Ukrainian Gas Industry Reform Privatisation or Nationalisation

1
Ukrainian Gas Industry ReformPrivatisation or
Nationalisation?
Andrei Adolfovich Pestov Director General, GAZEKS
Management LLC

G A Z E K S G A S H O L D I N G C O M P
A N Y
Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
TABLE OF CONTENTS

• GAZEKS in the Ukrainian Gas Market
• Ukraine in the Eurasian Energy Domain
• The Ukrainian Gas Industry Internal Consumption
• The Ukrainian Gas Industry Distribution
  Pipelines
• The Ukrainian Gas Industry Levels of
  Responsibility
• A Model of the Ukrainian Gas Market Risks for
  Investors
• A Model of the Ukrainian Gas Market Risks for
  Consumers
• Consolidation of the Interests of All Gas Market
  Participants

Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
GAZEKS in the Ukrainian Gas Market
Private investor competent, competitive, ready
to invest

Krivorozhgaz Natural gas transport volume 2.07
billion m3 Natural gas sales volume 275.5
million m3 Liquefied gas sales volume 1,423
tonnes
Dneprogaz Natural gas transport volume 2.14
billion m3 Natural gas sales volume 645
million m3
Kharkovgorgaz Natural gas transport volume 2.37
billion m3 Natural gas sales volume 428.9
million m3
Kharkovgaz Natural gas transport volume 1.75
billion m3 Natural gas sales volume 1.076
billion m3 Liquefied gas sales volume 8,195
tonnes
Average annual volume of gas transport via gas
distribution pipelines by GAZEKS companies in the
Russian Federation and Ukraine appr. 25 billion
m3
Donetskgorgaz Natural gas transport volume 0.9
billion m3 Natural gas sales volume 231.65
million m3
Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
Ukraine in the Eurasian Energy Domain
Country specific advantages factors of
investment attractiveness
Russia

• The most developed industry and economy in the
  former USSR territory.
• Mental, economic, political and legal
  preparedness for accession to the EU
• Geopolitical location transit of energy
  resources from CIS states to EU states,
  favourable transport logistics
• Liberalisation of gas prices

Ukraine
EU
Country specific risks

• Political instability
• No uniform, stable, clear rules of the game for
  investors

Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
The Ukrainian Gas Industry Internal Consumption
!
The issue of closing the balance insufficient
production
The issue of extra-standard losses quality of
control
Poor quality and deterioration of pipelines
!
Special attention to consumption issues
!
!
Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
The Ukrainian Gas Industry Distribution
Pipelines
Most Ukrainian gas distribution systems are
owned by the state.
Quality of gas pipelines
Losses of gas 7 billion m3
Current capital investment
Required capital investment per year
The replacement cost of all distribution
pipelines in Ukraine up to 2037 ?.
Ukraine's national interest minimising
reputation risks! The government must protect
Ukraine from claims on the part of the EU and
Russia through high quality and efficient gas
supply.
Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
The Ukrainian Gas Industry Levels of
Responsibility
National level state investment

• Direct management
• Provide consumers with access to gas resources
• (internal production imports)
• Fulfil intergovernmental agreements on gas
  transit to Europe

Objectives of the Government

• Indirect management
• make use of private investment to ensure
  development of gas pipelines and infrastructure
  by reforming the system of price control for
  distribution services by means of introduction of
  generally accepted market principles

Local level private investment Shaping investment
incentives
!

• Stimulate capital investment
• Constantly reduce industry risks
• Establish reliability criteria
• Stimulate efficiency

Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
A Model of the Ukrainian Gas Market Risks for
Investors

• Most gas distribution systems are operated by gas
  distribution organisations under lease
  agreements.

• Subsidiary Company Ukrgazseti has been
  established for operating state-owned gas
  distribution systems. Termination of contracts
  with GDOs initiated.
• Reliable, uninterrupted and safe gas supply in
  Ukraine depends on entrusting GDOs only with
  functions for operating technological assets.
• Substitute state-run companies for private ones
  at the distribution level, and private companies
  for state-run ones at the supply and trading
  level.

SC Ukrgazseti
Privatisation industry at the national
level Nationalisation the privatised part of
the industry at the local level
Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
A Model of the Ukrainian Gas Market Risks for
Ukrainian Consumers
Price of Natural Gas for Households,
hryvnias/1000 m3

• Gas prices have grown by 160 and become close to
  prices in Europe
• Low solvency of heating utilities.
• Poor quality of services in distribution and
  retail (prices incompatible with quality)
• Consumer-oriented companies are bankrupt
  (including state-run companies).
• No long-term industry development programme.

Price of Natural Gas for Industries (ex. VAT and
transport tariff), hryvnias/1000 m3
Consumers dissatisfied with the state of affairs
in the gas industry
Source Interfax Ukraine News Agency, National
Energy Regulation Commission
Ukrainian Investment Summit, London, 12 14
March 2007
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Andrei Pestov, Director General, GAZEKS
Management LLC
Consolidation of the Interests of All Gas Market
Participants
A new gas policy institution should be
established in Ukraine to consolidate the
position of its members for effective action on
behalf of them.

• Tasks for the new industry organisation
• Shaping the target gas market model
• Overcoming uncertainty and instability trends
• Revealing and coordinating the interests of
  various gas market participants, including
  representatives of the business community,
  consumers, and pubic bodies
• A constructive dialogue between private business
  and the government, as well as international
  institutions

• The task of creating the most representative
  public industry organisation in Ukraine suggests
  voluntary accession thereto of companies (public
  organisations) representing the entire production
  chain from gas extraction (production) to sales
  in Ukraine
• producing companies
• companies that transport gas via gas mains
• gas distribution companies
• gas traders.

Transparency required in the Ukrainian gas
industry
Ukrainian Investment Summit, London, 12 14
March 2007
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• THANK YOU FOR YOUR ATTENTION!
• GAZEKS Gas Holding Company
• Director General of the Management Company
• GAZEKS Management LLC
• Andrei Adolfovich Pestov
• A.Pestov_at_ies-holding.com www.ies-holding.com
• Bldg. 3, 23 Obrucheva St, Moscow, 117630
• Telephone [phone] Fax 7 (495)
  980-59-08