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НАК „НАФТОГАЗ УКРАЇНИ“. Річний звіт англійською (2017 рік) - 2

15.3

4.1

1.1

2.7

2.2

1.0*

0.8

0.3

0.1

0.5

9.3

8.7

5.4

14.1

20.5

27.5

4.4

34.6 31.9

Naftogaz

Private

importers

from Europe

Public sector

and religious

organizations

Industrial

consumers

11.2

Households

(direct use)

4.6***

Heat producers

for households

1.9**

Heat producers

for public sector,

religious organizations,

industrial sector

15.8

Households

Imports

Sources

of gas

Gas

usage

Gas consumed

by users

Operating needs

Production

Ukrgazvydobuvannya

Other

Ukrnafta

UGS stock change

Other Ukrnafta

UGV

Gas

distribution

networks

Ukrtransgaz

UKRAINE’S GAS BALANCE 2017

bcm

* including unauthorized gas withdrawals (≈0,8 bcm)
** including unauthorized gas withdrawals (≈1 bcm)
*** Source: NJSC Naftogaz of Ukraine Gas Sales Department

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OUR MARKET AND REFORMS

ANNUAL REPORT 2017

In 2017, LNG supplies to EU

countries increased on average

by 5%. At the same time, the

seasonality trend of supplies

and their dependence on prices

on the Asian market continued,

which in turn does not allow

LNG supplies to compete fully

with pipelines on the European

market.

Last year, the global supply of

LNG increased by 38 bcm or 11%

due to the launch of new gas

liquefaction projects in Australia

and the United States. However,

LNG spot prices in Northeast

Asia grew significantly above

2016 levels as China, which is

now the second largest liquefied

natural gas consumer in the

world, absorbs huge volumes

of supplies under an intensive

program of coal substitution for

gas in contaminated and densely

populated cities along the eastern

coast of the country

After steadily high supplies of

LNG from the North African

countries in Q1 2017, they

dropped by 30% compared in Q2

and Q3 2017 compared to the

same period in 2016. This trend

is driven by a combination of

factors, namely the high prices

of natural gas supplied by North

African countries under long-term

contracts with anchoring to the

price of petroleum products, as

well as a more favorable price for

LNG during the specified period.

From September to the end of

2017, the spot price of LNG in

the Asian market was gradually

increasing, despite the new offer

from the US terminals (Sabine)

and the start of supplies from

Australia (Wheatstone) and the

Russian Yamal project. Lower air

temperature in Q4 2017, nuclear

power plant accidents in South

Korea, and the intensive coal

substitution policy for gas in the

LNG OUTLOOK 2018 Reuters

northeast of China supported the

demand for LNG and triggered a

significant rise in prices by 85%

from USD 6.05/ MMBtu at the

end of August to the three-year

maximum of USD 11.20 / MMBtu

by the end of 2017.

We should specially consider

the situation that has arisen

with the use of gas volumes in

underground storage facilities

(UGS). During the winter, as

a result of long-term low-

temperature regimes, higher

pumping rates of natural gas

from UGS for use in the energy

sector were observed. At the end

of the heating season, the UGS

filling level was about 25%, which

is 10% less than for the same

period of 2016

, which led to an

increase in demand for imported

natural gas supplies in the spring-

summer period. The gas injection

to the UGS started earlier than

usual, but due to the low level

of filling at the end of the

heating season as of the end of

September 2017, the filling level

was about 90% of the indicator

for the corresponding period of

2016.

The price situation on the main

European hubs during the

summer months has encouraged

market participants to postpone

their plans for increasing

Reuters Eikon. (daily stock levels UK,SLO, POL,
POR, NLD, ITA, HUN, FRA, ESP, DK, DEU, CZE, BUL,
BEL, AUT)

Dynamics of LNG supplies and prices

on the Asian market in 2017

1 600

1 400

1 200

1 000

800

600

400

January

February

Mar

April

June

July

Augu

Sep

tember

Oct

ober

vember

December

LNG supplies, TWh (left axis)
Spot price of LNG on the Asian market, USD/MMBtu (right axis)

