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Presentation 'Ukraine, between Russia and the EU: Strengthening regional stability through an effective and reformed gas market in Ukraine' by Marc-Antoine Eyl-Mazzega, Centre d’Etudes et de ...

Presentation 'Ukraine, between Russia and the EU: Strengthening regional stability through an effective and reformed gas market in Ukraine' by Marc-Antoine Eyl-Mazzega, Centre d’Etudes et de Recherches Internationales (CERI / Sciences-Po), at Lviv International Security Forum, April 15-16 2010

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Section5 eyl mazzega-eng Section5 eyl mazzega-eng Presentation Transcript

    • Marc-Antoine Eyl-Mazzega
    • Centre d’Etudes et de Recherches Internationales (CERI / Sciences-Po)
    Ukraine, between Russia and the EU: Strengthening regional stability through an effective and reformed gas market in Ukraine Presentation for the Regional Security Conference Lviv, 15-16/04/2010
  • Building an effective gas market
    • Challenges and constraints
    • Gas market has not been adapted to market prices
    • Important level of gas consumption, especially public sector
    • Important value of state subsidy to the public sector
    • Single external gas supply source, hardly any other reachable as real alternative and diversification
    • Naftogaz near monopoly of imports, production and distribution though in a fragile situation due to intrigues and economics of gas imports
    • No rule of law, inefficient state regulation, conflicts between various private interests leading to instability
    • Rules of the game are political
    • No or hardly any credits available for the Ukrainian market
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • Assets
    • Unique storage facilities, well located
    • Relatively important domestic production and existing reserves
    • Important transit volumes providing huge revenues
    • One of the world’s leading gas producer and exporter is the neighour
    • Many possible alternatives to gas available, just need to be developped
    • Ukraine draws attention from investors, far more could come in
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • Key issue
    • Having a liquid gas market, with relatively optimal and reasonable market prices, efficient, predictible, depoliticized and secure regulation through competition of actors, security of supply and mitigation of strategic risks
    • Key risks:
    • Price setting by dominant external actor and political and economic influence taking through gas supplies; Deterioration of infrastructure; Contradiction between private interests and state interests and use of state ressources for private interests; Ruin of state budget; Intransparency
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • The check list (1)
    • Is diversification of supplies possible ? No
    • Is reduction of state subsidy to public sector possible? Yes
    • Is reduction of public sector’s gas consumption possible? Yes
    • Can gas be substitueted by alternatives fuels? Yes
    • Is reduction of Ukrtransgaz gas consumption possible? Yes
    • Is increase of internal production possible ? Yes
    • Is improvement of market conditions possibles? Yes
    • Is development of alternative fuels possible? Yes
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • The check list (2)
    • Is a gas market without Russian participation possible? No
    • Can Ukraine afford continuing under the same system? No
    • Can the state budget further support the current level of subsidy? No
    • Can Naftogaz survive its indebtness? Hardly
    • Should the Ukrainian citizen be satisfied with the current system? No
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • The agenda of reforms (1)
    •  EU lead reform agenda usefull, but not the one and only task
    •  Increase domestic gas production to increase competition with Russian gas
    •  Decrease public sector’s gas consumption to decrease burden on state budget and free up domestic gas for the industry
    • Increase the regulated prices, also for electricity! Differentiate consumers on the basis of their status: retired, or active
    • Use transit revenues to modernise gas pipeline system and finance the remaining state subsidy
    • Provide for exceptionnal investment conditions for foreign, private investor in the energy sector (otherwise no money will come and nothing will happen)
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • The agenda of reforms (2)
    •  Let Russian actors in: the more, the better !
    •  Provide for innovative market access conditions and licence obligations for new actors on the distribution market: supply at least 15% of gas at regulated prices, store 20% of domestic supplies, pay taxes in Ukraine, provide for strong financial guarantees, and for long term gas supply contracts
    •  Provide for transparent, stable and predictible working conditions for gas actors: rule of law is key, clear competition law with benchmarks, same as an independant regulator, with extensive energy security responsibilities and capacities to act
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • The agenda of reforms (3)
    • Get a workable deal with Russia: greater flexibility of supplies, better price, in exchange for direct access to domestic consumers and relative advantage on the gas transit price
    • Make Naftogaz ready for competition and reforms, separe the gas from the oil function to make it more efficient in turning Naftogaz into a holding with two branches, NeftUkrajina and GazUkrajina and transform it into a dynamic gas actor
    • Rather to think about an LNG terminal, think about acceeding to Baumgarten gas
    • Establish a predictible, attractive and secure market and political environment to attract European companies in Ukrainian storage
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • A Gas consortium?
    • Objectives:
    • secure funding for modernisation; strengthen trust as a gas transit corridor; improve transparency; ensure best level of revenues for state budget; develop opportunities for creating value through the gas storage facilities. The increase of volumes in transit or attempts to avoid alternative pipelines is irrealistic !
    • What to do?
    • Unbundling; project of concession; new study of pipeline system technical state; decide whether investors will make money or just provide for stability; calculate what it may cost and benefit the state
    • What should Ukraine not do?
    • Consider the consortium issue in view of other stakes (gas price) and mix up short term arrangements with long term interests
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • Future actors on Ukraine’s reformed gas market
    •  Production:
    • At least two international majors working under PSA
    • Increased number of Joint production agreements with Naftogaz
    •  Imports and distribution :
    • 50% of industrial sector to be supplied by two Russian companies; 20% by Naftogaz; 20 % by private, Ukrainian companies; 5% by non Russian, foreign companies
    •  Infrastucture and networks :
    • Naftogaz/Private companies, even Russian, provided that strong regulatory framework providing for energy security, transparency and third party access
    •  Exports/transit
    • Gazprom, private Ukrainian and foreign companies, Naftogaz
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Building an effective gas market
    • Future of Naftogaz in the gas sector
    • - Be the country’s most important gas producer
    • - Possibly, be the operator of gas transit infrastructure and storage facilities, or co-operator (if consortium)
    • - Rely on a long term supply contract from Gazprom with reduced volumes (10-15 bcma)
    • - Obtain a better market price from Gazprom in exchange for direct access to final consumer in Ukraine
    • - Supply gas to about 70% of public sector at regulated, though increased prices and thus benefit from increased revenues
    • - Supply gas to about 20% of industrial consumers at market price
    • - Provide for budget revenues to cover the remaining subsidy
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Conclusion (1)
    • Russia may be difficult partner, EU may be disappointing, but:
    •  The ball lies in Ukraine’s hands. Urgent action needed, no further complaints, or irrealistic projects
    • Ukraine should prepare for a different external gas equilibrium within the next 5 years. Ukraine will in no case transit more than current gas supplies. Important decrease of gas volumes in transit is likely (at least, 20%)
    • Ukraine should change its gas market before it gets into further, heavy trouble and will suffer irreversible losses
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
  • Conclusion
    • Bring market rules in !
    • Bring foreign investors in !
    • Bring new players in the distribution and production!
    • Let the market do its job !
    • Be prepared to suffer some inevitable costs at first !
    • Change before it’s too late !
    • Start developing a real gas policy !
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010
    • Thank you!
    • [email_address]
    Marc-Antoine Eyl-Mazzega – Lviv conference on regional security, 15-16/04/2010