unbundling of natural gas transportation from gas production

Transcription

1 Round Table NJSC "Naftogaz of Ukraine" restructuring concept aimed at unbundling of natural gas transportation from gas production and supply activities NJSC Naftogaz of Ukraine 19 February _Naftogaz_StrategicPlan_v14.pptx

2 1. FULFILLING EU REQUIREMENTS REGARDINGTHE UNBUNDLING OF TRANSMISSION SYSTEM OPERATOR _Naftogaz_StrategicPlan_v14.pptx

3 Unbundling of gas transmission segment or full Naftogaz restructuring? The Third Energy Package (3EP), in particular Directive 2009/73/EC outlines a clear mechanism to eliminate discrimination in third-party access to the gas transmission system (GTS) it requires to effectively separate networks (transmission) from activities of production and supply. This is called effective unbundling. In joining the Energy Community (EnC), Ukraine has taken on an obligation to implement key EU energy legislation. The Law of Ukraine On the Natural Gas Market (the Law) introduces EU requirements regarding unbundling and independence of the natural gas transmission system operator (TSO) into the Ukrainian legislation. Gas Sector Reform Action Plan (Reform Plan), adopted by the Decree of the Cabinet of Ministers of Ukraine (CMU) on 25 March р and approved by the World Bank, envisages development of the Naftogaz restructuring plan aimed at unbundling of the natural gas transmission activities in accordance with the Law. The Law paves the road for the next phase of the TSO restructuring engaging a reliable foreign partner in GTS operation. In view of the delay already occurred, the decisions on unbundling should be taken rather quickly in order to respect the deadlines set in the gas sector development plan and notably the gas law. Klaus-Dieter Borchardt, Director Internal Energy Market, European Commission (EC), an official letter to the Ministry of Energy and Coal Industry (MECI), 1 February The priority objectives of the Naftogaz restructuring plan at this stage are reaching compliance with the Law with respect to the TSO unbundling, establishing basis for foreign partnership in operating TSO, use of the best practices of the natural monopolies regulation. These goals do not envision other forms of Naftogaz restructuring not related to unbundling of the gas transmission business. 3

4 What are the implications of choosing of the OU unbundling model? 1 In January 2016, a broad consensus was reached regarding the Ownership Unbundling (OU) model. Out of the three possible options, OU presents the most stringent requirements regarding the independence of the TSO. The restructuring plan must ensure their fulfilment so that the operator can obtain a final decision on certification from the Regulator. Implication of the selected TSO unbundling model The selected model must ensure that the same person or persons are not entitled to either directly or indirectly exercise over a production or supply undertaking and, at the same time, exercise control or any right over a TSO or transmission system (Article 9 of Directive 2009/73/EC). How to ensure the absence of control? Management of the state assets in TSO must be transferred to a competent government body which is the most independent from the vertical of power that controls Naftogaz. Considering that Naftogaz is controlled by the Ministry of Economic Development and Trade of Ukraine (METD) a part of the Cabinet of Ministers of Ukraine (CMU) this requirement is fulfilled if the TSO is not controlled by any of the Ministries. 2 MECI* role in regulating TSO operations Ukraine s fundamental choice of European integration requires modification of the role of the MECI in the energy markets from an entity managing state property in companies to a policy maker for the entire sector. The MECI has to implement objectives specified in the Law effectively and carry out its mandate in the energy market (ensuring security supply, monitoring market environment, determining technical standards, responding to crisis situations); The MECI must relinquish its responsibilities of managing the state property in energy sector; Strategic decisions regarding the TSO should be taken by the CMU. * MECI Ministry of Energy and Coal Industry of Ukraine 4

5 OU Naftogaz restructuring proposal compliant with the requirements of the 3EP Existing structure Target structure State State METD State Property Fund METD State Property Fund NJSC Naftogaz of Ukraine services under the contract with NJSC Naftogaz of Ukraine PJSC MGU (TSO for Gazprom. the whole GTS, transmits 100% 100% gas to domestic and international customers) PJSC Ukrtransgaz All of GTS 100% 100% 100% All UGSFs* * UGSF Underground Gas Storage Facility * SSO Storage System Operator Naftogaz acts as a TSO for transit UTG is the TSO for transmission for local customers on the territory of Ukraine. PJSC Ukrtransgaz Servicing functions Certain UGSFs All of GTS UTG is the SSO* for certain UGSFs. Thorough analysis and strategy are developed for individual UGSFs. The JSC Main Gas Pipelines of Ukraine ( MGU ) shall be the designated TSO, 100% of the shares will be owned by the state; Management of the state corporate rights in MGU shall be exercised by the State Property Fund of Ukraine (SPFU); The independence of the TSO shall be ensured by an appropriate corporate governance according to the OECD standards; The GTS, as the state property not subject to privatization, shall be transferred by SPFU to MGU under the right of commercial management; MGU shall perform all functions and obligations of the TSO under the Law without attracting resources of vertically integrated undertakings; Analysis of individual Underground Gas Storage Facilities (UGSFs) shall be conducted to determine the optimal development strategy. As a result, some UGSFs may be privatized, European or American partners may be engaged to operate others. 5

