Ukraine raises domestic gas storage rates June 27 2013; the Ukrainian government ordered private gas production companies to pump at least 50% of gas into storage

Last week, the Ukrainian government ordered private gas production companies to pump at least 50% of gas to be produced between July 1-October 15 to the underground storage facilities. Concord Capital comments on the news: The NERC decree is more discouraging news for independent gas producers Regal Petroleum (RPT LN), Kulczyk Oil (KOV PW), JKX Oil & Gas (JKX LN) and Cadogan (CAD LN). Not only do they have to delay sales of half of their products over the next 3.5 months, but they will be additionally charged for this delay. Naftogaz’s revenue from this mandatory storage for private producers at new rates will be only about UAH 41 mln. The maximum benefit of Naftogaz from higher tariffs till the year end will be UAH 0.4 bln, we estimate, which is little compared to the deficit that Naftogaz seems to have this year. In particular, Interfax reported on June 26 that a draft of Naftogaz’s 2013 financial plan, prepared by the Energy Ministry, estimates a UAH 32.2 bln cash deficit. Of this amount, the state budget covered only UAH 8 bln. The government has refused to approve Naftogaz’s plan since it demands extra financing from the state budget of UAH 24.2 bln. So we should be prepared either for a long-anticipated gas tariff increase for households and heating companies, or some other creative measures from the government that will allow for financing the Naftogaz deficit at somebody else’s expense. Dragon Capital comments on the news: The news is marginally positive for Naftogaz Ukrainy, implying additional revenues for gas storage services, yet we note that Naftogaz is by far the largest client of Ukrtransgaz, its subsidiary. A recent government decree ordering private natural gas producers as well as JVs between private and state-owned companies to pump 50% of their output into underground storage reservoirs between July 1-Oct. 1 would provide for an additional UAH 40m ($4.9m) of revenues. However, uncertainty remains about gas produced by Ukrnafta. The company extracts close to 2 bcm of gas p.a. but keeps refusing to sell it to Naftogaz at below-market prices for further supply to households. The company secures court rulings on a regular basis obliging Ukrtransgaz to sign storage contracts for Ukrnafta-supplied volumes, yet Naftogaz has refused to comply and reportedly sold this gas to households. The hike in storage tariffs may have greater impact on Naftogaz’s financials if the company succeeds in attracting EU companies to use its storages facilities. We estimate that Naftogaz has 15-16 bcm of spare storage capacity which could theoretically bring up to $150m of additional revenues annually.

Last week, the Ukrainian government ordered private gas production companies to pump at least 50% of gas to be produced between July 1-October 15 to the underground storage facilities

Concord Capital comments on the news: The NERC decree is more discouraging news for independent gas producers Regal Petroleum (RPT LN), Kulczyk Oil (KOV PW), JKX Oil & Gas (JKX LN) and Cadogan (CAD LN). Not only do they have to delay sales of half of their products over the next 3.5 months, but they will be additionally charged for this delay. Naftogaz’s revenue from this mandatory storage for private producers at new rates will be only about UAH 41 mln. The maximum benefit of Naftogaz from higher tariffs till the year end will be UAH 0.4 bln, we estimate, which is little compared to the deficit that Naftogaz seems to have this year.

In particular, Interfax reported on June 26 that a draft of Naftogaz’s 2013 financial plan, prepared by the Energy Ministry, estimates a UAH 32.2 bln cash deficit. Of this amount, the state budget covered only UAH 8 bln. The government has refused to approve Naftogaz’s plan since it demands extra financing from the state budget of UAH 24.2 bln. So we should be prepared either for a long-anticipated gas tariff increase for households and heating companies, or some other creative measures from the government that will allow for financing the Naftogaz deficit at somebody else’s expense.

Dragon Capital comments on the news: The news is marginally positive for Naftogaz Ukrainy, implying additional revenues for gas storage services, yet we note that Naftogaz is by far the largest client of Ukrtransgaz, its subsidiary. A recent government decree ordering private natural gas producers as well as JVs between private and state-owned companies to pump 50% of their output into underground storage reservoirs between July 1-Oct. 1 would provide for an additional UAH 40m ($4.9m) of revenues. However, uncertainty remains about gas produced by Ukrnafta. The company extracts close to 2 bcm of gas p.a. but keeps refusing to sell it to Naftogaz at below-market prices for further supply to households. The company secures court rulings on a regular basis obliging Ukrtransgaz to sign storage contracts for Ukrnafta-supplied volumes, yet Naftogaz has refused to comply and reportedly sold this gas to households.

The hike in storage tariffs may have greater impact on Naftogaz’s financials if the company succeeds in attracting EU companies to use its storages facilities. We estimate that Naftogaz has 15-16 bcm of spare storage capacity which could theoretically bring up to $150m of additional revenues annually.