Naftogaz reports on progress of unbundling

The meeting was attended by around 100 participants including gas traders, industry experts, members of the Ukrainian parliament, representatives of the diplomatic corps, international financial institutions, mass media, as well as members of the supervisory board and management of Magistralni Gazoprovody Ukrainy (MGU)

On 26 June, Naftogaz of Ukraine presented its fourth quarterly report and held an expert discussion on the unbundling of the independent Ukrainian gas transmission system operator (TSO).

The meeting was attended by around 100 participants including gas traders, industry experts, members of the Ukrainian parliament, representatives of the diplomatic corps, international financial institutions, mass media, as well as members of the supervisory board and management of Magistralni Gazoprovody Ukrainy (MGU).

Speakers reporting on the TSO unbundling progress included representatives of Naftogaz, Ukrtransgaz, and the consortium of the European transmission system operators.

In her opening speech, Clare Spottiswoode, chair of Naftogaz supervisory board, said: “We have come a long way and now reached the final stretch. Late last year, Naftogaz announced its intention to create a separate operator of the gas transmission system by mid 2019, and today the new TSO is already up and running. By the end of July, Gas TSO Ukraine LLC will be ready to apply for certification to the Ukrainian regulator.”

Internal Ukrtransgaz unbundling preparations

In his report, Naftogaz CEO Andriy Kobolyev provided insights into the unbundling milestones already achieved and highlighted those that still lie ahead.

Kobolyev reminded that the gas transmission system operates 24/7 and, unlike with a usual asset split, it cannot be stopped to prepare for the transaction. Naftogaz conducts the complex unbundling process with great care to make sure that the unbundling is done seamlessly and gas transmission continues with no interruptions.

With this goal in mind, the unbundling project team has first set up a Branch TSO within the Ukrtransgaz structure in order to pull together all assets, personnel and processes required for gas transmission operations. Previously, transmission-related services, assets and personnel were dispersed among various other functions performed by Ukrtransgaz. The new branch has successfully passed a month-long test period to prove it can operate independently of the overall Ukrtransgaz infrastructure. Starting from 1 July, its core has been transferred to Gas TSO LLC, a separate legal entity currently 100% owned by Ukrtransgaz.

The unbundling project team has analyzed all Ukrtransgaz assets (more than 530,000 items) and identified the properties necessary for gas transmission (more than 320,000 items worth over UAH 95 billion). These are the assets transferred to the Branch TSO, to be later received by Gas TSO LLC.

Naftogaz group experts have also analyzed all Ukrtransgaz contracts still in force – out of a total number of more than 5,600 contracts, nearly 3,000 will be taken on by Gas TSO LLC. In addition, the team has revised and adjusted 152 regulations necessary for the operator to work as a separately-run entity, and adapted the relevant processes and IT environment.

An approximate headcount of 10,000 people involved in gas transmission operations will also pass from the Branch TSO to Gas TSO LLC. The company has already been granted a permit for high-complexity works by the Main Directorate of the State Labour Service.

After the current transit contract between Naftogaz and Gazprom expires, Gas TSO LLC will be separated from the Naftogaz group structure and placed under governance of an organization authorized by the Cabinet of Ministers of Ukraine, which will finalize the implementation of the TSO unbundling.

Next steps to complete unbundling

“In terms of our team’s efforts and time required for the unbundling, it was filling of Gas TSO LLC with functionality and meaning that corresponds to 80% of all the works that had to be done,” said Kobolyev.

The next important milestones include the Law “On Concession” to be passed by the Ukrainian parliament, which will make it possible for the government to transfer the gas transmission system to the new operator without its privatization. It is also essential that the Cabinet of Ministers of Ukraine supports the independent system operator (ISO) model, as it will help protect Ukraine’s interests in ongoing arbitration against Gazprom.

As noted by Kobolyev, the timely and appropriate certification of the new TSO by the National Commission for State Energy and Public Utilities Regulation (NEURC) is also of great importance.

“What must be taken into account while we proceed? The first key requirement is that the selected model and all our actions must comply with the European Union Third Energy Package. The second requirement is to secure the position of Ukraine and Naftogaz in arbitration proceedings against Gazprom. The third requirement is to facilitate partnerships of the new Ukrainian TSO with international companies to the maximum. Whatever we do, we need to ensure compliance with these three requirements,” summarized the Naftogaz CEO.

Kobolyev emphasized that successful completion of the unbundling process will require teamwork from the parliament, government, other public authorities, and Naftogaz – the company counts on effective cooperation with the next parliament and the Cabinet of Ministers of Ukraine.

Ukrtransgaz representatives reported on progress made in preparations for TSO unbundling and urgent steps to be taken in order to ensure timely completion of this process and for the operator’s further stable work.

In particular, Sergiy Oleksiyenko, acting President of Ukrtransgaz, pointed out that in order to guarantee the work of the GTS operator, it is critical that the NEURC sets economically justified tariffs and disables unauthorized gas offtake by gas distribution networks.

“The temporary tariffs that were established by the regulator and that became applicable from 1 January have resulted in a financial shortfall of nearly UAH 20 billion for Ukrtransgaz in 2019. At the same time, the regulator totally ignores our largest problem at Ukrtransgaz – unauthorized gas offtake by distribution system operators. This situation poses a risk to the completion of the unbundling process and to the stable functioning of the independent TSO,” he said.

Representatives of the consortium of European transmission system operators underlined how important it is to involve them in the unbundling process and to make use of international expertise in adopting key decisions such as tariff-setting processes for the Ukrainian TSO.

“We are ready to share our experience and expertise – we will make every effort to improve cooperation between the company and the regulator in the future”, said Paolo Ventrella, Business Development Manager of Snam S.p.A. (Italy).

Individual participant presentations are available via the following links:

Claire Spottiswoode Unbundling Discussion;
Andriy Kobolyev Unbundling. Present Status and Next Steps
Andriy Kobolyev Unbundling Discussion;
Sergiy Oleksiyenko Financial Situation and Next Steps Needed;
Sergiy Oleksiyenko Financing Update
Pawel Stanczak Unbundling. Next Steps;
Sergiy Makogon Gas Transmission System Operator Unbundling Process 2018-2020.

Communications Department
NJSC Naftogaz of Ukraine

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