• Ukraine ranks seventh in Europe (including Turkey) by natural gas consumption. In 2015, Ukrainian consumers purchased 33.8 bcm of gas. Nearly half of this amount (16.4 bcm) was imported. Over 2015, public and private companies in Ukraine produced about 19.9 bcm of gas. During the year, gas reserves in underground storage facilities increased by 2.5 bcm.

     

    MARKET CONTRACTION IN 2015 

    In 2015, natural gas consumption in Ukraine dropped by 21% to 33.8 bcm (excluding gas consumption data in Crimea and, starting from March 2015, in the occupied area of Donbas in eastern Ukraine), compared to 42.6 bcm in 2014.

    Since February 2015, natural gas supply is not supplied to consumers in eastern Ukraine located in regions not currently controlled by the Ukrainian government.

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    Higher gas prices encouraged consumers, for the first time in many years, to take up a more conscientious attitude towards energy consumption

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    Gas demand dropped in all regions of Ukraine and across all consumer categories. The largest reduction in demand occurred in the segment of residential consumers.

    In 2015, residential consumers (excluding Crimea and, from March 2015, the occupied regions in Donbas) used 25% less gas than in the previous year: 11.3 bcm vs. 15.1 bcm.

    Top 10 countries by gas consumptionCompared to figures for the last 10 years, this is the first substantial reduction in consumption in this segment: for the period from 2004 to 2013, gas demand of households decreased by just 1%.

    The most obvious reasons behind the reduction of domestic demand are the ongoing hostilities in the Donbas, which resulted in the suspension of supply to consumers in the ATO area starting from February 2015, as well as relatively warm winters in 2014 and 2015, and changes in the consumption standards for unmetered customers.

    However, these factors cannot explain the significant drop in demand in full. At least 2 bcm of the total 5 bcm decrease in residential demand are explained, in the first place, by the reduction of indirect gas price subsidies for domestic consumers from the state budget, which led to higher retail prices for gas and heating for the households.

    District heating companies reduced their use of gas to produce heat for all consumer categories by 17% over the last year.

    Gas demand in Ukraine by consumer categoryAccording to actual temperature readings in different regions of Ukraine, the 2015 winter months were not on average significantly warmer than the 2014 winter months, meaning that the reduced consumption in these categories might be explained rather by more economical use of gas.

    Through Naftogaz efforts to diversify supply routes and sources of gas imports, purchase prices for imported gas to Ukraine went down to the European level in early 2015 and сontinue to fluctuate in line with EU gas prices.

    Ukraine's access to the European market has played a significant role in reforming the domestic gas market. In the spring of 2016 when gas prices on the European market plunged to multi-year lows, the import parity price for gas in Ukraine also decreased.

    This created a more favourable situation in the country to level out gas prices for households with prices for industrial consumers: the difference was much smaller than before Naftogaz had opened up opportunities to import gas from the European gas market.

    Gas demand in Ukraine

    GAS IMPORTS

    Diversification of gas supply sources to Ukraine remained one of the Naftogaz priorities in 2015. Alongside the reduced demand for gas in Ukraine, imports of this resource also declined. Compared to 2014, 2015 imports decreased by almost 20%, from 19.5 bcm down to 16.4 bcm.

    Weighted average price of gas imported by naftogazAt the same time, imported gas volumes from Europe doubled from 5 bcm in 2014 to 10.3 bcm in 2015, whereas imports from the Russian Federation, on the contrary, decreased 2.3 times compared to 2014, from 14.5 bcm down to 6.1 bcm.
    In 2015, Ukraine imported 37% of gas from Gazprom, with the rest coming from European suppliers.

    Diversification has allowed Ukraine to reduce excessive reliance on a single supplier, which in the past years made gas an instrument of political and economic pressure on Ukraine (see Security of Supply).