Gas stored in the EU UGS

1 000

900
800

700

600
500
400
300
200

100

105

131

157

183

209 235

261

287

313

339 365

days

2016 2017

TWh

In early 2017, due to weather

factors, a sharp increase in the

volume of pipeline imports began

in the European market, which

according to the results of Q1

of 2017, increased by about 9%

compared with the same period

in 2016. This trend persisted

throughout 2017

It should be noted that the

increase in demand for natural

gas in Europe and the growth

in consumption resulted in a

further increase in the share

of natural gas from Russia in

the total volume of imports to

European countries. Gazprom

has a monopoly right to export

gas from Russia through piplenes

and remains the main supplier

of natural gas to European

countries

Russia is projected to continue

strengthening its dominant

position in the coming years,

while Norwegian natural gas

production will decrease. The

annual volume of production of

several key natural gas deposits in

Norway – Ormen Lange, Asgard

and Quietbjorn – is expected

to decrease by 2020 by 10 bcm

compared to 2017. To some

extent, this trend will be offset

by an expected increase by 8.6

billion in gas production at Asta

Gastin field

Eurostat. Supply of gas – monthly data
[nrg_103m]

Based on data from the Reuters Eikon (total
monthly European import GWH/D). The share
of Russian Federation is calculated as a sum
of supplies through the main pipelines, and
supplies to Poland.

Rystad Energy https://www.rystadenergy.com/
newsevents/news/press-releases/Norway-
Russia-gas-volumes/

EU gas production

EU gas gross imports

Gas imports to EU by the country of origin in 2016-2017

14
13
12

9
8

60
50
40
30
20

January

February

Mar

April

June

July

Augu

Sep

tember

Oct

ober

vember

December

January

February

Mar

April

June

July

Augu

Sep

tember

Oct

ober

vember

December

2016 2017

Russia (Gazprom) Norway North Africa
LNG (Europe, Africa, Аsia, USA)

bcm

47%

27%

13%

2017

2016 2017

2016

13%

14%

27%

46%

EUROPEAN NATURAL GAS

MARKET

-------------------------------------------------------------------------------------------------------------------------------------------------------------

OUR MARKET AND REFORMS

ANNUAL REPORT 2017

pumping volumes, since in

summer the price for gas with

delivery on the next day (day-

ahead) included a premium to

the price of forward contracts.

The effect of “deferred” demand

has led to increased demand

for natural gas for injection in

the UGS in the autumn and the

relevant level of price support

Changes in the European energy

market, which will continue to

have an impact on the natural

gas consumption volumes and

transport flows, include the

following:
– As a result of lengthy

discussions in Italy, a

legislative act (Italian Energy

Strategy) was adopted

which states that by 2050

the country intends to

decommission all coal power

generation capacity.

- The countries in the Baltic

region have taken another

step towards the creation of

a competitive and liberalized

market. Lithuania, Latvia and

Estonia have established a

common regional exchange,

where the market participants

are able to trade on natural

gas on a daily basis and on

a monthly basis and use this

tool for balancing. Finland

intends to join this platform by

2020.

- Starting from 1 October 2017,

the Trading Region Upgrade

(TRU) project, which aims

to create a single market for

natural gas in Austria and the

Czech Republic, entered the

pilot phase. The proposed

mechanism will allow the

market participants to trade gas

through virtual supply points,

passing Slovakia.

- The Dunkirk LNG terminal in

France began operations in

January 2017. The total

Reuters Eikon.

capacity of regasifying LNG

plants in France today is about

37 bcm / year.

Major fundamental factors

such as the low level of filling

of underground gas storage

facilities in Europe at the

beginning of the filling season,

uncertainty about production

volumes in the Netherlands,

the steadily growing demand

for natural gas, and high world

oil and coal prices will support

the price of natural gas on the

main European hubs in 2018.

Taking into account planned

stops for the maintenance

of natural gas pipelines from

Russia in July 2018 and the

technical limitation of natural

gas production in Norwegian

deposits, significant price

fluctuations that are generally

typical for the summer season

can be expected. From the

Relative dynamics in prices for natural gas in TTF hub

in 2016-2017 (TTFD1 price as of January 1, 2016 and 2017 = 100%)

140
130
120

110

100

90
80

60
50

January

February

Mar

April

June

July

Augu

Sep

tember

Oct

ober

vember

December

2016 2017

2�5

2�0

1�5

1�0

0�5

–0�5

–1�0

–1�5

–2�0

TTFD1 premium to the price with delivery in the next month (right axis)
TTFD1 price with delivery on the next day (left axis)
TTF price delivery in winter 2017 (left axis)

January

February

Mar

April

June

July

Augu

Sep

tember

Oct

ober

vember

December

Changes in prices for natural gas on TTF hub in 2017, EUR/MWh

point of view of supplying

natural gas for the needs of

Ukrainian consumers and

filling Ukrainian UGS, such

trends in the European markets

will complicate the process

of choosing a strategy for

the purchase of natural gas

by Naftogaz and will require

continuous analysis and

adjustment of the pricing

mechanism.

