Zoltan Jolsvai:

Zoltan Jolsvai: "Suppliers are forced to gain customers only by price"

Zoltan Jolsvai, Head of Trading of Ukrnaftoburinnya PrJSC believes that stable rules, customer-oriented approach, and accuracy of the regulator will help set up the efficient gas market in Ukraine

- Ukrnaftoburinnya (UNB) is one of the largest players in the Ukrainian gas market. How much gas does company sell? How much in these gas sales belongs to your own production, how much gas is bought from the domestic market, and how much of gas is imported?

- For one year of active trading, UNB was able to increase gas sales by 5 times, and today we sell on average 130 million m3 -150 million m3 of in the market. At the same time, the total result of 2017 amounted to 849 million m3, and for the first 11 months of 2018 this figure was 1,406 million m3. This volumes is distributed approximately by 1/3 and 2/3 between traders and consumers respectively, and approximately the same ratio relates to the gas of our own production and the one purchased for resale. Taking this opportunity, I would like to announce the establishment of UNB-Commodities, our new gas trading division. We are striving to equip this newly created trading company with our best expertise and practices, not forgetting to empower it with flexibility and quick decision making akin to independent trader. The goal is to separate our key competences into drilling/production and commercial sales, and with UNB-Commodities to enter the natural gas market, expand in sales of products fully meeting the demands and expectations of end consumers. And, UNB itself will further concentrate its efforts on exploration and production.

- How does UNB buy natural gas in EU markets?

- UNB-Commodities will form their resources with domestically originated gas (partially with the one produced by UNB) and imported gas. Our task is to optimize this portfolio to be flexible in our offers to buyers. Gas imports impose more risks in big purchase deals. These risks can be of two types. Firstly, there come risks associated with the contracts, such as fluctuations in price quotations, currency exchange rates, availability of capacities enroute to and at the boarder of Ukraine. Secondly, there exist risks related to work of Naftogaz of Ukraine and the National Commission for State Regulation in Energy and Utilities (NKREKP). By using analytics and our own experience, we sort out such risks on “eggs&basket” diversification principle, and use proactive approach for exchange rates and price quotations. The complexity of this work requires close cooperation of departments within the company, as well as regular interaction with customers.

- How do you evaluate the development of natural gas market in Ukraine over the last year?  Was there any growth of competition and margins?

- The specifics of the gas consumer market in Ukraine center around monthly purchases, whilst in EU year-long contracts prevail. This makes the traders to gain customers only by good price, that entail shifting over to buyers the risks of slumps or surges in prices. All that are the abnormalities in supplies, if one compare it with the integrated market in EU. In reality, nobody can determine expenditures in advance, and industries (say a factory or a combined heat and power plant) get 15 % fluctuations in production costs every month. This means that there exist additional risks for finance, production cost determination, etc. It is hard for a producer to form orders, procurements. I would like also mention that Ukraine’s economy, unfortunately, also lacks working capital. But nowadays, there are industries which have survived and are moving forward, after they have established the stable operational practices, applied good analytics of cycles in production under new conditions, and worked out cooperation principles with banks. On our part, we have capacity to offer them terms and products for smoothing down the market fever.

- What are your forecasts as to implementation of intra-day gas balancing? How can it impact your company and the market as a whole? What has this new system brought to EU countries?

- Stability is essential, when one introduces new sophisticated products (finance, gas, capacities, etc.) to resolve problems of customers. As I have already mentioned, one should be able to understand the regulator’s actions. The key issue here, there should be a balance in the supply system. This is the essence, and is not the subject to oppose. Hence, the issue of creating such balance and distributing expenditures thereon should be of key importance in order to understand how this mechanism can work. For efficiency in work one needs: a) clear rules, b) and these rules should not be changed over the gas supply year. Also, the legal framework is important. We are holding at UNB numerous meeting with customers from various industries to discuss intra-day balancing. Their first reaction, ”It is impossible with us! How could one?!” In a while, it is clear that most industrial customers have detailed statistical data in production or energy departments, but not shared with departments in charge of procurement. If one integrates all such data into one database with access provided to all departments within a company, the tasks can be accomplished. It is true, that there exist particulars (dependence on weather changes, say, in case of agricultural or food production), which the regulator should take into account and work on. Many countries have the notion of a “seasonal consumer”, and apply it both to capacity management and balancing. But “seasonal consumers” comprise a separate and small group. One cannot grant special status to everybody. The system, as a whole, should be unified and coherent.

- Over the last years in Ukraine they are developing the trade in gas at Ukrainian Energy Exchange (UEEX) platform. Have you ever tried to trade in gas there? How do you evaluate the trading at UEEX, and how does it differ from practices at EU energy exchange hubs?

- It is a complicated issue. I think, when we have our product (we offer solution to problems of our clients, rather than attempting just to supply gas to them), new Code (legal framework), as well as intact “rules of play” in place, then we will come from our bazar marketplace to a sound market. Nowadays, there are many energy exchange platforms able to match demand with supply. There are good emerging templates for future energy stock exchanges, as well as “procurement alliances”. The future exchanges lack two things - standards (here there are many opportunities) and governance by central counterpart. The availability of the latter is a complex issue. As to “procurement alliances” by uniting several procurement platforms, I must admit, based on Hungary’s experience, they result in a deadlock. Yes, one can over two or three years on end urge traders to lower prices and offset by sales volumes. In other words, one tries to ally a bakery with a farm, and foist a steelmaker into such alliance. But when such strange alliances collapse because of incongruity of business activities, then the stripped trader won’t be able to provide due financial support, the balancing will come to the initial point, and end consumer will suffer from hits of the big market. Stock exchanges can serve as an interim stage. Not all companies will rush at once to them, yet will use them as a price reference tool (in formula price determination). One can argue that it will bring us back to spot prices. But this is not the case, since one uses formulas, firstly, to preliminary determine the base of pricing, and, secondly, to divide company’s demand volumes by baseload, peakload or flexibility. One takes two contracts, two price quotes, calculations with planned volumes added, mixes them altogether, relates them to minimum two quarters of the year, and the newly made dish for sure will be favored by all participants.

 

 

- Could you tell us how you organize sales of gas condensate and oil?

- The UNB-Commodities will handle trade in petroleum products and light oils as well. To answer your question: over the last six months we use formulas for cost calculation of contracts. We have found solutions applicable for specifics of the Ukrainian market, and based on such solutions, we will expand the range of products and conditions for their sales. In general, we are all for standards in trading based on independent benchmarking. However, we understand that for a long time the domestic market will correlate to the worldwide market – both the procurements and the downstream have limitations, which impact production costs and prices.

- We spotted on UNB’s webpage a chapter on power trading. Have you started trading in it?

- We believe that future belongs to those traders, who are offering integrated solutions to their customers and end consumers. That is why, UNB-Commodities has applied for permits to trade in electricity. Shortly, we will start to work out proposals combining related commodities. Our client will do what he does best – produce tomato ketchups, cast metals, roll tubes and pipes, bake breads, or deliver heat for house warming. On our part, we must fully procure gas and electricity to them at acceptable costs and delivery terms. This is the key task of any energy trader in the 21 century.