Avoiding manipulations in the Ukrainian gas market. Perspectives of extractors, traders, and the ministry. UPDATED

Avoiding manipulations in the Ukrainian gas market. Perspectives of extractors, traders, and the ministry. UPDATED

The preconditions for 'cartel distortions' remain, but the situation can still be rectified

Цей матеріал також доступний українською
Avoiding manipulations in the Ukrainian gas market. Perspectives of extractors, traders, and the ministry. UPDATED
Photo: depositphotos.com

The cost of gas in Europe has been declining for the eighth consecutive week. As of May 26, prices dropped to 24.275 euros per MWh (around 11.550 UAH per 1000 cbm, including VAT) – the lowest level since September 2021. They lost over 20% in the past week. Yesterday, on May 29, at the close of trading, the price of gas for supplies in June at the TTF benchmark hub in the Netherlands stood at 25 euros per MWh.

The decrease in prices is facilitated by increased imports of liquefied natural gas as a substitute for supplies from russia, a relatively mild winter in Europe, and economic issues: China's recovery after the coronavirus pandemic has slowed down, and European production is experiencing a significant decline, as Bloomberg reports.

Analysts from the research company Energy Aspects forecast that gas prices in the EU could fall below 20 euros per MWh if the demand for LNG imports remains weak in China.

There hasn't been a rapid decrease in gas prices on the Ukrainian Energy Exchange. Prices for domestically produced gas remained around 12,800 UAH per 1000 cbm (including VAT) for a long time and fell by 1.2% in the past week. On May 29, Naftogaz of Ukraine purchased gas at the UEEX auction for 12,700 UAH per 1000 cbm (including VAT).

With lower gas prices in the EU, it becomes advantageous for Ukrainian companies to import it instead of relying solely on domestically produced resources. Currently, some traders continue to accuse the state-owned holding of manipulation and conspiracy with extraction companies to prevent prices from collapsing on the domestic market, despite the decrease in industrial gas demand due to the war.

Naftogaz, however, holds a different opinion. "This year, there will be enough Ukrainian gas to go through the 2023/2024 heating season without imports… We are working on increasing our own production. We systematically and transparently buy gas from Ukrainian private extraction companies on the Ukrainian Energy Exchange. This encourages the companies to produce more gas as well," said Oleksiy Chernyshov, the CEO of Naftogaz.

But the preconditions for manipulations in the Ukrainian gas market also exist. "All private extractors have affiliated traders, to whom they sell their resources at non-market prices. It creates an environment for coordination within vertically integrated corporations, where the highest added value is transferred to the final product, such as metallurgy," explained a source from the Ministry of Economy to Mind.

According to the calculations of the Ministry of Energy, gas consumption in Ukraine reached 19.485 billion cbm in 2022, while domestic production amounted to 17.587 billion cbm. This year, gas needs are projected to increase to 20.5 billion cbm, partly due to the shortage of coal for generation, which will need to be compensated with natural gas.

In other words, the overall domestic gas market is not in surplus but in deficit. Therefore, the Naftogaz of Ukraine may require additional resource imports. To achieve this, the company has joined the gas joint procurement platform Aggregate EU.

On the other hand, industrial gas consumption in Ukraine, which is supplied by private extractors, has decreased since February 24, 2022. As a result, these companies have accumulated reserves in underground gas storage facilities. "It is beneficial for these companies to keep the resource in underground storage because there is a cash-based rent payment mechanism that allows them to defer payments to the budget and wait for better price offers in the market," explains a source from the government to Mind.

It is one of the reasons for the 'cold' conflict between extraction companies and independent energy traders, which has been developing since last year, and risks leading to a redistribution of the market in favour of dominant players.

Mind collected comments from participants in the gas market regarding the current course of events in this complex situation, complicated by the conditions of wartime, which also reflect the differences in their views on the recovery of the Ukrainian economy.

Як уникнути маніпуляцій на українському газовому ринку. Погляди видобувників, трейдерів і міністерства. ОНОВЛЕНО

Press service of DTEK,

the largest private gas producing company in Ukraine:

"The industry expects the state to protect the proper functioning of the free and competitive gas market in Ukraine."

Today, companies in the industry, in addition to direct destruction and damage to infrastructure due to hostile attacks, are also facing other problems and challenges dictated by the wartime situation: unavailability of advanced international oil and gas services, complications or destruction of logistic supply routes for equipment and materials, labour shortages, and so on.

For the private sector, the issue of gas realisation is crucial, as companies have lost a significant portion of their sales market due to the destruction of industrial enterprises that used to be their main consumers. Currently, this issue is partially addressed through the purchase of gas by Naftogaz Ukraine at the Ukrainian Energy Exchange. However, the industry expects the state to protect the proper functioning of the free and competitive gas market in Ukraine, as well as to move towards its further integration into the pan-European market.

