REFORMING NAFTOGAZ OF UKRAINE, STRATEGIC OBJECTIVES · Publication of this presentation does not...

150402_Naftogaz_Strategic_goals+Reforms AA : BB : CD : DB : EF

REFORMING NAFTOGAZ OF UKRAINE,

STRATEGIC OBJECTIVES

March 2015

2

AA : BB : CD : DB : EF

The information contained herein has been prepared by the National Joint Stock Company “Naftogaz of Ukraine” (hereinafter – Company, Naftogaz, Naftogaz of Ukraine, NJSC Naftogaz

of Ukraine).

Publication of this presentation does not constitute any investment (or other)- related consultations by the Company or any of its representatives, employees or affiliate entities thereof

and must not be considered as such consultations.

Some data given in the presentation (including market or statistical information regarding other companies) were received from different sources the Company considers reliable.

Nevertheless, the Company makes no statements thereon and bears no responsibility for accuracy or completeness of such information.

The Company has made reasonable efforts to verify reliability of the data used in this presentation. But neither Naftogaz, nor the respective subsidiaries, partners, managers, employees,

proxies or advisors (such managers, employees, proxies or advisors hereinafter referred to as “representatives”) make any statements or guaranties (expressed or implied) regarding the

reliability, accuracy, validity and completeness of information contained herein, or any other additional information; and such persons or entities categorically waive all probable

obligations or responsibility (except the one related to fraudulent misrepresentation) related to accuracy or sufficiency of such information, or any other mistakes or omissions herein, or

any additional information related to grounds for taking such decisions based on or usage by the reader or any of his / her partners or representatives hereof or any additional

information, or any other written or verbal messages addressing the reader or any of his / her partners or representatives or any other person.

Statements of predictive nature herein include the statements which are or may be recognized as “statements of predictive nature”. Such statements of predictive nature can be

determined by use of terminology of predictive nature, including the terms “assumes”, “estimates”, “envisages”, “expects”, “counts”, “may”, “will”, “should” or other variations thereof,

or similar terminology. Such statements of predictive nature cover all matters which are not historical facts. They are contained throughout the presentation and include statements

related to intentions, assumptions or current expectations of the Company. The statements of predictive nature intrinsically cause risks and uncertainties as they pertain to events and

depend on circumstances, which may or may not take place in future. The statements of predictive nature do not guarantee future business results. Company’s actual productivity,

business results and financial situation may be significantly different from the impression created by the statements of predictive nature contained herein.

Taking into account its legal commitments, Naftogaz waives any obligations related to updating or revision of any statements of predictive nature contained herein to reflect any changes

in expectations regarding claims or any changes of events, conditions or circumstances, any of such statements is based upon.

Any addressee of this presentation bears full responsibility for assessment and review of such assessment with regard to business, financial situation, prospects, solvency, state of

affairs of the Company. Under no circumstances it is derived from the publication hereof that no negative changes are possible in Company’s business after the date of publication

hereof or after any date of changes/amendments hereto.

Some quantitative parameters included herein have been rounded. Accordingly, the quantitative parameters indicated in the summary values in some tables may not be the arithmetic

sum of the preceding figures.

Legal Disclaimer

3


* – as a result of occupation of Crimea by the Russian Federation in Q1 2014, Naftogaz has lost control of the assets of SJSC Chornomornaftogaz

** – currently, Naftogaz does not control Ukrnafta. Although Naftogaz holds 50% + 1 voting share in Ukrnafta, we are currently not in the position to unilaterally hold a legitimate general shareholder meeting.

