Naftogaz strategy Affordable energy for Ukraine. Andriy Kobolyev, CEO 24 October 2017, Kyiv

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1 Naftogaz strategy Affordable energy for Ukraine Andriy Kobolyev, CEO 24 October 2017, Kyiv

2 Key results during Relations with Russia: independence from Gazprom s gas supplies, saved US$4 bn, $44 bn of claims dismissed in arbitration Zero tolerance to corruption: operating in interests of the company and Ukraine vs. business groups and politicians (procurement, sales, HR); first profit in 5 years 3 5 Cooperation with international banks: raised US$800m from EBRD and World Bank at average cost of less than 2% p.a Effect on state budget: from deficit corresponding to 6.2% of GDP to 16% of state budget revenues; top dividend payer in Ukraine 6 Upstream: +600 mcm of gas expected in UGV in 2017 Market development: private imports up 18 times, dozens of new shippers; created market for gas production services 2

3 Target for market transformation: liberalized and competitive gas market in line with European best practices From highly regulated inefficient gas market Integrated supply model with bundled end-user prices Excessive premium on Russian imports which has low reflection of European hub market prices Regulated gas price for end consumers Public service obligation (PSO) cost paid by Naftogaz to liberalized and competitive market in line with European best practices TSO unbundling driven by regulation, introducing competition forces and distinctive capabilities Competitive hub-linked gas market pricing Retail gas market liberalization Development of traded & short term markets Increasing competition

4 Target for market transformation: liberalized and competitive gas market in line with European best practices From highly regulated inefficient gas market Inefficient energy consumption, lack of incentives for energy efficiency Underfinanced and suboptimal domestic upstream Immature third party access regulation in practice to liberalized and competitive market in line with European best practices Efficient energy consumption, incentives for energy modernization Growth of domestic production Fully implemented, tested and effective third party access

5 Naftogaz mission: to support the market transformation and capture the benefits from achieving Affordable energy for Ukraine to be the leading engine of modernization and professionalism of the Ukrainian energy sector, integrated with the European market, ensuring security of supply and competitively priced energy while maximizing value of local resources Naftogaz realizes this mission through vertical integration and leverage of Naftogaz expertise, while strengthening capabilities, building a culture of efficiency, business integrity and transparency, and adhering to high standards of Health, Safety and Environment to the benefit of all stakeholders in a profitable and sustainable manner 5

6 Mission implementation Corporate objectives of Naftogaz: 1 2 Ensure competitive price of gas for Ukraine Ensure secure supply of energy Ensure competitive price of natural gas for Ukraine in the European market by: Facilitating Ukrainian gas market integration into EU incl. supporting adoption of European laws and regulations Supporting Ukrainian TSO in building international partnerships and attracting potential investors Ensure secure supply of energy and, in particular, natural gas, while considering Ukrainian specifics: importance of subsidies and gas price sensitivity high credit risk of market participants etc. 6

7 Mission implementation Corporate objectives of Naftogaz: 3 4 Increase O&G reserves and production Facilitate improvement of energy efficiency and develop local supply chain Increase O&G reserves and production through: sustainable investments into E&P leveraging Naftogaz scale and expertise international partnerships strengthening Naftogaz capabilities, management and governance system Facilitate improvement of energy efficiency level in Ukraine through a roll-out of modern energy services Develop efficient local supply chain, incl. service companies, relevant infrastructure in Ukraine, and reliable data 7

8 Mission implementation Corporate objectives of Naftogaz: 5 Promote efficiencies along the oil and gas value Maximize value of Naftogaz assets and improve HSE chain to maximize value of Naftogaz assets in a sustainable manner Continuously improve Health, Safety, and Environment standards 8

9 How should Naftogaz be controlled? New strategy introduces efficient control mechanisms: implementing corporate governance system based on OECD principles for SOEs opening of retail markets, including gas and heat supply to households, whereby Naftogaz will be forced to compete improving operating efficiency to get IPO-ready 1 by Final decision on Naftogaz IPO is to be made by Verkhovna Rada of Ukraine 9

10 Who will control Naftogaz? Under proposed model based on OECD principles, Naftogaz will have a more efficient control system than ever before Supervisory board consisting of a majority independent directors selected on professional merits Internal auditor subordinated directly to Supervisory board Cabinet of Ministers of Ukraine defines ownership policy Personal responsibility of management vs. hiding behind collegial decisions IPO: stock exchange requirements to disclosure + additional safeguard against political meddling Independent external auditor appointed by General Shareholder Meeting 10

11 What are the outcomes for people of Ukraine and the state? +7.4% GDP growth thanks to market transformation $8.4 bn government take from Naftogaz in bcm gas import needs, market-driven decrease in gas prices up to $10 bn potential IPO proceeds; reliable governance system ADDITIONALLY: Energy security and market transformation Competitive market integrated with the EU Raising sizeable and affordable FDI Kick-start of household energy modernization program Quality development of oil and gas resources Create new markets for local content 11