6 2. WHY STORAGE SYSTEM OPERATOR AND TRANSMISSION SYSTEM OPERATOR SHOULD BE SEPARATE ENITIES _Naftogaz_StrategicPlan_v14.pptx

7 Why should a foreign partner be engaged in the operating GTS? The investment attractiveness and the likelihood of involving a foreign partner are the principal evaluation criteria of the TSO unbundling plan, as such participation would permit to increase the value of this asset for the state. This appears impossible if an independent TSO company is not established and if the transmission and storage infrastructure is combined in one entity and this entity operates both. Why a foreign partner is needed for the TSO? We want to unbundle the TSO not to imitate reforms but to increase the value of the Ukrainian GTS, an asset, to the people of Ukraine. Engaging a foreign partner in the operating GTS will: bring the necessary commercial and technical know-how to enhance cost efficiency and trust of international customers and the European policy makers via to prompt detection and dealing with corruption; provide a chance to settle dispute with Gazprom and ensure more effective utilization of the Ukrainian GTS; allow to attract significant additional investments to the GTS modernization; require transparent business operations and would thus be an effective tool to fight corruption and power abuse. Is it possible to engage a foreign partner if TSO and SSO are combined? NO, since Western companies are interested in natural gas transmission business, not in developing the gas storage segment, currently unprofitable both in Ukraine and Europe (due to excessive gas supply, smaller spread between winter and summer prices etc.); No, since the cost of our UGSFs (the largest in Europe) is very high, and investors are not interested in making significant investments in this segment since it is unprofitable, lacks strategy, and Gazprom is blocking interconnectors; No, since Ukraine has no transparent and clear tariffs for gas storage. Results of the gas storage segment (Naftogaz IFRS reporting), billion UAH ,5-0,7-3,0 What else needs to be in place to engage foreign partner to running the TSO? Western companies will be interested to invest in the company with: transparent and clear cash flows generated from regulated tariffs according to the standard European practices and based on booked capacity of 110 bcm/y till 2020; an independent supervisory board; reformed corporate management system; management which is resistant to political pressure. 7

8 Can the TSO operate separately from the SSO? Experience of the EU countries It is a common practice to separate gas transmission from gas storage business in Europe. 2/3 of the SSOs are separated from the TSOs. Only in four European countries the SSOs are not separated from the TSOs. TSO and SSO not separated Both TSO and SSO separated n/a Latvia has the largest storage volume among countries where the TSO and SSO are not separated ~2,3 bcm in Ukraine the active storage volume is ~31 bcm Latvia (2,3 bcm)* Denmark Lithuania Ireland Netherlands Czech Republic Great Britain Belgium Poland Germany ( 0,7 bcm)* Slovakia Slovenia Portugal Gibraltar Spain France Sweden (0,01 bcm)* Finland Estonia Austria Hungary Romania Italy Bulgaria (0,6 bcm)* Greece * UGS active volume in countries where the TSO and the SSO are not separated During the working mission to Ukraine, the World Bank consultants held a series of work meetings with the management team and technical specialists of Ukrtransgaz and came to the conclusion that there are no technical complications or obstacles for separating the TSO and SSO. The relations between two independent operators should be solely commercial and should be regulated by the adopted Network Codes and corresponding legislation. 8

