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Ukrainian gas market


Discovering investment potential and opportunities

June 2018
PwC | Advisory services | Ukraine
www.pwc.com/ua
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PricewaterhouseCoopers Advisory LLC (“PwC”)


75 Zhylyanska Street, 01032 Kyiv, Ukraine
Telephone: +38 (044) 354 0404; fax: +38 (044) 354 0790
http://www.pwc.com/ua

Dear Colleagues,
CONTACTS: During the last years Ukraine has made tangible progress in its ambitious socio-economic reform program. In
2016-2017 the economy began to show the first signs of improvement after a sharp decrease in 2014-2015 and
Olga Andrienko-Bentz Ukraine’s current trajectory provides reasons to be cautiously optimistic about the future.
Director, Strategy & Operations In the gas sector, the Ukrainian government has introduced a number of very important regulatory changes
olga.andrienko-bentz@pwc.com aimed to ensure market liberalisation and its harmonisation with the EU Third Energy Package. In April 2015 the
Parliament has adopted a new Gas Market Law that created a legal framework for a gradual transition to a
Pawel Dobrowolski competitive gas market in Ukraine. The new rules of the game have already given the first results, but a lot of
Director, Oil & Gas work still lies ahead.
pawel.dobrowolski@pwc.com In recent years PwC Ukraine has gained an extensive experience working closely with policy makers,
government agencies and oil & gas clients – both local and international. This report has been developed to
Vladyslav Medvedev provide the most up-to-date information to all market stakeholders and create a basis for their familiarisation
Project Manager, Strategy & Operations with the progress in one of the most important and most challenging reforms for Ukraine.
vladyslav.medvedev@pwc.com We believe that Ukrainian gas market has a great and still untapped potential for development and growth, as
well as broad opportunities for institutional and private investors. Realisation of these opportunities will help to
reach the goal of country’s energy independence, attract the best technological solutions for efficiency
improvement and make Ukraine a reliable partner on the European energy market within the foreseeable future.
We would also like to express our appreciation to DiXi Group, IMEPOWER and CMS Cameron McKenna
Nabarro Olswang for their input and valuable ideas that are reflected in this report.
Yours sincerely,
PwC Team

Disclaimer
This presentation has been prepared for information purposes only, and does not constitute professional advice. You should not act upon the information contained in this presentation without
obtaining specific professional advice.
All informational sources used for particular analyses are listed in footnotes on respective slides. Various statistical agencies use different methods and approaches in their assessments.
Therefore, numbers in different parts of this report may differ depending on the sources of information used for a particular analysis. PwC relied on information from the sources that, in our view,
are the most relevant and reliable for the purposes of analysis.

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Ukraine’s natural gas potential is really high, and ongoing market


liberalisation could benefit both society and business in the long run
Executive summary
 Ukraine’s economy has stabilised after the 2014-2015 crisis and its current trajectory provides reasons to be cautiously optimistic about the future.
 The pro-European government supported by the global community is moving forward with an ambitious reforms agenda to put Ukraine’s weak economy
back on solid ground and create a welcoming business environment (+76 positions in Doing Business ranking during the last years).
 Ukraine is actively pursuing energy supply diversification policies and has already made a great step forward in the Gas sector.
 Gas market liberalisation: started from adoption of the Gas Law in 2015, has already produced some initial results, but a lot of work still lies ahead:
Ukraine has enough natural gas reserves (№3 country in Europe) to materially substitute import and aims to increase domestic production from
20 to 28 bcm by 2020. This ambitious target requires a set of regulatory and fiscal enablers to be in place at the national level.
During the last years Ukraine completely switched to natural gas imports from European direction; moreover, it has reduced imports by 50%
between 2013-2017 – from 28 to 14 bcm. The segment has been opened for competition (67 importers at EU borders in 2017) and leading
European companies have already launched their operations in Ukraine.
Ukrainian gas transmission system is one of the most powerful in the world and being used for transit of the majority of Russian gas to the EU.
With the risk of construction of pipelines bypassing Ukraine and the expiration of transit contract with Gazprom, preserving gas transit through
Ukraine (which currently generates ~3% of Ukraine’s GDP) became a question of national security. Ukraine is looking for international partner to
manage its GTS, bring technological know-how and secure transit flows after 2019.
Capacity of Ukrainian underground gas storage facilities is the largest in Europe, equals to nearly a third of EU-28 capacity and is currently being
underutilised. Taking into account the available infrastructure, Ukraine could be a natural candidate for an Eastern European Gas Hub.
Total length of Ukrainian gas distribution system is 292 ths kilometers, connected to more than 12 million end consumers. There are 44 licensed
DSOs in Ukraine - most of them are controlled by the private business group.
Ukraine’s natural gas consumption shows a steady decline during the last decades and amounted to 32 bcm in 2017 (only 65% of demand was
satisfied by local production). It consists of two nearly equally-sized segments – regulated and non-regulated. The regulated segment is being
supplied at regulated prices and operates under public service obligations (that mandate procurement of domestic natural gas from UGV by Naftogaz
and its subsequent sale to suppliers to households, religious organisations, and DHC). Pricing in non-regulated segment is determined by the market.
 The Ukrainian gas market is at a stage of its transformation which creates opportunities for new market entrants. We believe that Ukraine is attractive
for investors in the long run, but a thoughtful entry strategy is required for success.

Source: PwC analysis

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 2


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Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 3


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Ukraine is one of the largest countries in Europe with significant


potential for economic development and growth
Ukraine at a glance

Area – 603.6 ths km2

S (one of the largest countries in Europe)

Population – ~42.3 million1


(~70% is urban-based)
Location
Convenient trade
GDP per capita in 2017 – 8 710 USD hub to EU, Middle
East and Asia
(adjusted by purchasing power parity)

Average salary in April 2018 ~ 325 USD / month


(one of the most cost-competitive
manufacturing platforms in Europe)

Free Trade agreements


(valid with EU, Canada, EFTA etc.; ongoing
negotiations with Turkey and Israel)
1) Excluding temporary occupied territory of Crimea and Sevastopol
Source: State Statistics Service of Ukraine, EIU “Ukraine: 5-year forecast table” as of 15 May 2018

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Ukraine’s economy has stabilised after recent crisis and its current
trajectory provides reasons to be cautiously optimistic about the future
Ukraine’s macroeconomic context
Dynamics of real GDP and consumer prices Net foreign direct investment
(%, 2013–2022F) (USD bln, 2013–2022F)
forecast forecast
5.6
43.3% 4.6
4.1 3.7
3.0 3.3 3.2
2.8
2.2

0.3
24.9%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

1
12.4% 13.7%
9.0%
6.5% 6.0% 5.5% UAH / USD exchange rates
5.0% (UAH / USD, 2013–2022F)
0.5% forecast
2.5% 3.2% 3.3% 3.5% 3.7% 4.0%
2.4%
0.0% 27.5 29.2 29.5 29.9 30.1
25.6 26.6
21.8
-6.6%
-9.8% 8.0 11.9

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Change of real GDP, % Change of consumer prices (year-end), %

Source: IMF, EIU “Ukraine: 5-year forecast table” as of 15 May 2018

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The government is actively working on improving state regulation


and making Ukraine more attractive to investors
Doing Business in Ukraine
Ukraine's position in the ranking of “Doing Business” Key components of the ranking “Doing Business 2018”
(2011–2020P) (Ukraine's position in the ranking)
According to the
Strategy
“Ukraine-2020”
Protecting
Starting a
TOP Business 52 Minority
Investors
81
170
30

Dealing with
Construction
Permits
35 Paying Taxes
43
76
81 80
Getting Trading across
96
Electricity 128 Borders 119
112

137 Registering Enforcing

149 152
Property 64 Contracts 82

Resolving
Getting Credit 29 Insolvency 149
2011 2012 2013 2014 2015 2016 2017 2018 2020

Source: WB Group

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Recent reforms and anti-corruption campaign are signs of


Ukraine’s continuing move towards Europe
Ukraine and other post-Soviet states in political freedom and corruption perception ratings
Transparency International Corruption Index
(0 = “highly corrupt”, 100 = “highly clean”)
Freedom House Political Rights and Civil Liberties Rating

0 10 20 30 40 50 60 70 80
1  EU group of countries
Slovakia Czech Lithuania Estonia
republic Poland
characterised by higher
political freedom and
Bulgaria
2 Latvia lower level of corruption
Romania

Ukraine 2017 Hungary  Ukraine differs from other


(1 = free, 7 = not free)

post-Soviet countries –
3 Georgia
Moldova
already democratic, but
still with a lot of areas for
Ukraine 2012
improvement in anti-
4
Armenia
corruption
 During the last years
5 Kyrgyzstan
Ukraine has become
closer to the European
bloc in terms of political
6 Belarus freedom and corruption
Russia
Tajikistan Azerbaijan
perception

7 Turkmenistan Uzbekistan

Source: Freedom House, Transparency International, Ukrainian Energy Forum 2018

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We believe that Ukraine is attractive for investors in the long run,


but a thoughtful entry strategy is required for success
Ukraine’s SWOT with regard to Oil & Gas

Strengths Weaknesses
 Important oil & gas transit country linking producing and consuming  Highly dependent on foreign oil & gas supplies
countries  Underutilised resource base and overcapacity
 One of the most powerful oil & gas transmission and storage systems  Inefficient energy resource consumption
in the world with multiple import / export options  Lack of historic investment, and subsequently – outdated
 Pro-European and democratic vector of development equipment and technology
(free trade zone with EU, association agreement)  Reputation of unstable political environment, corruption,
 Large populous country – consumer market of 42.3 oligarch’s impact on political process and cronyism practice
million people  High government debt and depreciating currency
 Skilled and educated workforce at competitive cost  Weak economy / spending power per capita

Opportunities
SWOT Threats
 Significant oil & gas resource base  Historically monopolized industry value chain with
 Ukraine is actively pursuing energy supply diversification policies, misaligned interests
which could considerably reduce its reliance on imports of energy  Highly variable regulatory environment
 Local currency devaluation provided a competitive advantage for  Significant uncertainty constraining economic growth and
both national exporters and foreign investors inward investment
 Further integration with EU markets  Political instability and social unrest could have a negative effect
 Strong support from international community in anti-corruption and on the business environment
deregulation reforms  “Brain drain” trends caused by low average salaries in Ukraine
 Stimulating tax rates for gas production on new onshore compared to European countries
gas wells from 2018
Source: PwC analysis

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 8


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Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