Gas transit to the European market

According to the European

Commission in 2017, the volume

of gas transit to the EU was

as follows: Ukraine 44% (43%

in 2016), Nord Stream – 30%

(28% in 2016) and Belarus 24%

(26% in 2016). The volumes

transported through Ukraine

that are traditionally the main

source of Russian gas supplies

to the EU, increased in 2017

by 14% compared to 2016.

Supplies through Nord Stream

increased by 17%, and transit

supplies through Belarus rose by

6%. Utilization of Nord Stream

was nearly 87%, with 130 days

when it reached almost 100%.

The pipeline was out of service

during 10 days in September

for scheduled maintenance.

Moreover, in 2017, the EU court

allowed using full capacity of

OPAL pipelines, which transmits

gas from Nord Stream to the

Czech Republic. This increased

utilization of Nord Stream. Yamal

pipeline was more than 96%

loaded, going lower than 90%

only during maintenance in

summer and being almost fully

stopped in July 2017 because of

poor quality of gas at the entry to

Poland.

The volume of gas transit

through the territory of Ukraine

in 2017 reached a record high for

the last 6 years and amounted to

93.5 bcm of natural gas, which

is 14% more than in 2016

This high result is even more

valuable, given the fact that

Gazprom failed to comply with

contractual pressure levels at

Data of Ukrtransnafta.

the entry point to the Ukrainian

GTS. Such an approach used by

Gazprom regarding the creation

of daily requests for transit

of gas through the territory

of Ukraine is contrary to the

terms of the existing contract,

and for its implementation

Ukrtransgaz should involve

additional production resources

and incur unplanned expenses.

Meanwhile, average utilization

of the Ukrainian route was 54%,

with daily fluctuation between

35% and 70%. Average utilization

of the major transit direction

2014

2015

2016

2017

62�2

67�1

82�2

93�5

m/year

100

Gas transit volumes through the territory of Ukraine,

2014–2017

Physical flows in points/ pipelines: Greifswald/ OPAL and

Uzhhorod /Velké Kapušany (SK)

�01

�2017

�02

�2017

�03

�2017

�04

�2017

�05

�2017

�06

�2017

�07

�2017

�08

�2017

�09

�2017

�10

�2017

�11

�2017

�12

�2017

�01

�2018

2 500

2 000

1 500

1 000

500

Greifswald/OPAL Uzhgorod (UA) – Velké Kapušany (SK)

-------------------------------------------------------------------------------------------------------------------------------------------------------------

OUR MARKET AND REFORMS

ANNUAL REPORT 2017

(entry point to Slovakia) made up

52% fluctuating between 25%

and 71% of maximum capacity,

while the southern direction was

loaded 68% on average, with daily

fluctuation between 22% and

94%.

The main reason for the increase

in transit was the growth in

demand for natural gas in

Europe, especially in the first

months of 2017 and in summer

due to unusual heat and low

electricity generation at European

hydroelectric plants.

At the same time, the volume

of transit through Ukraine could

have been even higher in 2017.

Thus, according to the decision

of the European Commission of

28 October 2016, on the increase

in the share of utilization of

OPAL pipeline capacities, the gas

flow through the specified gas

pipeline, after the corresponding

auctions had been conducted,

began to increase and in January

2017 reached its maximum. The

Polish company PGNiG Supply &

Trading and Naftogaz of Ukraine

NJSC appealed to the General

Court of the European Court of

Justice against the European

Commission and requested the

annulment of its decision of 28

October 2016.

