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НАК „НАФТОГАЗ УКРАЇНИ“. Річний звіт англійською (2018 рік) - 5

 

 

71

70

2018

OPERATIONS

ANNUAL REPORT 2018

TECHNICAL   

BUSINESS ENABLING UNIT 

The Technical Business Enabling Unit 

(further – Technical or Technical BEU) 

includes all general and oil & gas field 

services, R&D and capital project 

activities including engineering and 

procurement.

Technical BEU encompasses all 

service units of Ukrgasvydobuvannya 

and Ukrtransgaz as well as all teams 

responsible for capital project planning 

and execution and procurement located 

in Naftogaz or its subsidiary HQs or other 

organizational units managed by other 

BDUs.

Since 2014 when the new management 

team came to Naftogaz, the results 

of the market and company reforms 

have made it possible to direct growing 

investments into modernization and 

growth of key subsidiaries of Naftogaz 

group, primarily into the natural gas 

exploration & production activities 

of Ukrgasvydobuvannya. The USD-

denominated volume of investments 

in the three biggest subsidiaries has 

increased almost 6 times over 4 years. 

This increase has placed a strain on the 

technical, operational and procurement 

resources of Naftogaz group.

Gas production increase and  new efficiency level since 2015

Well services

Drilling

workover 

operations

400+

+123%

commercial drilling 

speed increase 

new own 

drilling rigs

+20

330+

hydraulic fracturing 

operations

1500+

coiled tubing 

operations 

Context, progress and challenges to capital project  

activities in Naftogaz group 

Operations of UGV’s service divisions 

Drilled

Fracks performed

0

50

100

150

200

250

300

350

400

450

2016

2017

2018

2016

2017

2018

0

20

40

60

80

100

120

140

160

180

200

 thousand met

ers

173

249

313

8

104

173

Cooperation with Schlumberger

Schlumberger and UGV started cooperation 

in Q1 2018, and it has ramped up significantly 

since then:

•  Multi-Service Agreement (MSA) was 

signed in March 2018, and currently 

has 16 service lines under it

•  UGV and Schlumberger signed 

Memorandum of strategic cooperation in 

October 2018 

•  Long-term (3-year) Coiled Tubing 

services contract for 4 fully-equipped 

CT units and advanced downhole tools 

and technologies was signed in October 

2018 

•  Schlumberger is currently the key 

supplier of high-tech services and 

products to UGV, including drilling 

(cementing, mud, MWD, drill bits), 

well-intervention (CT), engineering and 

G&G (software, wireline logging)

•  In 2018 alone UGV has contracted 

Schlumberger for USD 120+ million 

across 15+ different service lines and 

products

Weatherford was the first world-leading 

OFSC, which UGV began cooperation 

with in 2017:

•  Bundle service contract for Fishing 

tools and services was signed in 2017

•  UGV has already obtained over 

150 mcm of gas through Weatherford 

services

•  Weatherford provided UGV engineering 

services on well candidates selection 

and design for Work Over, Fishing and 

Artificial-lift programs in 2017-2018 

•  Multi-Service Agreement (MSA) was 

signed in May 2018, and currently has 8 

service lines under it

•  Weatherford is key UGV's provider of 

Liner Hangers, Artificial-lift systems and 

Fishing tools and services

Cooperation with Weatherford

-------------------------------------------------------------------------------------------------------------------------------------------------------------

73

72

2018

OPERATIONS

ANNUAL REPORT 2018

Naftogaz group priority investment projects in 2018

Modernization of Shebelynka's 
petroleum and gas condensate 
refinery plant (construction 
of hydrocarbon isomerization and
aromatization facility)

USD 78 million 
Q1 2018 – 2022
Saving of MTBE component 
up to 

thousand t/year 

Increase in Euro-5 fuels production 
to 

300 thousand t/year

Construction of Khrestyshenska
extraction plant

USD 87 million 
Q1 2018 – 2021
Increase in LPG production 
up to 

150 thousand t/year

Construction of a deep 
hydrocarbon recovery facility
with capacity of 

12 mcm/day

Construction of new 
Chervonodonetska BCS

USD 57 million 
Q4 2018 – 2020
Purchase of new equipment 
for Chervonodonetsk DKS

Purchase of 15 new
base drilling rigs
with various carrying capacity

USD 184 million 
30.04.2017 – 31.12.2019
Expected drilling velocity 
is at least 

600 m/month 

Modernization and kitting of 
33 drilling rigs for
Ukrburgaz current fleet

USD 98 million
30.06.2018 – 31.12.2019
Increase of drilling velocity up to 

400 m/month

Purchase of 5 new 
high-tech drilling rigs
with carrying   
capacity of 450 t

USD 115 million 
30.04.2017 – 31.12.2019
Expected drilling velocity 
is at least 900 m/month