    Once Naftogaz demonstrated the ability to ensure a stable flow of imported gas from alternative suppliers, Gazprom changed its pricing tactics to offer similar or lower prices than EU suppliers. After the first quarter of 2015, price offers received by Naftogaz from all directions practically levelled out.

    Provided that a supplementary agreement is in force to regulate the disputes regarding gas supply contract prior to the conclusion of arbitration proceedings between Naftogaz and Gazprom, Naftogaz selects suppliers by the lowest price at the moment of purchase.

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    The Russian share of domestic gas demand in Ukraine dropped from 34% in 2014 to 18% in 2015

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    Thanks to the possibility to contract gas in the liquid European market, as well as Gazprom's efforts to compete with European suppliers, Naftogaz was able to fully benefit from the gas prices decrease in the EU. The weighted average price of gas imported from all directions, including the cost of transmission to the Ukrainian border, decreased from USD 315 tcm in 1Q 2015 to USD 228 tcm in 4Q 2015.

    In 2015, Naftogaz was the major importer of gas to Ukraine. In the same time, the share of private companies (traders and consumers) involved in gas imports from the EU increased from 3% in 2014 to 7% in 2015.

    Retail price of gas

    This change was possible due to the Law of Ukraine "On Natural Gas Market" that came into effect on 1 October 2015, and other steps taken towards creating an open and competitive gas market in Ukraine.

    Origins of gas imported into UkraineWHOLESALE GAS TRADING

    In 2015 Naftogaz as a separate legal entity sold 23.5 bcm of gas. The share of Naftogaz in Ukraine's wholesale gas trade was 73%.

    The wholesale market for consumers that paid for gas at commercial prices throughout 2015, excluding Naftogaz group members, amounted to nearly 13.9 bcm of gas.

    These categories include gas purchased by industrial and commercial enterprises, public sector entities and district heating companies to produce heat for the public sector and industry, as well as gas for the operating needs of gas distribution networks.

    The share of Naftogaz in this market was nearly 35%: sales reached 4.9 bcm. Other suppliers sold around 9.1 bcm of gas to these consumer categories.

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    In 2015, private companies imported 1.1 bcm of gas to Ukraine, 7.5 times more than in 2014

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    UGV and Ukrnafta, both gas production companies within the Naftogaz group, used 0.5 bcm and 0.3 bcm respectively of their own resources to cover production and operating needs. A further 0.4 bcm was illegally withdrawn in the area of combat operations, or was not allocated. These volumes were covered from Naftogaz resources and are reflected in financial statements as company losses.

    Naftogaz sells its own produced and imported gas to retail suppliers (oblgazes) to be sold on to all residential consumers in Ukraine and religious organizations. Naftogaz also sells gas to district heating companies (DHCs) through direct contracts. In 2015, the company was the sole gas supplier for these consumer categories.

    Volume of natural gas imported to Ukraine

    In order to cover domestic needs, Naftogaz sold 11.3 bcm of gas for individual use by households and 5.9 bcm for centralized heat production for households supplied to district heating companies. A further 1.2 bcm of gas was supplied by Naftogaz to district heating companies to produce heat for the public sector and industry.

    Gas volumes supplied for the needs of religious organizations and for heat production to religious organizations amounted to 0.02 bcm (17.2 mcm).

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    In 2015 more than 1300 companies purchased gas directly from Naftogaz, with nearly 1800 contracts concluded

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    In addition, Naftogaz provided 100% of gas for its own use and for the operating needs of Ukrtransgaz (1.5 bcm), as well as nearly 90% of gas for the operating needs of gas distribution companies (1.0 bcm). These gas volumes were priced at the commercial rate.

    For the needs of public sector institutions, Naftogaz sold 0.3 bcm of gas, which made up around 60% of total gas use in this market segment.

    Finally, Naftogaz sold 2.4 bcm of gas in 2015 to industrial consumers. The share of Naftogaz in this market amounted to 22%.

    Naftogaz share of wholesale gas trade

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