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Ukraine’s primary energy consumption (including ~3o% share of


natural gas) reduced during the last years..
Energy consumption in Ukraine
Ukraine’s primary energy consumption 2016 breakdown by intended use and economic activity
(Mtoe, 2013–20161) (Mtoe, 20161)

116
Others 3% 106 -21%
Nuclear 3%
energy
19%
90 92 92
22% 4% 4% Loses 4%
5%
Energy sector
Natural 26% 23% own consumption
gas
34%
Conversion to other 35%
32% types of fuel
52 Non-energy
28% use
Crude oil 29% 6%
& Oil products
9%
10%
12% 48% Other
12%
End-use
Coal consumption
56%
& Peat
36% 34% 18% Transport
30% 32%
29% Industry

2013 2014 2015 2016 By intended End-use consumption


use by economic activity

Source: State Statistics Service of Ukraine 1) The latest available data

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..and natural gas has downward trend in almost all end-user


segments
Change in end-use consumption by segment 6.7 / 4.7 - Mtoe 2013
+ >50% 20-50% 0-20%
(Mtoe & %, 2013 VS 2016) VS 2016
− >50% 20-50% < 20%

Segment share Crude oil & Oil


Sector Segment Activity driver Coal & Peat Natural gas Other
in a sector, % products

Metallurgy 55 ton produced 6.7 / 4.7 -30% 0.1 / 0.1 -59% 2.5 / 1.2 -52% 2.9 / 2.3 -18%
Non-ferrous mineral
8 ton produced 0.7 / 0.6 -14% 0.1 / 0.0 -77% 0.5 / 0.4 -25% 0.3 / 0.3 -19%
resources
Industry
Chemicals 7 ton produced < 0.1 -83% < 0.1 -92% 0.3 / 0.2 -30% 1.5 / 0.8 -45%

Others1 30 ton produced < 0.1 -10% 0.8 / 0.1 -87% 1.1 / 0.7 -36% 4.4 / 3.5 -20%

Automobile 77 km travelled n/a 8.0 / 7.0 -12% < 0.1 -33% < 0.1 -20%

Pipeline 15 toe transported n/a < 0.1 +20% 2.3 / 1.4 -39% 0.1 / 0.0 -55%
Transport
Railway 7 km travelled < 0.1 -56% 0.1 / 0.1 -24% n/a 0.6 / 0.5 -15%

Others 1 km travelled 0% < 0.1 +7% < 0.1 -50% < 0.1 -34%

Households 72 cm / sm heated 0.7 / 0.3 -57% 0.0 / 0.1 +283% 13.5 / 9.3 -31% 9.2 / 7.9 -14%

Trade & Services 20 cm / sm heated 0.1 / 0.2 +100% 0.1 / 0.1 +18% 0.6 / 0.6 +3% 5.0 / 4.0 -19%
Other
Agriculture 8 ton produced < 0.1 -33% 1.4 / 1.4 +3% 0.2 / 0.1 -31% 0.6 / 0.6 -10%

Others 0 cm / sm heated n/a < 0.1 +560% n/a < 0.1 -33%

Conversion sector 97 ton produced 0.4 / 0.5 +25% 0.5 / 0.5 +16% 4.0 / 1.8 -55% n/a
Non-energy
use
Other sectors 3 ton produced n/a 0.1 / 0.1 +5% n/a n/a

Source: State Statistics Service of Ukraine 1) Others category includes non-ferrous metallurgy, mining, consumer goods, food, wood, and textile industries, construction and machine industry

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However, Ukraine is still one of the most energy inefficient


countries in the world
Overview of energy efficiency in selected countries
Energy intensity of GDP at constant purchasing power parities Ukraine’s energy intensity of GDP benchmarking
(koe / $2005p, 20161) (koe / $2005p, 20161)
Average 0.144
Below 0.1 0.1-0.12 0.12-0.15 0.15-0.3 Above 0.3

N/a, not included


in research Germany 0.101

France 0.115

Romania 0.118

Turkey 0.119

Poland 0.124

Sweden 0.130

Czech
Republic 0.143

Ukraine 0.318

Russian
0.326
Federation

Source: Enerdata Global Energy Statistical Yearbook 2017 1) The latest available data

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Ukrainian government aims to ensure the country’s energy


security and efficiency…
Ukraine’s strategic priorities in energy sector
2020 2025 2035
2 – 3 years 5 years 10 years

Main Phase 1: Reforming energy sector Phase 2: Optimisation and innovation Phase 3: Ensuring sustainable
phases development development of the energy sector

Main • Final stage of the 3EP implementation • Ukraine’s ENTSO-E integration • Adaptation of GTS capacities to the
priorities (operating mode) European level
in a phase • Completion of Ukraine’s ENTSO-G
integration • Execution of investment projects • Innovative development of energy
• Reforming of the energy companies within the NERP sector (incl. high-efficiency cogeneration)

• Increase in natural gas production • The formation of local heat supply • Increase in unconventional gas
systems production as well as production of the
• Formation of the coal products market gas extracted on the shelf
• Development of distributed generation of
• Gradual reduction of GDP energy smart grids • Establishment of specific and transparent
intensity down to 0.2 toe/ $ ths conditions for the coal sector
• Investments attraction to the
• Alternative energy usage increase to alternative energy sector • CHP reconstruction for emissions
8% reduction to 20%
• Modernisation and improvement of
• Observance of high ecological accounting systems collecting own • Increase of RES share in PES (primary
standards energy consumption data energy supply) to 25%
• National emission reduction plan with • Implementation of the infrastructure for • Establishment of the standards for
the target amounting to more than 5% electric transport improvement “passive house” construction

Source: Energy Strategy of Ukraine 2035 approved on Aug 18, 2017

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.. and has made a great step forward in the Gas sector

List of adopted regulations

Novenber 2, 2015 September 22, 2016 June 30, 2017 March 1, 2018
Rules on the security of natural Adoption of the Law of Ukraine “On Adoption of the deregulation bill
gas supply Adoption of the new rules for the
the National Commission for State
extraction of oil and gas deposits №3096-d on simplification of the
regulation of Energy and Utilities” permitting system for the gas
National Action Plan in case of industry
an emergency in supply

December 7, 2017
March 25, 2015 July 1, 2016 December 20, 2016
Introduction of taxation to
Adoption of changes to the Budget stimulate gas production on new
Government approval of Adoption of Naftogaz
code of Ukraine on decentralization onshore gas wells from 2018
the Action Plan for Gas restructuring action plan
of SST payments since Jan 2018 (incl. stabilization clause)
Sector Reform

September 30, 2015


• General rules of supply
April 9, 2015 Adoption of secondary legislation: • Criteria for determination of the August 18, 2017
access regime to the gas storages
Adoption of the • Gas Storage Code • Methodology for tariff calculation
Law of Ukraine • Gas Transmission System Code for transportation of natural gas for Approval of
“On Natural • Gas Distribution System Code entry and exit points the Energy
Gas Market” Strategy of
• Order of creation of the natural • Standard natural gas storage Ukraine 2035
gas reserve stocks contract December 27, 2017
• Standard natural gas transmission • Standard supply contract for the
contract supplier of last- resort Adoption of changes to the Gas
• Standard natural gas distribution • Standard contract of supply to Transmission System Code in the
contract household consumers part of the implementation of
daily balancing
Changes & Improvements

Source: Ukrainian legislation, PwC analysis

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Gas market liberalisation has already produced some initial


results, but a lot of work still lies ahead
Key milestones already reached and next steps

Diversification and Gas market Operating Transparency and


security of supply reform efficiency accountability

 EU-UA Gas Network  3EP-compliant Gas  Profitability of Naftogaz  Corporate governance


Integration to diversify market law  Improved debt collection reform launched
supply  Deregulation of and revenues  Detailed annual reports
 Increasing the share of commercial market  Largest taxpayers in were published by
private importers  Increasing the share of Ukraine Naftogaz for 2014-2016
 Stable gas supplies for private suppliers in the  Procurement system
Ukraine and the EU non-regulated market reform
segment
Next steps

 To ensure effective access  To create conditions for an  To attract capital for  To attract a reputable
of alternative suppliers independent regulator investments into energy western TSO as a partner
to all end users  To improve secondary efficiency and gas to operate Ukrainian
legislation and system of production GTS
subsides

Source: Naftogaz Annual Reports, PwC analysis

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 15


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Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

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Ukraine was at the origins of the world’s gas industry and


historically played one of the key roles on the European gas market..
History of the Ukrainian gas industry

1983
The Bilche-Volytske UGS, one of the world’s
largest underground gas storage facilities,
was put into operation

1950
Exploration of the Shebelinka gas field -
the largest in Europe at that time

Source: Naftogaz of Ukraine, PwC analysis

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.. and despite all the difficulties, continues to play this important


role today
Ukraine’s position on the European gas market
(2016)

№1 by transit volume of Russian gas to the EU

№1 by capacity of underground gas storages

№3 in proven natural gas reserves

№4 by gas production volume

№7 by gas consumption

№ 14 by gas imports

Source: Naftogaz of Ukraine

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Oil & Gas sector plays an essential role in Ukraine's socio-economic


stability – its companies are among the largest taxpayers in Ukraine
TOP-10 Ukrainian taxpayers in 2017
Taxes collected by the Office of large taxpayers Company Place Taxes payed, UAH bln
(UAH bln, 2017)
PJSC
1 50.4
5 out of TOP-10 taxpayers Ukrgasvydobuvannya
in 2017 were Oil & Gas PrJSC V.A.T. Pryluky
companies (62% taxes Tobacco Company
2 14.1
payed by TOP-10)
PrJSC Philip Morris
Ukraine 3 13.5

PJSC Naftogaz of Ukraine 4 11.5

Total PJSC Ukrnafta 5 10.4


TOP-10
Others 60% collected 40%
taxpayers PJSC JTI International
6 9.5
UAH 355 bln Ukraine

PJSC Ukrtatnafta 7 8.7

SE NNEGC Energoatom 8 8.7

PJSC Ukrtransgaz 9 7.8


PrJSC Imperial Tobacco
production Ukraine 10 7.5

Source: State Fiscal Service of Ukraine x Oil & Gas companies


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Ukrainian gas market could be structured into five key segments


– from E&P to end consumption
Ukraine’s natural gas flows and market structure
(bcm1, 2017)
Natural gas transit
93.5 bcm

Consumers directly 4) Including:


Gas production2
connected to GTS4 2.08 bcm for industry and others,
0.26 bcm for DHCs, and
18.5 bcm 2.3 bcm <0.001 bcm for public sector.