*** – state company

Currently Naftogaz is a vertically integrated group covering the entire supply chain of the gas business

Key Naftogaz Activities

Naftogaz gas business constitutes 90% of Company’s earnings

Wholesale gas distribution &

trading

Until 2012 – monopoly gas importer. Over 2012-2014, remained a major importer of Russian and European gas to Ukraine

Gas produced by Ukrgazvydobuvannya is purchased exclusively by the NJSC Naftogaz of Ukraine. This gas and the gas imported by Naftogaz is sold through regional gas distribution companies and by

Naftogaz directly to be consumed by households, heat-generating and budget institutions

NJSC Naftogaz of Ukraine

SC*** Gaz Ukrainy (100%)

Naftogaz Overseas S.A. (100%)

SC Ukravtogaz (100%)

OJSC Kirovohradgaz (51%)

Gas transportation & storage

In 2014 natural gas transportation to Ukrainian consumers – 38.1bcm and transit through the

territory of Ukraine – 62.2 bcm 13 underground gas storages with the total

capacity of 32 bcm and daily injection capacity of up

to 265 million cubic meters (mcm)

Ukrtransgaz (100%)

Ukrspetstransgaz (100%)

Upstream, gas processing

15.1 billion cubic meters (bcm) of gross gas production in 2014

5 gas processing plants Over 230 oil, gas, gas condensate and oil

condensate fields

Ukrgazvydobuvannya (100%)

SJSC Chornomornaftogaz* (100%)

Ukrnafta** (50%+1 share)

Naftogaz Group

1

4


I. Nafogaz old mission

III. Naftogaz new mission

II. Why Naftogaz must be reformed

IV. Naftogaz new mission: implementation focus areas

Appendices

5


Naftogaz Old Mission The objective of Naftogaz establishment: 1998-2000

1998 Naftogaz was founded at the initiative of Ihor Bakay (first Chairman of the Board of Naftogaz)

when Leonid Kuchma was the President of Ukraine

Objective for the Company establishment

In 1999-2000 77% of value of Turkmen gas

delivered to Ukraine was exchanged for the goods

and services shipped by Ukraine and for the

undertaken construction works

(for the entirety of volumes shipped in 1999-

2005 – 45% of value)

The exchange ratio of Russian gas price to the service fee for transit through the territory of Ukraine was

to be determined based on the understanding of the “market” conditions by the contemporary leaders of

Russian and Ukrainian gas industries – the gas price of USD 80/thousand cubic meters (tcm) and the

transit fee of USD 1.75/tcm/100 km.

But afterwards the Russian side proposed to “save” on taxes – to reduce the price to USD 50 and the

transit fee to USD 1.09.

Implement “Turkmen Program” 1

Procure Turkmen natural gas in exchange for product supplies from Ukraine – de facto barter

Procure Russian gas in exchange (de facto barter) for the Russian gas transit to Europe 2

Ensure security of supply (both for consumers in Ukraine and for transit of Russian gas to Europe) 3

Protect against uncontrolled privatization 4

of the strategic oil-and-gas assets which at the time belonged to the state

Increase payment collections for the consumed gas 5

Satisfy social demand for paternalism (government protection) as an element of the “soviet” legacy 6 “low” gas prices – by setting the price of domestic gas production at the marginal cost level, as well as cross-subsidization at the expense of the transit income

“Centralize” corruption 7 2

6


Naftogaz Old Mission Changes in the early 2000’s

After Vladimir Putin came to power in the Russian Federation (2000) and Aleksey Miller was appointed as Head of Gazprom (2001), Naftogaz primarily sought to counteract the

Russian policy

Change of Company’s objectives

2000

Counteract the Russian policy which sought to: 1

Remove Ukraine from the Turkmen gas market Become monopolist gas supplier Deliver gas to different consumers in Ukraine at different (maximum) prices – “price discrimination” Lower the transit cost

A characteristic of Naftogaz' actions was that unfortunately the

counteraction of the Russian policy predominantly served not in

the interests of the state, but

in the interests of a certain group

(Eural Trans Gas, Rosukrenergo, Group DF)

And Russia was actively using that as an effective

mechanism to corrupt Ukrainian governments–

Kuchma’s, then Yuschenko’s, then Yanukovych’s

Preserve paternalist role 2

Satisfy social demand for paternalism, “low” gas prices as an element of the “soviet” legacy

Persist with the objective of ensuring security of supply 3

Formal privatization of the oil-and-gas assets of lesser strategic value 4

Informal privatization of the oil-and-gas assets of greater strategic value (“rent-seeking”) 5

