EC delegation visit to Naftogaz: meeting remarks

The European Commission delegation represented by Mr. Borchardt, Director for energy markets at the European Commission, and Ms. Pinho, Member of Cabinet of Commissioner Oettinger ...

The European Commission delegation represented by Mr. Borchardt, Director for energy markets at the European Commission, and Ms. Pinho, Member of Cabinet of Commissioner Oettinger, held a meeting in Kyiv with Naftogaz management on April 26 to discuss the company’s reform plan, efforts to fully integrate with the European energy market and the pressing need to start accumulation of gas reserves in Ukrainian underground storage facilities to safeguard stable gas supplies in both Ukraine and the EU next winter. The key meeting remarks are outlined below.

Ukraine’s energy market can attract significant investment if reforms are made – Borchardt
Mr. Borchardt stated that if Ukraine implements key reforms to bring its energy market up to EU standards, the industry will become highly attractive for investment as Ukraine has abundant undeveloped resources of conventional gas, in addition to its considerable shale gas potential.

The EC is willing to actively promote such investments from European companies, providing essential informational support as well as financial guarantees. Necessary reforms should include, first of all, an unbundling of key gas market functions, namely, gas supply and transportation. Secondly, Ukrainian internal prices should be lifted to a reasonable market level to make such an investment financially justified. Thirdly, Naftogaz should introduce long-needed measures to raise the transparency of the company and its subsidiaries and establish international corporate governance standards.

Reforms are ongoing, supply diversification is essential prior to opening the market – Kobolev
Mr. Kobolev, the Chairman of the Board of Naftogaz, noted that these steps perfectly match the reform plan the company is developing jointly with a group of international financial institutions and local experts. Some of these recommendations are already being implemented. For instance, Naftogaz has applied to the Gas Infrastructure Europe transparency initiative to publish its underground storage information on a regular basis.

To facilitate bringing the internal gas price to a market level, the company and the government’s working group are jointly developing measures to counterbalance the negative effects of a price hike on the poorest consumers. These measures include a mechanism of taxes and royalties which will provide additional funds for the state budget and will enable financing the required compensations.

Unbundling of gas market functions will make sense only after Ukraine achieves significant diversification of its gas supplies. One of the key sources of such diversification is the reverse flow from Slovakia which can provide transit capacity of up to 30bcm but the central European state is reluctant to do this because of certain undisclosed legal limitations imposed by Gazprom.

Gazprom needs to behave like a normal shipper in Slovakia – Borchardt
Mr. Borchardt agreed that it is essential that gas supplies are made available to Ukraine via Slovakia. He also stressed the need for signing a direct interconnection agreement between the Slovak transit system operator TSO Eustream and its Ukrainian counterparty Ukrtransgas in accordance with EU energy regulations. “The EC will do its best to clean up the relations between Eustream and Gazprom at the Slovakian border. Gazprom is not a licensed TSO in Slovakia and needs to behave like a normal shipper. The Commission will carefully look into this matter, and if necessary, will take the appropriate measures” — Mr. Borchardt said.

South Stream project not a priority for the EU since it doesn’t bring new sources of gas – Borchardt
Speaking of the South Stream project Russia is currently in pursuing southern Europe, Mr. Borchardt reiterated the position that according to Commission analysis the bilateral agreements concluded by Russia with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria are in breach of EU law. The Commission will only accept the operation of this pipeline if it is managed in accordance with the 3rd Energy Package, which includes a clear separation of transit and shipping functions and third party access”, — Mr. Borchardt explained.

Forming sufficient gas reserves in Ukraine’s UGS system essential, trilateral talks with Gazprom suggested – Pinho
Ms. Pinho also confirmed that it is essential to ensure sufficient gas supplies in Ukraine’s underground storage facilities to secure stable supplies to the EU in the winter season. The EC understands the urgency of this issue. Mr. Borchardt suggested initiating a trilateral discussion between Naftogaz, Gazprom and EU representatives to find a solution acceptable to all parties, including prompt repayment of Naftogaz debt and an urgent start of pumping gas into Ukrainian underground storages at a fair market price.

Public Relations Department
National Joint-Stock Company «Naftogaz of Ukraine»

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