Transported to
Supplied to
consumers
GTS Residential
Import (excl. internal
(excl. transit consumers
transportation
volumes)
14.1 bcm and ATO3 zone) Distributed to
11.2 bcm
Supplied to consumers
39.2 bcm 27.5 bcm GDS from GTS (incl. distribution
in ATO3 zone)
Withdrawal from 25.2 bcm Non-residential
UGSF 25.1 bcm consumers5

6.7 bcm 13.9 bcm

5) Including:
- E&P 6.7 bcm for DHCs,
0.5 bcm for public sector, and
- Import / trading 6.7 bcm for industry and others.
- Transmission & storage Injection to UGSF GTS & UGSF Gas DSO operating
and linepack operating needs production2 needs
- Distribution
- Consumption / End-use 9.3 bcm 2.2 bcm 1.0 bcm 1.0 bcm

1) Totals may not add up due to rounding. NEURC’s data differs from Naftogaz’s data 2) Commercial gas, excl. operating needs of production companies
Source: NEURC 3) Anti-Terrorist Operation Zone on the East of Ukraine

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In 2017 Ukraine consumed 31.9 bcm of natural gas – only 65% of


demand was satisfied by domestic production
Ukraine’s gas balance
(bcm, 2017) 31.9
bcm

Gas supply Gas consumption


31.9 bcm 31.9 bcm
14.1 -2.7
31.9 31.9
5.4
Private 4.4
companies 27.5 1.1 Other (3%)
Other 3
0.5 Non-
Naftogaz 8.7 Public sector
regulated
20.5 9.1 Industry segments
Ukrnafta 1.1
DHCs for industrial (44%)
Private 4.1
producers 1.0 and public sectors
4.6 DHCs for
HHs
Regulated
segments
UGV 15.3 Households (53%)
11.2 (HHs)

Production Import from EU Net changes Total Total Operating End


in UGS1 needs2 consumption
1) Calculated as a difference between the volume of gas stored in 2) Includes fuel gas for TSO, DSOs and production
Source: Naftogaz of Ukraine, UTG Live, PwC analysis UGSF as of 01.01.2017 (11.9 bcm) and as of 01.01.2018 (14.7 bcm) 3) Unsanctioned withdrawal, unallocated volumes, unbalance

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Historically, Ukraine’s gas market has been immature with only a few
players, but recent changes could drastically change the situation
Ukraine’s natural gas value chain summary
Gas
Gas import / Gas Consumption /
E&P transmission
trading distribution End-use
and storage

Domestic  Estimated gas  14.1 bcm import in  Entry capacity –  25.1 bcm supply to  31.9 bcm in 2017:
Market Size reserves: 906 bcm 2017: 304 bcm, exit capacity end-users - HHs (incl. heating): 15.8 bcm
– 178.5 bcm - Industry: 9.1 bcm
 2017 Production: - 14.1 bcm from Europe
20.5 bcm (11.1 bcm in 2016)  31 bcm of underground - Heating for industrial and
gas storages public sectors: 1 bcm
- No import from  93.5 bcm transit and
Russia in 2016-2017 - Public sector: 0.5 bcm
29 bcm local
transportation in 2017 - Operating needs: 4.4 bcm
- Other1: 1.1 bcm
Competitor Highly-concentrated Naftogaz position: Natural monopoly: Multiple entities, Consists of 2 segments –
Landscape (based on 2017 highly concentrated regulated and non-regulated:
production):  62% share in gas  UTG manages all ownership:
import in 2017 trunk high pressure  Naftogaz covers regulated
 UGV: 75% (74% in 2016) pipelines and all  44 local distributors segments (by UGV and
major gas storage (oblgazes and imported gas) under PSO –
 Ukrnafta: 5%  2012-2017 major facilities, has 100% gorgazes), ca. 1 for as a designated wholesale
importer
 Other: 20% of the transit gas each region or city supplier to incumbent
 till 2012 monopoly market regional suppliers and DHC
importer  5% share of Naftogaz in
industrial segment in 2017
(22% in 2015)

Key ~70% of distributors


Regional supply
Domestic UGV Naftogaz UTG controlled by private
companies / Naftogaz
Players business group

Source: Naftogaz of Ukraine, Ministry of Energy and Coal of Ukraine, NEURC, companies’ data, press research 1) Unsanctioned withdrawal, unallocated volumes, unbalance

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 22


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Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 23


1 2 3 E&P 4 *** FOR PUBLIC USE ***

During the last ten years Ukraine’s natural gas production has
ranged from 20 to 21 bcm/year..
Ukraine’s annual gas production
(bcm, 2008-2017)
Share of private producers in total production: DTEK

9% 9% 11% 12% 11% 13% 16% 20% 21% 20% Burisma


14%
4% UNB
21.3 21.4 Geo-Alliance
21.1 20.5 20.6 20.5 20.5 5% 4%
20.5 19.9 20.2 4.1 Smart-Energy
1.9 1.9 2.7 6% 40%
2.2 2.5 2.3 bcm4.2 Kub-Gas
1.2 1.2 3.3 4.1 9%
1.1 1.1 1.2 1.7 3.9 4.3 Poltava O&G
3.2 3.0 0.3
2.4 2.1 2.0 1.9 1.7 1.1 18% Other
1.5 1.3

Commercial gas
(mandatory supply
to HHs and DHCs
through Naftogaz)
15.2 14.9 15.0 15.1 15.1 15.3 6% 15.3
14.8 14.8 14.5 14.6 91% Joint venture
3% bcm
agreements
Operating
needs

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1) Located on temporary occupied territory of Crimea and
Private producers Chornomornaftogaz1 Ukrnafta2 UGV3 Sevastopol
2) 50%+1 owned by Naftogaz of Ukraine
Source: Naftogaz of Ukraine, Ministry of Energy and Coal of Ukraine, Association of Gas Producers of Ukraine, press research 3) 100% owned by Naftogaz of Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 24


1 2 3 E&P 4 *** FOR PUBLIC USE ***

.. and benchmarking with other European countries shows that


Ukraine’s reserves base is currently being underutilised
Gas – Proven reserves & Production
Ukraine’s proven reserves in
(bcm, at the end of 2016) “BP Statistical Review of World
Energy 2017” report could differ
from the data of the SRPE
1 763 “Geoinform Ukraine”. BP report
was used as the main source
for benchmarking purposes

Proven
697 591
reserves
207 110 91 35 35

Norway Netherlands Ukraine UK Romania Poland Germany Italy

9 4 7 5
18
Annual 40 41
Production 1)

117
Extraction 7% 6% 3% 20% 8% 4% 19% 15%
factor
Years of 15 17 33 5 12 23 5 7
Production
Source: BP Statistical Review of World Energy 2017 1) Excludes gas flared or recycled. Includes natural gas produced for Gas-to-Liquids transformation.

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 25


1 2 3 E&P 4 *** FOR PUBLIC USE ***

Ukraine has significant potential to materially substitute import..

Ukraine’s natural gas resource potential


(2017)

Depth of Share of total Number of


Unconventional: formation, km reserves, % fields, # Field size, bcm
> 10 000 bcm
1 km
Total Contingent
Resources:
2 km
39% 4 > 30
4 6831 bcm
3 km
Reserves:
9062 bcm 28% 15 30-10
4 km

2P Reserves:
4003 bcm
22% 16 10-5
5 km

1) New fields (C3, D1 & D2 resources)


2) Based on State Register of Mineral Reserves
11% 367 <5
3) 2P reserves (SPE-PRMS classification) based on
extrapolation of Naftogaz data (Ryder Scott Co report)

Source: The State Service of Geology and Mineral Resources of Ukraine, Geoinform of Ukraine SRPE, Association of Gas Producers of Ukraine, Naftogaz of Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 26


1 2 3 E&P 4 *** FOR PUBLIC USE ***

.. and Ukrainian government has announced ambitious plans to


increase domestic natural gas production up to 28 bcm in 2020
Ukraine’s gas production targets 2020
(bcm / year1, forecast 2016-2020)
20.1 Ukraine’s total
16.5 18.2
14.5 2.8
15.2 1.7
0.1 0.4 1.0 250 Amount of necessary CapEX
(mln USD / year)
1 726
0.9 2.3 3.9 5.8 7.6
UGV

CAGR: 10%
13.5 12.5 11.6 10.7 9.7 27.6
25.2
22.5 5.0
+ 20.3 3.5
2016F 2017F 2018F 2019F 2020F 2.3
18.7 0.9
0.1
1.9 4.0 6.2 9.0 11.3
Other companies2

7.0 7.4
5.0 6.0
4.3 0.0 1.8 2.2
0.5 1.3
16.8 15.3
1.0 1.7 2.3 3.2 3.7 14.0 12.7 11.2
3.3 2.8 2.4 2.0 1.5

2016F 2017F 2018F 2019F 2020F 2016F 2017F 2018F 2019F 2020F
1) Totals may not add up due to rounding
2) Excluding Ukrnafta’s production – 1.4 bcm in 2016
New fields Existing fields Baseline production

Source: Concept of Ukrainian gas sector development 2020, Association of Gas Producers of Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 27


1 2 3 E&P 4 *** FOR PUBLIC USE ***

Successful implementation of the plan requires a set of enablers to


be in place at the national level
High-level roadmap for increase of domestic natural gas production

Related production initiatives Key enablers Status

Operating wells Prolongation of current licenses for bona fide holders !


optimization &

30.5
intensification: Resolving JV issues 3
- Well workovers
bcm
- Hydrofracturing
New licenses granting by local authorities !
Existing - Modernization and
fields construction of boosting
Incentive-based fiscal policy in upstream 3
compressor stations etc.
Availability and affordability of supporting services 3
Abolishment of requirement for reserves re-
 Ukraine’s Drilling new wells
estimation every 5 years 3
gas production in existing acreage 28 bcm
11.8 Deregulation of land issues 3 in 2020
bcm Geological &

New
seismic exploration New Rules of Development of Oil and Gas Fields 3
fields
Exploration and
New Subsoil code ∞
exploitation drilling
International standards of classification and
categorization of reserves and resources ∞
X - Estimated cumulative effect on Ukraine’s
bcm natural gas production for 2017-2020 Improvement of geological info sharing procedure ∞
Source: Concept of Ukrainian gas sector development 2020,
Association of Gas Producers of Ukraine, PwC analysis
3 - Done 3 - Partially / LT task ∞ - In progress ! - At risk