Як уникнути маніпуляцій на українському газовому ринку. Погляди видобувників, трейдерів і міністерства

Artem Petrenko,

Association of Gas Producers of Ukraine:

"The trend of decreasing production volumes continues."

– Last year, gas production volumes were reduced due to the objective consequences of the armed conflict, with extractors having to work under constant rocket attacks and in active combat zones. This year, considering the latest news in the media, the market trend negatively affects the industry and investment climate, and the trend of decreasing production volumes will continue.

The government and Naftogaz have listened to the association regarding the necessity of purchasing gas of Ukrainian production. The auctions are held on the Ukrainian Energy Exchange, and as of May 26, 356.5 million cbm of fuel have been purchased. This is one of the effective mechanisms to support the industry because the ability to sell the extracted resource allows companies to pay rent to the state and local budgets, as well as invest in drilling, well repairs, and planning new projects.

Як уникнути маніпуляцій на українському газовому ринку. Погляди видобувників, трейдерів і міністерства

Maksym Dmytruk,

CEO of TAS Energy Ukraine trader:

"It's a legitimate business approach only at first glance."

– Naftogaz Ukraine is an organisation that does terrible things. It manipulates the gas price by setting fixed prices on the Ukrainian Energy Exchange, creating what is known as price skimming and appropriating the role of the state regulator instead of the National Commission for State Regulation of Energy and Public Utilities. This leads to the loss of budget funds.

In our industrial gas market, there is a significant surplus, which could allow for a minimum 20% reduction in procurement prices. However, it is not happening. Such actions may contain signs of corruption. Demand and supply should balance the price, not a fixed gas price.

In the current conditions of Ukraine's energy sector development, the issue of non-receipt of rent payments for natural gas becomes increasingly relevant. Extraction companies, taking advantage of legislative loopholes, deliberately avoid paying rent by injecting gas into underground storage facilities.

This is a complex mechanism by which companies can withhold gas for trading during the winter period instead of selling it on the market. At first glance, it may seem like a legitimate business approach. However, in the context of the country's financial stability, this practice becomes a matter of outrage.

The non-receipt of rent payments significantly affects Ukraine's budget revenues, which has far-reaching consequences for the implementation of strategic programmes and projects, including the funding of vital national security needs.

Як уникнути маніпуляцій на українському газовому ринку. Погляди видобувників, трейдерів і міністерства

Volodymyr Shvedky,

CEO of ETG.UA trader:

"For the first time in the history of the Ukrainian gas market, we have a situation that allows for the creation of a national benchmark."

– We have a surplus in Ukraine’s commercial gas market: there is enough supply from domestic private extraction companies to meet the demand. And it is a special moment. Never before in the history of our gas market have we had such a situation that allows for the creation of a national benchmark that will serve as a reliable reference point. There is demand in the market to form an adequate gas price specifically for Ukrainian consumers.

All of us – extraction companies and traders – are working to meet the demand for gas. The higher the demand, the more conditions there are for our economy to return to pre-war indicators and strengthen its competitiveness. In the conditions of a hot war with the aggressor, this achievement is no less significant than the combat capability of the Ukrainian army on the battlefield.

An internal benchmark can only be ensured through active exchange trading of domestically produced resources, with the interests of the real sector of the economy being the focus.

For example, when sugar or glass factories can calculate the cost of their production two quarters in advance based on domestic gas prices, it can stimulate their development, especially in unstable conditions.

If gas extraction companies themselves do not strive to increase their activity on the organised exchange market, then the state should intervene. It can, for example, impose obligations on them to sell 30-50% of the monthly volume of extracted gas through the exchange.

Як уникнути маніпуляцій на українському газовому ринку. Погляди видобувників, трейдерів і міністерства

Mykola Kolisnyk,

Deputy Minister of Energy of Ukraine:

"To address the issue of abuses, increased liquidity in the gas market and transparency of exchange operations are needed."

– Coordinated actions of entities exchanging corporate information and creating conditions for non-market profit in the Ukrainian energy market can occur due to the lack of implementation of the EU Regulation on Wholesale Energy Market Integrity and Transparency (REMIT).

This document was developed by the European Commission in 2008 after the financial crisis and was implemented in 2011. The Regulation defines the concept of market abuse and manipulation and provides definitions of insider information and trading with such information. The document prohibits abuse in wholesale energy markets and sets requirements for the disclosure of insider information by market participants. An important aspect is that this document obliges market participants to report suspicious transactions.

The REMIT Regulation will be implemented in Ukrainian legislation in the near future. The corresponding Draft Law No. 5322 is being prepared for voting in the second reading. Its adoption will increase transparency in the gas and electricity markets and create a competitive environment. Both of these factors will ensure fair price formation. I am confident that MPs will support it.

In addition to implementing REMIT, increasing real liquidity in the market and clearing, which means transparency of exchange operations, are necessary to address the issue of abuses. We also need to be sensitive to market changes in general.

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