Ukraine's Naftogaz sees potential for 3-4 years of 'depressed' gas prices

Gas prices could remain low for the next three to four years, a senior official at Ukraine's state-owned gas company Naftogaz Ukrayiny said late July 6.

Prices across Europe have tumbled to record lows in recent months, driven by oversupply and weak demand, and Naftogaz CFO Petrus van Driel said during a webcast panel discussion that the company was prepared for working through the downturn.

"There will be more than one year -- maybe three to four years -- where gas prices are likely to be depressed," van Driel said.

"We know gas prices go up and down. We are fortunate to have a strong balance sheet," he said, adding that the company was looking to increase its preparedness for an initial public offering.

"We are getting ready for an IPO [...] in a timeframe of about three years," he said.

Naftogaz has carried out a wide-ranging restructuring of its business this year, creating a new commercial gas division designed to develop the company's gas trading capabilities further.

Until the end of last year, Naftogaz was the umbrella group for all Ukraine's state-owned gas-related activities from production, transportation and storage to supplies to intermediaries for retail sales.

But as part of its preparations for a new gas transit deal with Russia's Gazprom from 2020, it unbundled the transportation division into a new legal entity, leaving it focused on upstream activity, gas trading and storage.

Storage business

Naftogaz has also looked to monetize the vast spare gas storage capacity operated by subsidiary UkrTransGaz by opening it up to European traders.

Under the country's Customs Warehouse regime, European traders are able to store gas in Ukraine net of taxes and customs duties.

Van Driel said he expected a strong contribution from the storage business in 2020.

"In a world where we no longer have revenues from transmission, the [storage] model I think is an especially valuable source of income," he said, adding that Naftogaz' ability to trade around storage positions would also contribute.

Otto Waterlander, recently appointed chief operating officer at Naftogaz, said he had been "excited" to see how quickly the company had been able to develop the Customs Warehouse regime and how traders had embraced it.

Waterlander cautioned that Ukraine would not have the same opportunity every year as the use of its storage would depend on the market.

EU storages are currently filled to more than 80% capacity having ended the winter well stocked and with the market in a state of oversupply, leaving Ukraine as one of the only options for storage to absorb the gas glut.

Waterlander said Ukrainian storage was now well on the radar of market players.

"We see an increased sphere of influence for our storages, the integration of our market, and storage being used more and more," he said.

Waterlander added that Ukraine's storages could act as a home for European LNG imports. "We see that supply into Europe finds its way into our storage facilities -- turning summer LNG into winter [gas] for our customers," he said.

Ukrainian gas hub

The European Commission is also supportive of Ukraine being able to create a gas hub around its storage capabilities.

Torsten Woellert from the EC's Support Group for Ukraine said during the discussion that conditions were increasingly "favorable" for conceptualizing the establishment of a gas hub in Ukraine.

"Traders are already storing gas in Ukraine linked to the gas price in Europe," Woellert said.

"But can we develop a more long-term, sustainable business concept out of this?" he said.

Olena Zerkal, adviser to Naftogaz CEO Andriy Kobolev, said the company was at the stage now of forming its business case to create a gas hub in Ukraine.

"The Ukrainian market is full of opportunities for European companies," she said.

Ukraine has moved closer to being able to set up a gas trading exchange with the adoption of a new financial instruments law.

Energy trader group EFET said July 6 that the new law created the framework for the establishment of an exchange with central clearing, regulated and unregulated platforms.

The law, EFET said, was crucial to pave the way for "well-functioning, liquid and competitive gas and power markets in Ukraine."