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 28


1 2 3 E&P 4 *** FOR PUBLIC USE ***

Kharkiv and Poltava are the key gas production regions in


Ukraine..
Ukrainian gas production and resources by region
(bcm, 2016 and as of 01 Jan 2017)1
East (244 fields, 727 bcm)
West (116 fields, 111 bcm) (Dnipro and Donetsk oil and
(Volyn and Podillia, Precarpathian, Carpathian 4% gas province)
and Transcarpathian oil and gas provinces)
2%

906 Sumy region


bcm 9% 37%
3%
47%
Total balance of gas
Lvivskiy region Poltava 35%
reserves in Ukraine
region 41% Kharkiv region

4%
20 2% 3%
Житомирская обл. (7)
1%
1%
bcm <1% 1%
Ivano-Frankivsk 3%
region Other regions Luhansk region
Gas production Dnipro
volumes in 2016 region

Legend: South (42 fields, 68 bcm)


(Predobrudja, Black Sea and Crimean,
X% – share of total reserves, % Azov and Berezan, Indolo-Kuban, and
Black Sea Prospective provinces) 4%
X% – share of total production, %
2%
Shelf of the
black sea Crimea
1) The latest available data

Source: Geoinform of Ukraine SRPE

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 29


1 2 3 E&P 4 *** FOR PUBLIC USE ***

.. and the largest natural gas fields are located in the East

The key natural gas fields of Ukraine


(bcm, as of 01 Jan 2017)1

Oil & Gas Start of Initial gas Current gas


No. Field name Company
region development reserves, bcm reserves, bcm

East (Kharkiv
1 Shebelynske UGV 1956 734 111
region)

Zakhidno- East (Kharkiv


2 UGV 1970 345 51
Krestyshchenske region)
 TOP-6 fields
East (Poltava
account for
3 Yablunivske UGV 1980 116 60 ~ 32% of
region)
Ukraine’s
4 Yefremivske
East (Kharkiv
UGV 1967 110 37 current
region)
reserves
East (Kharkiv
5 Melykhivske UGV 1973 81 23
region)

East (Poltava
6 Mashivske UGV 1968 39 4
region)

1) The latest available data

Source: Geoinform of Ukraine SRPE

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 30


1 2 3 E&P 4 *** FOR PUBLIC USE ***

In 2016 geological exploration led to an increase in balance


reserves of natural gas by ~9 bcm
Increase in balance natural gas reserves
(20161, mcm)

Increase in balance
Share in 2016 natural gas reserves, mcm
Company name Field name
total increase, %
Total Incl. new fields
Skhidno-Poltavske 1 773 0
Zahidno-Sosnivske 1 319 0
UGV 80%
Yablunivske 806 0
 45 objects
Other 3 108 139
covered by
Systemoilengineering 5% Vodyanivske 461 461
reserves
Kub-gaz 5% Makiivske 402 0 assessment2
Rudkivske-Chervonozavodivske 277 109
 8 805 mcm of
Ukrnafta 4% Andriyashivske 38 0 total increase
Kachanivske 6 0
Nordik 4% Kolodnytske 311 311
Ukrnaftoburinnia ~1% Sakhalinske 112 0
Ukr-Az-Oil LLC SAUP ~1% Velykomostivske 104 104
Nadra-Geoinvest LLC ~1% Skorobahatkivske 88 0

1) The latest available data


Source: Geoinform of Ukraine SRPE 2) In 2016 the State Commission of Ukraine on Mineral Resources approved natural gas reserves for 25 deposits.
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 31
1 2 3 E&P 4 *** FOR PUBLIC USE ***

During 2016, for the purposes of geological exploration, R&D, and


O&G extraction, 535 special permits were valid in Ukraine
Effective special permits issued by years
(2008-20161)
301 for commercial
55 38 development of deposits

17
3 32 119 for geological
exploration and R&D

108 for extraction


2009 2011 2013 2015 5352 special purposes
… // permits
effective in
2008 2010 2012 2014 2016 2016
3 for performance
via PSA

7
28 4 for other purposes
21
49

1) The latest available data


2) The data does not include 6 permissions suspended back in 2015 and as of November 7, 2017 recognized by Geoinform of Ukraine SRPE as invalid
Source: Geoinform of Ukraine SRPE

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 32


1 2 3 E&P 4 *** FOR PUBLIC USE ***

UGV as the main holder of Ukraine’s natural gas reserves will play a
key role in the ambitious government plan for production increase
Key players in Ukraine’s natural gas upstream
(April 20171)

Company Special permits, Licensed area, Wells in operation, Natural gas balance
name quantity sqm quantity reserves, bcm

UGV 174 12 200 2 738 672

DTEK Naftogaz 3 209 23 25

Burisma Group 29 3 891 64 120

Geo Alliance Group 16 1 169 13 35

Smart Energy 4 370 20 37

Kub-Gaz 6 823 15 5
Poltava Oil&Gas
Company 6 405 47 4

Source: Association of Gas Producers of Ukraine 1) The latest available data

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 33


*** FOR PUBLIC USE ***

Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 34


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

Since gaining its independence in 1991, Ukraine has significantly


decreased its gas consumption and consequently import volumes
Natural gas consumption and import in Ukraine
(bcm, 1991-2017)

Gas consumption, bcm Gas import, bcm X% Import share, %

Decrease in natural
gas imports between
1991-2017
118.2

113.4

-85%
102.8

92.4
91.6

89.1

86.0
85.4

81.3
79.6

76.3

76.4
75.7

75.8
75.6

73.9
73.4
71.2

70.5

69.8

69.8
69.0

66.3

66.3
62.4

61.7
60.0

59.3

59.3
59.2
58.7

58.8
57.7

57.6
56.9

57.0

54.8
53.6

52.6
51.9

50.4
44.8

42.6
36.6

33.8

33.2
32.9

31.9
28.0
27.0

19.5

16.4

14.1
11.1
2009

2012

2013
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2010

2011

2014

2015

2016

2017
78% 79% 77% 75% 78% 83% 77% 71% 79% 81% 81% 83% 77% 78% 81% 77% 84% 79% 52% 64% 81% 60% 56% 46% 49% 33% 44%

Source: Naftogaz of Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 35


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

At the same time, over the last years Ukraine has completely
switched to European natural gas suppliers
Import of natural gas to Ukraine
(bcm1, 2014-2017)
Import to consumption ratio:

46% 49% 33% 44%

19.5

-28%
16.4

14.1 14.1
6.1 Hungary
From 14.5 (37%) 2.8 (Beregdaroc)
Russia (74%) 11.1
1.3 Poland
(Germanovichi)
Hungary 14.1
(Beregdaroc)
5.0 11.1 (100%)
10.3 Slovakia
Poland 0.6 (63%) (100%) 9.9 (Budince)
(Germanovichi)
0.9 From
5.0
Slovakia Europe
3.6 (26%)
(Budince)

2014 Europe 2014 2015 2016 2017 2017 Europe


Source: Naftogaz of Ukraine 1) Totals may not add up due to rounding

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 36


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

Today Budince (Slovakia) is the key interconnection point for


natural gas imports from the EU (~70% of imports in 2017)
Utilisation of entry points at EU borders and respective shares of main importers
(Jan-Dec 2017)
Slovakia Hungary Poland
(Budince) (Beregdaroc) (Germanovichi)

42.5 mcm / day 16.8 mcm / day 6.4 mcm / day


- Utilized capacity, mcm 4.3 mcm / day
- Available capacity, mcm

Jan-Dec 2017 Jan-Dec 2017 Jan-Dec 2017

4% 0%
13%
Naftogaz
9.9 Naftogaz 2.8 Naftogaz 1.3
Others
bcm Others bcm Others bcm

87% 100%
96%

Source: Naftogaz of Ukraine, UTG Live

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 37


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

Naftogaz continues to be the major natural gas importer, but the


share of private players is gradually increasing
Key suppliers of imported natural gas to Ukraine
(bcm, 2017) Naftogaz of Ukraine Other traders X No. of importers at EU borders