 

Purchase of 10 new workover rigs
with carrying capacity of
125/180 t for wellwork operations
(project in collaboration with EBRD)

USD 43 million 
01.01.2018 – 31.12.2020
Increase in drilling and 
well maintenance operations 

Purchase of 5 new rigs
with a capacity of
125 tons for workover

USD 10 million 
01.01.2018 – 31.12.2020
Increase in drilling and 
well maintenance operations 

Purchase of 6 plugging
fleets for use in
drilling and 
workover

USD 23 million 
01.01.2018 – 01.04.2020
Covering the full
operational needs
of Ukrburgaz for
plugging machines

Total project cost (excluding VAT) 
Expected project timeline
Evaluation of project results

(performance indicators)

Lviv region
Poltava region
Kharkiv region

UGV’s investments in production modernization, UAH billion

2013

2014

2015

2016

2017

2018

1.8

2.1

3.8

5.4

12.7

21.5

-------------------------------------------------------------------------------------------------------------------------------------------------------------

75

74

2018

OPERATIONS

ANNUAL REPORT 2018

Key advantages of creating an integrated Technical Business Enabling Unit

Single accountability

structure

Clear boundary between production unit
and service unit
Single responsibility in Capex
execution

Project management focus

Capex execution

and control by Project

Project manager handles all issues

from zero to end

Speed/efficiency oriented

Secure Capex execution on time
with high-quality is the best way
to add value 
Minimize cross control and duplication of 
functions for transparency purpose

Well-made business interface 

Clear understanding of responsibility

and business process between

business unit and service unit

minimize operation risks

Key

advantages

mana

gem

ent 

foc

us 

Proje

ct

st

ru

ctu

re

Si

ng

le 

ac

co

unt

abili

ty

Sp

ee

d/e

fficie

ncy

orie

nte

d

We

ll-m

ad

e

busi

nes

s in

te

rf

ac

Single

accountability

Project

management 

Business

interface

Speed and 

efficiency

The role of the Technical BEU is to 

be the technical heart of Naftogaz 

group, supporting Naftogaz Business 

Delivery Units to add and protect value 

for Naftogaz group. While remaining 

ultimately accountable for final result, 

Business Delivery Units delegate delivery 

responsibility to the Technical Business 

Enabling Unit for activities where there 

is a clear value case.

Creating clear accountability for 

capital project delivery with a clear-cut 

business interface and focus on project 

management excellence and speed and 

efficiency of business delivery were 

the key advantages for creating the 

Technical BEU within Naftogaz group.

Strategic rationale and key objectives  

for the creation of the Technical Business Enabling Unit

-------------------------------------------------------------------------------------------------------------------------------------------------------------

77

76

2018

OPERATIONS

ANNUAL REPORT 2018

Source: Gas Infrastructure Europe, 2019

0.3

3.1

18.7

12.4

4.8

0.8

1.0

2.5

3.2

3.1

0.6

22.3

8.8

3.4

6.5

3.8

0.5

0.5

2.6

18.6

142.4 

bcm 

Total capacity

EU and Ukraine gas storage capacities, bcm

30.9

30.9 

bcm 

Total capacity

1.9

1.9

2.1

2.3

17.0

1.0

0.7

1.3

0.4

0.4

1.5

0.3

Acquifer

Salt cavity

Depleted O&G field

Other

Located in temporary occupied territories

Business activities beyond  

the Gas Transmission and Storage Unit

Gas transmission

Due to legacy problems and, in particular, 

the inability of Naftogaz to reassign 

transit contracts with Gazprom to 

Ukrtransgaz, described in more detail 

in section “Arbitration proceedings” 

of this report, both for management 

and reporting purposes, Naftogaz 

distinguishes natural gas  transit as a 

separate segment.   

The gas transit segment and a dedicated 

team at Naftogaz, led by Yuriy Vitrenko, 

Naftogaz group executive officer, 

are responsible for servicing  the 

current transit contract with Gazprom, 

negotiating the post-2019 transit 

contract, as well as protecting Naftogaz 

interests in arbitration proceedings in 

Stockholm. (for more information on this 

business segment see page 84).

Service functions

Apart from its core businesses, 

Uktransgaz also offers services such as 

construction, diagnostics, repairs and 

engineering services, acting as internal 

contractor for core transmission and 

storage activities, as well as other non-

core activities (agriculture, heating, etc.). 

This part of the Uktransgaz business 

is part of the Technical Business 

Enabling Unit and not related to the 

Gas Transmission and Storage Business 

Delivery Unit.

