Energy Resources of Ukraine (ERU) is the first company in Ukraine, who in the partnership with PGNIG have contracted LNG from the U.S.A. The U.S.-origin LNG, after regasification, is expected to reach the Ukrainian border in mid-November. Delivering a pilot batch of 90 million cubic meters, ERU company expects to work out another alternative gas supply channel for Ukraine.
Is it economically feasible to buy LNG from the United States, or is it for ERU just to solidify the position of a leading gas importer into Ukraine? Why don’t Ukrainian companies export natural gas at current high prices to the EU? What is to happen with gas prices in the domestic market this winter? Those were the questions ExPro Gas posed to Mr. Yaroslav Mudryy, Managing Partner of Energy Resources of Ukraine and Director of ERU Trading LLC.
Today ERU has thrived into one of the largest gas sellers in Ukraine, but was the company initially started with other objectives in mind?
The ERU Group was established amid the Government of Ukraine was planning to privatize Centrenergo, a promising asset of Ukraine. The future founders, Andrew Favorov, Dale Perry, and I spotted opportunities for setting up a company in Ukraine to attract European and American investors. We did a great job in this area, and were next to being involved in privatization. Unfortunately, this did not happen, because privatization of Centrenergo was cancelled at that time.
When we saw that the privatization of Centrenergo back-pedalled, the question was: what’s next? After all, the company was established with capital of its founders, and the company’s equity was enough only for salaries to several employees. So, while Andrew [ Andrew Favorov, a co-founder of ERU – Ed.] was engaged in privatization issues, I, as a partner with experience in trading, began to develop this business direction. We started with coal imports, then switched to natural gas trading. In August 2015, we start our cooperation with Gas de France. The first deal was unprofitable, a reputational one, but having implemented it, we became the first to resume gas imports into Ukraine after a long time. At that time, in September 2015, there were shortages of gas in Ukraine, more precisely, shortages of reasonably-priced supply offers at the backdrop high prices by Naftogaz, consumers began hunting for alternatives. And, we were the first ones to timely meet the demand with our imports of natural gas. So, that was how we started our ERU’s history in natural gas trading.
In your opinion, what changes have taken place in the Ukrainian natural gas market, since the times ERU started operating in it?
The market of natural gas in Ukraine has become highly competitive and transparent. If, at its onset, we were essentially the only importer, over а short period the number of importers grew by several times. Prices in the market today are quite clear. There have been emerging good practices in the market.
In particular, providing traders with the opportunities to store natural gas volumes in Underground Gas Storages of Ukraine (UGS) under customs bonded warehouse terms is a huge step forward that allows importers to optimize their cash flow and get additional free money to pump gas. From this year, this mechanism has finally been de-facto operational. For many European companies, this was a key precondition for deciding whether to store gas in the Ukrainian UGS.
The disruption of transit of Russian gas (even if occasional) is a major factor that can influence prices in the gas market of both Ukraine and Europe. What is your vision for the next few months?
It is highly probable that transit of Russian natural gas can be disrupted in January 2020. Natural gas today is the cheapest over the last 10 years, so key players in the global market are interested in rising prices.
The gas price forecast is based on the dynamics of futures, which are market trend indicators. At the beginning of November, futures for December on European hubs were 5 €/MW more than spot prices, and that is by almost 50% more, and subsequently market expectations for prices to rise came true: spot prices started to go up.
If one calculates the cost of import parity, now the natural gas in Ukraine is cheaper than in the EU. Several companies, and ERU in particular, have already pioneered small export batches, but large-scale exports, as such, have not yet taken place. How can one explain it?
Ukraine is a scarce natural gas country, so it cannot cost less than elsewhere abroad. Just today, we have temporary small surplus of gas.
Quite a number of players storing imported gas in the Ukrainian UGS have considered re-exporting. But will it be economically feasible to off-take it later on? First and foremost, it is a matter of stable entry and exit fees, that, though may be reconsidered. Mr. Sergiy Makogon, Director of GTS Ukraine Operator, moves with the practice of the so-called short-hauls, herewith making it is possible without extra financial burden to store transit gas intended for European consumers. One expects that the latter option be in parallel with the adjustment of entry/exit fees depending on the length of the route over the GTS. So far, no one had seen this mechanism yet.
We are all for such initiatives on developing the capacity of the Ukrainian GTS, and in general, there are many people in the structure of the GTS Operator, who are ready to implement sound practices in the market. They have progressive ideas, but, unfortunately, not always they are able to implement them quickly enough.