2015 18
94% / 6%
2016 34
74% / 26%
2017 67
0% 62% / 38% 100%
RWE 2.0 PGNIG,Trailstone, AOT,
Eru Trading 1.0 Axpo, ERU Management
Axpo Trading 1.7 Promenergo
Resource 0.6 ~~~ Nafta-Gaz
DufEnergy 1.0 ~~~~~~
AOT, Axpo, MET Gas, Trafigura,
~~~~~~ Socar Ukraine 0.5 ~~~~
ENGIE 1.0 Polski Koncern Naftowy ORLEN
Trafigura
Uniper Global 0.9 ~~~~~~ Ukraine 0.4 ~~~~~ Trafigura
Met Gas
0.5 ~~~~~~ DufEnergy, Gunvor, MET, Trafigura,
and Energy Skela Tertsium 0.2 ~~~~~~ Worldenergy, Uniper, TRAILSTONE
Trailstone 0.4 ~~~ Naftogaz Energy Trade
0.2 ~ ~ Natural ALSTKONIX
Shell Energy 0.2 ~ ~ ~ ~ ~ Natural Group
gas
Engie EM ENGIE
CEZ 0.2 ~ ~ ~ ~ ~ ~gas ~ ~ ~ ~ ~ Ukraine
0.2 ~~~~~~
Naftogaz Trading
Europe
0.2 ~~~~~~ ~~~~~ Metida 0.2 ~ ~ ~ ~ ~ ~ Nafta-Gaz
ENI 0.1 ~~~~~~ ~~~~~~ Systems World Petroleum Group Polska, JAS
0.2 ~~~~~~ Energy,MET Gas, Nitrofer
AOT 0.0 ~~~~~~ ~~~~~~ Active

Ukrgaz 0.1 ~~~~~~ Gunvor, World Petroleum


Trafigura 0.0 ~~~~~~ ~~~~~~ Group Polska, Nitrofer, Onico

Source: Naftogaz of Ukraine, presentation of UTG Executive director @ Ukrainian Energy Forum 2017, press research

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 37


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

Leading European companies have already entered the market


and launched their operations in Ukraine
European players in the Ukrainian market
European gas companies that signed agreements with UTG
and operate in Ukrainian gas market

ENGIE SA TRAFIGURA AOT ENERGY PGNiG

France Netherlands Poland Poland

DUFENERGY TRAILSTONE Axpo Trading MET


TRADING SA GMBH HOLDING AG

Switzerland Germany Switzerland Switzerland

Source: press research, UTG

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 39


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

In 2017 total value of Ukraine’s natural gas imports amounted to more


than USD 3 bln – prices were characterised by seasonal fluctuations
Natural gas import monthly volumes1 and prices for Ukraine
(2017)
252.9
Average 246.9 248.1
239.5
import 229.5 232.2
price, 224.9
208.4 213.7 214.5 210.1 212.9 2.07
USD/tcm

1.61
1.50

1.17 1.14 1.20


1.06 1.01
0.91 0.97
Import 0.80
volumes,
bcm 0.49

Jan’17 Feb’17 Mar’17 Apr’17 May’17 Jun’17 Jul’17 Aug’17 Sep’17 Oct’17 Nov’17 Dec’17

Cost of
import, 394.0 230.9 351.6 102.1 248.8 210.8 237.9 223.0 266.5 238.7 501.4 222.1
mln USD

1) Data on natural gas import volumes from the State Statistics Service of Ukraine (13.9 bcm in 2017) differs from data of Naftogaz (14.1 bcm in 2017)
Source: Ministry of Economic Development and Trade, State Statistics Service of Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 40


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

Taking into account the available infrastructure, Ukraine could be


a natural candidate for an Eastern European Gas Hub
Required preconditions and potential advantages of Gas Hub set-up in Ukraine

Preconditions Advantages

Fully liberalised gas market and the high level of Long-term energy security incl. diversification
transparency in gas trading of gas supply

Sufficient level of liquidity in the market and a large Guarantee of adequate gas supply
number of suppliers and buyers in the hub for domestic consumption

Non-discriminatory entry to the gas hub and Possible gas price reduction (as a result of
the Third Party Access (TPA), incl. attractive competition)
tariff system

Unbundled gas grid (commercially and politically Further integration of Ukraine into the European
independent TSO) Energy Community

Online-trading platform based on a bidding system


Increased transparency in the energy sector
and a clearing house processing matching bids

Source: DiXi group, PwC analysis

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 41


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

As a result of regulatory reforms, Ukraine was, for the first time,


included in EFET Gas Hub Development Study with a score of 3.5
Scores according to the EFET Gas Hub Development Study 2017

Gas Hub / Country 2014 2015 2016 2017


NBP 20 20 20 20
EFET Gas Hub
TTF 19 19.5 19.5 19
Development Study
2017 ZTP 16 17.5 18 19
NCG 15.5 19 19 17.5
France 16 16.5 18.5 17.5
GASPOOL 16 19 19 17
Zee Beach 17 17 17 16.5
PSV 10.5 15 15 16
VTP 13 13 13.5 16
PVB 7 7 13.5 16
GTF 9 11 14 15.5
CZ 8 8.5 9.5 13
Hungary 5 6.5 9 12.5
Poland 4.5 5.5 9.5 10
SK 3.5 7 8 8.5
Greece 4.5 5.5 5.5 6.5
Turkey 5.5 5 4 5.5
Ukraine N/A N/A N/A 3.5
Romania 2.5 1.5 2 3
Bulgaria 1.5 1 1.5 1

Source: EFET Gas Hub Development Study 2017

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 42


Import /
1 2 3 trading 4 *** FOR PUBLIC USE ***

Progress towards the set up of a gas hub in Ukraine requires a


number of steps to be taken at the national level
Further actions needed for Ukraine to progress towards creating a gas hub
Assuring potential partners
Start raising awareness among other CEE countries (especially
Slovakia, Hungary, Poland and Czech Republic) about the benefits
of a gas hub and its associated trading and gas storage services.

Detailed gas hub study Negotiations with EU


A detailed study on the design of the authorities
gas hub from a technical point of view Make EU public aware of the business
should be conducted by the benefits linked to gas hub trading and to
government as well as a report on convince officials that modernising the
cost of construction of additional Ukrainian Gas Transmission System is
infrastructure and pipelines with bi- far less costly than investing in a whole
directional flow. new pipeline system.

A Gas Hub Network Code GAS HUB Promotion of energy


A Gas Hub Network Code, aligned efficiency
with laws mentioned in the report and IN UKRAINE Promote energy efficiency in order to curb
the Third Energy Package, should be domestic gas consumption by raising
developed. An Authority responsible public awareness on energy waste. At the
for the gas hub management should same time, Ukraine should strive to
be established, and its duties and attract the necessary foreign investment
responsibilities described in the to increase domestic production in order
Network Code. to achieve a level of self-sufficiency.

Cooperation with energy exchange


Start negotiations with an energy exchange on gas trading,
establishment of a Clearing House for the gas hub and the potential
cooperation between exchange and the hub for balancing.

Source: DiXi group, PwC analysis

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 43


*** FOR PUBLIC USE ***

Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 44


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

Ukrainian gas transmission and storage system is one of the most


powerful in the world
Characteristics of Ukraine’s GTS and UGS facilities

Parameter Units Value incl. TOT, TUT1

Total length of gas pipelines ths km 38 2.5


Capacity:

- Entry bcm per year 304


(incl. from Europe) bcm per year 23
- Exit bcm per year 178.5
(incl. to Europe and Turkey direction) bcm per year 146
Gas compressing stations number 73 3

Gas compressing yards number 111 3

Gas compressing units number 705 35

Capacity of compressing stations MW 5 496 175

Underground gas storages number 12 1

Capacity of underground gas storages bcm 31 0.4

Gas distribution stations number 1 475 83

UTG headcount ths employees 20

1) Incl. located in temporarily occupied territories and temporarily uncontrolled territories of Ukraine
Source: Naftogaz of Ukraine, UTG, Presentation of UTG Executive director @ Ukrainian Energy Forum 2018

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 45


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

It is a fully developed and operating infrastructure connecting


European consumers and Russia
Map of Ukrainian gas pipelines with entry / exit points

Entry / exit Entry, Exit, 364 transmission 344 storage Entry / exit Entry, Exit,
point bcm bcm services customers services customers point bcm bcm
in 2017 in 2017
0.0 0.0
1 Kobryn 28.9 n/a 8 Mozyr 6.0 n/a

1 66.1
Drozdo- 1.3 4.7 9 Sudzha 107.5 n/a
2 1.5 5.0 8 9
vychi
10 12 6.6
2
11 10 Valuiky 25.5 n/a
9.9 53.4 13
3 Uzhgorod 15.5 98.4

3
Sere- 0.0
n/a
11 13.0
2.9 11.6 4 6 brianka
4 Berehove 6.1 23.5 5 14
15
19.2
12 Pysarivka 48.5 n/a
0.7
5 Tekove n/a 4.5 Sokhra- 1.6
n/a
13 46.0
nivka
2.7 7
6 Oleksiivka n/a 3.5 Prokho- 0.0 0.0
14 3.3 32.5
Legend: rivka
Gas metering station
20.2 Gas pipelines X located close to the border 0.0
7 Orlivka n/a 26.8 15 Platove 6.0 n/a
Gas volume transmitted on Gas volume transmitted
GTS entry in 2017, bcm X.X X.X on GTS exit in 2017, bcm
Designed GTS entry X.X X.X Designed GTS exit
capacity, bcma capacity, bcma

Source: UTG Live (may differ from Naftogaz’s and NEURC’s data)

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 46


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

Ukrainian gas transmission system is a reliable route for transit of


the majority of Russian gas to the EU
Overview of UA GTS operations

Transmission work of Ukrainian GTS


(bcm / year, 2005-2017) Share of Ukraine’s transit in EU demand for Russian gas
(bcm / year, 2014-2017)
194
178
159
201 147 22%
100
96
177 Transit 85 92 94
13% bcm 57%
157 94 5%
62 67 82 3%

136 123 Moldova Romania


2014 2015 2016 2017
120 100 Poland Slovakia
Through other routes Through Ukraine
104 Hungary
94
62 Volumes of gas transported to UA consumers
(bcm / year, 2014-2017)

65 -26%
57 53
38 28 38
Domestic 3 31 29 28
3 2 2 To direct consumers
2005 2008 2011 2014 2017
35 To GDS
28 27 26
Transit to the EU, other European countries,
Turkey direction
Transportation to Ukrainian consumers 2014 2015 2016 2017

Source: Naftogaz of Ukraine, presentation of UTG Vice-President @ Ukrainian Energy Forum 2018, NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 47


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

Today, Ukraine’s gas transmission and storage system is being


managed by UTG that performs a wide range of functions – above
and beyond what is found in many other European TSOs
Business areas of major European TSOs

UkrTrans Energinet. Gaz- Snam German


Fluxys Enagas TIGF DESFA GRTgaz Eustream NET4GAS FGSZ
Gaz dk System Rete Gas operators

Ukraine Belgium Spain Denmark France Greece Poland France Italy Slovakia Czechia Hungary Germany
Gas
transmission             
LNG operations             
Natural gas
storage             
Services for
pumping and             
compressors
Construction
         
~75%
  
and engineering
of EU TSOs
