On 25 May 2017 the National Commission for State Regulation of the Energy and Public Utilities Sectors (the “Regulator”) adopted Resolution No. 689 on amendments to the Gas Storage System Code and Methodology for Calculation of the Gas Storage (Injection, Withdrawal) Tariffs (the “Amendments”). The Amendments aim to simplify gas trading in storage and add flexibility to the capacity-based storage services. They will come into effect after official publishing.

The most important changes include the following.

1. Trading transactions

The Amendments detail the role of the Storage System Operator (“SSO”) in the administration of trading operations with respect to the customer’s storage capacity and/or natural gas kept in the storage facilities. In particular,

1. The yearly storage capacity may be partially transferred by and between the customers; 
2. The SSO shall coordinate the transfer of natural gas (decreasing the amount of gas kept in the seller’s storage account and increasing the amount of gas kept in the purchaser’s storage account):

1. Administration shall be performed on the basis of the so-called “trading notices” executed by the customers according to the Operator’s standard template (in electronic or paper form).
2. The trading notices shall be reviewed by the SSO within 2 hours (for gas trading operations) or 3 days (for transfer of capacity).

1. The SSO shall confirm the trading notice for transfer of gas only if it is compliant with the applicable requirements, for example if: (i) the parties’ trading notices are consistent; (ii) the customer is not indebted to the SSO; or (iii) gas volumes being traded are not under arrest, etc.

1. Services rendered by the SSO

Currently, services rendered by the SSO only include: (i) yearly capacity; (ii) monthly capacity and (iii) individual services. However, in order to diversify trading options for customers and to facilitate use of underground gas storage facilities (UGSF), the Amendments extend the list of services to the following:

1. yearly capacity (granted on a guaranteed basis, can be booked for one year during four consecutive years. The “minimal working volume” is 1000 m3 per day, which means that the customer shall always be required to pay for storage of such minimal volume irrespective of its actual use); 
2. monthly individual services, including:

1. individual working volume (granted on a guaranteed basis, can be booked for a period of one month, the minimal working volume is 1000 m3 per day);
2. monthly injection/withdrawal capacity (granted on an interruptible basis, can be booked for a period of one month and allows the customer to inject/withdraw gas irrespective of the season).

1. individual day-ahead services (injection or withdrawal capacity granted on an interruptible basis) shall be available only to those customers to which the yearly capacity or individual working volume has already been allocated by the SSO. These services can be booked by following the nomination procedure. 

1. Allocation of capacity

The SSO shall allocate capacity for the services in the following order: (1) yearly capacity, (2) monthly services, (3) day-ahead services. The yearly capacity, suggested for allocation by the SSO shall not exceed 90% of the available GSF capacity; at least 10% of the available capacity shall be used for monthly individual services.

Applications for the allocation of capacity may be executed by customers in electronic form. In the event that the total capacity requested by the customer exceeds that which is available, the SSO shall be entitled to allocate the capacity between the customers on a proportional basis keeping a due account of their minimal requested volumes.

The Amendments provide for detailed rules and procedures for the allocation of UGSF capacity under the above mentioned services by the SSO.  For example, customers will have only 15 calendar days (between 1 and 15 February) to submit their applications for allocation of the yearly capacity. However, applications for allocation of the yearly capacity for the 2017-2018 period and for allocation of the monthly capacity for July 2017 must be submitted by customers before 22 June 2017.

1. Calcuation of the Tariffs

The tariffs for storage/withdrawal/injection services (in UAH per 1000 cm per day) will be calculated on the following basis: (i) the Operator’s “planned (estimated) costs for storage” (i.e. expenses and costs listed in the Methodology and included in the relevant tariff); (ii) the planned “level of profitability” (the Amendments provide that it shall be equal to 4%) and (iii) the planned “working volume for storage” or “injection/withdrawal capacity”. The Regulator may also approve the tariff indexes, as follows:

• the index for individual monthly services shall vary between 1.1 and 2.5;
• the index for individual day ahead services shall vary between 1.2 and 3.0; and
• the index for interruptible capacity (currently between 0.1 and 0.8) was removed.

1. Payment for the Operator’s services

Customers shall be required to make a 100% prepayment for the services ordered five banking days prior to commencement of the gas month. With respect to the yearly capacity, customer prepayments are to be made separately five days prior to commencement of the relevant month.

Day-ahead services must be prepaid by close of the banking day prior to submission of the relevant nomination.

However, the rules also become more stringent. If the customer fails to make the prepayment within the established timeframes, the SSO can freeze the relevant unpaid capacity allocation and immediately offer such capacity on an interruptible basis to any other customers (currently it is possible only after the 14-day period expires). In addition, the SSO may refuse to accept the customer’s nominations and/or notices on the transfer of gas/capacity until the prepayment is made in full.

1. Customs formalities

The SSO shall be obliged to account separately for gas stored at UGSFs under the different customs regimes. This novelty was introduced in line with the Government’s recent initiative on application of the regime of the “customs warehouse” to the gas storage facilities (see – overview of Order No. 292 of the Ministry of Finance of Ukraine “On Approval of Amendments to Certain Legal Acts” dated 27 February 2017). The Order eliminates legal barriers for the cross-border transportation of natural gas for the purpose of temporarily storing it in Ukraine. In particular, according to the Order the customer is allowed:

1. not to pay the 20% import VAT and customs duties; and
2. to store the goods in this regime for 1095 days

1. Gas in Storage

In the event that a certain amount of gas is still kept in storage after the storage services have been performed, the customer shall be obliged to: (i) either transfer such amount of gas to third party(-ies); (ii)  withdraw the relevant gas from the storage facilities; or (iii) order storage services for the next period. Otherwise, the SSO is entitled to execute the act on the remaining amount of gas unilaterally and to calculate a price for its storage services under the tariffs established for monthly individual services. The SSO may not accept nominations/re-nominations from the relevant customer and/or administer gas transfer, until the services are paid in full.   

1. Reporting

Prior to the 12th day of the month following the reporting period, the customer and the SSO shall execute the detailed act on movement of natural gas kept in GSFs. This measure is expected to require the SSO to conduct more detailed accounting, as currently, such acts only provide for the amount of gas injected/withdrawn by the customers in any given month. If the parties fail to execute such act, the SSO may formalise it unilaterally prior to the 13th day of the month following the reporting period.

1. Transparency

In order to provide customers with the necessary market information and to increase transparency of the operator, the Amendments provide for an extensive list of information which must be published by the SSO on its official website.

1. General

In order to ensure protection of gas storage customers’ rights, the Amendments provide for the following new provisions:

1. SSO must always ensure that all customers are provided with unprejudiced, equal and transparent access to gas storage; and
2. The duration of a period needed for technical maintenance of the storage facilities, scientific research and studies, etc. (the so-called “neutral period”) may not exceed 30 days following the base season.

1. New version of the model agreement

The Regulator approved a new version of the Standard Gas Storage Agreement, reflecting the above mentioned changes. The Regulator also removed provisions regarding unilateral termination of the agreement at a party’s request from the template (currently such unilateral termination is possible by giving 30 days’ written notice in the event of the other party’s failure to perform its obligations under the agreement and subject to full financial settlement). However, we note that either of the parties will still be entitled to terminate the storage agreement unilaterally by applying to the relevant court.

Authors:

Vitaliy Radchenko, Partner, vitaliy.radchenko@cms-cmno.com

Inna Antipova, Associate, inna.antipova@cms-cmno.com