At the end of July 2017,

Düsseldorf Court in Germany

rejected a lawsuit by the Polish

company and ruled that there

were no reasons to restrict

Gazprom’s access to the OPAL

pipeline. The court stated that

the plaintiffs failed to prove

irreversible damage caused

by Gazprom access to OPAL’s

capacities. As a result, starting

from August 2017, auctions for

the sale of “additional” capacities

of the OPAL gas pipeline

started on the platform for

https://platform.prisma-capacity.eu/#/
network-point/details/5865472

sale/ reservation of transportation

capacities, which respectively led

to the maximum level of loading

both of the OPAL pipeline and

the North Stream gas pipeline

ENSOG data, REUTERS Eikon. The Yamal oil
pipeline maintenance in the first and second
parts of August was balanced by increase in
physical flows through the Nord Stream and
the Ukrainian route. Nord Stream maintenance
in September was balanced by increase in gas
flow through Yamal and Ukraine’s GTS.

Reduced physical flows of Russian

gas transit through Ukraine were

observed immediately after the

restoration of the Nord Stream

gas pipeline after its annual

maintenance. On 22 September

(which is the final date for the

maintenance of the North Stream

gas pipeline), the transit flow

through Ukraine began to decline

and reached a minimum level in

Share of natural gas supplied through different

routs from Russia August – October 2017, %

�08

�2017

�08

�2017

�08

�2017

�08

�2017

�08

�2017

�09

�2017

�09

�2017

�09

�2017

�09

�2017

�10

�2017

�10

�2017

Ukraine’s GTS Yamal-Europe
Nord Stream OPAL Nord Stream NEL

44%

45%

46%

71%

21%

25%

Dynamics of share of the natural gas transit routes

from Russia in 2016-2017, %

Ukraine’s GTS Yamal-Europe Nord Stream

January 2016

February 2016

Mar

ch 2016

April 2016

y 2016

June 2016

July 2016

Augu

st 2016

Sep

tember 2016

Oct

ober 2016

vember 2016

December 2016

January 2017

February 2017

Mar

ch 2017

April 2017

y 2017

June 2017

July 2017

Augu

st 2017

Sep

tember 2017

Oct

ober 2017

vember 2017

December 2017

early October. At that time, gas

volumes transported through the

NEL and OPAL pipelines increased

during the last days of September

and early October, and the trend

continued until the end of 2017

and early 2018.

Analysis of the operations of all

routes for the transportation of

Russian gas to Central European

countries shows that, unlike

almost 100% the load of Yamal

(Russia-Belarus-Poland-Germany)

and Nord Stream (Russia-Germany

via the Baltic Sea), Ukraine’s GTS is

used by Gazprom not as a priority,

but as a gas transportation

orridor for balancing gas supplies

to the EU.

Without an onshore connection,

the new gas pipeline Nord

Stream 2 would not make sense.

Like its predecessor, the pipeline

will end in the German city of

Greifswald just a few meters from

the coast – far from any existing

gas transportation networks and

potential consumers of Russian

gas. Therefore, the OPAL and

NEL pipelines were specially

laid for Nord Stream, and the

EUGAL gas pipeline is planned

for Nord Stream 2. Its length

will be 485 km, it will pass from

Greifswald to the south through

the territory of three eastern

German regions to the border

with the Czech Republic in the

area of Doichodorf. The total

capacity of its two branches will

be 51 bcm of gas per year.

On 6 March 2017, at the annual

auctions on the PRISMA platform,

a new capacity was sold with

delivery to GASPOOL zone and

from GASPOOL to the west and

south

. At the new network point

of Lubmin II (the exit point of

Nord Stream 2 and the start of the

EUGAL gas pipeline), transport

capacity up to 55 bcm (about

https://platform.prisma-capacity.eu/#/
network-point/details/6193154

73 GW) a year in the long run

(until 2039) was purchased at

the auction

. Natural gas will be

received from the Nord Stream 2

pipeline and will be further

transported to the European

market through the EUGAL

pipeline and other existing gas

pipelines directly linked to EUGAL.

Natural gas

imports to Ukraine

In 2017, imported gas was only

supplied to Ukraine from the

European gas market. Compared

to 2016, gas imports increased by

27% – from 11.1 bcm to 14.1 bcm.

Despite the fact that Naftogaz

is the largest importer, it has

faced increased competition

from independent importers that

deliver products to consumers

on a liberalized market. In

2014, besides Naftogaz, only

5 companies imported natural

gas to Ukraine. At the end of

https://www.gascade.de/en/press/press-
releases/press-release/news/successful-
booking-of-new-transport-capacities/

2016, the number of importers

who competed with Naftogaz

increased to 33. This growth

continued in 2017, reaching 66

importers by the end of the year.