Other business
services           
engaged in 
Research, transmission
design and
consulting
           only  
Energy
transmission             
Source: PwC analysis

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 48


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

Capacity of Ukrainian underground gas storage facilities is the


largest in Europe and equals to nearly a third of EU-28 capacity…
Technical working gas volume of underground gas storage facilities per country
(TWh, as of April 20161)
Planned
351
Under construction
275 270 Operational
10 5 60
351 23 151 139 146
260 4 95
188 67 94 44 45
151 135 95 67 51 1 37 5
2
36 9
Ukraine2 Germany Italy Netherlands France Austria Hungary UK CzRep Slovakia

UGSF utilisation – by countries (heating season 2017-2018)


Czech
Ukraine Germany Italy Netherlands France Austria Hungary UK Slovakia
Republic

55% 92% 98% 96% 75% 88% 73% 91% 98% 92%

25% 15% 44% 6% 3% 14% 20% 13% 21% 5%

- Start of heating season


- End of heating season 1) The latest available data
Source: Gas Infrastructure Europe, AGSI+ 2) Including Hlibovske underground gas storage of PJSC Chornomornaftogaz (Crimea)

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 49


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

.. and it is currently being underutilised (1/2)

Gas volumes in Ukraine’s UGSF


(bcm, Jan 2015 – May 2018)

35 252 Maximum injection / withdrawal 263


mcm / day capacity to / from UGSs mcm / day
~ 31 bcm – total UGS capacity
30

25 ? ?
?

20
? 17.0 ? ? ?
16.9
(55%) (55%)
14.5
15 (47%)
8.3 8.0
8.5
10
7.7 (27%) (26%)
(28%)
(25%)
~ 5 bcm – cushion gas
5

Mar-17
Mar-15

Mar-16

Mar-18
Sep-15

Nov-15

Sep-16

Nov-16

Sep-17

Nov-17
Jul-15

Jul-16

Jul-17
Jan-15

May-15

Jan-16

May-16

Jan-17

May-17

Jan-18

May-18
Source: UTG live, Naftogaz of Ukraine, NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 50


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

.. and it is currently being underutilised (2/2)

Underground gas storages capacity and utilisation Legend:


(yearly-average, 2017 ) Olyshivske Solokhivske X – UGS capacity, bcm

31% 28% – % of UGSF utilisation


Uherske
– under-utilisation of UGSF
(XIV-XV)
39% 24% 15% 0.3 1.3
Major underground gas 57%
1.9 1.9 47% 44%
storages located within
100 km from Poland’s 17.1
58% 0.4
border 1.5 1.0
Oparske 35%
45% 66%
2.2 Chervonopar- Verhunske
Bilche- Proletarske 0.4
Volytsko- tyzanske Житомирская обл. (7)
2.3 0.7
Uherske Krasnopopivske
Dashavske
Kehychivske

Bohorodchanske
UTG’s operating needs for UGSF
(mcm, 2016-2017)
90 0%
81

1.0

Hlibovske

2016 2017
Source: Naftogaz of Ukraine, UTG live, AGSI+, NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 51


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

Ukraine has recently introduced a customs warehousing service that


allows it to retain gas in UGSF w/o paying taxes and customs duties
Customs warehouse service of UTG

Ukraine’s UGS capacity can be used by


foreign traders, including residents of the Customs Warehousing
countries which lack storage capacities UKRTRANSGAS PJSC (TSO) and other authorities
(e.g. Romania, Slovakia, Hungary, have fulfilled all necessary organisational and legal
Poland, Slovakia) conditions for functioning of customs regime
“customs warehouse” on the basis of 10 gas
storage facilities (Chervonopartyzanske, Solokhivske,
Bogorodchanske, Bilche-Volytsko-Uherske, Uherske,
Dashavske, Oparske, Kehychivske, Proletarske,
Krasnopopivske).
The specified customs regime allows customers to
>14 bcm store natural gas in the underground gas storage
10 capacity
storages facilities of Ukraine in the customs regime - "customs
available 1 095 days warehouse" within 1095 days without paying taxes
with no
customs and customs duties.
clearance

Prerequisites
112 UAH / tcm
To receive the services of storage of natural gas in the
for storage
cycle customs regime "customs warehouse" it is necessary
to conclude with the TSO following agreements:
 contract for natural gas storage;
 agreement on rendering services of customs
declaring procedure for the gas transferred across
the customs boarder of Ukraine.

Source: NEURC, UTG web-site

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 52


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

In order to meet the challenges and improve the state and competitive
position of Ukrainian gas market, TSO unbundling is required
Incentives for TSO unbundling in the Ukraine

Remaining More transparency Possible engagement National and Natural gas market
competitive and efficiency of business partners European regulations liberalisation

Unbundling should Successful unbundling


Unbundling should Both national and TSO unbundling is a
positively affect the and establishing of an
improve the European regulations first step towards
competitive position of independent,
transparency, efficiency insist on the formation natural gas market
the Ukrainian gas transparent and
and eliminate corruption of independent gas liberalisation and its
market, especially after efficient TSO should
within the natural gas transmission system compliance with
Nord Stream 2 attract potential
sector operator European standards
completion business partners

Source: PwC analysis

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 53


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

Ukraine has adopted an unbundling plan in 2016, but the recent


arbitration ruling in Stockholm necessitates plan review/update
Overview of Ukraine’s unbundling plan adopted in July 20161
Current structure After unbundling1
The Cabinet of
The Cabinet of
Ministers of
Ministers of Ukraine
Ukraine

Assigned Assigned Ministry of Energy


state state and Coal Industry
institution institution of Ukraine

Supervisory Supervisory Supervisory Supervisory


Board, Executive Board, Executive Board, Executive Board, Executive
Board Board Board Board

TSO SSO
MGU PGU
Naftogaz Naftogaz
(Gas Transmission (Natural Gas
of Ukraine of Ukraine
System) Storage)

UTG UTG

TSO SSO
Gas Stockholm’s Tribunal did not support NAK’s request to reassign the transit contract with
Natural Gas
Transmission Gazprom to a designated TSO, saying it is beyond the powers of the Tribunal and being a
Storage
System task for UA regulatory authorities. In this matter, transit contract remained unchanged.

Source: Naftogaz of Ukraine, The Cabinet of Ministers of Ukraine, press research 1) CMU resolution #496 dated 1 July 2016 2) According to the ownership unbundling (OU) model

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 54


Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

EU experience shows that OU & ITO are the most common unbundling
models, while only OU & ISO are possible from UA legal perspective
Unbundling models of the major European TSOs (>2 ths km of pipelines)
ITO / ISO / Headcount1, ths Length of
Country TSO Type of GTS ownership UGSF
OU FTE pipelines1, ths km

UA UkrTransGaz n/a state-owned 3 19.7 38.02

IT SNAM RETE GAS OU owned by TSO 7 2.9 32.5


FR GRTgaz ITO owned by TSO 7 2.9 32.4
RO Transgaz ISO co-owned by TSO and state 7 4.6 13.3
DE Open Grid Europe ITO owned by TSO / co-ownership of some pipelines 7 1.5 12.0
ES Enagas OU owned by TSO 3 1.3 12.0
NL Gasunie T.S. OU owned by TSO 7 0.2 12.0
PL Gaz-System OU owned by TSO 7 2.8 11.0
DE Ontras ITO owned by TSO / co-ownership of some pipelines 7 0.3 7.2
HU FGSZ ITO owned by TSO 7 0.8 5.8
FR TIGF OU owned by TSO 3 0.6 5.1
DE Thyssengas ITO owned by TSO / co-ownership of some pipelines 7 0.3 4.2
BE FLUXYS OU owned by TSO 3 0.9 4.0
CZ NET4GAS ITO owned by TSO 7 0.5 3.8
DE Gasunie Deutschland OU co-ownership 7 0.2 3.8
DE GASCADE ITO owned by TSO / co-ownership of some pipelines 7 0.4 2.5
SK Eustream ITO owned by TSO 7 0.6 2.3
LT AB Amber Grid OU owned by TSO 7 0.3 2.1
2) Incl. located in temporarily occupied territories
Source: European Commission, companies' data, press research, smida.gov.ua, PwC analysis 1) The latest available data and temporarily uncontrolled territories of Ukraine
PwC | Advisory services | Ukraine Ukrainian gas market June 2018 55
Transmission
1 2 3 / storage 4 *** FOR PUBLIC USE ***

Securing gas transit for Ukraine after 2019 requires concrete


actions to be taken in a number of directions
Key actions to be undertaken

Challenges Directions Next steps

Construction of Nord
Stream 2 and other
 Engage reputable international GTS partner in order to ensure
bypassing pipelines transit volumes after 2019 and attract investments / experience
Preserving gas transit for further development of GTS
through Ukraine  Finalise TSO unbundling process in accordance with EU and
Transit contract Ukrainian regulatory requirements (taking into account results of
expiration in 2019 Stockholm arbitration between Naftogaz and Gazprom)

 Finalise transposition and implementation of EU energy


regulations and standards
Moderate pace of Reaching a point of no return for  Ensure transparent and non-discriminatory TPA to all infrastructure
market reforms Ukraine’s gas market reform
 Open all market segments for competition
 Develop as a gas hub

 Resolve debt and legacy issues


TSO preparation to
UTG business  Extend scope of services and pool of clients on the market
the work in the new
market environment transformation  Transmission system upgrading and modernisation
 Optimise TSO operations and business processes

Source: PwC analysis

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 56


*** FOR PUBLIC USE ***

Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 57


1 2 3 Distribution 4 *** FOR PUBLIC USE ***

Adopted Gas Law envisages that distribution and gas supply


functions must be separated
DSO reform summary

DSO becomes legally and organisationally


independent from other activities on the gas
market not related to distribution of gas (i.e.
production, transmission and supply).

Implementation of simple and non-


burdensome conditions for access to gas
distribution systems for new users (including
wholesale sellers and suppliers).

General rules of operation and access to a


gas distribution system are set by the Gas
distribution system code approved by the
NEURC.

Access of consumers to gas distribution


systems is a subject to Standard agreement
(designed and approved by NEURC) signed
between consumer and DSO.

Source: Law of Ukraine “On Natural Gas Market”, NEURC, Naftogaz of Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 58