GAS TRANSMISSION AND STORAGE 

BUSINESS DELIVERY UNIT  

Key results in gas transmission 

•  Total volumes  transmitted to domestic users – 28.5 bcm, 

which is marginally above the volumes transmitted 

previous year 

•  Gas imports from the EU comprised 10.6 bcm, or 24.8% 

less year-over year. Of these volumes, 61% were imported 

from Slovakia, 32% from Hungary and 7% from Poland. 

•  ROIC in 2018 was  -5.2% due to the effect of provisions for 

unauthorized offtakes and non-implementation of RAB 

tariff on internal entry points in 2018.

Key results in gas storage 

•  Injection to the storages by all parties comprised 9.8 bcm 

(7.2% y-o-y). Withdrawal volumes by all parties were 

10.6 bcm (64% increase, compared to previous year)

1

.

•  As of 1 January 2019, 13.9 billion cubic meters of gas 

were accumulated in Ukraine's gas storages, which is 

by 5.4% less than a year ago, but by 15.6% more than 

those volumes of gas stored in Ukrainian storages as of 

1 January 2017.

•  ROIC in 2018 was  -1.1% that was significantly lower than 

the estimated cost of capital 

The Unit

2

 is responsible for securing safe 

and economically viable gas transmission 

and storage services while integrating the 

Ukrainian gas infrastructure with the Eu-

ropean system. Pawel Stanczak, Director 

of the Ukrtransgaz branch “Operator of 

the Gas Transportation System of Ukraine” 

(“Branch TSO”) was selected as the leader 

of the unit.

From 1 January 2020, Ukraine is required to 

unbundle gas transmission activities from 

the group pursuant to Ukraine’s obligations 

under the Treaty on the Establishment 

of the Energy Community and the Third 

Energy Package. The Unit's key objective is 

to ensure uninterrupted operation of the 

Ukrainian GTS during the restructuring and 

creation of an independent and full-fledged 

TSO in 2020 (unbundling).

Gas transmission and storage

The Unit is responsible for operating 

Ukraine’s GTS and for ensuring the reliable 

and safe operation, maintenance and de-

velopment of the system. UTG is responsi-

ble for the transportation of all gas entering 

the Ukrainian GTS (including the group’s 

own produced gas), providing gas transmis-

sion services within the territory of Ukraine 

(domestic gas transmission), including to 

Ukrainian clients and foreign clients for gas 

imports, as well as technically supporting 

gas transit services to Gazprom. 

This Unit also includes 12 underground

storage facilities in mainland Ukraine.

Meanwhile, Krasnopopivske UGS facility

is located in the temporarily uncontrolled 

territory of Luhansk region.  

The group anticipates that after 1 January 

2020 The group anticipates that beyond 

the stated date it will no longer control the 

gas transmission system operator, while it 

will maintain control over the gas storage 

system operator.

Composition and overview

1

  The figures include only physical volumes movements. Total injections, including the replacement volumes, by all parties, amounted to 11.5 bcm in 2018. Total withdrawals, including the 

replacement volumes, by all parties, amounted to 12.2 bcm in 2018.

Formal creation of the Transmission and Storage BDU is planned in 2019.

2015

2016

2017

2018

Gas volumes transmitted through Ukraine, bcm

67

82

94

87

30

30

27

29

0

10

20

30

40

50

60

70

80

90

100

110

120

130

Natural gas volumes transmitted to consumers in Ukraine

Transit

ROIC for the Gas Transmission and Storage Business Delivery Unit was  -2.2% in 2018 compared to the estimated 

USD denominated cost of capital of 12.0%. The major reasons of negative ROIC were unauthorized offtakes and non-

implementation of RAB tariff on internal entry points in 2018.

-------------------------------------------------------------------------------------------------------------------------------------------------------------