The emergence of new market

participants has led to a reduction

in Naftogaz’s share of imports

from 74% in 2016 to 62% in 2017.

In 2017 Naftogaz imported

from the European market

8.7 bcm of gas, which is 0.5 bcm

(6%) more than the previous

year. The number of European

suppliers from which Naftogaz

purchased natural gas in 2017

decreased to 13 companies (from

15 companies in 2016). None of

these companies supplies more

than 25% of the total imported

gas.

It should be noted that during

the last three years, the use of

natural gas in Ukraine has been

rapidly decreasing, which has led

to a decrease in imports. Overall,

in 2017, the use of natural gas in

Ukraine decreased by 1.3 bcm.

2015

2016

2017

bcm

Gas imports to Ukraine in 2015–2017

Naftogaz's imports from Europe
Naftogaz's imports from Russia
Other imports from Hungary

Other imports from Slovakia
Other imports from Poland

-------------------------------------------------------------------------------------------------------------------------------------------------------------

OUR MARKET AND REFORMS

ANNUAL REPORT 2017

In 2017, Slovakia remained the

main transit country for supplying

natural gas to Ukraine from

Europe. Hungary became the

second largest transit route for

gas supplies to Ukraine in 2017.

Diversifying the supply of

imported gas has contributed

to the increase in the number

of private suppliers and

strengthening competition in the

market, which in turn makes the

domestic market more efficient

and helps end users to benefit

from acceptable competitive

prices. The market has become

significantly more competitive,

as the HH index has dropped

from over 4,800 in 2015 to about

2,500 in 2017. Therefore, both

the reduction of the Naftogaz’

market share and the fall of

the HH index evidence the fact

that the supply of gas over the

past three years has become

significantly more competitive.

However, it concerns only the

supply of gas in the liberalized

natural gas market segment, as

the competitive environment

in the retail gas supply segment

for households has not changed

dramatically due to the continued

existence of regulated marginal

2017

bcm

2009

2011

2013

2015

2010

2012

2014

2016

Sources of gas supply and its consumption in Ukraine

Domestic production Naftogaz imports Total imports Consumption

2015

2 500**

2016

2017

HHI

5 000

4 000

3 000

2 000

1 000

The Herfindahl-Hirschman Index (HHI) by number of importing

companies*

The index can range from 100 to 10 000, where 100 corresponds to a very large number of small companies,
and 10 000 – to a single monopoly. Decrease in HHI means increased competition and reduced market power.

The HHI of 2,500 or greater indicates a highly concentrated marketplace among importing companies

Natural gas supplies from Slovakia and Hungary in 2017

1 400

1 200

1 000

800

600

400

200

January

February

Mar

April

June

July

Augu

Sep

tember

Oct

ober

vember

December

From Slovakia GMS Budince From Hungary GMS Beregdaroc

retail prices, which in turn reduces

the commercial attractiveness

of this segment for new market

participants.

Natural gas

production

In 2017, Ukraine produced

20.5 bcm of gas (in 2016 –

20.1 bcm). The increase in gas

production compared to 2016

amounted to 0.45 bcm, or 2%.

In 2017, Ukrgazvydobuvannya

produced 15.25 bcm of gas

(73% of the total production

in Ukraine). This volume

also includes joint venture

agreements and gas extracted

by the enterprise for its own

technological needs.

The company managed to

achieve stabilization of gas

production due to the measures

envisaged by the Strategy 20/20.

Chornomornaftogaz in 2017

produced 10.5 mcm of gas,

which is about the level of 2016

(10.4 mcm). The company is

developing one deposit, Strilkove,

and its gas satisfies the needs of

the city of Genichesk in Kherson

region.

In 2017, Ukrnafta reduced the

volume of gas production

by 17% from 1.3 to 1.1 bcm.

The main reason for the

reduction of hydrocarbon

production by Ukrnafta was

the suspension by the state

of the company’s special

permits

. If the special permits

were prolonged on time, the

level of oil, condensate and

gas production would remain

stable during the year. Due to

the forced end of production

at six fields, Ukrnafta lost over

92 thousand tons of oil and

condensate and 76 mcm of

gas.