3

7


Naftogaz Old Mission Status prior to the Revolution of Dignity

By then the initial mission of Naftogaz has practically lost relevance

Major oil-and-gas assets were transferred under control of oligarchic

groups (de facto privatized)

The senselessly low gas prices for the households, the main reason of the Naftogaz deficit, caused a whole series of critically negative implications:

Domestic production stagnated, households consumed gas and heat inefficiently –

and Russia was the first to benefit, as it received the opportunity to sell more gas to

Ukraine at a non-market (high) price, thus draining Ukraine and making it critically

dependent on Russia

Difference with the prices for industry was a fertile ground for corruption – the gas

could be received “for households” but delivered for industry consumption

“Low gas prices” became one of the foundations of the oligarchic-cleptocratic system

and the respective social contract – authorities illegally grow rich and curtail civil

rights, but in exchange ensure a certain level of paternalism and enable illegal

enrichment (theft) at lower levels as well

“Cross-subsidization” has transformed into the national budget directly

covering the Naftogaz deficit

Russia was able to dictate the terms of gas supplies and transit

1

2

3

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Naftogaz transit income from OAO Gazprom, billion USD 1.5 1.4 1.6 1.4 1.4 1.5 1.9 1.7 1.9 1.7 3.0 3.1 3.0 3.0

– actual gas transit volume, bcm 120 123 119 122 123 125 121 104 107 96 98 93 84 86

– weighted-average transit rate, USD/tcm/100 km 1.1 1.0 1.2 1.1 1.0 1.1 1.5 1.5 1.6 1.7 2.8 3.0 3.2 3.2

Naftogaz gas import cost, billion USD 1.6 1.1 1.3 1.5 1.6 1.0 4.8 6.5 9.4 6.3 9.4 12.4 10.6 5.1

– actual gas import volume*, bcm 27.2 22.0 25.7 26.0 32.2 20.4 50.1 50.1 52.6 26.8 36.5 40.0 25.0 12.9

– weighted-average import price, USD/tcm 58 50 50 59 51 50 95 130 180 233 257 309 425 397

Annual average gas price at European hubs**, USD/tcm - - - - - - - 318 386 176 243 331 338 377

Annual average gas price for households (as commodity), USD/tcm 21 19 19 19 18 18 30 47 43 41 44 49 43 42

– difference between gas prices for households and weighted-average

import price, USD/tcm (37) (31) (31) (39) (33) (32) (65) (83) (136) (192) (212) (260) (382) (355)

Source: Naftogaz, in-house estimates and calculations * – gas import from OAO Gazprom; ** – price at TTF hub, Day Ahead Spot since the start of price data publication in 2007 4

8






Appendices

9


Why Naftogaz Must Be Reformed Main reasons

Financial deficit is covered by the national budget 1

This financial deficit amounted to USD 8.05 billion in 2014 (6.2% of GDP or 27% of the national budget income) and is expected to amount to USD 4.3 billion in 2015, (5.0% of the expected GDP or 19% of the planned national budget income).

The question arises: why does the state create such a problem for the national budget and is it able to resolve it with no help from outside?

Impact on gold and foreign currency reserves and exchange rate

In 2014 Ukraine was forced to import gas for a total of USD 5.7 billion. Undoubtedly, that was one of the most negative drivers of the trade balance. Was Naftogaz to blame? It depends on the perspective. Without Naftogaz, the amount could have been USD 3.4 billion higher (see calculation on slide 14).

Maybe, we insufficiently develop domestic production and excessively consume gas?

2

Is such a subsidy system effective and fair?

