On July 29, 2020, National Energy and Utilities Regulation Commission (NEURC) published a draft resolution to amend the Gas Transmission Code of Ukraine. Should these changes be adopted, cost of settlements of natural gas imbalances for traders will increase from 10% to 20%, conversely, the level of profitability of the Gas TSO of Ukraine will rake in from 20% to 40% in profit.
It also reduces the size of the permissible imbalances by traders from 10% to 3%, which under the current market conditions is almost impossible to keep within, especially for small and medium-sized suppliers.
ExPro spoke with Andrew Myzovets, President of the Association "Gas Traders of Ukraine", about the details of such innovations, and how gas trading in Ukraine can function one changes are in effect.
GTSOU balancing prices should reflect the real market situation
- Amid a sharp increase in imbalances in the Ukrainian natural gas market in June and July of this year, what was the cause of that?
- Let's start with the fact that the functional purpose of the Gas TSO of Ukraine (GTSOU) is both physical and commercial balancing of the GTS and relations with players in the market. This is explicitly stated in the GTS Code (Article 1, Section I). If the GTSOU somehow copes with physical balancing, while preventing accidents of natural gas transmission pipelines, yet, as for balancing of commercial relations, much remains underperformed. In particular, in winter there was a situation when market for natural gas in Ukraine saw a significant increase in positive imbalances, and in summer, conversely, there emerged a situation of large negative imbalances. We learned from media that GTSOU for some reason was dissatisfied with the actions of gas suppliers, traders and other market players.
- That is, traders "flooded" the market with imbalances?
- Somehow it looks like this, based on the statements of the GTSOU[chuckles - Ed.]. In fact, the situation is simple. Trading in gas, as in other commodities, supposed that one finds a resource cheaper and resell it for more. And today, all traders who have been licensed to buy and resell, and there are about 700 of them, are working within the legislation framework in the field using market mechanisms authorized by regulators.
The situation in winter and summer (with positive and negative imbalances) clearly reflected the real market developments. That is, during some periods the real prices in the market differ from the marginal prices set by the GTSOU.
According to the GTSOU itself, during the last 6 months of 2020, out of the UAH 1.031 billion due to negative imbalances, the imbalances by suppliers were at 0.25%,with everything beyond caused by regional gas distribution network operators!
- We recall that this February you made a statement that the GTSOU should have improved the mechanism for calculating the base price of natural gas, which is the basis for the determination of marginal purchase prices for settlement of imbalances. Has anything changed since then?
- Unfortunately, not! That's the issue. The GTSOU, as GTSsystem operator, which is the subject of legislative initiatives to improve the GTS Code, could have addressed the problematic issues occurring over the last six months, which, according to the GTSOU, distorted the market situation. Therefore, to accuse traders now of abusing the situation when gas purchased from the GTSOU to offset negative imbalances is cheaper the price of gas traded in the free market, seems to me unreasonable and unprofessional!
- And how do you think, based on your experience, one could resolve the situation with imbalances? Have member companies of the Association somehow reacted to such accusations against them?
- As I’ve said, there are a lot of players in the market. However, as our Association is very active in drafting the legislation for the industry, we regularly respond to problematic issues by increasing public awareness of the real state of things in the natural gas market, which is still being reformed.
So, as for decisions on imbalances, it is known that prices on the Ukrainian market correlate with European ones. Today it is possible to work out mechanisms, so that the balancing price of the GTSOU reflect the real market price for natural gas in the Ukrainian market. Then we would not have, for example, a winter situation, when the GTSOU apparently affected with by euphoria of concluding a long-term contract for transit of Russian gas at the end of the month "retroactively" changed the base gas price for imbalance settlements in January 2020.
A similar situation is repeated now. If the GTSOU does not have time to change in parallel with the market, then they should immediately draw conclusions and adjust their policy and strategy. The market exists to correct such problematic moments and unaccounted nuances. The best solution is to sit down with all market participants, discuss problematic issues, find constructive solutions, and then get down to adjusting the GTS Code with taking into account interests of all market participants.