In 2017, 9 Ukrnafta’s licenses expired. Attempts
by the company to extend the special permits
were blocked by the State Geology and Mineral
Resources Service (DerzhGeonadra) from
April to June 2017 Ukrnafta was forced to stop
mining at six deposits. The company won a
number of lawsuits challenging the inaction of
the regulator in the issue of special permits
extension. At the end of October and November,
after the extension of special permits and
obtaining land allotment, Ukrnafta was able to
resume production at the suspended deposits.
By the end of 2017, Ukrnafta submitted an
application to the DerzhGeonadra for the
extension of 27 special permits which expire in
2018 and which account for 24% of annual oil
and condensate production and 18% of annual
gas production of the company.

At the same time, in Q4

2017, Ukrnafta increased its

hydrocarbon production. The

average daily oil and condensate

output increased by 15% from

3.3 thousand tons per day in

October to 3.8 thousand tons

per day in December. During

the same period, the level of gas

extraction increased by 12% from

2.6 mcm to 2.9 mcm per day, and

the average daily production of

liquefied gas increased by 30%

to 325 tons per day. The increase

in production figures became

possible after the prolongation

of special permits and recovery

of production in 6 fields where

it was suspended during 2017.

The volume of gas production

by private producers in 2017

amounted to 4.1 bcm which

is almost equal to the level of

2016 (4.2 bcm).

Use and sale of gas

The statistical data evidence

shows a significant decrease in

gas use in Ukraine during 2014–

2017, both in the regulated and

unregulated market segments.

During 2017, household

consumers used 11.2 bcm of

gas, which is 0.7 bcm less than

in 2016 (–6%).

District heating companies

(DHC) which produce heat

energy for the population, used

4.6 bcm of gas, which is 1.1 bcm

less than in 2016 (–19%).

The volume of gas supplied by

the DHC to produce heat for

2015

2016

2017

24
22

18
16
14

8
6
4

Gas production in Ukraine in 2015-2017, bcm

Ukrgazvydobuvannya
Ukrnafta

Private producers

14�5

1�5

3�9

4�2

4�1

1�3

1�1

14�6

15�3

-------------------------------------------------------------------------------------------------------------------------------------------------------------

OUR MARKET AND REFORMS

ANNUAL REPORT 2017

budget institutions and public

sector amounted to 1.0 bcm.

Religious institutions consumed

19 mcm last year compared to

17 mcm in 2016. The use of gas

by this category of consumers

in the total gas consumption

is 0.06%.

According to the law, namely,

Article 11 of the Law of Ukraine

“On the Natural Gas Market”,

Ukrgazvydobuvannya shall

sell extracted natural gas to

Naftogaz, while Naftogaz is

required, pursuant to its public

service obligations (PSO),

to ensure the sale of gas to

regional gas suppliers, religious

organizations and DHC, and

serving households. The former

gas supply regime under PSO

was established by the Cabinet

of Ministers’ Decree No. 758

of 1 October 2015, and it was

due to expire on 1 April 2017.

However, the regime was

extended until 1 June 2018, and

then – until 31 May 2018.

The establishment of PSO has led

to a tangible difference between

the regulated price and their CIF

equivalence. By the end of 2017,

the difference was 50%.

Under the existing conditions,

when natural gas for the needs of

households, DHCs and religious

organizations is supplied by

Naftogaz at prices regulated by

the state in accordance with

PSO assigned to the company,

and without ensuring equal

access to gas distribution

networks for new market

participants, without establishing

Naftogaz wholesale prices since January 2015,

UAH net of VAT/tcm, weighted average by category

10 000

9 000

8 000

7 000

6 000

5 000

4 000

3 000

2 000

1 000

Industrial comsumers Households Heat producers

January 2015

Mar

ch 2015

y 2015

July 2015

Sep

tember 2015

vember 2015

January 2016

Mar

ch 2016

y 2016

July 2016

Sep

tember 2016

vember 2016

January 2017

Mar

ch 2017

y 2017

July 2017

Sep

tember 2017

vember 2017

January 2016

February 2016

Mar

ch 2016

April 2016

y 2016

June 2016

July 2016

Augu

st 2016

Sep

tember 2016

Oct

ober 2016

vember 2016

December 2016

January 2017

February 2017

Mar

ch 2017

April 2017

y 2017

June 2017

July 2017

Augu

st 2017

Sep

tember 2017

Oct

ober 2017

vember 2017

December 2017

Dynamics in difference between the market and regulated price of natural gas, %

120

100

a competitive environment

for retail suppliers, without a

transparent and comprehensive

market mechanism – these are

prerequisites for the formation

of structural disproportions in the

industry and the economy of the

country and unreasonable use of

capital. Such a situation provides

no incentives for a decrease in gas

consumption, limits investment

in the exploration of new oil and

gas reserves, and reorientation

of wholesalers to the segment

of sales to end-users.