Subsidies: direct subsidies, reimbursements from the national budget, non-payments, exchange rate differences

In 2014 the gas and heating subsidies to households amounted to UAH 4.1 billion. Reimbursement from the national budget of the heating tariffs difference (UAH 10.7 billion in 2014) should also be included in this total. But we also must account for hidden subsidies: state reimbursement of non-payments primarily of heat generation for households (the amount of such receivables as of 01.03.2015 was UAH 19.8 billion) and losses due to exchange rate difference (net loss from exchange rate differences was UAH 45.0 billion in 2014)

3

Calculation is based on the average inter-bank exchange rate of 2014 at the level of UAH 12.04/USD 1 and the expected average rate at the level of UAH 21.7/USD 1 in 2015 5

10


Why Naftogaz Must Be Reformed Main reasons (continued)

* – Ukrgazvydobuvannya and Chornomornaftogaz (prior to Q2 2014, when Naftogaz lost control over this company’s assets) ** – calculation based on: (1) average interbank currency exchange rate in 2014 at the level of UAH 12.04 /USD 1; (2) average regulated gas selling price of Ukrgazvydobuvannya at the level of UAH 349.3/tcm in 2014; (3) average import gas price at the level of USD 293.4/tcm.

Hidden subsidies: non-market prices for the gas of domestic production

The lost opportunity from selling domestically produced gas at a fair market price is to be assessed separately. We sold 14.4 bcm of domestically produced gas * in 2014. Had we sold it at the 2014 weighted-average import price, we would have received USD 4.2 billion. Instead, the regulator forced us to sell the gas to the regional gas distribution companies to supply the households at a price 7.5 times lower than the market one, hence we received only USD 0.4 billion for this gas**. The difference of USD 3.8 billion is also a hidden subsidy. Yet it is granted in an unfair (consuming more gas = getting subsidized more) and a non-transparent (who can guarantee that the private regional gas distribution companies transfer all the USD 3.8 billion of such subsidies to the households?) manner.

4

Financial problems of Naftogaz did not simply appear in 2014 – they have been accumulating over many years 5

But there always comes a time to pay the bill: in 2014, Naftogaz reimbursed Eurobonds in the amount of USD 1.6 billion and USD 2.3 billion for the gas supplied back in 2013. Moreover, Naftogaz was forced to “work off” the gas transit advance payment in the amount of USD 1.5 billion, received and spent in 2010-2013.

What is left: external credits in the amount of USD 1.7 billion, USD 0.5 billion of which are guaranteed by the state (signed reimbursement schedule through 2018), and credits from Ukrainian banks in the total amount of UAH 23 billion and USD 0.4 million (to be repaid in 2015-2016).

Taking into account Naftogaz turnovers and asset value– this amount is relatively small. The problem is the very limited possibility of refinancing these credits, not to mention the high

market refinancing value

6

11


Why Naftogaz Must Be Reformed Main reasons (continued)

Key drivers of the Naftogaz deficit in 2014, billion USD

Source: Naftogaz, in-house assessment and calculations Notes: * – other components which primarily consist of financial result of the gas transit operations, gas sales for consumers other than households and district heating providers (DHP, heating for households), change of balance in the underground gas storages and accumulation of other assets, costs of interest payment less the accumulation of payables

7

Payment for

gas supplied in

2013

Gas transit

services for

previously

received

advance

payments

Eurobonds

repayment

Loan

repayment

Deficit due to

repayment of

previous years

obligations

Losses due to

price difference

(sales of imported

gas to households

& district heating

providers)

Advance

payments for

gas supplied in

Jan 2015

Receivables

accumulation

Other*

Total deficit

2014

Deficit payments

through

refinancing &

involvement of

new loans

2014 deficit that

was paid by the

state through

issue of

government

bonds to

replenish stock

capital

12






Appendices

13


Naftogaz New Mission Why Naftogaz is currently necessary : pragmatic perspective

Pragmatic

approach

Claim with the

Stockholm Arbitration

Court for the total

amount close to

USD 12.2 billion

Avoid state- guaranteed loan

acceleration, organize repayment of payables (in particular towards state-owned banks)

Collection of

receivables

Ensure gradual

increase of gas

price for

households during

the transition

period

Consumer protection

after price deregulation

(according to the

established European

practice)

Energy security:

need to fully utilize the

reverse flow capacities

8

14


345

341

473

2029

156

154

191

608

0 1000 2000 3000 4000

2012

2013

2014

2015

Ціна газу як товару Тариф на транспортування магістральними трубопроводами без ПДВ