9 Why in Ukraine the TSO should be operated separately from the SSO The Ukrainian UGSF system is composed of 12 underground storages with the total volume of 31 bcm. The gas storage activity is lossmaking, hence it is cross-subsidized at the expense of gas transmission. No new storage tariffs have been developed yet. There is significant uncertainty as to the future cash flows. Criteria Positive effect for the TSO Positive effect for the SSO Investment attractiveness and costeffectiveness. Attracting a foreign investor is the key condition to ensuring sufficient revenue and capital investments, bringing new technologies, and overcoming fraud and corruption. Transparency Technical aspects Transmission business is more attractive for potential partners from Europe and the USA. Taking into account the existing market situation, interest in operating storages is low. Capital needed to enter the market will be much smaller if the investment asset does not include the UGSF. Volatility and decreasing demand of the gas storage segment would not affect the investment attractiveness of the GTS. Establishment of MGU presupposes that the new company will be a transparent and effective structure, free of non-essential operating assets and personnel. Involvement of reputable independent directors with required skills and experience. Improvement of internal controls system. Leaving historical risks and problems, indebtedness, lawsuits aside. Naftogaz is currently the only market actor with sufficient experience, expertise and institutional capacity to fundamentally reform the natural gas storage business. Establishment of an independent supervisory board formed exclusively of professionals with high level of trust will facilitate development and approval of an appropriate UGS strategy. Nondiscriminatory access to UGS will be regulated by an independent regulator. Without cross-subsidization, incentive for efficiency improvement will increase, finally resulting in greater investment attractiveness of UGS. Contracts will fully comply with the 3EP, resulting in significant decrease of the corruption element in the development market relations between the independent TSO and SSO. There are no technical conditions prohibiting separation TSO and SSO or diminishing security of supply after such a separation: Ensuring transit, meaning covering the 36-hour difference from nomination to physical gas delivery at the western border is a commercial issue (currently done by UTG free of charge) and is to be settled separately. 9

10 3. MANAGING NAFTOGAZ : ROLE OF THE STATE AND THE OECD PRINCIPLES _Naftogaz_StrategicPlan_v14.pptx

11 What should the role of the state be: ensuring market effectiveness instead of ad-hoc management An efficient market cannot emerge spontaneously. In fact, creation of an efficient market and promoting its operation is an essential role of the state. Role of the state in creation and promotion of an efficient market Credibility Free competition Ensuring transparency Gas market examples: Fair regulation of tariffs for operators of transmission and distribution pipelines; Promoting establishment of a hub and exchange trading; Ensuring disclosure of financial and operational statements, data on flows and capacities etc. by market participants; Adoption and implementation of the security of supply legislation. Ensuring market integrity Gas market examples: Administering an effective subsidy system; Encouraging diversification of supply sources through political means; Development of the necessary infrastructure and ensuring equal access thereto; Removing barriers to integration with liquid markets. Property rights protection Gas market examples: Creating a competent and independent regulator; Elimination of corruption within courts, law enforcement and tax authorities, etc; Transition to predictable, fair and efficient tax regime. 11

12 How should the OECD principles be applied in managing Naftogaz? Attempts of the MECI to restructure Naftogaz violate not only the rights of the shareholder (METD), but also the principles of sectoral policy development and implementation MECI should determine not the restructuring model of a separate group of companies, but the policy for the entire sector, regardless of ownership structure. Decision on Naftogaz restructuring within the limits of the ownership rights management framework determined by the state lies within the competence of the company Supervisory Board. OECD Principles Content Application to Naftogaz restructuring Role of stateowned enterprises (SOEs) on the market The legal and regulatory framework should ensure a level playing field and fair competition in the marketplace when SOEs undertake economic activities. (Principle III). In particular, the state should separate functions of: : Managing ownership rights and conflicting functions; market regulation and sector policy that may influence the conditions for SOEs (Principle III.A). MECI develops the sectoral policy for the fuel and energy complex. It may propose policy which would equally affect all enterprises within the sector, not a particular entity. Decision regarding restructuring a particular state company should be approved by an authority with an ownership mandate (currently METD). Role of the State as an owner Naftogaz supervisory board, its responsibilities The state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness (Principle II). In particular: The state should let SOE boards exercise their responsibilities and should respect their independence (Principle II.C); The exercise of ownership rights should be clearly identified within the state administration. In particular, the exercise of ownership rights should be centralized in a single ownership entity. (Principle II.D). The board should be fully accountable for its actions, thus it should be assigned a clear mandate (Principle VII.A), based on broad mandates and objectives set by the government (Principle VII.B). MECI proposals regarding separation of Naftogaz eliminate independence of its supervisory board. Centralized ownership function means that MECI may not affect decisions regarding Naftogaz restructuring in any way. Shaping strategy should be one of the Naftogaz supervisory board functions, and any restructuring decision should be a consequence of the strategy. 12

13 4. EXPECTED TRANSFORMATION OF THE NAFTOGAZ GROUP _Naftogaz_StrategicPlan_v14.pptx

