• THE DROP IN WORLD PRICES FOR HYDROCARBONS

    After stagnation in 2014, global gas demand returned to growth in 2015. However, despite this increase, the rate of growth remained well below the historical average. According to the IEA, during 2013-2015, world gas demand grew by only 1% per year (in 2015 — 1.4%) compared to 2.2% overall for the 2006-2015 period. This decrease in the growth rates of demand for gas as well as all other fossil fuels, was driven by a slowdown in demand for primary energy due to slower growth in the world economy and a further reduction of the general energy intensity of the global economy.

    Dynamics of energy prices since

    Oil prices in 2015 continued to decline (-32% YoY) due to significant supplies from OPEC members and a reduction of the risk appetite on financial markets — with a decrease in the desire of investors to increase their share of risky assets, which also include commodity markets.

    The fall in oil prices was observed despite the increase in geopolitical tensions in the Middle East, which created the basis for the consolidation of market expectations regarding the low oil price conservation scenario over a long period.

    With the drop of oil prices, prices for natural gas also fell. Price dynamics for alternative fuel have become an additional factor driving cheaper gas prices: coal prices have fallen by 12% since August 2015 together with the fall in oil prices.

    Other things being equal, low fossil fuel prices usually cause a positive response in demand that is accompanied by the resumption of economic growth. However, in 2015, these equal conditions did not exist: the prices of other commodities also declined, while forecasts for global economic growth have been lowered.

    In addition to lower prices for alternative energy, prices on the main gas markets such as the UK (National Balancing Point, NBP), USA (Henry Hub, HH) and Asia (Japan/Korea Marker, JKM), fell dramatically due to excess supply of liquefied natural gas (LNG), as well as reduced consumption in winter because temperatures were higher than normal. A decrease in consumption in Asia led to the European market becoming the market of last resort for LNG.

    As a result, the expected surge in LNG supplies due to several new projects could lead to greater competition with Russian or other suppliers of pipeline gas to Europe. At the same time, Asian buyers are looking for concessions from sellers in terms of pricing and flexibility in their long-term contracts.

    Dynamics of gas prices

    Long-term expectations over the role of natural gas have not changed, i.e. the fuel remains a reliable and affordable alternative to coal, particularly in Asia, given that the world seeks to reduce the negative impact of climate change.

    The future of the global gas industry in the medium-term perspective will also depend on oil prices, the evolution of Chinese energy demand, and the impact of COP21 on national energy policies. Given relative cleanness and large reserves, natural gas can play a key role as a transition fuel from traditional to renewable energy.

    POLITICAL VOLATILITY AND THE MACROECONOMIC ENVIRONMENT IN UKRAINE

    Change in long-term sovereign ratings of Ukraine

    In 2014 and early 2015, Ukraine was characterized by considerable political instability with the military conflict in the east and occupation of Crimea, which led to the deterioration of public finances, volatility in financial markets, almost complete absence of liquidity in domestic capital markets, high inflation, and a significant depreciation of the Ukrainian hryvnia against major foreign currencies. Altogether, this led to a decrease in Ukraine's sovereign ratings from international rating agencies.

    However, in 2015 the Ukrainian government managed to achieve macroeconomic stabilization, restructure sovereign debt, and attract the necessary financial and technical assistance from international donors and creditors.

    On 11 March 2015 the IMF approved a financing package worth USD 17.5 billion for four years. The terms of this new financing package envisaged a number of tax and economic reforms, including reforms in the banking and energy sectors (including pricing reform and reform of the system of subsidies on the gas market).

    During 2015, Ukraine received the first and second tranches within this funding program of USD 5 billion and USD 1.7 billion. Further tranches from the IMF depend on the implementation of reforms by the Ukrainian government, as well as other economic, legal, and political factors.

    In October 2015, Ukraine reached agreements with most of its creditors on restructuring of public debt worth USD 15 billion. As a result, against a backdrop of macroeconomic stabilization and improved public finances in late 2015, Ukraine's sovereign ratings improved.

    Changes in world prices


    The significant depreciation of the Ukrainian hryvnia during 2015 (relative to the US dollar, the exchange rate fell from 15.8 UAH/USD on 1 January 2015 to 24 UAH/USD as of 31 December 2015) was one of the most negative macroeconomic factors encountered by Naftogaz group. Gas gas prices for household consumers in 2015 were fixed in hryvnia, while the company imported gas purchased at prices denominated in euros or dollars.

    THE DECLINE IN INDUSTRIAL PRODUCTION AND DEMAND FOR GAS

    During 2015, Ukraine's GDP fell by 9.9%, while annual inflation accelerated to 28.5%. The decline in industrial production as a result of the challenging economic situation in Ukraine contributed to weak demand and low prices for gas in the market segment of gas supply to industrial consumers.

    This fall in industrial production was due to the moderate growth of the world economy, weak external demand, and a further decline in commodity prices (in particular, the drop in prices for such important components of the Ukrainian export economy as steel products and iron ore). These factors have shaped the generally adverse external conditions facing Ukraine's economy.

    This led to a further decrease in gas consumption by the industrial sector.

    Industrial production index

    In December 2015, the decline in Ukrainian industrial production slowed to 3.3%. In January-May 2016, a return to growth was recorded. Further growth of industrial production, especially in the steel and chemical industries, will boost gas consumption in 2016 compared to 2015.

    Overall, in 2015 the use of gas in Ukraine decreased by 8.8 bcm compared to 2014, dropping from 42.6 to 33.8 bcm, or 21%, year-on-year (see Import and wholesale supply of gas).

    Even with the reduction of energy consumption in Ukraine, there remains huge demand for energy given the deficit of local production.

    Domestic gas production in 2015 totalled 19.9 bcm (see Gas production). According to Naftogaz forecasts, the gap between demand and production of gas will continue to exist in Ukraine in the near future, although it will gradually shrink.

     

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