Starting this month, Ukraine has a new gas market.
The government removed a public service obligation (PSO) that kept prices artificially low, which means that the market will now determine household gas prices. These prices will rise but not by much due to this year’s massive gas glut.
The government also made it easy for households to freely change their gas provider at any point. While few people are expected to switch providers at first, experts expect up to a fifth of the population to do so eventually.
The new system creates opportunity for suppliers, but for none so much as state-owned gas giant Naftogaz, which is expanding its business-to-consumer segment. Other companies are also looking to compete — Rinat Akhmetov’s conglomerate DTEK is launching its own gas supply business and even national postal operator Ukrposhta will participate in the new market.
However several questions remain. Some market players worry about Naftogaz’s massive advantage, due to its exclusive access to cheap gas from its production arm, Ukrgasvydobuvannya.
Naftogaz also won a contest to become a “supplier of last resort” for consumers who don’t have any other suppliers. These consumers will not have to pay a premium but using the last-resort supplier have a 60-day limit, after which they will have to switch to a different supplier.
“Much will depend on what Naftogaz does,” said Hennady Kobal, an analyst with ExPro, a hydrocarbon analytical and consulting agency. “If they lower prices, like what is happening now, no one will be able to compete with them.”
Maksim Rabinovych, the head of Naftogaz’s gas supply business, retorted that the company will not have a monopoly on the domestic market and that the company is interested in making gas available to other players. He added that about 40% of the gas currently stored in Ukraine does not belong to the company.
“This is enough to get through the heating season without turning to Naftogaz,” he said.
Even with its advantages, Naftogaz has a way to go — it claimed only 2% of the household market in the first half of 2020, compared to 69% by regional gas companies dominated by exiled billionaire oligarch Dmytro Firtash, who is fighting extradition to the United States on corruption accusations.
Price impact
With the state no longer regulating prices, analysts expect these prices to rise but not significantly, due to the huge volume of gas currently stored in the country and abroad.
Rabinovych said that 70% of a provider’s cost structure is actually buying the gas, with the rest being transportation, distribution tariffs and other operating costs. He expects that suppliers will increase their markup to home consumers. During the days of the PSO, the markup was fixed at 2.5%, but now it will rise — Naftogaz itself will have a markup of about 6%.
“The markups will increase, but they will be constrained by competition,” he said.
According to Rabinovych, Naftogaz’s relatively low prices could keep prices down for the population, as suppliers whose gas costs much higher, will soon find themselves out of business.
The company has rolled out an annual contract with a price of Hr 4.73 per cubic meter. Although it’s higher than the current monthly price of Hr 3.24 per cubic meter, it may be cheaper for customers in the long run, especially during the colder seasons.
Competition
Ukrgasvydobuvannya (which means Ukrainian Gas Production and abbreviated as UGV) produces 70% of the natural gas in Ukraine.
As its parent company, Naftogaz has the exclusive privilege of buying the resource directly from UGV at the cost of production. Other players, however, must buy the gas on the market, which means they pay more. This allows Naftogaz, which is also a major importer, to undercut the competition to the point where no one else will be able to compete with its prices.
Kobal said that smaller, more flexible companies can try to stay in the game by offering better service quality or offering bundles of services, like gas and electricity combined. However, “if Naftogaz continues dumping, the market will not work out.”
Energy officials confirmed there are talks about giving market players access to UGV’s production. A bill filed to parliament on Aug. 5 would make UGV have to sell its resource on an exchange.
The Association of Gas Traders of Ukraine stated that the removal of PSOs frees up 6 billion cubic meters of gas (out of UGV’s total production volume of 14 billion) that could be sold on the market.
Andrii Myzovets, the association president, said that this move would support competition, provide a real indicator of how much gas is worth and increase revenues to UGV, which would help it maintain or increase production.
“When a company gets less money than its product is worth… that is a path to nowhere,” he said.
Andriy Gerus, head of the parliamentary energy committee, suggested that he’d like to see some middle ground, where some percentage of UGV’s gas, say 15%, is sold on the open market.
Rabinovych said that Naftogaz is interested in selling UGV’s gas on the market in the future but he did not say when. “We are preparing to go on an exchange,” he said, adding that the question of why this has not happened yet should not be addressed to the company.
He also said that in terms of price parity, there is no difference between UGV and imported gas.
Other market players and some analysts remain skeptical that Naftogaz is all that eager to give away its biggest advantage.
Last resort
People who end up without a gas supplier for whatever reason, are automatically switched to the supplier of last resort for up to 60 days. Naftogaz won a tender to assume this role in Ukraine.
Experts said suppliers of last resort should typically charge a higher premium on gas, to incentivize customers to find a different provider. But Naftogaz has a premium of zero percent, which Kobal sees as another move to control more of the household market.
Myzovets expressed concern that a supplier of last resort should not cost cheaper than ‘ordinary’ market prices. Rumors are going around among market players that the government may get rid of the 60-day limit and make it indefinite.
When asked if he thinks whether the limit should be extended, Rabinovych said, “I don’t think we need to, 60 days is enough for the customer to choose a supplier.”
Additional reporting by Liza Semko.
