Ukraine: Naftogaz Unbundling Plan Adopted

Ukraine

On 1 July 2016, the Cabinet of Ministers of Ukraine (the “CMU”) approved a comprehensive plan for restructuring of national joint stock company “Naftogaz of Ukraine” in line with the new law “On the Natural Gas Market” adopted by the Parliament on 9 April 2015. Naftogaz’s unbundling has been a key aspect of the Ukrainian gas sector reform. The CMU resolution has not yet been officially published; however the draft text (the “Draft Plan”) is available.

The Draft Plan was created by the Government in cooperation with the Energy Community Secretariat (the “ECS”) and its primary goal is to ensure Ukraine’s compliance with the Energy Community legal framework. In particular, the Draft Plan outlines a number of steps to be undertaken by Ukraine’s state authorities to meet the country’s commitments under the Energy Community Treaty and the “3rd Energy Package” of the European Union (in particular - Directive 2009/73/EC concerning common rules for the internal market in natural gas) with respect to unbundling of the transmission system operator (TSO).

The state oil and gas monopoly Naftogaz is, together with its subsidiaries, currently carrying out gas production, transmission, storage and supply functions in Ukraine. The Government must ensure that TSO - Naftogaz’s subsidiary Ukrtransgaz is legally and functionally independent from Naftogaz and from any of its gas production and gas supply operations. The Draft Plan contains a list of Government measures and actions to be taken for such unbundling, and also provides for strict implementation deadlines.

It is worth noting that according to the Gas Market Law, the Government was entitled to decide upon the unbundling model – either Ownership Unbundling (“OU”) or Independent System Operator (“ISO”). According to the Draft Plan, the Government opted for the OU Model – please refer to the chart below.

 

* - Ukrtransgaz will remain under Naftogaz’s control until all of its non-key assets are disposed of and all of the relevant disputes are resolved

** - GTS shall be transferred to the new TSO within 30 days after the final award in the SCC case vs Gazprom is rendered

Please find below an overview of actions and measures to achieve success of the restructuring process.

1. TSO Functions

           

 

The Government’s Measures and Actions

Deadline

1.

Establish a separate Public JSC “Main Gas Pipelines of Ukraine” (100% owned by the State, managed by the Ministry of Energy) as an operator of the national main gas pipelines (i.e. TSO) and develop its corporate governance structure ( in line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises

1 October 2016

 

2.

Develop:

(i)           a list of property and fixed assets which are necessary for performance of the gas transmission activity by Public JSC “Main Gas Pipelines of Ukraine” and

(ii)          An action plan for transfer of such property and fixed assets,  from Ukrtransgaz to Public JSC “Main Gas Pipelines of Ukraine”

3.

In consultations with the ECS – develop a plan for transfer of the state-owned enterprises and authorities with regard to performance of control over the state’s corporate rights from the Ministry of Energy to other state bodies, in order to ensure compliance with the Gas Market Law. In particular, according to the Gas Market Law the Ministry of Energy may not directly or indirectly exercise any rights over companies engaged in production and/or supply of natural gas and/or electricity. 

4.

Recommend establishment of the Supervisory Board of Ukrtransgaz consisting of the following members:

(i)           3 members - independently appointed by Naftogaz (provided that such persons are not involved in gas production/supply businesses); and

(ii)          2 members appointed by Naftogaz in compliance with the applicable procedure for competitive selection of candidates.

5.

With assistance of ECS – develop the following amendments to the Gas Market Law:

(i)           with respect to conditions and procedures for concession of the state property, used for transmission and storage of natural gas, which is not subject to privatisation; and

(ii)          with respect to criteria for independence of two state bodies (that control gas/electricity production and supply activities on the one hand and gas/electricity transmission activities on the other) provided that such state bodies are not under the common influence of another state body

1 November 2016

6.

Ensure transfer of property and fixed assets which are necessary for performance of the gas transmission activity from Ukrtransgaz to Public JSC “Main Gas Pipelines of Ukraine” (with a due account of loan liabilities of Naftogaz and its subsidiaries)

Within 30 days following the effective date of the final awards on Naftogaz-Gazprom cases, which are currently pending in the Arbitration Institute of the Stockholm Chamber of Commerce (hereinafter – the “Arbitration Awards”)

7.

Ensure that Public JSC “Main Gas Pipelines of Ukraine” applies for a TSO certificate

Within 60 days following the date when the Arbitration Awards become effective

2. SSO Functions

 

The Government’s Measures and Actions

Deadline

1.

Establish a separate Public JSC “Underground Gas Storage Facilities of Ukraine” (100% owned by the State, managed by the Ministry of Energy) as an operator of the Underground Gas Storage Facilities of Ukraine (i.e. SSO) and develop its corporate governance structure in line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises

1 July 2017

2.

Conduct a complex analysis of the Ukrainian GSFs and to develop a draft plan for their effective use (this draft plan will be subject to approval of the ECS).

3.

Adopt:

(i)     plan for effective use of GSFs (as approved by the ECS) and

(ii)    resolution on transfer of GSFs to Public JSC “Underground Gas Storage Facilities of Ukraine” in line with the mentioned plan.

1 August 2017

4.

Ensure transfer of the relevant GSFs to Public JSC “Underground Gas Storage Facilities of Ukraine”

Within 30 days following adoption of the mentioned Government’s resolution

(but in any case after the Arbitration Awards become effective)

LAW: Resolution of the Cabinet of Ministers of Ukraine “On Unbundling of Activities on Transportation and Storage (Injection, Withdrawal) of the Natural Gas” dated 1 July 2016