79

78

2018

OPERATIONS

ANNUAL REPORT 2018

HUNGARY

POLAND

Mozyr

Sudzha

Platove

Tekove

SLOVAKIA

ROMANIA

MOLDOVA

RUSSIA

BELARUS

Capacity 

                       entry: 25.5

Capacity 

                       entry: 107.5

Capacity 

                       entry: 48.5

Capacity

                       entry: 13.0

Capacity 

                       entry: 46.0

                Capacity

               exit: 32.5     entry: 3.3

Capacity 

                       entry: 5.3

               Capacity

exit: 26.8     

                   Capacity

exit: 3.5   

                       Capacity

exit: 4.5   

Capacity

               exit: 13.2     entry: 6.2

                       Capacity 

                  exit: 92.6   entry: 15.5

              Capacity

                  exit: 5.0   entry: 2.1

Capacity 

                       entry: 28.9

Capacity 

                       entry: 6.0

7.9

7.1

5.9

5.7

6.4

6.5

5.9

0

0

0

0

1.1

0.6

0.5

2009

2010

2011

2012

2013

2014

2015

65.2

67.9

70.6

51.8

53.5

31.4

37.8

0

0

0

0

0

3.6

9.7

2009

2010

2011

2012

2013

2014

2015

2.8

3.4

4

3.8

3.9

3.5

3.7

0

0

0

0.1

1

0.9

0.1

2009

2010

2011

2012

2013

2014

2015

2

3.1

3.5

3.1

3.4

2.6

2.1

2009

2010

2011

2012

2013

2014

2015

5.4

4.3

4

3.3

2.8

0.5

2.4

2009

2010

2011

2012

2013

2014

2015

77.6

83.8

83

72.1

71

47.3

45.4

2009

2010

2011

2012

2013

2014

2015

8.6

11.1

9.5

9.4

10.5

7.4

7.5

2009

2010

2011

2012

2013

2014

2015

2009

2010

2011

2012

2013

2014

2015

19.4

24

24

21.1

15.2

13.1

12.8

2009

2010

2011

2012

2013

2014

2015

0.8

3.3

2.8

1.9

0.9

1.1

2009

2010

2011

2012

2013

2014

2015

0.7

0.9

1

0.7

0.7

0.6

0.0

0.0

0.0

0.0

0.0

2009

2010

2011

2012

2013

2014

2015

16.6

16.7

19.9

19.6

19.6

18

16.7

2009

2010

2011

2012

2013

2014

2015

3

3.2

3.1

3.1

2.4

2.8

2.9

2009

2010

2011

2012

2013

2014

2015

0.3

0.3

0.7

0.3

0.2

2009

2010

2011

2012

2013
2014

2015

8.1

3.7

4.4

4.4

5.7

4

3

2009

2010

2011

2012

2013

2014

2015

0.0

0.1

5.1

1

1.3

0.9

0.0

Ukrtransgaz data 2018

                       Capacity 

               exit: 32.5     entry: 3.3

Designed GTS exit capacity

Transborder 
gas metering stations   

Designed GTS entry capacity

Gas transmission volume at GTS entry

Gas transmission volume at GTS exit

2016
2017

0.0

2018

2016

0.0

2017

0.0

2018

2016

1.6

2016

16.5

19.2

2017

16.4

2018

2017

1.6

2018

2.3

2016

0.0

2017

0.0

2018

0.0

2016

7.1

2017

6.6

2018

5.7

2016

57.0

2017

66.2

2018

62.4

2016

0.0

2017

0.0

2018

0.0

2016

0.0

2017

0.0

2018

0.0

2016

1.0

4.5

2017

1.3

4.7

2018

0.7

4.0

2016

9.1

48.8

2017

9.9

53.5

2018

6.5

49.3

2016

1.0

6.7

2017

2.8

11.7

2018

3.4

11.8

0.8

2016

0.7

2017

0.7

2018

3.0

2016

2.7

2017

2.9

2018

18.5

2016

20.2

2017

18.1

2018

0.0

0.0

Kobryn

Valuiky

Serebrianka

Pysarivka

Sokhranivka

Drozdovychi

Uzhhorod

Berehove

Oleksiivka

Orlivka

UKRAINE’S GTS

2018, bcm

temporarily occupied and uncontrolled territories

Prokhorivka

Gas transit to Europe 

Gas imports to Ukraine

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

86.8

 bcm

In 2018, the volume
of natural gas transit
to Europe reached

bcm

122.8

Gas flow to Ukraine

0

20

40

60

80

100

120

140

160

180

134.4

137.7

118.0

114.2

81.8

83.5

93.3

107.6

97.4

27.0

35.8

33.5

33.7

28.1

19.6

16.4

11.1

14.1

95.8

98.6

104.2

84.3

86.1

62.2

67.1

82.2

93.5

86.8

10.6

-------------------------------------------------------------------------------------------------------------------------------------------------------------

81

80

2018

OPERATIONS

ANNUAL REPORT 2018

Key challenges for the Unit development 

Market, operational and financial challenges Gas Transmission and Storage BDU  is facing 

Market

Operational

Financial

Decrease of transit flows 

and uncertainty 

with transit  

after 2019

Market deficiencies

Underutilized and 

underinvested 

infrastructure

Efficiency gap 

Pending implementation of 

cost-reflective transmission 

tariffs

Uncertainties regarding  

transit after 2019

Historically, the Ukrainian GTS transited 

ca. 120 bcm of gas to Europe (compared 

to designed transit exit capacity up to 

146 bcm). However, the volume of gas 

transited consequently decreased e.g. 

by partial transit rerouting on alternative 

(new) routes bypassing the territory of 

Ukraine (Yamal-Europe, Nord Stream). 