1 2 3 Distribution 4 *** FOR PUBLIC USE ***

Total length of Ukrainian gas distribution system is 292 ths


kilometers, connected to more than 12 millions of end consumers
Characteristics of Ukrainian GDS
(2017)

High-pressure
461 Medium-pressure
Low-pressure
licensed DSOs 42% 7%
8% 16%
25.1 bcm
distributed to Ukrainian consumers
17% 292 ths km
of distribution
12.4 m pipelines
consumers connected to 68%
GDS, including:
 12.3 mln residential
 0.1 mln non-residential
State property
consumers 41% Municipal property
DSO-owned
Other owners

Source: NEURC 1) Including PrJSC “Makiivkagaz” and PJSC “Donetskmiskgaz” located in the temporary uncontrolled territories (TUT)

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 59


1 2 3 Distribution 4 *** FOR PUBLIC USE ***

There are 441 DSOs in Ukraine whose tariffs vary by region

Tariffs on natural gas distribution by region


(UAH / tcm excl. VAT, 2017)
Tariffs on gas
5 713.5 distribution are
30 725.5 43 627.5 regulated by
Weighted average distribution 31 540.6 NEURC
tariff in 2017 and its structure 12 328.8
23 151.1
39 459.6 26 541.6
21 708.1 11 634.9 44 211.9
5% 32 724.1 28 699.2 36 269.1
5% 22 720 18 567.2 20 722.1
33 631.9 38 595.2 29 674.4
1% 2 724 35 721.1
13 711.5 16 713.1 34 355.8 1 685.1 41 316.5 27 220.2
40 558.5 8 466.2
17 710.5 3 726.9
513.7 46%
42 723.7 4 679.9 19 613.3
9 580.6
6 522.6
UAH/tcm 10 295.8
39% 7 571.6
NEURC on 23 Jun 2017 established 14 430.2
tariffs for the services of natural gas
distribution based on capacity (new
24 730.5
methodology). 25 369.1 15 669.2
4% Taking into account consumer 37 600.2
appeals to the Prime Minister and the
President of Ukraine, NEURC on 10
Apr 2017 cancelled the decision.
Operating needs Depreciation
Thus, during 2017 the previous tariff
Materials Profit margin based on physical volumes of
distribution as of 1 Jan 2017 was
Payroll Other (incl. applicable (old methodology).
3% for individual
meters)
Source: NEURC 1) Excluding PrJSC “Makiivkagaz” and PJSC “Donetskmiskgaz” located in the temporary uncontrolled territories (TUT)

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 60


1 2 3 Distribution 4 *** FOR PUBLIC USE ***

Almost all DSOs are characterised by a prevalent private share in


their ownership structure (1/2)
Characteristics of DSOs
(2017)
Length of Private share in DSO
# Licensed territory / DSO Region Supplier under PSO
pipelines, ths km ownership structure, %
1 PJSC Vinnytsiagaz Vinnytsia Region 14.3 75 LLC Vinnytsiagaz Zbut
2 DE Montazhnyk LLC TD Valinor Vinnytsia Region 0.2 100 DE Montazhnyk LLC Krystal
3 LLC Gazovyk Vinnytsia Region 0.3 n/a LLC Gazovyk
4 LLC Gazpostachservis Vinnytsia Region 0.1 n/a LLC Gazpostachservis
5 PJSC Volyngaz Volyn Region 7.3 100 LLC Volyngaz Zbut
6 PJSC Donetskoblgaz Donetsk Region 11.4 62 PJSC Donetskoblgaz
7 PJSC Mariupolgaz Donetsk Region 1.7 100 LLC Azovgaz
8 PJSC Dniprogaz Dnipropetrovsk Region 2.9 100 LLC Dniproptrovskgaz Zbut
9 PJSC Dnipropetrovskgaz Dnipropetrovsk Region 14.1 75 LLC Dniproptrovskgaz Zbut
10 PJSC Kryvorizhgaz Dnipropetrovsk Region 2.3 100 LLC Dniproptrovskgaz Zbut
11 PJSC Zhytomyrgaz Zhytomyr Region 9.8 100 LLC Zhytomyrgaz Zbut
12 PJSC Korostyshivgaz Zhytomyr Region 0.2 77 LLC Polissyagaz
13 PJSC Zakarpatgaz Zakapattya Region 7.5 100 LLC Zakarpatgaz Zbut
14 PJSC Zaporizhgaz Zaporizhzhya Region 7.8 75 LLC Zaporizhgaz Zbut
15 PJSC Melitopolgaz Zaporizhzhya Region 1.4 75 DE Gaz Melitopolya PJSC Melitopolgaz
16 PJSC Ivano-Frankivskgaz I.-Frankivsk Region 15.2 75 LLC Ivano-Frankivskgaz Zbut
17 PJSC Tysmenytsiagaz I.-Frankivsk Region 0.9 75 LLC Ivano-Frankivskgaz Zbut
18 PJSC Kyivoblgaz Kyiv Region 23.4 75 LLC Kyivoblgaz Zbut
19 OJSC Kirovogradgaz Kirovograd Region 4.8 49 DE Tsentrgaz OJSC Kirovogradgaz
20 PJSC Luhanskgaz Luhansk Region 7.2 75 PJSC Luhanskgaz
21 PJSC Lvivgaz Lviv Region 18.3 75 LLC Lvivgaz Zbut
22 SE Novorozdilske DGHP Sirka Lviv Region 0.01 0 n/a
Source: NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 61


1 2 3 Distribution 4 *** FOR PUBLIC USE ***

Almost all DSOs are characterised by a prevalent private share in


their ownership structure (2/2)
Characteristics of DSOs (continue)
(2017)
Length of Private share in DSO
# Licensed territory / DSO Region Supplier under PSO
pipelines, ths km ownership structure, %
23 LLC Spektrgaz Lviv Region 0.01 n/a n/a
24 PJSC Mykolaivgaz Mykolaiv Region 6.3 75 LLC Mykolaivgaz Zbut
25 PJSC Odesagaz Odesa Region 10.4 100 LLC Odesagaz-postachannya
26 PJSC Hadiachgaz Poltava Region 1.3 75 LLC Kremenchukgaz-postachannya
27 PJSC Kremenchukgaz Poltava Region 2.9 75 LLC Kremenchukgaz-postachannya
28 PJSC Lubnygaz Poltava Region 2.6 n/a LLC TD Lubnygaz
29 PJSC Poltavagaz Poltava Region 12.7 75 LLC Poltavagaz Zbut
30 PJSC Rivnegaz Rivne Region 8.4 75 LLC Rivnegaz Zbut
31 PJSC Sumygaz Sumy Region 9.7 75 LLC Sumygaz Zbut
32 SE Kremenetske UPRG Ternopil Region 0.7 0 SE Kremenetske UPRG
33 PJSC Ternopilgaz Ternopil Region 10.2 75 LLC TernopiloblgaZ
34 PJSC Ternopilmiskgaz Ternopil Region 0.9 75 DE Gazpostach PJSC Ternopilmiskgaz
35 PJSC Kharkivgaz Kharkiv Region 12.3 100 LLC Kharkivgaz Zbut
36 PJSC Kharkivmiskgaz Kharkiv Region 5.3 100 LLC Kharkivgaz Zbut
37 PJSC Khersongaz Kherson Region 5.4 100 LLC Khersonregiongaz
38 PJSC Khmelnytskgaz Khmelnytsky Region 17.8 75 LLC Khmelnytskgaz Zbut
39 PJSC Shepetivkagaz Khmelnytsky Region 0.6 75 DE Shepetivkagaz PJSC Shepetivkagaz
40 PJSC Umangaz Cherkasy Region 1.8 75 LLC Umangaz Zbut
41 PJSC Cherkasygaz Cherkasy Region 11.1 100 LLC Cherkasygaz Zbut
42 PJSC Chernivtsigaz Chernivtsi Region 7.2 100 LLC Chernivtsigaz Zbut
43 PJSC Chernihivgaz Chernihiv Region 10.9 75 LLC Chernihivgaz Zbut
44 PJSC Kyivgaz Kyiv City 2.1 72 DE KyivgazEnergy PJSC Kyivgaz
Source: NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 62


*** FOR PUBLIC USE ***

Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 63


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

Ukraine’s natural gas consumption shows a steady decline during


the last decades – from 76 bcm in 1998 to 32 bcm in 2017
Ukraine’s natural gas consumption
(bcm, 1998-2017)

-58%
76 76 76 76 76
73 74
71 70 8 9 70
8 8 9 8
8 66
8 8 7
7
58 59 CAGR
5 55 1998-2017
52 5 50
33 30 28 34 33 34
4 by segments:
30 34 30 6 4 43
32 30 0.4
28 4 34 33
29 32 -3%
28 0.4 0.01 1
29 27 3 4
4
24
19 -3%
37 38 20
35 33 34 34 34 33 17
30 32 30
23 26 23
17 19
14 11 -7%
10 9

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Unauthorised withdrawal Operating needs Households, DHC and public sector Industry

Source: Naftogaz of Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 64


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

Today Ukraine’s gas market consists of two nearly equally-sized


segments – regulated and non-regulated
Ukraine’s natural gas consumption
(bcm, 2014-2017)

Share of Naftogaz
n/a 29% 20% 22% X% in retail segment

42.6
Unauthorised withdrawal
0.4 and unallocated volumes
3.6 -25%
0.7 Operating needs
33.8 33.2
31.9 Public sector
0.4 0.0
14.2 3.3 3.8 1.1 Industry
-19% 0.5 0.5 4.4 Non-
DHC for industrial &
0.5 public sectors4
-6% -3% 47% regulated
11.2 9.7 DHCs for households
1.5 segments1
9.1 Households
7.1 1.2 1.6
1.0
5.9 5.7
4.6
1) After the introduction of the
Regulated new Law on the Natural Gas
15.1 -23% +2% -5% 53% segments2 Market in Ukraine starting from
11.3 11.9 11.2 October 1, 2015
2) Incl. religious organisations
and DHCs for religious
organisations (~0.02 bcm/year)
3) This segment became
2014 2015 2016 2017 regulated in 2017

Source: Naftogaz of Ukraine, NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 65


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

Regulated segment of the gas market is functioning in the


framework of public service obligations
The framework of public service obligations (PSO) in Ukrainian gas market

 PSO framework set by the of Law of


Upstream Wholesale Ukraine On natural gas market
(article 11) and Cabinet of Ministers
• Obligation for state • Obligation of
of Ukraine resolution No 187 as from
gas producers Naftogaz to sell
March 22, 2017 (previously -
Ukrgasvydobuvannya gas to district
resolution of CMU No 758 as from
(UGV) and
Chornomornaftogaz
PSO heating companies
(and for the latter
October 1, 2015)
(ChNG) to sell gas to to buy it) for all  The deadline for PSO was officially
Naftogaz (and for the needs at a extended until Aug 1, 2018
latter to buy it) for regulated price  Gas prices on the residential
residential market market (households, religious
needs at a regulated organisations and heat producers)
price are regulated by PSOs to ensure
• If this production is the public interest in the functioning
not enough, Naftogaz Retail of the natural gas market
buys the necessary
additional supply from • Obligation of Naftogaz to sell gas  It means that there is an obligation
other wholesalers, to suppliers under PSO (and for for parties under PSO to sell / buy
including overseas the latter to buy it) for residential natural gas at a regulated price set
market needs at a regulated price by CMU

Source: NEURC, Law of Ukraine On natural gas market, CMU resolution No 187 as from 22.03.2017, National Investment Council

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 66


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

Ukrainian consumers received ~16.8 bcm3 of natural gas within


fulfilment of public service obligations in 2017
Public service obligations (PSO) fulfillment in 2017
Wholesale Retail

For residential
needs
Residential
P 4 942 UAH1 P 6 917 UAH2
consumers
Ukrgaz-
P 4 849 UAH1 Q 11.23 bcm 37 Q 11.23 bcm
(households)
Q 13.89 bcm suppliers
vydobuvannya
(UGV) (under PSO)
For religious
organisations needs
P 2 469 UAH1 P 3 915 UAH2 Religious
Q 18.9 mcm Q 18.9 mcm organisations
Naftogaz
of Ukraine Weighted average
P 4 849 UAH1 suppliers’ mark-up: DHC
Chornomor-
Q 5.9 mcm • 89.92 UAH / tcm (for
naftogaz residential consumers)
(ChNG) P 4 942 UAH1 • 69.96 UAH / tcm (for For residential
Q 4.61 bcm religious organisations)

Other (non-PSO) P 2 471 UAH1 For religious


P market Q 1.7 mcm organisations
suppliers – if
Q ~ 2.9 bcm3 For others
required P 6 611 UAH1
+ electricity
Q 0.96 bcm production

1) Excl. tariffs and VAT


2) Incl. transmission & distribution tariffs, suppliers’ mark-up and VAT P xx UAH - Weighted average selling price, UAH / tcm
3) PwC estimate as a diff between sold and procured gas under PSO Q xx bcm - Sales volume, bcm
Source: NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 67


