On 25 March 2015 the Cabinet of Ministers of Ukraine (CMU) approved a comprehensive Plan for Implementation of Gas Sector Reform (CMU Resolution No 375-p dated 25 March 2015). This document is developed in line with the Memorandum of Economic and Financial Policies executed between Ukraine and the International Monetary Fund on 27 February 2015 (IMF Memorandum) and the new Law “On the Natural Gas Market” adopted by the Parliament on 9 April 2015. Its primary goal is to ensure Ukraine’s compliance with the Energy Community legal framework.
The Plan was drawn up by the Government in cooperation with the World Bank, European Commission and Energy Community Secretariat (EC Secretariat). Adoption of the Plan was a precondition for further financial assistance from the IMF and World Bank to Ukraine.
The plan outlines the steps to be undertaken by Ukraine’s state authorities to improve its gas market and meet its commitments under the Energy Community Treaty. Besides a new legislative and regulatory framework, the plan also contains a list of Government measures and actions to be taken in four main areas: (1) increase of domestic gas production, (2) unbundling of transmission and distribution system operators, (3) prices and social assistance programme, and (4) transparency and gas metering.
1. Increase of the domestic gas production
One of the Government’s goals is to boost domestic gas production. The Plan provides for a number of measures and actions to achieve this goal.
| The Government’s Measures and Actions | Deadline |
| 1. | Revision of the current royalty regime for production of hydrocarbons | May – June 2015 |
| 2. | Preparation of a new taxation regime compliant with IMF recommendations and developed in line with the best international policies in the oil and gas sector. The new regime is to be introduced on 1 January 2016. |
| 3. | Introduction of amendments to the Auction Procedure for the Sale of Special Permits for Subsoil Use in order to ensure the transparency of the process in line with the best international policies in the oil and gas sector. | April – July 2015 |
| 4. | Adoption of a new version of the Subsoil Code (applicable from January 2016) which would incorporate provisions of various fragmented laws and regulations in the oil and gas sector and allow transfers of subsoil use rights (including sale and pledge mechanisms, etc.) | July 2015 – January 2016 |
| 5. | Comprehensive audit of production and exploration licences, held by private and state subsoil users. If the subsoil users do not comply with the provisions and requirements of the licensing agreements, their licences may be revoked and later re-auctioned (in April 2016 – July 2017). | July 2015 – April 2016 |
| 6. | Performance audit with respect to licences held by state-owned gas producers. | April 2015 – January 2016 |
| 7. | Adoption of a state programme to ensure that state-owned companies relinquish some licences (no less than 5% of the total number of licences held by the state companies), where the subsoil users cannot ensure compliance with the work programmes. Such licences will be sold to private investors at transparent auctions (in July – August 2016). | January – July 2016 |
2. Unbundling of transmission and distribution system operators
The state oil and gas monopoly Naftogaz, together with its subsidiaries, is currently carrying out gas production, transmission and supply functions in Ukraine. Naftogaz’s unbundling has always been one of the most important aspects of Ukrainian gas sector reform. The Government now by law has to ensure that the operator of the Gas Transportation System (currently – Naftogaz’s subsidiary “Ukrtransgaz”) is legally and functionally independent from Naftogaz and from any of its gas production and/or gas supply companies. The new gas market law provides for the possible implementation of two different unbundling models in Ukraine – “Ownership Unbundling” (OU) and “Independent System Operator” (ISO), and it is up to the Government to decide on the final model.
The plan provides for a number of actions and measures that would ensure the success of this restructuring process.
| The Government’s Measures and Actions | Deadline |
| 1. | Development of the draft plan for Naftogaz’s unbundling. The draft will be subject to the approval of the EC Secretariat. | April – October 2015 |
| 2. | Adoption of a plan for the performance of Naftogaz’s loan liabilities (in terms of Naftogaz’s future unbundling) |
| 3. | Legal unbundling of Distribution System Operators (DSOs), in order to ensure that DSOs are no longer involved in the gas supply businesses and are legally and functionally independent of any other types of activities which are not related to natural gas distribution. | April 2015 – January 2016 |
| 4. | Selection of the unbundling model (OU or ISO) to be implemented in Ukraine and adopting the plan for Naftogaz’s unbundling. | October 2015 – January 2016 |
| 5. | Improvement of the corporate governance of Naftogaz, its subsidiaries and other state-owned companies in line with the best international standards and practices based on the OECD Guidelines. Elaboration of the regulations and procedures for effective control over the state’s corporate rights on the basis of the EBRD’s recommendations (according to conditions of the loan agreement for the modernisation of the gas pipeline “Urengoy – Pomary – Uzhhorod”) | January – May 2016 |
| 6. | Completion of the unbundling process. | January – June 2016 |
| 7. | Comparative analysis of the operating expenses of DSOs in order to assess their efficiency | January 2016 – January 2017 |
| 8. | Adoption of the Code of the Gas Transportation System and Methodology for Calculation of the Gas Transportation Tariffs. | April – July 2016 |
3. Prices and Social Assistance Programme
Ukraine is committed to stepped increases in gas prices for households and district heating tariffs over a two-year period. The prices for natural gas extracted by Ukrainian state-owned entities must also be increased. The Government’s intention is to reach fair market prices in 2017.
| The Government’s Measures and Actions | Deadline |
| 1. | Assurance of gas consumers’ rights to freely select and change gas suppliers. | On a permanent basis |
| 2. | Development of a draft resolution on increasing gas prices for households and heating tariffs (in line with Ukraine’s obligations under the IMF Memorandum) and prices for natural gas extracted by state-owned gas producers. The prices shall be increased in three stages. The draft shall be subject to the approval of the EC Secretariat. | Prior to 30 April 2015 |
| 3. | Review of the structure of natural gas production costs incurred by Naftogaz (and its subsidiaries) and other state-owned gas producers, based on the results of the audit performed by the international audit companies. Review of the long-term investment programmes of such producers. | April – August 2015 |
| 4. | Simplification and adoption of a procedure for granting subsidies and targeted state aids to the “vulnerable” gas consumers. | April 2015 – August 2015 |
| 5. | Ensuring that the sufficient funds are provided by the relevant State Budget for subsidies and targeted financial aid (in order to reimburse payments for municipal services and gas consumption). | April 2015 – April 2017 |
| 6. | Performance of the financial settlements for the natural gas consumption via accounts with the special regime of use. | 1 October 2015 – 1 April 2017 |
4. Transparency and gas metering
The plan foresees a number of actions to improve the metering of gas consumption, supply and distribution.
| The Government’s Measures and Actions | Deadline |
| 1. | Development of a draft law on the independent status of the Regulator (i.e. National Commission for State Energy Regulation and Public Utilities Regulation). | April – May 2015 |
| 2. | Amending the Law “On the Commercial Accounting of Natural Gas” with respect to the installation of gas meters and heat metering devices. | April – June 2015 |
| 3. | Prevention, identification and restraint of violations, protection of economic competition on the gas market (including on-site audits and unscheduled inspections) | April 2015 – December 2017 |
| 4. | Installation of gas meters and heat metering devices in residential buildings | April 2015 – April 2017 |
| 5. | Technical audit at each stage of the natural gas accounting (i.e. including the extraction, transportation, distribution and consumption stages) in order to calculate the natural gas losses at each of the stages. | July 2015 – July 2016 |
LAW: the Resolution of the Cabinet of Ministers of Ukraine No 375-p “On the Issue of Reform of the Natural Gas Sector” dated 25 March 2015
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