UGS

Ukraine entered 2018 with the largest, compared to the beginning of the last 5 years, gas reserves in

underground storage facilities –

14�7 bcm.

In 2017, Ukrtransgaz pumped

9.2 bcm of gas into underground

storage facilities, which is by

43.2% more than in 2016. In

January-December 2017, 6.4 billion

cubic meters were selected from

Ukrainian UGS. This is 23.2% less

than in 2016.

Underground gas storage facilities

play an important role in ensuring

the security of gas supply, especially

in winter. They provide coverage for

the temporary growth in demand

in peak periods, and also guarantee

a certain level of security of supply

during abrupt changes in gas

supply volumes in the short run.

In addition, UGS are essential for

balancing the system due to their

flexibility and the ability to quickly

respond to the changes in gas

flows.

The choice of a policy which is

different from the typical policy of

EU countries regarding the rates

and volumes of filling UGS in 2017

in Ukraine proved to be the right

one given the development of the

price situation during the heating

season in 2017. Subsequently, a

sufficient level of filling UGS had

played a key role in balancing the

operation of the Ukrainian gas

transmission system in early March

2018 during a critical situation that

arose due to failure of Gazprom

to comply with the terms and

conditions of the contracts,

failure to comply with Stockholm

arbitration, and another pressure

reduction (down to 49.8 atm

instead of 60

atm stipulated in the

contract) in the main gas pipelines

at the entry point of GMS Sudzha.

Volumes of natural gas injected to and withdrawn from the UGSFs, April – December 2017

Injection/withdrawal of gas, mcm (right axis) Price NCG hub, EUR/MWh (left axis)

April

May

June

July

August

September

October

November

December

INJECTION

WITHDRAWAL

-------------------------------------------------------------------------------------------------------------------------------------------------------------

17.8

0.5

0.8

3.1

0.09

3.2

8.6

1.7

10.3

1.4

9.7

11.1

4.3

0.09

4.4

2.5

0.01

2.5

0.1

14.5

4.2

18.7

4.1

0.01

4.1

33.6

0.06

33.6

14.1

20.5

34.6

5.1

49.1

0.04

49.1

8.0

0.2

8.2

14.1

1.2

15.3

0.8

0.01

0.9

2.0

5.0

63.6

5.6

69.3

1.3

1.6

2.9

0.7

4.8

5.6

114.6

8.2

122.8

3.0

46.4

43.3

48.5

42.8

91.3

97.1

7.8

104.9

1.1

2.3

gas production

gas imports

gas consumption

gas exports

30.9

23.9

17.2

14.3

11.7

8.4

6.3

3.5

3.4

3.2

2.6

1.4

KRAINE

ERMANY

TALY

ETHERLANDS

RANCE

USTRIA

UNGARY

ZECH

EPUBLIC

LOVAKIA

OLAND

PAIN

ENMARK

USE OF DOMESTICALLY PRODUCED GAS,
IMPORTS FROM OTHER SOURCES IN 2017,

BCM

TOTAL UGS CAPACITY, BCM, 2017

(

SOURCE

: U

NDERGROUND

TORAGE

THE

ORLD

– 2017

PUBLISHED

CEDIGAZ)

(

SOURCES

: E

UROPE

–

THE

UROPEAN

OMMISSION

, U

KRAINE

- N

AFTOGAZ

)

Ukraine

Germany

Italy

The Netherlands

France

Austria

Hungary

Spain

Slovakia

Czech

Republic

Denmark

Bulgaria

Estonia

Croatia

Latvia

Lithuania

Portugal

Poland

Luxembourg

Belgium

Romania

Slovenia

Sweden

Norway

Finland

Greece

Ireland

UKRAINE IN THE EUROPEAN GAS MARKET

35.4

90.7

110

207

590.9

34.9

696.7

1 763.4

203

33 500

1 763
5 284
5 366
5 702

32 271

8 714

PROVEN RECOVERABLE GAS RESERVES AS

OF THE END OF 2016,

BCM

(SOURCE: BP)

