1) Domestic gas production will cover Ukraine’s needs only in 2023
An analysis of current volumes of natural gas production, the scope of exploration and exploration works and investment programs for domestic drilling enterprises leads us to conclude Ukraine’s domestic gas production will cover domestic needs only in 2023. By 2024, however, it will exceed them by 19.6%.
In our opinion, the state program to increase national gas production in the amount of 27 billion cubic meters (bcm) by 2020 will fail because of faulty tax legislation and a flawed system for issuing permits for subsoil use. However, biased information reflecting deposits is the greatest concern. After analyzing the life cycle of individual deposits and comparing information on the debits of individual wells available from extraction companies, we have concluded the information is misleading. The growth predictions are unrealistic: they are not objective in their own right. This is precisely why we support global transparency for extractive enterprises, as well as independent public inspections of the real state of affairs at state gas fields. Success should not reflected in figures and optimistic presentations alone, but felt ordinary Ukrainians in the form of lower gas tariffs.
2. Ukraine will continue transitting at least 40 bcm of gas after 2019
At least 40 bcm of natural gas to the EU will flow through Ukraine’s gas transit system after 2019, based on current forecast modeling of transit flows across Europe. In our opinion, Ukraine will retain the status of a transit state amid current utopian gas transportation projects, such as the Turkish Stream project and active energy diplomacy.
The southern bypass gas pipeline from Russia remains the biggest challenge to the EU’s energy security system. European states are well aware of this and are demonstrating restrained diplomacy in their relations with Russia.
At the same time, in order to preserve transit volumes at 40 bcm, tariffs for entering/leaving Ukraine’s gas transmission system (GTS) should be reduced. They are currently artificially high and mainly play a political role, with the ultimate goal being accelerated depreciation of the GTS. We doubt the appropriateness of this approach, because an accelerated depreciation method is economically justified only in areas where the commodity is produced within a short time. For example, accelerated depreciation is beneficial for manufacturing smartphone models with a 2-year lifespan. In other areas, this method leads to distortion of financial results, violating basic accounting principles of the compliance of income and expenditure made to obtain the former.
Since Ukraine’s gas transportation system can not stop its activity (because it is used to meet domestic demand) when the residual value reaches zero, an additional asset valuation will be required. Assets without residual value can not generate income – the principle of compliance is violated. On this basis, we forecast an excessive depreciation of several billion UAH, which would additionally prime the tariff for natural gas consumers who once paid it.
3. The Ukrainian gas hub will be formed automatically after the construction of an interconnector with Poland in 2020
Lowering the cost of gas for all categories of domestic consumers is possible only after the creation a gas hub in Ukraine. In our opinion, the gas hub will be formed automatically in 2020 after the completion of the interconnector facility with Poland. The project will provide Ukraine with access to gas from Norway and the United States, and Poland and European partners to Ukraine’s gas transportation and gas storage facilities.
We are convinced that the greatest economic effect for the budget of Ukraine can be achieved through the creation of a joint interstate enterprise. According to our calculations, in a pessimistic scenario, the interconnector will pay for itself within 7 years, after which annual profits will total up to 130 million dollars.
The need to search for alternative sources of gas to Ukraine is due to the fact that 80% of gas imported from Europe using existing routes is of Russian origin.
This problem will become increasingly relevant after 2019, when the transit of gas through the territory of Ukraine will be halved. Due to the lack of gas resources, it is possible the gas imports using existing routes will decrease in a similar way.