14 Natogaz Mission: сreating value for clients in a financially sustainable way During the transitional period, Naftogaz will use its incumbent position to jump-start an efficient gas market in Ukraine. What it means for consumers (economy) 1 2 Reliability of gas supply The lowest acceptable price (due to subsidies, gas affordable even for the poorest) What it means for the shareholder (state / people of Ukraine) 1 2 Energy independence Highest return on equity After creation of an effective legal and regulatory environment, the Naftogaz group assets should be completely or partially privatized. 14

15 Restructuring: expected Naftogaz Group transformation Cabinet of Ministers Ministry of Energy Independent Board Cabinet of Ministers Centralized Ownership Entity State Property Fund of Ukraine MGU (TSO) as nominal shareholder sale of up to 49% Fully privatized: UGV UN USTG UAG GU Naftogaz Ukrtransgaz (UTG) Ukrgazvydobuvannya (UGV) Independent Board Naftogaz UGV UTG (SSO) Privatization JV / Sale of minority stake Partially privatized / JV: MGU (TSO) SSOs UTN Ukrnafta (UN) UN Privatization Ukrtransnafta (UTN) UTN JV / Sale of minority stake Naftogaz Group is dissolved Gas of Ukraine (GU) GU Privatization Ukrspetstransgaz (USTG) USTG Privatization Ukravtogaz (UAG) UAG Privatization Zakordonnaftogaz (ZNG) ZNG Privatization Naukanaftogaz (NNG) NNG Privatization Ukrnaftogazkomplekt (UNGK) UNGK Privatization 15 3

16 5. WHY AT THIS POINT UKRGAZVYDOBUVANNYA SHOULD REMAIN NAFTOGAZ SUBSIDIARY _Naftogaz_StrategicPlan_v14.pptx

17 Why Ukrgazvydobuvannya may not be currently separated from Naftogaz UGV operating cycle The 3EP has neither requirements nor recommendations regarding separation of upstream from trading activities. Moreover, the separation of Ukrgazvydobuvannya (UGV) from Naftogaz lacks commercial rationale due to: (1) absence of gas sales function in UGV; (2) public service obligation (PSO) mechanism requiring UGV to sell all gas it produces to Naftogaz; (3) sales price regulated under the PSO mechanism, precluding investors engagement before April 2017; and (4) significant tax liabilities for Naftogaz if UGV is unbundled. Sales Ukrgazvydobuvannya has no sales function gas is sold through NJSC Naftogaz of Ukraine, proceeds from these sales amount to over 70% of the total UGV revenue. According to the CMU Resolution on public service obligations, prior to 1 April 2017 UGV is required to sell Naftogaz all gas it produces in order to establish the natural gas resource for household consumers, religious organisations and heat energy producers. Processing Production Drilling Exploration Capital investments in the gas production segment, 2014 Dragon Oil JKX (UK) Romgaz (Romania) Petroceltic International Gazprom (Russia) Novatek (Russia) Naftogaz USD/BOE 3,6 2,3 4,8 4,6 8,6 11,7 21,8 Source: Bloomberg, companies data, own assessments Before October 2015, the price of gas sold by UGV to Naftogaz was regulated and determined by the Regulator. Low regulated price was the reason behind the lack of funding for the UGV capital investments, which caused a 4% drop in company s production in Over the past years, Naftogaz has not required dividend payments from UGV; UGV s available funds were used to develop the company. Under the public service obligation, from October 2015 the UGV natural gas sale price was regulated and determined by the Cabinet of Ministers (UAH 1,590 per 1 mcm VAT excluded till , expected to be USD 150 per 1 mcm from till ). Price regulation and lack of gas sales function currently prevent market players from investing in UGV. 17

18 Relations between UGV and Naftogaz Currently the new UGV management team has full support of the Naftogaz leadership, and this situation led to significant improvements 2015 production plan accomplished. Sales effectiveness increased effect > UAH 100 mln. On crucial supplies, intermediaries were removed and contracts amended. Effect > UAH 500mln savings in 2H Financial stabilization achieved via savings on procurement and sales, this allowed to salvage the defaulted PIB credit. Modernization and equipment procurement program launched (coil tubing, drilling). Management and technical team strengthened at all levels. Sale of up to 25% of shares via IPO will be the first step of the UGV privatization, expected in 2H 2017 (after the market is liberalized and the strategy approved by the Naftogaz supervisory board is implemented). Jun 2015 Sep 2015 Dec 2015 Feb 2016 Jun H Quick wins by new management Development of long-term investment and restructuring Strategy 20/20 and its approval by Naftogaz supervisory board Hiring a financial advisor for further privatization Deep transformation (implementation of Strategy 20/20) Privatization through staged public offerings in 4-6 years (by placing up to 25% shares annually) after price liberalization in April