The group does not have any reasons to 

believe that there will be long-term and 

material transit flows through Ukraine af-

ter 2019 as planned additional bypassing 

routes (Nord Stream 2 and Turkish Stream)  

are becoming more viable. Loss of  transit 

would cause significant underutilization of 

GTS and substantial revenue drop.

Decrease of domestic  

gas consumption

Ukraine’s natural gas consumption has 

been in decline during recent years, fall-

ing from 76 bcm in 2005 to 32.3 bcm in 

2018, leading to lower utilization of  the 

gas system for domestic transmission. This 

clear trend of significant reduction of gas 

consumption in Ukraine is due to increases 

in gas prices, which led to wider implemen-

tation of energy efficiency technologies 

and energy saving measures, along with an 

economic crisis inhibiting gas consumption 

in the industrial segment.

Consumption is set to follow this down-

ward trend in the future, which will have 

an adverse influence on demand for trans-

portation services.

Unauthorized offtakes

Gas transmission and Storage BDU faced 

unauthorized offtakes by district heating 

companies and regional distribution com-

panies (in 2018 unauthorized offtakes 

equaled ~1.3 bcm), creating liquidity 

problems and rapid increase in provision 

for bad debts for balancing services (from 

UAH 0.1 bn in 2015 to UAH 28.3 bn in 

2018). 

Disproportionate distribution of  

risks and benefits among market 

participants

Regional gas supply and distribution com-

panies (oblgazes and oblgazzbuts) are not 

obliged to pay in advance or  

to pay financial sanctions in case of un-

timely payment or even non-payment, 

causing poor receivables collectability.

Pending implementation of  

cost-reflective transmission tariffs

Tariffs based on the regulatory asset base 

(RAB) for domestic entry/exit points were 

not applied by the NEURC during 2016-

2018 (in March 2017 the National Energy 

and Utilities Regulatory Commission  

(NCREU) adopted a resolution setting 

capacity-based exit tariffs and then can-

celled it in April 2018). The situation did 

not change in 2018 – RAB-based tariffs 

were not introduced for gas transmission 

at internal entry and exit points.

On 21 December 2018, NEURC adopted 

Resolution #2001, which set temporary 

entry and exit transmission tariffs for 

2019. Under this resolution, the allowed 

transmission revenue was reduced to 

a level that is not cost-reflective for the 

transmission system operator, which 

is expected to face significant cash  

shortfall in 2019 unless tariff levels   

are reviewed.

 Scenarios, reflecting possible gas transit after 2019, bcm

Russia expected export volume to EU

Russia expected volume to Turkey

Existing alternative routes to EU (except UA)

Export to Turkey (through Blue Stream)

Remaining volume via Ukraine (w/o new projects)

New projects (Nord S2, TS)

86

15

~98

29

170

~91.5

Key initiatives

In natural gas transmission:

Unbundling in compliance with the EU 

Third Energy Package. In order to meet 

the legal requirements and, taking into 

account the existing limitations  

of Ukraine (for more derails please refer 

to the Unbundling section of this Report), 

Ukrtransgaz is implementing  

a comprehensive action plan. This has 

been developed under the supervision 

of international consulting firm PwC 

Polska z.o.o., to prepare the organization 

for unbundling in early 2020 after the 

expiration of the existing transit contract 

between Naftogaz and Gazprom.  

Achieving EU regulatory and standards 

compliance including the introduction of 

daily balancing. The ultimate purpose of 

the initiative is to introduce EU  

best practices and to comply with the 

established EU regulatory framework, 

which shall increase Ukrainian gas 

market’s development and support 

integration with the European market. The 

purpose shall be achieved through the 

following actions:

•  introduction of daily balancing, which 

shall:  (i) support more efficient 

balancing of supply and demand i.e. 

more efficient gas consumption and 

supply, (ii) increase TSO responsiveness 

to any abusive actions from customers, 

(iii) improve financial risk management 

in terms of receivables collection;

•  alignment with EU network codes, 

including with respect to balancing, 

tariffs, interoperability rules, and 

capacity allocation mechanisms;

•  signing and enforcing of direct 

interconnection agreements with 

neighboring European gas transmission 

system operators and annual capacity 

auctioning in July 2019.

On 1 March 2019, the Ukrainian 

gas market switched to a daily 

balancing regime. To support 

this transition, Ukrtransgaz 

introduced a new information 

platform.  

This step finalizes one of the 

key reforms in the energy sector 

of Ukraine, bringing it into line 

with the model applied to gas 

balancing zones within the 

borders of the EU.