Middle East

79 377

Europe

3 745

South and

Central America

7 589

North America

11 129

Africa

17 536

Continental Asia

52 947

Asia and Pacific

COUNTRIES WITH BIGGEST GAS RESERVES

Denmark

Germany

Poland

Romania

Ukraine

Italy

The Netherlands

Norway

Others

Norway

Nigeria

China

Venezuela

USA

Iran

Russia

-------------------------------------------------------------------------------------------------------------------------------------------------------------

OUR MARKET AND REFORMS

ANNUAL REPORT 2017

In 2017, the global oil

demand growth trend

remained unchanged; it

has been recorded for the

third consecutive year,

and last year demand

growth amounted to about

1.6 million barrels per day

(Mb/d). Global oil demand

at the end of 2017 was close

to the 97.0 Mb/d mark.

Against the background of

the overall recovery and

the growth of the world

economy in 2014-2017, the

growth in demand for oil

was about 5 Mb/d.

GLOBAL OIL MARKET

Oil demand Supply

Global oil demand and supply

2013

2014

2015

2016

2017

Mb/d

January 2017

February 2017

March 2017

April 2017

May 2017

June 2017

July 2017

August 2017

September 2017

October 2017

November 2017

December 2017

January 2018

February 2018

March 2018

OPEC nations faltered in their efforts to comply with oil-cut targets

164%

148%

136%

135%

129%

103%

93%

96%

86%

82%

109%

104%

109%

97%

99%

OPEC members

maintain a production

target of

1�176

Mb/d

Source:

https://www.bloomberg.com/graphics/2017-opec-production-targets/

Source: OPEC Monthly Oil Market Report December 2017

The agreements that were

declared in 2017 to reduce oil

production by OPEC member

countries in coordination with

other countries including the

Russian Federation resulted in

a reduction of oil production

and, therefore, excess supply

on the market

. This situation

enabled the launch of the

process to balance the

market, which eventually

led to certain equilibrium in

the market and the gradual

reduction of commercial

global oil reserves.

At the same time, the growth

in production and supply by

the USA, Brazil, Iran, Libya and

Nigeria somewhat limited

the pace of the restoration of

equilibrium in the market.

Unlike 2016

, the price

situation in the market was

more stable during Q1-Q3

2017. However, after the

market participants received

clear evidence of a reduction

in market surplus and a

reduction in commercial oil

reserves, the prices began to

increase at Q4.

The gradual recovery of crude

oil prices from the summer of

2017 and the emergence of

confidence in this long-term

trend led to the launch of

financing by the world's oil

companies of 18 previously

suspended large production

projects.

Oil-producing countries (OPEC members and
others) combined efforts through entering
into a Declaration of Cooperation agreement
to reduce oil supply to the global market by
1.8 Mb/d.

The prices for crude oil in 2016 dropped
to the lowest level in the last 12 years. The
average Brent oil price was USD 44 per barrel.
In addition, the crude oil price was quite volatile
in 2016, ranging from $ 26 to $ 55 per barrel.

Rystad Energy (http://www.offshore-mag.com/
articles/2018/01/analyst-finds-18-delayed-
projects-reached-fid-last-year.html)

Source: OPEC Monthly Oil Market Report December 2017

2015

2013

2016

2014

2017

Mb/d

2�5

2�0

1�5

1�0

0�5

–0�5

–1�0

Global oil demand and supply balance and price for oil

Demand and supply balance (left axis) Price for Brent crude oil (right axis)

120

100

1�120
1�100
1�080
1�060
1�040
1�020
1�000
980
960
940

3�100

3�050

3�000

2�950

2�900
2�850
2�800

2�750

Commercial stocks of crude oil in OECD countries and oil on

water for the period, thousand barrels

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Commercial stocks of crude oil in storages (left axis)
In tankers (oil on water) (right axis)

D/barr

Mb/d

Brent crude oil price, 2017

Price for Brent oil Demand and supply balance

0�6

0�4

0�2

–0�2

–0�4

–0�6

–0�8

–1�0

–1�2

–1�4

Source:

Platts

-------------------------------------------------------------------------------------------------------------------------------------------------------------

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