Тариф на транспортування розподільчими трубопроводами без ПДВ Тариф на постачання без ПДВ

Податки (ПДВ + цільова надбавка)

Naftogaz New Mission Why Naftogaz is currently necessary: pragmatic perspective (continued)

Schedule of final household gas price increase as per IMF Memorandum, UAH/tcm*

Schedule of final gas price increase for DHP as per IMF Memorandum, UAH/tcm*

2167

5042

4950

6600

687

1400

1377

1786

0 2000 4000 6000 8000 10000

з 01.04.15 р.

(в межах соціальної норми)**

з 01.04.15 р.

(понад соціальну норму)

з 01.04.16 р.

з 01.04.17 р.

39% of parity price

75%

75%

100%

parity

1803

4950

6600

535

1240

1610

0 2000 4000 6000 8000 10000

з 01.04.15 р.

з 01.04.16 р.

з 01.04.17 р.

75%

34% of parity price

100%

parity

Source: Naftogaz, IMF Memorandum requirements as of 20.03.15 Notes: * – provided that gas transportation and supply tariffs are constant after 1st of April 2015, average price of import gas in 2015-2017 at the level of UAH 6600/'000 cu m ** – social standard within 200 cu m/month from 1st of October to 1st of May (for clients using gas for heating) *** – computation provided that average import gas price of USD 300/tcm and currency exchange rate within 2015-2017 at the level of UAH 22/USD 1

770

774

756

1271

199

200

208

296

234

234

233

388

0 500 1000 1500 2000 2500

3509

3485

4760

6552

847

841

1226

1705

0 2000 4000 6000 8000 10000

3509

3490

3622

6589

856

851

947

1712

0 2000 4000 6000 8000 10000

Structure of annual average final gas prices for households, UAH/tcm

Structure of annual average final gas prices for DHP (heating for households), UAH/tcm

Structure of annual average final gas prices for industry, UAH/tcm

Structure of annual average final gas prices for budgeted institutions, UAH/tcm

Price that meets parity terms with import prices ***

Price reform according to the IMF Memorandum presumes bringing of all domestic gas prices to the economically viable level (market level based on import parity) by Q2 2017

According to the IMF Memorandum, the deficit of NJSC Naftogaz of

Ukraine will improve from the level of 5.7% of GDP in 2014 to 3.1% of GDP in 2015 and to 0% of GDP by

2017 and beyond. The Memorandum requires

elimination of two category pricing structure and thus increase of

household prices to the level of 75% of import parity in April 2016 and 100% of this level by April 2017.

9

from 01.04.15 (within the

social standard)**

from 01.04.15 (above the

social standard

from

01.04.17

from

01.04.16

from

01.04.15

Price of gas as commodity

Tariff for transportation via distribution pipelines net of VAT

Taxes (VAT + target surcharge)

Tariff for transportation via transmission pipelines net of VAT

Supply tariff net of VAT

from 01.04.17

from 01.04.16

15


Naftogaz New Mission Why Naftogaz is currently necessary: strategic perspective

Experience of the developed economies proves that Efficient market is best at meeting the interests of consumers and investors All functions now performed by Naftogaz can be better performed by private companies –provided that

an efficient market exists

SUPPLY RELIABILITY

Minimize political risks

Minimize technological risks

ACCEPTABLE PRICE

Once “hubs” (spot markets) in Europe turned liquid, gas became an exchange commodity, and its price is now determined by the pan-European market environment

How can Naftogaz under such conditions affect gas price decrease for the consumers in Ukraine through market methods: • Increase in-house production and

promote production by others (thus increasing the aggregate supply);

• Demand Gazprom to supply gas to Ukraine at European hubs prices less cost of gas transportation to these hubs

Naftogaz can help its clients reduce their gas expenses via risk hedging and energy efficiency improvement

Financially

sustainable

manner

Covering operational costs

Adequate return on invested

capital:

• New capital investments

(return at the funding cost

level)

• Old capital investments

(covering available costs –

analyzing lost

opportunities, in

particular, privatization)

Naftogaz

Mission

Create value for

customers in a

financially

sustainable

manner

Value

10

16


Role of the state in creation and support of an

efficient market

Trust Free competition

Ensure transparency

▪ Fairly regulate tariffs of transmission and distribution pipelines’ operators

▪ Enable establishment of exchange trading and hub

▪ Ensure publication of financial and operational statements, flows and capacities data etc. by market participants.