Labor efficiency improvement. Some 

functions, commonly outsourced by  

EU operators, shall remain outside  

the perimeter of the gas transmission 

operator after unbundling. In addition, the 

new target operating model developed 

by the international consulting firm is 

expected to be adopted by the TSO 

after unbundling. In future, additional 

labor efficiency can be achieved 

through digitalization and automation of 

processes.

The group aims to achieve effective 

digitalization and automation of gas 

infrastructure through investments in 

relevant hardware and software systems 

including SCADA, Enterprise Pipeline 

Management System used as telemetric 

and telemechanic system, contract 

management system. 

In natural gas storage:

Adjusting storage capacity to demand 

through storage optimization. Due to 

significant underutilization and poor 

financial performance, storage capacities 

need to be optimized and tailored to 

actual needs stemming from market 

demand and supply security in Ukraine. 

Due to these initiatives, the asset base and 

OPEX related to the storages will decrease, 

thereby increasing UTG’s return on assets 

in the long term.

Advocating and supporting 

the introduction of tariffs 

that reflect costs and cover 

depreciation for gas storage 

services. 

Introduction of new products and 

revenue streams. As one of the ways 

to increase revenue and infrastructure 

utilization, the UTG plans to introduce 

new products in order to increase the 

share of revenue from services other than 

traditional seasonal storage, following 

the trends of European SSOs. The new 

services will be especially dedicated 

to European clients, taking advantage 

of Ukraine’s location and developed 

infrastructure in the Western part of the 

country.

2015

UAH billion

2016

2017

2018

Provisions for bad debts for unauthorized gas withdrawals

0.1

4.1

14.5

28.3

28.2

-------------------------------------------------------------------------------------------------------------------------------------------------------------

83

82

2018

OPERATIONS

ANNUAL REPORT 2018

GAS TRANSIT 

Key results in 2018:

  Gas transit contributes 28% to the consolidated revenue of the group and it accounts for 17% of the carrying value of 

property, plant and equipment and net working capital of the group.

  Gas transit volume amounted to 86.8 bcm (-7% compared to 2017). This corresponds to almost 40% of the total gas 

supplied by Gazprom in 2018 to European countries.

  Under the final award in the transit contract case issued by the Arbitration Institute of the Stockholm Chamber of 

Commerce, Gazprom must pay Naftogaz USD 4.63 billion of compensation breach of the minimum contractual volume 

of gas transit in 2009-2017. Naftogaz has already received USD 2.1 billion through a set-off according to the award and 

continues to enforce the rest of the awarded amount.

  As of the date of this report, Gazprom and Naftogaz have no transit arrangements reached for the period beyond 2019. 

Preparation of a claim against Gazprom regarding the revision of the transit tariff for 2018-2019 is in process.  

In 2018, the volume of Russian gas 

transit through Ukraine amounted to 

86.8 bcm, or 6.7 bcm less than in 2017

1

At the same time, the revenues of 

Naftogaz from transit services provided 

to Gazprom in 2018 amounted to 

USD 2.65 billion, which is 4% less than 

the revenues for gas transit in 2017 

(mainly due to reduced transit volumes).  

This decrease in transit volumes is 

explained by three main factors:

1.  Reduced reverse supplies of imported 

gas from Europe to Ukraine by 3.5 bcm 

compared with 2017. The purchase 

of gas by Ukrainian importers in the 

EU and not in Russia increases the 

overall level of demand in Europe – 

so the reverse purchases have a 

positive effect on the volume of 

transit. According to our estimates, 

due to the purchase of gas in the 

EU, in 2018 alone Naftogaz group 

received additional transit revenue of 

UAH 9.2 billion. 

2.  A higher level of utilization of the Nord 

Stream pipeline capacity compared 

to 2017. The reduced supply of 

Russian gas to Western Europe via 

the Ukrainian route in 2018 (36% 

according to Thomson Reuters) 

compared with 2017 (40%) is due  

to the fact that the OPAL pipeline  

and, accordingly, the Nord Stream 

pipeline became available at maximum 

possible capacity in the second half of 

2017

2

.

See also the section "Global gas market"

2  

At the end of July 2017, the Düsseldorf Court in Germany rejected the claim of the Polish company PGNiG Supply & Trading and ruled that there were no reasons to restrict Gazprom's access to the OPAL pipeline. As a result, 
already from August 2017, the gas transmission capacity trading platform PRISMA launched  auctions to book the "additional" OPAL capacity, which led to the maximum utilisation of both the OPAL gas pipeline and the Nord 
Stream gas pipeline in the autumn-winter 2017. For comparison, in 2018, during almost the entire period, except for the regular scheduled maintenance stops, the OPAL pipeline was utilized to its maximum capacity. 

