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24 June 2021

Gas market of Ukraine: import and export

Ukraine produces gas, actively imports it and establishes practice of exporting gas. Export-import relations of Ukraine with the EU in the gas sector have been progressively strengthening since 2013. Several factors have contributed to this:

  • setting internal state goals for the development of energy security system, diversification of gas sources in order to reduce the level of external influence on the energy market of Ukraine as a whole
  • fulfilment of obligations within the framework of membership in the Energy Community
  • harmonization of the legislation, standards and procedures of Ukraine and the EU in the framework of the implementation of the Association Agreement with the EU

What are the main results of export-import relations of Ukraine with the EU?

In 2020-2021, the factors associated with the COVID-19 pandemic and the global decline in gas prices gave an additional impetus to the development of business in the field of gas transmission and storage between Ukrainian and European partners.

In 2020 the Storage System Operator of Ukraine injected 28.3 bcm in gas storages that was a record volume for the last 10 years. The record volumes of imported gas pumped into gas storage facilities in Ukraine in 2020, although due to the factors that are unlikely to repeat in the future, nevertheless made it possible to Ukraine to demonstrate ability to introduce convenient and profitable instruments on the market (see also the Gas Market of Ukraine: general overview). One of the key factors was understanding that the volumes of transit of Russian gas and profits from it will gradually decrease, which requires search for new directions for using gas transmission system of Ukraine.

Opportunities of Ukrainian gas transmission and storage systems and directions of their development are analysed in more detail in the research by The Oxford Institute for Energy Studies, released in March 2021. High re-export tariff for foreign traders in the EU countries and a requirement to establish a legal entity in order to get VAT refunds were mentioned as the main barriers for integration of Ukraine to the EU gas market in this study.

What are the main options for foreign companies to participate in the Ukrainian gas market?

In 2020 the volume natural gas imported in Ukraine was 36.6 per cent from annual volume or 15.9 bcm.

Growing interest of European companies in entering the Ukrainian gas market reveals certain features of doing business on the Ukrainian market, namely, in the corporate and tax areas. Thus, a foreign company can trade on the border with Ukraine or with gas injected into underground gas storage facilities in Ukraine.

At the same time, gas can be stored in gas storage facilities in the “customs warehouse” mode for up to 1095 days. During this period, gas can be (and after 1095 days must be) re-exported without paying taxes and duties or could be sold on the Ukrainian market (after customs clearance and payment of taxes and duties). In 2020, 10.2 bcm of the natural gas were stored in the “customs warehouse” regime.

For a more effective participation in the Ukrainian gas market, foreign companies shall create a legal entity in Ukraine, which gives more opportunities to carry out transactions for the purchase and sale, supply of gas, incl. the ability to sell gas to a larger number of buyers/consumers, as well as the possibility of VAT refunds (including those paid during customs clearance).

In Ukraine, on the platform of the Ukrainian Energy Exchange (UEEX), the exchange segment of trading in the short-term, medium-term and long-term gas markets is actively developing, incl. trade in the gas transmission system (the “GTS”) of Ukraine and in the underground gas storage facilities (the “UGS”).

A clear mechanism has been established for how to gain access to the gas market on the UEEX platform (for example, access to gas located in the UGS):

Expansion of the functionality of the commodity exchange will allow attracting non-residents to the trading process on the exchange, incl. to trade gas in the “customs warehouse” mode and in the “customs warehouse + short haul” mode in the underground storage facilities, as well as launch a derivatives (futures) market, the regulation of which based on the new Law of Ukraine “On Capital Markets and Organized Commodity Markets” comes into force in Ukraine from 1 July 2021 (this Law was developed on the basis of and taking into account European legislation, incl. MiFID II, MiFIR, EMIR and others).

What are the results of cooperation with ENTSOG and EFET

In addition, interaction between Ukraine and the EU is carried out at the level of the European Network of Transmission System Operators for Gas (ENTSOG), where Gas Transmission System Operator of Ukraine (GTSO) has status of an observer member. As noted in GTSO, ENTSOG gives access to the main European coordination centre in gas transmission sector, it is a platform for consultation and exchange of progressive ideas. It is also an opportunity for GTSO’s staff to participate in highly specialised training events and interact with colleagues from other countries. In addition, ENTSOG provides dispatch centres of GTS operators with tools for operational communication, monitoring and joint response in crisis and emergency situations.

Another area of cooperation is EFET (European Federation of Energy Traders). Within the framework of EFET active work is also underway to adapt the terms of standard contracts of this organization to trade in gas with Ukrainian counterparties. The following EFET documents for Ukraine are already available for use:

Conclusions

Due to the largest storage facilities and special conditions for foreign traders, Ukraine has possibility to become a new gas hub in the Eastern Europe. At the same time, Ukraine needs to solve a lot of internal problems with functioning of the gas market and to overcome the internal and external barriers for the foreign traders.

 Information contained in this article is for the general informational purposes only, does not constitute legal or other professional advice and should not be relied upon as a substitute for specific professional advice adapted to the specific circumstances.

 

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