▪ Adopt the National Action Plan for Emergency Prevention and Response

Ensure market integrity

▪ Ensure access to the required infrastructure and its development

▪ Remove barriers to integration with liquidity markets

▪ Politically facilitate diversification of supply sources

Protect property rights

▪ Establish a competent and independent regulator

▪ Eliminate corruption in courts, law enforcement and tax authorities, etc.

▪ Transition to predictable, fair and efficient tax regime

Naftogaz New Mission Why Naftogaz is currently necessary: strategic perspective(continued)

An efficient market cannot emerge spontaneously. Establishment of an efficient market and support of its functioning is an essential role of the state.

11

17


To be a leader in creating an efficient gas market in Ukraine 1

• To ensure adequate infrastructure access

• To ensure integration with European markets

To ensure during the transition period: 2

• Reliability of gas supply to Ukrainian consumers

• Maximization of gas, oil and condensate production (marginal costs should not be higher than the price of

imported gas)

• To minimize the negative impact of the existing market (including infrastructural ones) limitations in receiving

natural gas with an optimal balance between price and supply reliability on Ukrainian consumers

• Increasing the value of assets owned by the state ("value“ is judged from the point of view of the Ukrainian

people) - hydrocarbon reserves, fixed assets, corporate rights, etc.:

• Privatization at an optimal time:

• when the change of ownership increases the value of these assets

• when the risk that the assets are used against the creation of an effective market is minimal

• Operational efficiency - maximizing the present value (cost) of cash flows (revenues less expenses and investments

into assets, considering their typical level of risk)

• Awareness-raising (among the public and public authorities) regarding the assessment of missed opportunities (from

the point of view of the Ukrainian people) and, based on this assessment, regarding the need for an adequate rate of

return

To win the suit against Gazprom in the Stockholm Arbitration Court 3

To help switch to targeted subsidies and to implement critically important energy efficiency measures 4

To balance receivables and payables 5

Naftogaz New Mission Key strategic goals of Naftogaz

12

18


For example, we eliminated corrupt practices of mediation in gas procurement – now we have only direct contracts We publish data on UGS and transit

We changed our HR policy

We were the first to initiate the implementation of corporate governance standards for state companies, developed by the Organization for Economic Cooperation and Development (OECD). At our suggestion it

was added to the coalition agreement. Currently, we are implementing a project to develop an action plan for bringing corporate governance system in line with OECD standards together with the EBRD. Also,

among examples of rapid change, we were the first among state companies to hold an open competition in order to attract the best graduates of foreign universities, professionals with experience in leading

international and Ukrainian companies to managerial positions in Naftogaz

We cannot effectively fight corruption as long as there are economic reasons for its occurrence:

in particular, due to distorted pricing which enables corrupt schemes at the regional level (for example, because of the difference between regulated prices for households and industry). Therefore, we suggest to eliminate government price regulation to eliminate this precondition for corruption

Naftogaz New Mission Battle against corruption

Beyond Naftogaz control

Fair and efficient judicial system

Effective law enforcement

Sector regulation

Legislation

Government policy in energy sector

Within Naftogaz control

Management

decisions and

management’s

personal

example

Change of the

corporate

governance

system

Elimination of

economic

preconditions

for corruption

13

19


We have ensured uninterrupted gas supply for Ukrainian customers in the situation of a de-facto war with the country, which provided more than half of the gas volumes needed by Ukraine. It was made possible due to several measures. In particular, the efforts with Gazprom should be highlighted (Gazprom gas injections in Q2 2014 and the “Winter Package”); construction and commissioning of the “Vojany-Uzhgorod” Interconnector, and signing of the contracts with new gas suppliers (Statoil etc) and using EFET contracts (supply at VTP in power units). Important elements of energy security was to ensure reliable GTS operation without interruption during a war and to maintain domestic production (Ukrgazvydobuvannia) at the highest possible level.

