restructuring of ukrainian oil and gas market

PUBLIC HEARING ON RESTRUCTURING OF UKRAINIAN OIL AND GAS MARKET

AS PER 3EP REQUIREMENTS (vision of MoECI)

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The overall vision of distribution of key state-owned assets in fuel and energy complex among public bodies

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Restructuring plan of NJSC “Naftogaz of Ukraine”

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Выступающий

Заметки для презентации

Participation of IFIs and European Commission in discussion of the MoECI’s model

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Analysis of the Restructuring Options of NJSC Naftogaz of Ukraine – Unbundling options for gas transmission and storage, February 2016

“Points of concern” in MoECI proposal. Well-grounded or doubtful?

1. 3EP refers to transportation activity only. 2. MoECI: mixture of functions as a policy maker and

“owner” of TSO. 3. State Property Fund: special status grants independence

in terms of 3EP. 4. GTS and UGSF will function effectively only if

separated. 5. Pending arbitration process and loan agreements:

“stoppers” for restructuring of NJSC “Naftogaz of Ukraine”.

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3EP refers not only to transportation activity

• Directive 2009/73/EC Para 6 of Preamble:

Effective unbundling - separation of networks from activities of production and supply;

• It is essential to prevent overlapping of transportation activity vis-à-vis production and supply at any stage of restructuring

Role of SPF: privatization of UGV and operation of GTS – risk of conflict of interests.

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Directive 2009/73, preamble , para 6: “Without effective separation of networks from activities of production and supply (effective unbundling), there is a risk of discrimination not only in the operation of the network but also in the incentives for vertically integrated undertakings to invest adequately in their networks.”

3 EP: no prohibition in combining the functions of public body as policy maker and “owner” of TSO

• OECD SOE Principles are the standards of good governance, not of obligatory character;

• Corporate governance principles will be implemented in TSO with special rule on ownership function of MoECI;

“Chinese wall” for department of MoECI dealing with ownership function of TSO + compliance officer.

• Decision of the Commission re Swedish electricity TSO

(Affärsverket svenska kraftnät, Sweden, 2012) – possibility of combining these functions is not excluded.

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1) OECD Guidelines on Corporate Governance of State-Owned Enterprises (SOE) Chapter III A. “There should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for state-owned enterprises, particularly with regard to market regulation.” 1.1. Despite the above-cited general principle it is also necessary to address to the explanation on applicability of OECD Principles, whereby “the Guidelines are understood as outcome-based, meaning that it is the role of governments to decide how to achieve the outcomes that they recommend”. In this respect, according to Annotations to Chapter III A, prevention of combining of state’s ownership function and function of market regulation is necessary to the extend that it ensures both the avoidance of conflicts of interest between different market players and distortion of competition. In this respect, it might be possible for the particular state agency to combine the ownership and market regulation functions if it can be proven that such combination does not provide the SOE undue market preferences. MoECI’s proposal is that this Principle can be achieved through alternative means (special status of department on coordination of TSO, compliance officer) not being detriment to the aim pursued by the Principle set out in Chapter III A. 1.2. Directive 2009/73, Article 21 «Compliance programme and compliance officer» (Compliance officer, применяется в модели ITO, но мы предлагаем по аналогии применить механизм в нашей модели, а именно, чтобы этот офисер в случае давления на него мог «стучать» регулятору, - НКРЭКУ) «3. The compliance officer shall be in charge of: (d) notifying the regulatory authority on any substantial breaches with regard to the implementation of the compliance programme;…» 2) Affärsverket svenska kraftnät (Sweden, 2012): Ministry, being the policy maker in oil & gas sector, can manage TSO activities provided that it can influence production / supply / distribution entities only via general policy guidelines and not by interfering with decision-making in day-to-day cases. 3) The role of MoECI in respect of TSO (the list of decisions that MoECI resolves while performing the functions of shareholder): Determining key directions of the company’s activities; Amending the corporate documents (including the internal regulations on governing bodies of the company); Alteration of charter capital, issuance of new shares; Approval of annual report of the company, allocation and distribution of profits and losses; Appointment or termination of powers of members of supervisory board; Approval of significant transactions of the company.

SPF: no advantages / disadvantages in comparison with the status of the Ministry

• Activity of SPF/Ministry is directed and coordinated by CMU; • Chairman of SPF/ Minister of energy/ Minister of economy is

appointed by the Parliament upon submission of Prime Minister; • Prime Minister may issue mandatory individual instructions to

SPF/ Ministry.

SPF has no special status granting independence in terms of 3EP

SPF is a state body with main competence in the sphere of privatization, not depending on the choice of sector itself.

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“SPF - Central executive body with special status that implements the state policy in the sphere of privatization, lease, use and disposal of state property and manages the state property,…” (Law “On SPF”, Article 1) Стаття 1. Статус Фонду державного майна України 1. Фонд державного майна України є центральним органом виконавчої влади із спеціальним статусом, що реалізує державну політику у сфері приватизації, оренди, використання та відчуження державного майна, управління об'єктами державної власності, у тому числі корпоративними правами держави щодо об'єктів державної власності, що належать до сфери його управління, а також у сфері державного регулювання оцінки майна, майнових прав та професійної оціночної діяльності.

Separation of GTS and UGSF cannot be conducted prematurely

• 3EP/Ukrainian laws: no requirement to separate GTS and UGSF;

• GTS & UGSF conjunction is not forbidden by 3EP/ Ukrainian

laws;

• Separation of UGFS and GTS is a time-consuming process;

• Separation of UGFS and GTS requires in-depth technical and economical analysis (this approach is supported by consultants of World Bank).

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Influence of pending arbitration process and loan agreements on restructuring of NJSC “Naftogaz

of Ukraine” – to be determined

• These issues would be equally applied to both MoECI and alternative models;

• “Existence of pre-liberalization long-term transit contracts does not justify any preferential treatment of 3EP” (Final results of ACER inquiry on Transit Contracts in EU Member States dated 9 April 2013);

• No expert conclusion has been made regarding the effect of restructuring process on Stockholm arbitration;

• Ongoing assessment of effect of restructuring process on contractual obligations under loan agreements:

(i) no material negative effects have been identified (preliminary conclusion); (ii) final expert opinion is expected shortly.

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“We understand that full harmonization of the Ukrainian regulatory framework with the European one is impossible if Naftogaz continues acting as a TSO by providing transmission services to Gazprom” (Letter of Prime Minister of Ukraine dated 13 February 2016 addressed to Vice-President of European Commission Mr. Maros Sefcovic).

Thank you for attention!

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restructuring of ukrainian oil and gas market

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