Dentons Kyiv Energy Newsletter, October, 2015
Dentons, Kyiv, Ukraine,
Fri, Oct 16, 2015
Procedure on Establishing Security Reserves of Natural Gas FinallyPublished
On October 13,Procedure on Establishing Security Reserves of Natural Gas (the “Procedure”)became available at the governmental website. According to the Procedure, gas suppliers willbe obligated to have security reserves in the amount of at least 30 days of gassupply under all of agreements of the respective supplier regardless of aperiod of the year. Suppliers can use either its own or borrowed funds and pumpits own or purchase gas to respective gas storages. The operator of the storagewill have to keep accounting of the security reserves and store this gas underan agreement according to a model contract to be approved by the Regulator.This requirement enters into force for all suppliers as of the date of itsentry into force (date of its official publication that will probably occursoon). However, gas producers got exempted from this requirement until January1, 2016, when, as expected, the level of royalty payments should be reduced.
Please notethat if any gas supplier fails to maintain the respective minimal securityreserves, a gas system operator should not accept nomination from such asupplier. A gas supplier may use its security reserves to fix its negativeimbalance provided it renews it during the following month. A gas supplier mayalso use the security reserves in case of emergency, for instance, stop ofsupplies of natural gas to Ukraine, in accordance with decisions of theUkrainian government.
The European Investment Bank (EIB) and World Bank (WB) signed anagreement under EU guarantee that aims to facilitate the purchase of gas byUkraine’s national gas company, NJSC Naftogaz
Lima, 9 October2015 - The European Investment Bank (EIB) and World Bank (WB) today signedan agreement under EU guarantee that aims to facilitate the purchase of gas byUkraine’s national gas company, NJSC Naftogaz.
The agreementwas signed today by EIB President Werner Hoyer and World Bank Group PresidentJim Yong Kim. The EIB will guarantee up to US$520 million of selected WorldBank loans in Ukraine, which will enable the World Bank to guarantee letter ofcredit facilities for gas purchases by Naftogaz. Today's agreement wasfacilitated by a counter-guarantee of the European Union granting comprehensivecover to the EIB linked to risks of these selected WB loans in Ukraine.
EIB PresidentWerner Hoyer commented: “European and global institutions are committed tohelping Ukraine avert a potentially severe energy crisis as winter approaches.The guarantee agreement we signed today will facilitate Ukraine’s purchase ofgas at a critical time. The deal reflects the EIB’s enduring support forUkraine as part of EU cooperation with the country and the Union’s EasternNeighbourhood region.”
“The newagreement is part of our broad support to the restructuring of the gas sectorin Ukraine and it will contribute to adequate gas supplies for the next threeyears,” said Jim Yong Kim. “The World Bank Group is committed to continuesupporting Ukraine’s ambitious reform program and we are pleased to workjointly with the EIB.”
The newagreement is part of the support for Ukraine by the European Union andinternational financial institutions, under which the EIB guarantees World Bankinvestment development projects in Ukraine. The EIB guarantee is structuredunder the 2014-2020 External Lending Mandate and benefits from the EUcomprehensive guarantee.
Draft LawAmending Royalty Payments Adopted in the First Hearing
On October 6,2015, the Ukrainian parliament passed in the first hearing Draft Law No. 2835of 13.05.2015 on Introduction of Changes to Tax Code of Ukraine regardingReduction of Price for Gas for Population (the “Draft Law”) which wasregistered by a number of members of the parliament, including Ms. Tymoshenko.According to the Draft Law and information about the course of hearingsavailable at the parliamentary website, the rates of royalty payments forproduced gas shall be reduced in the following way:
· for gas produced by private enterprises from wells up to 5 km – from 55% to29%;
· for gas produced by private enterprises from wells more than 5 km – from 28to 14%.
Because ofrecommendations from tax parliamentary committee and despite hot discussionsabout the respective changes during the hearings, it appears that theparliament had not voted for changes of royalty payments for gas produced bystate enterprises as well as under joint activity agreements of privateenterprises with state enterprises. This rate apparently remains at the levelof 70% in the voted Draft Law.
Special chargeon gas supplied to population until January 1, 2016, was reduced in the DraftLaw from 4% to 0%.
Please notethat the parliament attempted to adopt the Draft Law in general but theseattempts failed and we could expect the second (hopefully, final hearing) soonafter additional elaboration of the Draft Law which may result in additionalchanges to the Draft Law. At the same time, Draft Law No. 2352а of 14.07.2015on Introduction of Changes to Tax Code of Ukraine regarding Taxation ofBusiness Entities Producing Natural Gas registered by the Ukrainian governmentdid not get enough votes and was not voted. Potentially, we cannot exclude thatit could be re-voted. So, intrigue still remains. However, according toinformal information I received the governmental draft has much less chances tobe finally adopted for a number of reasons.
According tothe available version of Draft Law, it should enter into force on the datefollowing its official publication.
If the DraftLaw is finally adopted, it will reduce substantially rates of royalty paymentsfor private enterprises which will create conditions for the furtherdevelopment of the industry.
EBRD's loan to Naftogaz to buy gas with limit of $300 mln is revolvingfacility – EBRD managing director
The EuropeanBank for Reconstruction and Development (EBRD) has approved the provision of arevolving facility with a limit of $300 million to national joint-stock companyNaftogaz Ukrainy for three years, Managing Director for Eastern Europe and theCaucasus at the EBRD Francis Malige has said.
"It isalso a revolving facility, meaning that after the end of the heating seasonNaftogaz will need to buyback the amount and once they credit back they canrenew this again to purchase gas and that will valid for three years," hetold Interfax-Ukraine.
"This isnot one auction, what we say with this contract that we lend money to Naftogazand Naftogaz use this money to purchase gas and they can purchase gas in quantityas they want," Malige said.
"It is notgoing to be one auction, it is going to be a serious of auctions when Naftogazdecide to use the money," Malige said.
"Everysingle purchase has to be done according to EBRD procurement tools meaning thatthere should be transparency and fair competition among market participants onthe gas market," he said.
"There areno limits, the limit is the market price, that is the mechanism to ensure thatNaftogaz pays a market price, which is fair, transparent and competitiveauction," he said.
The EBRD saidin a Wednesday press release that both projects are designed to strengthencorporate governance at Naftogaz and introduce greater transparency andefficiency in its purchases of natural gas.
Technicalassistance for the implementation of a Corporate Governance Action Plan forNaftogaz is being provided by the EBRD-Ukraine Multi-Donor Account establishedat the bank in 2014 and funded by Finland, France, Germany, Netherlands,Sweden, Switzerland, UK, the U.S., Denmark, Japan and Norway.
The EBRD alsosaid that both projects are designed to stimulate reforms in the Ukrainian gasmarket that will help move the sector towards the best possible practices inline with market-based principles and liberalization.
Naftogaz Ukrainyis a state holding, which consists of a group of enterprises that extract,transport, store and process oil and gas, and supply fuel.
The EBRD is thelargest international financial investor in Ukraine. As of 1 September 2015,the bank had a total cumulative commitment of EUR 11 billion in 346 projectsthroughout the country.
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