- Was the draft resolution of the National Energy and Utilities Regulation Commission (NEURC) on amendments to the GTS Code, you mentioned at the beginning of the interview, discussed with market participants?
- Unfortunately not. Today, I see that it all came down to the fact that traders are to blame again, and therefore they need to be driven into the framework, which is, in my opinion, the wrong way to look into situation like that. After all, on the one hand, they declare European principles to us, and on the other hand, they use communist slogans: to forbid, to oblige, to punish, etc.
Therefore, today, given the situation, traders will turn to the NEURC to involve all possible European piers into the work on improving the balancing mechanism.
- By the way, how can you explain that against the backdrop of imbalances, according to GTSOU, in June 2020 the volume of negative imbalances amounted to 308 mcm, while during July 1-23, 2020 they get 458 mcm imbalanced… Shouldn’t it be that the GTSO work at a loss?
- It is obvious that natural gas, which is used by the GTSOU for balancing, is sold to traders with a 10% mark-up. Therefore, the words that imbalances create serious problems for the GTSOU sound very strange. I would call it manipulation, or substitution of concepts, if you like. The GTSO makes a profit in any case, because it receives gas for balancing at a price of about 2 600 UAH/tcm, and sells it to traders at a margin of + 10%. That is, traders, while maintaining the work of the GTSOU with a profitability of at least + 10%, are to be accused of "flooding" the market with imbalances ?!
This raises the question as to what level of profit will suit the GTSOU? Because, having a 10% premium to the base price, one needs to take into account that for balancing the GTSOU buys the surplus from the trader at a discounted price (-10%) of the market price, and sells with 10% add-up to the market price. Therefore, it is actually about 20% of the award yielded in aggregate. At the same time, the GTOU declares that it should not have a profit from balancing, that they exists to simply balance supply and demand.
Once again, the whole issue of such relations is that it is necessary to improve the commercial part of balancing by the GTSOU. Otherwise, it is possible that in autumn and winter the situation may recur. We will constantly step on the same rake, unless we fix the situation.
- Does the GTSOU need to increase balancing prices?
- Everything is very simple : the balancing prices of the GTSOU should reflect the real price situation in the natural gas market of Ukraine.
- Why won't they reflect yet?
- Apparently, because the contracts of the GTSO are pegged to the NCG and changes in quotations on this hub. There may be some time lag between prices on the NCG and prices of GTS balancing in Ukraine. There is a lot to guess at, but that once again suggests that the mechanism for determination of the base price for natural gas must get improved. Then there will be neither accusations by traders against the GTS Operator, nor by the GTSOU against traders.
I support the Operator in the fact that the price should be a market one, and suppliers should balance their portfolio similarly to practices in other European markets, where it is more profitable to go to commodity exchange rather than to buy balancing volumes from the GTS Operator. In my opinion, the GTSOU should go commodity exchange every day, forming a base price in accordance with the market price level in Ukraine, and not use medium- and long-term contract prices. Therefore, we welcome the steps by the GTSOU in this direction.
- That is, in the end we can conclude that the prices of negative imbalances are about UAH 200 on a tcm lower than the actual market price?
- Currently, yes. But at the beginning of the month the market price was slightly higher , at 3 400 UAH/tcm - 3,500 UAH/tcm, i.e. the margin for pick-up was even higher.
- How to determine whether a customer of the GTSOU’s transmission services abuses price discrepancies intentionally or unintentionally?
- I have no explanations, it’s a good question to ask GTSOU. It is unclear what legal ground their assumptions are based on.
- Meanwhile, accusations are heard against foreign traders…
- I will repeat once again that there are no such definitions in the GTS Code for GTSOU to govern by. Today, the statements of the GTSOU look unfounded. If, indeed, there is a fault with market participants, it must be proved in the prescribed manner. And, most importantly, as in the famous anecdote wisdom: in search of culprits, they get at themselves [smiles - Ed.].