Injecting

Gazprom’s

gas in Q2

2014

“Winter

Package”

New

Interconnector

“Vojany-

Uzhhorod”

New natural

gas suppliers

Reliable

functioning of

the GTS

Maintaining

domestic

production

USD 2.94 billion

Expenses decreased in 2014

369

353

353

304

269

385

337

492

497

485

437

Q2 2014

Q3 2014

Q4 2014

Q1 2015 Gazprom Price (old

contract terms)

Gazprom Price

(Winter Package)

Average Import Price

from the EU

Source: Naftogaz

Average price of imported natural gas for Ukraine, USD/tcm

Total cost of 17.3 bcm of imported natural gas, billion USD (during April 2014 – February 2015)

Naftogaz New Mission Accomplishments in implementing Naftogaz strategic goals

Energy security 1

Diversification of gas supplies, access to liquidity markets, gas imports at market rather than political prices 2

In 2014 Naftogaz began a real reform which envisions a substantial change in the business model

USD 0.45 billion

Revising the Gazprom price for gas supplied in Q4 2013

+

USD 3.4 billion Total expense decrease

=

14

2,92

8,27 2,41

Факт Вартість газу в разі згоди на

умови ВАТ "Газпром" в квітні

2014 р.

Закупівлі у ВАТ "Газпром" Закупівлі в ЄС

20


Appointing graduates of the best foreign

universities, professionals with

experience in leading international and

Ukrainian companies to managerial positions in

Naftogaz

International audit, evaluation of hydrocarbon

reserves, revaluation of fixed

assets

Law on Natural Gas Market

Stockholm Arbitration

Law on GTS

(allows attracting international investors and

partners to manage GTS)

Joining the largest European transparency platforms with data on remaining balances in

UGS and on gas transportation

Expansion of the Polish

Interconnector

Loan Agreement with EBRD and

EIB

Large (virtual) reverse flows

RAB-based tariff policy

Naftogaz New Mission Accomplishments in implementing Naftogaz strategic goals (continued)

Many other measures to

implement strategic goals

15

21






Appendices

22


Naftogaz New Mission: Implementation Focus Areas How we develop and implement Naftogaz strategy: a value chain example

Components of Naftogaz’ strategic plan, including Naftogaz’ strategic objectives, business plan etc. – are complex analytical products which take into account the legitimate interests of many stakeholders, and are the result of modern approaches to strategic analysis.

The value chain analysis is the key element of strategic plans:

Geological

exploration

Production of

hydrocarbons Trading Supply

Risk

management

Industrial gas

pipelines

LNG

Gas transmission

pipelines

Storage

Distribution

pipelines Subsidy system

Energy efficiency

Naftogaz is not present in these segments

Efficient market can not be created without these elements

How critical is Naftogaz participation in this chain?

16

23


Naftogaz New Mission: Implementation Focus Areas How we develop and implement Naftogaz strategy: an example of value chain

Gradual unbundling

and privatization Bankruptcy of Naftogaz

Examples of the considered strategic alternatives

Unbundling after the decision of the

Stockholm Arbitration Tribunal

Sale of 49% shares

of the Ukrainian gas TSO

17

24


Naftogaz New Mission: Implementation Focus Areas How we develop and implement Naftogaz strategy: joint projects with many stakeholders and advisers

Work on the main

components of Naftogaz

strategy was started by

the new management

even before joining the

Company.

