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9 September 2020

Gas market of Ukraine: wholesale market

On 1 February 2011, Ukraine became a Contracting Party of the Energy Community, an international organisation founded by the EU and non-EU states for integration of energy markets. On the basis of the contractual obligations within the Energy Community, Ukraine adopted the following laws for implementation on the gas market in accordance with the provisions of the Third Energy Package:

  • the Natural Gas Market Law, dated 9 April 2015 No. 329-VIII
  • law on the National Energy and Utility Regulatory Commission, dated 22 September 2016, No. 1540-VIII
  • gas Transmission System Code, dated 30 September 2015, No. 2493
  • gas Distribution System Code, dated 30 September 2015, No. 2494
  • gas Storage Code, dated 30 September 2015, No. 2495
  • other regulations

The main purpose of the implementation of the Third Energy Package is integration of the Ukrainian gas transmission system operator to the European Network of Transmission System Operators for Gas (ENTSOG).

According to the Energy Community report, dated 1 November 2019, the level of implementation of the Third Energy Package for the wholesale gas market of Ukraine is 62 per cent. This means that Ukraine has already done the significant amount of work and at the same time we need to proceed with implementation of the Third Energy Package.

What is the wholesale gas market of Ukraine?

The Natural Gas market of Ukraine means the legal relations arising in the process of purchase and sale and supply of the natural gas, as well as provision of services for its transportation, distribution, storage (injection, selection) and LNG installation services.

Natural gas is a commercial product in the meaning of the Natural Gas Market Law and is defined as:

  • a mixture of hydrocarbons and non-hydrocarbon components
  • these components are in a gaseous state under standard conditions (pressure: 760 millimetres of mercury and temperature: 20 degrees Celsius)

The definition of natural gas includes petroleum (associated) gas, coal gas (methane) and shale gas, dense rock reservoir gas, central-basin type gas (hereinafter gas).

On the basis of difference in rules and participants, the Natural Gas Market of Ukraine is divided into:

  • wholesale gas market
  • retail gas market

The wholesale gas market means purchase and sale of natural gas between wholesalers and wholesale buyers without requirements as to the licensing and sale of gas to the household consumers is excluded.

The retail market will be subject of our analysis in the next article.

Who are the main participants of the wholesale gas market?

The main wholesale gas market participants are:

  • the gas transmission system operator (“TSO”)
  • the gas storage operator
  • wholesalers
  • wholesale buyers
  • suppliers

Purchase and sale of natural gas on the wholesale gas market is carried out by wholesale buyers and wholesalers. According to the Annual Report of the NEURC for 2019, the number of wholesalers and buyers operating on the natural gas market of Ukraine in 2019 was about 347 business entities.

A Wholesale buyer is a business entity that purchases natural gas on the basis of a purchase and sale agreement not for its own consumption.

A Wholesaler is a business entity that sells natural gas to a wholesale buyer or supplier on the basis of a purchase and sale agreement. The wholesalers are traders and the natural gas producers in case of sale of gas on the wholesale gas market.

The activity of wholesalers and wholesale buyers on the wholesale gas market does not require licensing. Foreign entities can also be participants of the wholesale gas market under the rules of the customs warehouse regime.

The transportation of natural gas through the territory of Ukraine is carried out by the gas transmission system operator – LLC Gas TSO of Ukraine or TSO. The TSO was incorporated in 2019 by JSC Mahistralni Gazoprovody Ukrainy (MGU) which is 100 per cent owned by the Ministry of Finance of Ukraine and from 1 January 2020 is a certified operator. According to the results of the first half of 2020, LLC Gas TSO of Ukraine has:

  • 33,000 km of gas pipelines
  • 11,000 employees and
  • 623 clients

Storage of natural gas in underground gas storage facilities is carried out by Ukrtransgaz JSC as the gas storage operator. Ukrtransgaz JSC owns 11 underground storages with the capacity of 30,96 Bcm. In 2019, the gas storage operator had 449 customers of storage services that was in 95 customer more than in 2018.

In order to sale natural gas on the retail gas market, the wholesaler can sell natural gas to the natural gas suppliers. Natural gas supplier or the supplier is a business entity that, on the basis of a license supplies natural gas to the consumers. In 2019, 249 suppliers actually worked on the natural gas market and supplied the natural gas to the final consumers.

In which segments is the wholesale gas market of Ukraine divided?

The wholesale gas market of Ukraine consists of the regulated and unregulated segments.

The Regulated segment

The main rules of the regulated segment of the wholesale gas market are determined in:

  • article 11 of the Natural Gas Market Law that concerns special obligations to ensure the general public interest in the functioning of the natural gas market or the Public Service Obligations
  • procedure on imposing special obligations on natural gas market entities to ensure general public interests in the process of functioning of the natural gas market, approved by the Resolution of the Cabinet of Ministers of Ukraine No. 867, dated 18 October 2018

On 1 August 2020, the Public Services Obligations do not work for the household customers due to the commencement of work of the retail gas market in Ukraine. This means that from 1 August 2020, the household customers can choose the supplier and purchase the gas under the market prices.

At the same time, the following Public Service Obligations still apply to Naftogas Ukraine prior to 1 May 2021

Supply of the natural gas to:

  • heating energy producers that produce heating energy for all categories of consumers
  • producers of heating energy financed from the state or local budget, that use natural gas for the purpose of hot water supply and heating of housing, dormitories, heating office and production premises which belong to producers on the right of ownership or other property right
  • producers of heating energy – associations of apartment building co-owners, housing cooperatives and business entities that use natural gas for the hot water supply and heating of premises owned by them or other property rights
  • producers of heating energy that use natural gas for electricity production
  • heat producers whose property is managed by economic entities involved by the National Agency for Detection, Investigation and Management of Assets Obtained from Corruption and Other Crimes

Purchase natural gas from companies, 100 percent of shares of which belong to the state or another company the sole shareholder of which is the state (PJSC “Ukrgazvydobuvannia”, joint-stock company State Joint-Stock Company “Chornomornaftogaz” (hereinafter – JSC “Chornomornaftogaz”) for the formation of the natural gas resource for heating energy producers.

The Unregulated segment

The unregulated segment is based on:

  • trading by bilateral contracts and
  • trading through commodity exchange – the Commodity Exchange “Ukrainian Energy Exchange” (CE “UEEX”)

Trading by bilateral contract performs on the virtual trading point (VTG) from 2016 according to the Transmission Network Code.

The wholesale trade of natural gas is also possible on the Commodity Exchange “Ukrainian Energy Exchange” (CE “UEEX”). The level of trade of natural gas on CE “UEEX” is still low. In order to improve the situation, on July 2020 the CE “UEEX” concluded the Memorandum of Understanding between the Energy Community Secretariat, the Ministry of Energy of Ukraine and the European Bank for Reconstruction and Development. On the basis of this Memorandum the support to CE “UEEX” for establishment of a natural gas exchange is expected.

For the actual implementation of gas purchase and sale operations, the network user should enter into a gas transmission contract with the TSO in accordance with the Template Gas Transmission Contract approved by the NEURC Resolution No. 2497, dated 30.09.2015. The contract with the TSO provides for the provision of TSO services:

  • for the capacity allocation at the points of entry and exit to the gas transmission system (depending on the period of provision, there may be annual, quarterly, monthly or for a day ahead capacity allocation)
  • for the gas transmission by the gas transmission system of Ukraine and
  • for the settlement of the daily imbalance in the volumes of gas supplied to and taken from the gas transmission system

TSO provides natural gas transmission services to its clients on the Information Platform developed as the web application under requirements of the GTS Code.

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