-tinue in its initiative to get pipeline access to the LNG re-gasification terminals in the Baltic Sea.
RECOMMENDATIONS
Policy Brief
29
5. Ukraine should start negotiations with German officials and executives in order to achieve mutual understanding of Ukrainian energy issues. Ukraine should make German public aware of the business benefits linked to gas hub trading and to con-vince officials that modernizing Ukrainian gas transmission system is far less costly than investing in a completely new pipeline system.
6. Ukraine should explore with Georgia possibilities for LNG shipments as well as to start negotiations on gas supply from Azerbaijan and Turkmenistan, crucial for assuring gas-on-gas competition in the planned hub. At the same time, Ukraine should also approach Gazprom as such partner, which could benefit from the de-velopment of gas hub. With the increased LNG supply from the United States and Qatar to the European markets, Gazprom may be willing to keep its market demand secure and to make some concessions.
7. Ukraine should promote energy efficiency in order to curb domestic gas consump-tion by raising public awareness on energy waste, introduce new tools and incen-tives to save energy. At the same time, Ukraine should strive for attracting foreign investment needed for increase in domestic production.
Ukrainian gas hub – a chance for Europe
30
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