3

 See http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nrg_103m&lang=en

4

 Despite the frosty March 2018, the average temperature during the heating seasons of the last calendar year was higher compared with 2017 (mainly due to milder weather in the fourth quarter of 2018)

5

 See http://www.naftogaz.com/files/media/Transit%20Award_Redacted.pdf 

6

  The amount includes the effect of compensation for under-deliveries of gas transit volumes under the contractual tariff (USD 4.674 million) and the effect on the contractual transit tariff from the revision of gas prices under 

the gas supply contract from April 2014 (USD -42 million)

bc

m

2014

2017

2018

2015

2016

2017

2018

via Ukrainian border/Slovakia                           via Poland                       via Nord Stream

Gas transit net of reverse supplies
Gas transit via reverse supplies

0

10

20

30

40

50

60

70

80

90

100

62.2

67.1

82.2

93.5

86.8

5.0

10.3

11.1

14.1

10.6

57.2

56.8

71.1

79.4

76.2

-4 p.p.

40%

36%

38%

22%

22%

43%

Gas transit volumes through the territory of Ukraine, 2014–2018

The structure of Russian gas supplies to Western Europe

via various gas transmission corridors

GWt/da

y

0

500

1000

1500

2000

01

 January

14 January

27 January

09

 F

ebruary

22

 F

ebruary

07

 Mar

ch

20

 Mar

ch

02

 April

15

 April

28

 April

11

 Ma

y

24

 Ma

y

06

 June

19

 June

02

 July

15

 July

28 July

10

 A

ugust

23

 A

ugust

05

 S

ep

tember

18

 S

ep

tember

01

 Oct

ober

14

 Oct

ober

27

 Oct

ober

10

 No

vember

23

 No

vember

06

 December

19

 December

2017
2018
Technical capacity

Gas transmission through the Nord Stream in 2017-2018

3.  

Decreased gas consumption in 

Europe in 2018 (by 2.4% according to 

Eurostat

3

). Much of this was due to 

weather conditions

4

, however energy 

efficiency measures also played a role. 

Despite the fact that volumes of transit 

in 2018 exceeded average volumes in the 

last 5 years by 11%, these volumes were 

still lower than the volumes specified in 

the 2009 gas transit contract between 

Naftogaz and Gazprom by 23.2 bcm. 

During the Stockholm Arbitration 

on the transit case, the Tribunal, in 

its decision of 28 February 2018

5

acknowledged that in 2009-2017 

Gazprom was obliged to pump 

contractual volumes through 

Ukrainian pipelines and on this basis 

awarded Naftogaz compensation of 

USD 4.63 billion

6

. Taking into account 

the cross claims between Naftogaz and 

Gazprom and based on the results of 

the arbitration proceedings concerning 

the gas supply contract and the transit 

contract, the Arbitration ruling was 

that Gazprom shall pay Naftogaz 

USD 2.56 billion, as well as interest 

for late payment (which constitutes 

≈ USD 0.5 million for each day of delay).

0

20

40

60

80

100

120

140

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

120.1

110.0

102.7

112.0

112.0

112.0

112.0

110.0

110.0

110.0

110.0

95.8

97.8

92.9

84.3

86.1

62.2

67.1

82.2

93.5

86.8

Contract gas transit volumes

Actual gas transit volumes

bcm

Compensation to Naftogaz for actual 

volumes were below contracted

The amount that Gazprom shall pay 

additionally in monetary form (+ interest 

of USD 0.5 million/day)

Benefits already received by Naftogaz 

by offsetting liabilities for gas supplied 

by Gazprom in 2014

4.63

2.56

2.07

Actual and contractual gas transit volumes

Wins for Naftogaz in the gas transit arbitration, USD billion

Source: Naftogaz, Ukrtransgaz, in-house calculations

Source: Thomson Reuters Eikon, in-house calculations

Source: Thomson Reuters Eikon, ЕNTSOG

Source: Naftogaz

Source: Naftogaz, Stockholm Arbitration award

-------------------------------------------------------------------------------------------------------------------------------------------------------------

85

84

2018

OPERATIONS

ANNUAL REPORT 2018

Transit beyond 2019 

New arbitration proceedings related to gas transit

The Tribunal in its award of  

28 February 2018 did not support the  

claim of Naftogaz to review or apply 

regulated tariffs, arguing this point as 

follows:

1)  the Tribunal rejected the claim of 

Naftogaz to align the gas transit 

contract with the EU's and Ukraine's 

competitive and energy legislation, 

arguing that EU legislation does 

not apply to this dispute, and the 

implementation of reforms in Ukraine 

(including the application of new 

tariffs) falls within the competence of 

the Ukrainian regulator;

2)  when applying in its claim to review 

the tariff in 2009, Naftogaz failed 

to comply with all the procedures 

specified in the gas transit contract. 