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

In 2017 Ukraine’s natural gas prices paid to UGV were capped


below import parity
Ukraine’s natural gas prices and volumes – supply side
(kUAH / tcm excl. VAT, 2017)

Weighted average price for


8 Weighted average
imported gas on UA border
Commodity price of gas, kUAH / tcm

market wholesale price


Selling price to
Naftogaz 6.52,3
6.12
6
-25%
4.81

Other
UGV Import from EU
2
producers3

0
5 10 15 20 25 30 35
Natural gas supply in 2017, bcm
1) Regulated price
2) Weighted average wholesale price for local gas producers
3) Incl. transportation costs to UA border and UA GTS entry-tariff

Source: The Cabinet of Ministers of Ukraine, Naftogaz of Ukraine, Ministry of Economic Development and Trade, NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 68


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

It is estimated that ~ 400 economic agents (buyers and sellers)


were involved in wholesale natural gas market operations in 2017
Natural gas wholesale market
(2017) Weighted average / fixed prices
(UAH / tcm, excl. VAT)
~ 400 players on Ukraine’s
natural gas wholesale market
Regulated
UGV&CNG selling
segment

4 937

4 937

4 937

4 937
4 849

4 849

4 849

4 849
price to Naftogaz
Naftogaz selling
Weighted average natural gas price to suppliers
wholesale prices
(UAH / tcm, excl. VAT) Q1’17 Q2’17 Q3’17 Q4’17

5 607
Weighted average prices
(UAH / tcm, excl. VAT)
Price of local 6 139
gas producers
5 909
5 611

5 458
5 280

Wholesale price 6 682

6 892
6 355
(free market-pricing)

5 708
5 429
Q1’17 Q2’17 Q3’17 Q4’17 Non-
regulated Q1’17 Q2’17 Q3’17 Q4’17

7 270
7 102
segment

6 104
5 873
Imported gas 6 469
price on UA border1

Weighted average
X XXX Q1’17 Q2’17 Q3’17 Q4’17

7 123
yearly price, UAH / tcm

6 847

5 885

5 854
1) Includes transportation costs to
Source: NEURC UA border and GTS entry-tariff Q1’17 Q2’17 Q3’17 Q4’17

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 69


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

Ukrainian natural gas retail market covers more than 12 mln


consumers, most of which are domestic
Natural gas retail market
(2017) Weighted average prices
(UAH / tcm, excl. VAT, transmission and distribution tariffs)
• 225 suppliers, incl. 37 under PSO
• 12.4 mln consumers, 12.3 mln of which are Religious
domestic and 0.1 mln are non-domestic

5 052

5 063

5 066
organisations

5 000
2 528

2 532

2 533

2 533
Domestic
Regulated consumers
Weighted average natural gas
segment Q1’17 Q2’17 Q3’17 Q4’17
retail prices
(UAH / tcm, excl. VAT, transmission DHC-religion
and distribution tariffs) DHC -

7 907

7 907

7 907
households

4 942

4 942

4 942

4 942

4 942
2 471

2 471

2 471

2 471
DHC-budget
5 031 6 227 & others

Q1’17 Q2’17 Q3’17 Q4’17

Weighted average prices


6 559
6 094
6 056

5 945

(UAH / tcm, excl. VAT, transmission and distribution tariffs)


5 052

5 063

5 066
5 000

Budget

8 222
7 841

7 523

7 347

7 335
7 174
Q1’17 Q2’17 Q3’17 Q4’17 organisations

6 190
6 098
Non- Industry
regulated & others
Domestic Non-domestic
consumers consumers segment Q1’17 Q2’17 Q3’17 Q4’17

7 798
Weighted average

7 592
Others

6 983
6 941
X XXX
yearly price, UAH / tcm (non-PSO)

Source: NEURC Q1’17 Q2’17 Q3’17 Q4’17


PwC | Advisory services | Ukraine Ukrainian gas market June 2018 70
Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

On average, natural gas prices for Ukrainian households were


below European level
Average half-yearly natural gas prices for households and industrial end-users
(USD / tcm, incl. taxes and levies S1 2017)
Households Industry
(0.53 tcm/year < Consumption < 5.28 tcm/year) (0.26 mcm/year < Consumption < 2.62 mcm/year)

Slovenia 632 Slovenia 432


Czech 629 Czech 328
Republic Republic
Slovakia 481 Slovakia 388

Estonia 479 Estonia 381

Poland 477 Poland 384

Latvia 432 Latvia 373

Lithuania 417 Assumptions: Lithuania 388


EUR 1 = USD 1.083
Croatia 410 10.557 MWh = 1 tcm Croatia 351

Hungary 402 Hungary 378

Bulgaria 377 Bulgaria 300

Moldova 352 Moldova 325

Ukraine: ~ 264 USD/tcm Ukraine: ~ 359 USD/tcm

Source: Eurostat, European Central Bank

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 71


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

In order to ensure proper accountability, Ukraine is increasing


the number of households equipped with natural gas meters
Gas meters equipping level
(2017, 2018)
Group Share of households

1% 1%

With metering
Jan 1, Jan 1,
2017 2018 Without metering (disconnected,
Households using natural gas in terminated contracts etc.)
complex, incl. for home heating
99% 99%

11% 7%
With metering
Jan 1, Jan 1,
2017 2018 Without metering (disconnected,
Households using natural gas terminated contracts etc.)
for water heating and cooking 89% 93%

32% With individual metering


Jan 1, 38% Jan 1, 35%
49% With building-level metering
Households using natural gas 2017 2018
Without metering
for cooking 19%
27%

Source: NEURC

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 72


Consumption/
1 2 3 End-use 4 *** FOR PUBLIC USE ***

According to Naftogaz estimates, ~12 bcm of gas can be saved by


energy efficiency programs
Energy efficiency – potential gas savings & required investments

Gas savings, Investment,


Where What
bcm/year USD bln
 Energy Efficiency
Upgrading of individual heating systems ~3.0 ~4 Programs can ensure
savings in household bills
up to USD 2.5 billion and
Upgrading of heating systems for heat accelerate market
~1.1 ~2
producers
transformations
 The current status is
Modernization of gas pipelines ~0.7 ~2 characterized by
insufficient updates of
energy efficiency problems
Metering and thermoregulation in
~0.8 ~2 in Ukraine
apartment buildings
 Examples of Energy
Efficiency Programs in
Thermo-modernization of family houses ~5.5 ~10
Ukraine: Warm Credits, IQ
Energy, installation of
Thermo-modernization of apartment meters, Energy Efficiency
~3.4 ~16
buildings Fund etc.

Total ~12 bcm / year ~USD 36 bln

Source: Naftogaz of Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 73


*** FOR PUBLIC USE ***

Contents

1.
1 Macroeconomic fundamentals

2 Ukraine’s energy sector summary


2.

3 Overview of Ukrainian gas market


3.

 Exploration & Production


 Import / trading
 Transmission and storage
 Distribution
 Consumption / End-use

4 PwC in Ukraine

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 74


1 2 3 4 *** FOR PUBLIC USE ***

We use our global and local knowledge to work with our Clients in
solving their most complex problems – from strategy through execution

Functional competences of PwC advisory

since 3 practice in the Oil & Gas sector


offices in Kyiv,
1993 Dnipro and Lviv
Strategy Organisation

in Ukraine  Corporate & functional  Transformation programs


strategies  Organisation structures
 New market entry  Corporate governance & PMO
350+  Balanced scorecard  Headcount sizing
professionals, incl. more  Business model change  Corporate social responsibility

than 60 in advisory
 Post-merger integration

Capital expenditure Operational efficiency

 (Pre-)Feasibility studies  Efficiency improvement


PwC Ukraine  Modelling  Restructuring
PwC has been operating in Ukraine since 1993 and provides a full  Financing  Warehousing & logistics
range of professional services including consulting, assurance and  Investment process support  Process streamlining
tax & legal services.  Asset management  Procurement
PwC Ukraine draws on the talents of more than 60 consultants in  Controlling systems
management consulting, investments, corporate finance and
Innovation
valuation, 200 auditors, 110 tax & legal advisors. The high & technology
Sales & marketing
professionalism of all PwC people is a key driver to our market
leadership and excellence.  Innovation strategy  Segmentation
 Operational model of  Value proposition design
Engagements are generally staffed by a combination of Ukrainian innovations  Customer excellence
specialists, with knowledge of local conditions and regulations, and  Smart grids & Big data  New product launch
international consultants, who have expertise in tackling issues
 IT & OT integration  Pricing
faced by international organisations and experience in dealing in the
 Open innovation  Digital
Ukrainian environment.

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 75


1 2 3 4 *** FOR PUBLIC USE ***

We have an experienced team, covering full value chain and


functional scope for Clients

Experienced expert team Sector competences Functional competences

Experienced partner & managerial Complete Oil & Gas value chain coverage Hands-on experience in functional topics
team with hands-on experience in from primary fuels, through generation – strategy, capital expenditure,
international business advisory for and grids down to trading and retail operational efficiency, organisation, sales
the Oil & Gas sector & marketing, innovation & technology
driven business change

Client track record Proven international Thought leadership


cooperation model
Client portfolio encompassing Ukrainian Proven track record of international Regular issuance of discussion papers
and international Oil & Gas incumbents, cooperation within PwC network and public reports on key trends and
new market players, investors and allowing joint win-win challenges on Oil & Gas market
industrial associations

PwC | Advisory services | Ukraine Ukrainian gas market June 2018 76


Thank you!
Disclaimer

This presentation has been prepared for information purposes only, and does not constitute professional advice. You
should not act upon the information contained in this presentation without obtaining specific professional advice.
All informational sources used for particular analyses are listed in footnotes on respective slides. Various statistical
agencies use different methods and approaches in their assessments. Therefore, numbers in different parts of this report
may differ depending on the sources of information used for a particular analysis. PwC relied on information from the
sources that, in our view, are the most relevant and reliable for the purposes of analysis.

© 2018 PricewaterhouseCoopers Advisory LLC. All rights reserved.


PwC | Advisory services | Ukraine In this document, “PwC” refers to PricewaterhouseCoopers LLC which is a member firm of
PwC
PricewaterhouseCoopers International Limited, each of which is a separate legal entity.