After the official start

Naftogaz management

expanded considerable

effort to further develop

and implement the

strategy (including active

cooperation with

international companies

and organizations)

At the moment the work is

continuing …

Other leading financial and consulting organizations

Presentation on pricing reform

and system of subsidies

Presentation on major aspects of

Naftogaz’ reform

Analysis of interconnector with Slovakia

18

25


19

Naftogaz New Mission: Implementation Focus Areas Foreign policy issues

Credit recapitalization 1

Moving gas transfer points 2

Gas hubs, use of the Ukrainian UGS 4

Trade financing 5

Investment in production (private investments, international financial organizations,

etc.) 6

Establishing gas transmission system operators based on „asset-light” model. A joint

venture 3

We work on issues within the foreign policy domain:

26


20

Naftogaz New Mission: Implementation Focus Areas Dangerous myths

“Reach an agreement” with Gazprom 1

Trilateral consortium 2

Selling Ukrgazvydobuvannia right now 4

Cheap Ukrainian gas only for households 3

27


21

FAIRNESS TRUST ANALYTICAL APPROACH

Key value drivers Core functions Expectations Analysis

Naftogaz New Mission: Implementation Focus Areas Performance management of Naftogaz operations

As we lead Naftogaz operations, we are aligning Company performance management system with the best practices.

Conceptually, this process can be represented as follows:

This process is based on three main principles:

28






Appendices

29


22

The old social contract, when the government gradually gives back part of civil rights (taken during the soviet era or even earlier) and gradually reduces the amount of appropriation "of state property rent" in exchange for social stability, including gradual improvement of living standards for the majority of citizens, doesn’t work anymore: • the government cannot meet its obligations under this contract (hryvnia exchange rate, pensions, gas price, etc.) • people demand more civil rights, including control over the government, and become less tolerant of the "rent“

appropriation.

People call for “reforms“, which for paternalistic-minded majority of citizens means higher standard of living: “The government has to be changed and to start performing its "duties under the social contract."

The government is currently unable to satisfy the popular demand for reform - not only because of the military aggression from Russia.

The old social contract is unsustainable in Ukrainian situation for purely economic reasons - limited export opportunities compared to countries which can afford such a contract, and a heavy “load" of social security in the context of complex demography.

The most active part of people regularly brings attention of the general public to internal government problems, which further increases the level of dissatisfaction with authorities.

Our Understanding of the Overall Strategic Context of Economic Reforms in Ukraine

But in order to have at least a real chances to improve life in Ukraine, reforms at least have to meet the following

basic requirements: Facilitate integration with the European Union Increase security and independence from Russia Inspire trust in government

There is no easy

way out of this

situation

In terms of ideology (orientation) of these reforms, we do not see a

credible alternative to what is called the "Washington

consensus" (in the positive sense)

30


* – Currently Naftogaz has no control over PJSC Ukrnafta and JSC Ukrtransnafta. Although Naftogaz retains 50% + 1 share of the voting rights in PJSC Ukrnafta, now we do not have unilateral possibility of carrying out legitimate general

meeting of shareholders 23

Non-Gas Business Segments of Naftogaz

Naftogaz’ non-gas assets

Oil production and processing

PJSC Ukrnafta* (50%+1 share)

533 thousand tones of gross oil and condensate production in 2014

Processing volume of oil and gas condensate in 2014 amounted to 480 thousand tones

Oil transportation

Oil transmission pipeline system with the annual entry capacity of 114 million tones and transit exit capacity of 57.6 million tones

Oil transportation in 2014 amounted to 16.9 thousand tones

PJSC Ukrtransnafta* (100%)

Oil business

Research and development to expand the resource base of hydrocarbons

SC Naukanaftogaz

(100%)

Conceptualization and implementation of natural gas replacement projects; alternative

sources of natural gas

SC Vuhlesyntezgaz of Ukraine

(100%)

Research and

development

Other service enterprises

SC Natogazbezpeka

(100%)

PE Ukrnaftogazkomplekt (100%)

Prevention of emergencies, including oil and gas leaks

SC LIKVO

(100%)

Service companies

DC Zakordonnaftogaz (100%)

REFORMING NAFTOGAZ OF UKRAINE, STRATEGIC OBJECTIVES · Publication of this presentation does not...

Documents

Transcript of REFORMING NAFTOGAZ OF UKRAINE, STRATEGIC OBJECTIVES · Publication of this presentation does not...