Europeans Are Expecting Significant Changes in the Naftogaz Unbundling Plan

12 May 2016

The Secretariat of the Energy Community has assessed the proposed Naftogaz unbundling plan submitted by the Ministry of Energy and Coal Industry and offered its recommendations to improve the document.


The proposed unbundling model envisages that the TSO Ukrtransgaz together with the underground gas storage system comes under the control of the Ministry of Energy and Coal Industry, while a holding company under the control of the Ministry of Economic Development and Trade will be established to manage state-owned companies in electricity, gas and oil production and supply.


The Energy Community Secretariat approved of the proposed plan in general, but insists on introducing significant changes in it to fully unbundle the transmission function under the EU Third Energy Package and meet the requirements to establishing an independent transmission system operator.


Thus, the Secretariat insists on the need to create a new transmission operator instead of the existing Ukrtransgaz PJSC. The new company is supposed to be under control of the Ministry of Energy and Coal Industry, separate and independent of the Naftogaz of Ukraine NJSC group, unencumbered with any other assets, functions and obligations, including the functions of gas storage system operator. This will require, in particular, unbundling of the gas transmission system as an integrated system into gas transmission assets as such (main pipelines, gas compression plants, etc.) and underground gas storage facilities.


Also, according to the experts, the required process of functional unbundling of gas transmission should not be used for the purposes of implementation of any other related reforms. In the opinion of EU specialists, this must accelerate the unbundling process as a priority transformation.


In particular, the Secretariat of the Energy Community suggested reasons why separation of Ukrgazvydobuvannia PJSC from Naftogaz would be irrational from financial and investment points of view. In this context, Director of the Secretariat Mr. Janez Kopač said the following, “The Secretariat has requested that the Ministry first and foremost fully implements the Third Energy Package together with the unbundling of the TSO and does not use the unbundling process for a far reaching reshuffling of the management of key state-owned companies. There is no need for a hasty separation of Naftogaz as a trading company from upstream and even oil related activities.”


Experts of the organization conducted a deep analysis of the Ukrainian legislation and concluded that considerable update of the regulatory framework in the areas of privatization and concession legal regime is necessary, as these are the tools to help attract the Western investors in the industry. Also, the Ministry of Energy and Coal Industry will probably lose control over certain assets. “The Ministry will have to transfer the management competences for all electricity or gas supply companies like nuclear and hydropower plants and CHP generation to another state body. A timely unbundling process is of crucial importance for keeping the trust in Ukraine as a gas transit country”, said Mr. Kopač.


Therefore, the Secretariat called on the Ministry of Energy and Coal Industry to present the updated unbundling plan to the Cabinet of Ministers as soon as possible so that the implementation of a clear plan of the whole unbundling process could commence by 1 June 2016.


Let us remind you that as stipulated in Ukraine’s Gas Sector Reform Implementation Plan agreed with the World Bank and the Energy Community Secretariat in March 2015, the Secretariat’s approval of the selected unbundling model is required before the Government’s formal adoption of the plan can take place. The next step will then be the certification of the unbundled transmission system operator by the national regulatory authority, which is subject to the Secretariat’s prior Opinion according to the Third Energy Package.

Ukraine is a member of the Energy Community since 2011.


Let us also remind you that DiXi Group’s experts analysed the two main Naftogaz unbundling plans. The relevant report can be downloaded here

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