This autumn the parliamentary session offers new hope for Ukraine to advance reforms, especially by finally creating a law that establishes an independent energy regulator.
During 2014-2015, the first wave of gas market reforms took place, but the pace has slowed, and breakthroughs are needed in several areas.
Here are the priorities:
1. Demonopolization of national gas market
It was started with the adoption of a law on April 9, 2015, that determines the new rules for the market. It also establishes the basis for demonopolization by providing for the division of functions of operator, gas distribution companies and gas suppliers by implementing the principles of free competition, consumer protection and security of gas supplies. The European Energy Community positively evaluated the new law as fully compliant with Ukraine’s obligations as a member of the Energy Community.
2. Naftogas demonopolization is a core task.
In 2015, the Cabinet of Ministers of Ukraine approved a new charter and corporate governance reform plan for Naftogaz. The reorganization of Naftogaz stipulates the corporate governance reformation in compliance with the corporate governance principles of the European Organization for Economic Cooperation and Development. In addition, 100 percent of the the company’s shares were transferred from the Ministry of Energy and Coal Industry of Ukraine to the Ministry of Economic Development and Trade of Ukraine. It is essential to reduce political influence in this area. The Ministry of Economic Development and Trade of Ukraine controls merely the stocks and conducts strategic management of Naftogaz. Control over Naftogaz’s senior management is done by the respective supervisors’ board, which consists of two national representatives.
In order to separate transportation and storage capabilities, the Naftogaz restructuring plan was approved during the meeting of the Cabinet of Ministers in July. This plan envisaged the establishment of joint-stock company Magistral Pipelines of Ukraine and private joint-stock company Underground Gas Storage of Ukraine. The assets of Private Joint Stock Company Ukrtransgaz will be transferred to these companies and will remain in state ownership. The transformation process will take place during 2016-2017, but only after the final decision of the Stockholm arbitration involving claims between Naftogaz and Russian state-owned Gazprom will be made.
Main challenges
One of the main challenges is the unaccomplished legislative reform of the effective natural gas market operation. Taking into account that the law on the gas market adopted in April 2015, additional amendments are needed. For example, the law imposes a new norm that the mandatory fee should be applied for the use of distribution networks and transmission of networks which are in the balance of private regional gas distribution companies (oblgazes). However, at the moment, this norm has not been proposed by the Ministry of Energy and Coal. As a resul, there is a lack of opportunities to get a license by potential domestic and foreign suppliers willing to work on the natural gas market of Ukraine.
Therefore, the most urgent legislation initiatives are:
1. Adoption of the Law on National Energy and Utilities Regulatory Commission of Ukraine.
The new law should ensure political and institutional independence of the energy regulator, which will play an important role in stimulating competitiveness in the gas and other energy markets. The professional and independent regulator will improve the efficiency of regulated markets and protect the interests of consumers.
2. To normalize the gas reserve stock issue.
According to a decree of the Cabinet of Ministers, the norms of the natural gas reserve stock were established for private-owned suppliers up to the level of 100 percent. Therefore, in order to establish attractive and equal conditions for other operators – suppliers of natural gas – the stock reserve issue should be lowered to the 10 percent level. Equal and unburden conditions for both, state-owned and private gas traders will stimulate competition.
3. To modernize and stabilize tax system for hydrocarbon production in Ukraine.
In 2015, the parliament cut royalties on gas production for private companies from 55 percent to 28 percent of gas, extracted from the deposits lying entirely or partly at the depth of up to 5 kilometers, and from 28 percent to 14 percent of she selling cost of gas, extracted from the deposits lying entirely or partly at the depth of more than five kilometers.
Still this is only one aspect connected with the taxation regime challenges. On the other side, there is a problem of complexity of tax administration. In order to tackle these problems, the Interagency Working Group under the Ministry of Finance of Ukraine, created in 2015, should resume work on the gas extraction regime improvement.
4. To settle the issues related to activities under production sharing agreements.
Ukrainian legislation provides two legal models of cooperation in hydrocarbon sector: through joint ventures and production sharing agreements.
JVs have no proper legal regulation and do not contain detailed provisions on joint activities that can result in misuse of this legal form of venture. Existing procedure of PSAs model in Ukraine is extremely overregulated and requires comprehensive upgrade.
New market conditions require revision of the fiscal regime and development of economically viable tax rates for gas extraction, oil and condensate under PSA.
The successful implementation of current and future PSAs in Ukraine requires daily coordination of central and local executive and legislative authorities. Therefore, it is important to adopt the necessary changes to CMU Decree No. 644 d.d. 01.08.2013 “On interdepartmental commission for conclusion and implementation of the PSAs” and the Law “On Production Sharing Agreements” in order to transform the Interdepartmental Commission for conclusion and implementation of PSAs into an interagency state authority which would be able to carry out implementation of signed PSAs during the project period.
The competitive tenders on PSAs should be open for the general public, transparent and politically unbiased. All tender documentations, protocols of the interagency commission meetings etc. should be available to all stakeholders. Moreover, in order to control the fulfillment of the terms of the contract more effective legislative instrument within the PSAs mechanism has to be envisaged.
5. To land legislation deregulation for the needs of oil and gas sector
A number of draft laws have been registered in the Parliament so as to solve the problems of land allocation. However, they have not been put to vote because of different reasons. Oil and gas companies constantly experience problems with the land rights. These problems are caused by several factors: the land acquisition procedure can last for 1.5-2 years; most of land plots with hydrocarbon deposits are considered to be the agricultural land, and there is a moratorium on agricultural land allocation and change of the designated purpose; the agreements for exploration have a lot of legal defects (for example, registration of such agreements is not regulated by the current legislation, such agreements cannot be applied at the stage of production and at the stage of transition from geological exploration to production). All these problems can be solved by making comprehensive amendments to the Land Code of Ukraine. Draft Law No. 3096 “On Amendments to Legislative Acts of Ukraine on simplification of certain aspects of oil and gas industry” should be adopted as well. This draft has already been registered in the parliament.
6. Metering and energy efficiency laws.
According to the IMF requirements, Ukraine has to solve metering issue. As for gas sector, Ukraine has to be fully equipped with meters up to Jan. 1, 2018. As of today, 75% of consumers are equipped with gas-meters and approximately 60% with heat meters. Law on energy efficiency in buildings is also in the top of legislative agenda.