Ukraine is striving with a setup of a gas hub, which has a unique capacity of gas storage facilities, but if our storage entry fee costs $ 17 and the exit fee is $ 45 per thousand cubic meters, then we will hamper this move: it will be unprofitable to use the Ukrainian UGS.
The first batch of American LNG contracted to you through Poland's PGNiG is expected to arrive Ukraine in mid-November. Will these supplies be regular, and what is the economy of the deal?
LNG is the same gas as other regular gas, and is quite competitive with other energy resources available in the market.
We were just the only ones able to arrange the American LNG supply with our Polish partner PGNiG. We challenged the risks, they provided expertise to us, access to the infrastructure, their contacts in American companies to negotiate. Working directly with contractors in the United States is not realistic for Ukraine.
Signing long-term contracts for the supply of LNG to Ukraine is a very risky story, to say the least. Because in Ukraine we still do not have stable pricing, it is difficult to foresee. Currently, one cannot talk about purchasing some large volumes of LNG, the economy is highly dependent on operational situation in our and foreign markets.
By the key is that we are honing our practices in this direction. We were determined in our search for direct American LNG contractors, not swaps or in kind. If it had not been any direct contract in place, the ship from the United States would not have arrived in Poland. This is an additional spot volume contracted specifically for us.
In Europe, the LNG price is usually pegged to TTF quotes, but its calculation at times is a little different than for gas from other sources. As for us, it poses another option for making decisions when contacting, the possibility of an additional pricing option (except for prices from Hungary, Slovakia, and Germany via Poland). This is an additional factor for increasing competition in the Ukrainian market.
So far, we are making one-time delivery, although are in constant dialogue with our partners on this issue. LNG is a global market, influenced by China's shrinking demand, despite new manufacturing facilities to be commissioned shortly. Each manufacturer will decide whether to sell at market prices or to discontinue production. Therefore, in view of the operational situation, we will make calculations and determine our gain through procurement.
What about the capacity of the GTS of Poland to pump additional volumes of gas to Ukraine?
It’s true, it is not that big currently. In the summer, it can pump over 4 million cubic meters a day, and a bit more than 6 million cubic meters per day in winter. However, the Poles are steadily developing their infrastructure. Whether they will pull the interconnector to our border, depends on the Ukrainian side. It is not a matter of loud statements. There is a so-called open season practice, which is announced by the system operator to attract all parties interested in newly projected capacities. Thus, the system operator determines whether there is any sense in the construction of new gas pipelines. A few years ago, such an open season was announced, but, unfortunately, none of the Ukrainian companies came out. Under this, the Poles can obviously conclude that they do not need their capacity expansion.
Poland will have enough non-Russian gas in the near future. In this sense, it will be a promising source of fuel supply to Ukraine…
Undoubtedly. In addition, they have taken a strategic course and are following it. I believe that we should pattern Poland, while trying to ensure our energy independence through strategic projects.
At present, our task is to develop all possible options of gas imports. Romania is also a promising partner, in the near future a lot of resources are expected, since the country has done a lot to develop its own gas production. No doubt, we also need to invest some money into infrastructure. The projected investments are not that big, but there is no progress so far. We have to urgently handle this.
What can you tell us about your experience as a gas supplier of technological gas to Ukrtransgaz to support their daily operations?
What has been done over the recent years – launch of tenders for procurement of technological gas - is a major breakthrough for the Ukrainian market. Now, there is an understandable and competitive price, and high competition. UTG was able to outsource hundreds of millions of dollars for their daily operational needs, not from Naftogaz but rather from private domestic and international companies, and just for after-payment commitment.
What happened this year, I consider a big mistake that has negatively impacted UTG, the natural gas market of Ukraine, and consumers. Trust in UTG was simply crossed out. Disregarding widely negotiated procurements, Naftogaz became the sole supplier. UTG widely solicited to procurement tenders, and we even bidded for once, but no other big players came to them. So, it was not the reason of 6-months after-payment, but a matter of trust in the counterparty, and uncertainty in transparency of the procurement. Noteworthy, some companies are still supplying small volumes to UTG under earlier signed contracts, and it is explanatory to compare prices of the formers with the prices offered by Naftogaz.
Mr. Yaroslav Mudryy since 2015 has been the Managing Partner of the Energy Resources of Ukraine (ERU) group of companies. He is in charge of the company's trading business, interaction with partners, development of the company’s business in Ukraine and investment projects. During 2011-2015 he worked in DTEK's energy holding company, where he supervised all export-import operations in electricity, natural gas, coal, and CO2. Prior to joining DTEK, Mudryy worked at ContourGlobal, an international company, working on M&A deals and development of new projects in the CIS.Author: ExPro