In its decision of 28 February 2018, 

the Tribunal also rejected the claim 

of Naftogaz regarding the possibility 

of assigning rights and obligations to 

Naftogaz under the transit contract to 

Ukrtransgaz or any other legal entity 

assigned as the GTS operator

7

. The 

satisfaction of this claim would allow 

Ukraine to keep gas transit under the 

current contract and at the same time to 

unbundle the GTS operator. The Tribunal 

also noted that "the invalidation of the 

relevant provisions of the contract or 

amendments to them falls within the 

compentence of the regulator, and 

it is only the regulator who has been 

entrusted with mandatory control 

functions, the respective competence and 

mechanisms to enforce the said"

8

.

During 2018, the Russian Federation and 

its partners took a number of consistent 

steps that brought the North Stream 2 

(with its land extensions) and Turkish 

Stream

projects closer to realization. 

The gas pipelines are planned to be 

commissioned by the end of 2019, 

indicating a high risk of ending the transit 

of Russian gas from 2020. 

In view of the completion of the gas 

transit contract between Naftogaz and 

Gazprom in 2019, and the importance 

of the issue to Ukraine

10

, in the summer 

2018, the Ukrainian and European 

sides initiated trilateral negotiations on 

transit terms after 2019. Later in 2018, 

several rounds of trilateral negotiations, 

as well as bilateral and trilateral expert 

consultations between the Ukrainian and 

Russian sides with the participation of 

the EU took place. 

At the time of writing this report, no 

agreement on the terms of the transit 

contract after 2019 has been reached. 

During the last negotiations in January 

2019, the Ukrainian side was open to 

discuss suggestions on the transit of 

Russian gas in the future, in view of the 

fact that the new contract should be 

based on the norms of European and 

Ukrainian law. However, agreement has 

not yet been achieved. 

Since Gazprom does not agree to the 

standard European terms for signing a 

new contract for the period after 2019, 

the management of Naftogaz is currently 

considering the following scenario:

•  Zero volumes of Russian gas transit 

through the territory of Ukraine starting 

from 2020.

•  Naftogaz continues a new arbitration 

proceeding on the revision of the 

transit tariff, which was initiated 

in July 2018, according to which 

Naftogaz is able to receive multi-billion 

compensation for Gazprom's refusal to 

review the transit tariff.

Naftogaz has taken the existing 

limitations related to the contract 

and new arbitration proceedings into 

consideration while preparing the 

unbundling of the GTS operator.

In April 2018, Gazprom initiated a 

new arbitration proceeding with the 

Arbitration Institute of the Stockholm 

Chamber of Commerce, essentially trying 

to cancel the arbitration awards, or, 

alternatively, terminate the gas supply 

contract and the gas transit contract. 

Naftogaz in turn put forward a series 

of counter-claims regarding Gazprom's 

violations of both contracts, the amount 

of compensation for which is to be 

determined later.

As part of the arbitration proceedings 

concerning the gas transit contract, the 

Tribunal in its decision of 28 February 

2018 did not hear the Naftogaz case 

on merits for a revision of the transit 

tariff, as in its application to revise the 

tariff in 2009, Naftogaz failed to comply 

with all the procedures stipulated in 

the gas transit contract. Nevertheless, 

this decision did not deny the right of 

Naftogaz to claim a revision of the tariff – 

so Naftogaz sent a request to Gazprom 

to revise the tariff in March 2018, which 

triggered the initiation of negotiations  

on the terms of the gas transit  

contract. 

Since the parties did not come to a 

mutually acceptable solution during 

negotiations on this issue, Naftogaz had 

to seek arbitration in accordance with 

the terms of the contract. Therefore, 

on 6 July 2018, Naftogaz submitted a 

request for arbitration to the Arbitration 

Institute of the Stockholm Chamber 

of Commerce, requesting a revision of 

the tariff under the gas transit contract. 

In 2018, the Board of the Stockholm 

Chamber of Commerce combined 

the case initiated by Gazprom on the 

revocation of the previous awards of 

the arbitration and the case initiated by 

Naftogaz concerning the revision of the 

tariff, into one proceeding.

7

 See http://www.naftogaz.com/files/Information/Arbitrazh-anbundling-UA.pdf 

8

 Paragraph 3783 of the Tribunal's decision regarding the gas transit contract of 28 February 2018

9

 For more details, see section "European gas market"

10

 The termination of gas transit is expected to reduce the Ukrainian GDP by at least 4%

-------------------------------------------------------------------------------------------------------------------------------------------------------------

 

 

 

 

 

 

 

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