Energy companies may be left without cheap gas

On Tuesday, February 18, 2025, during a meeting of the Anti-Crisis Energy Headquarters, the Cabinet of Ministers instructed a review of gas prices supplied for electricity production. Mind exclusively learned about this from meeting participants. Why is this being planned, and how does the deteriorating financial situation of Naftogaz of Ukraine relate to it? Read more in the publication below.

Official Statements

As usual, the official agenda of the meeting was outlined in broad terms: the progress of the current heating season and preparations for the next autumn-winter period in the gas supply and extraction sector.

As Mind previously reported, Prime Minister Denys Shmyhal stated that discussions focused on protecting and restoring critical infrastructure damaged by Russian attacks, including the gas transmission system, underground gas storage (UGS) facilities, and gas extraction sites.

Additionally, the meeting participants began working on the gas balance for the new heating season.

"We listened to reports from the Ministry of Energy, state, and private companies on Ukrainian gas extraction and storage reserves in UGS... We are focusing on Ukrainian gas and must consistently increase our domestic production," the Prime Minister stated.

The government has also instructed Naftogaz of Ukraine to prepare a gas import strategy "to cover a potential deficit in the gas transmission system."

As Oleksii Kucherenko, a member of parliament and first deputy head of the Verkhovna Rada Committee on Energy and Housing and Communal Services, commented to Mind, the situation with gas reserves in underground storage facilities (UGS) is critical.

"The gas balance was reviewed, how it was compiled, and who is responsible for what. Unfortunately, the Ministry of Energy, Naftogaz, and the Gas Transmission System Operator have different figures. However, everyone agreed that we will need to import significant volumes of gas, as by the end of the current heating season, reserves in our UGS will be at a critical level. The volumes are quite substantial, and the country cannot cover them with domestic production," the MP said.

Mind has already written in detail about this issue. One of Naftogaz's scenarios projects that by the end of April, only about 5.2 billion cubic meters of natural gas will remain in UGS – the lowest amount the company has ever exited a heating season with in the history of storage operations.

Given that the minimum gas reserves required to successfully get through the winter should be 12 billion cubic meters, Naftogaz's need to replenish its reserves this year will be at least 8 billion cubic meters. This is the volume the state holding must inject into UGS within six months, starting in May, to restore its "safety cushion" in time for the next winter.

What the government omitted in its statement

Oleksii Kucherenko pointed out that in such a difficult situation, immediate measures must be taken to improve Naftogaz's financial health, as the company requires substantial funds for gas imports.

Therefore, at the meeting of the Anti-Crisis Energy Headquarters, the cancellation of preferential gas prices supplied by Naftogaz to electricity producers was discussed. This concerns revising the public service obligation (PSO) mechanism.

To recall, in August 2024, the government extended PSO obligations for gas supplies to heating companies, household consumers, gas distribution system operators, and electricity producers until April 30, 2025, covering the entire heating season.

Currently, electricity producers purchase gas at 10.5 UAH per cubic meter (including VAT), while on the Ukrainian Energy Exchange, gas prices have exceeded 21 UAH per cubic meter (including VAT).

According to a Cabinet decision, under the PSO mechanism, the cost per cubic meter of gas (including VAT) is:

• 7.96 UAH for households,
• 7.42 UAH for heat production for households,
• 16.39 UAH for heat production for budget institutions,
• 10.5 UAH for electricity production in a condensation cycle,
• 16.5 UAH for electricity production in a cogeneration cycle.

On February 18, 2025, the gas price on the Ukrainian Energy Exchange exceeded 21 UAH per cubic meter (including VAT).

"The PSO mechanism needs to be revised because it is absolutely ineffective and exacerbates Naftogaz’s financial problems. The Prime Minister instructed the Ministry of Energy and the state regulator (NERC) to work on the issue to make a justified decision," said Oleksii Kucherenko.

Another source present at the Cabinet meeting (who requested anonymity) confirmed to Mind that "the gas balance was reviewed, infrastructure protection was discussed, and changes to the PSO mechanism were considered to eliminate market distortions."

The financial state of Naftogaz

The meeting participant also noted that the real financial situation at Naftogaz is "not as satisfactory as the company’s executives have claimed in recent years."

"It must finally be acknowledged that Naftogaz is in a financial deadlock, unable to secure any loans without state guarantees and incapable of operating without government support," Oleksii Kucherenko confirmed.

According to the MP, the biggest beneficiaries of preferential gas prices are investors in distributed gas generation, while Naftogaz’s debts continue to grow.

"When investors in distributed gas generation can become profitable within two to three years, that is a significant privilege. They can buy gas from the state holding under PSO preferential terms while selling their electricity at market prices. This distorts the market," the Mind source noted.

In his view, eliminating the PSO mechanism for gas supplies to electricity producers would not only improve the gas market and Naftogaz’s financial position but also incentivize Ukrainian gas extraction companies to increase production.

As is known, due to the war, these companies are prohibited from exporting gas and are therefore artificially limited in their sales markets.

Mind reported previously that by the end of 2024, total gas production in Ukraine (by both private and state-owned companies) reached 19.1 billion cubic meters, which is 400 million cubic meters more than in 2023. However, the prospects for production growth in 2025 remain weak.

At the same time, market participants and members of parliament criticized Naftogaz for its poorly thought-out pricing policy aimed at attracting large consumers of natural gas. In particular, in December, Naftogaz offered 200 million cubic meters of gas from underground storage facilities at a price of 15,800 UAH per 1,000 cubic meters – a discount of about 1,000 UAH from the market exchange price. However, Ukrtransgaz then began purchasing imported gas on the Ukrainian Energy Exchange (UEB), which at that time was, on average, 9,000–10,000 UAH more expensive than domestic gas.

Due to this, the Verkhovna Rada’s temporary investigative commission has already initiated an audit of Naftogaz of Ukraine’s activities.