Ukraine needs to prepare for different scenarios of the heating season

Mass shelling of energy infrastructure facilities by the Russians once again confirmed that the Russian Federation will do everything in its power to disrupt the heating season in Ukraine. It is possible that with the onset of cold weather, the situation may worsen even more, especially against the background of the counteroffensive of the Armed Forces and the active liberation of captured territories. What is the state of the gas industry and what will this heating season be like for the industry?

Gas production in conditions of war

For more than 230 days all of Ukraine has been living in conditions of full-scale war, daily shelling of populated areas and critical infrastructure facilities. From the first days of the war, Kharkiv region, which was and is the leader in gas production, found itself in the zone of active hostilities, some fields were captured by the invaders.

Despite the danger, gas companies worked and produced gas where it was physically possible, and even where rockets were flying in the neighborhood. Everyone in their place did and is doing everything to bring our victory closer.

As of today, we can confidently say: the war did not break the gas producers. Being in extremely difficult conditions, the companies are drilling new wells, carrying out capital repairs of existing ones and even for the first time in Ukraine they have started to extract gas on the areas provided in accordance with production sharing agreements. Unfortunately, in 2022, we predict a general decrease in Ukrainian gas production by approximately 8-10%. And there are objective reasons for this. In general, information on the volumes of extraction, consumption, logistics, storage places of hydrocarbons, etc. during the period of martial law is closed.

At the same time, we see that the better the situation at the front, the more opportunities arise to resume operations at facilities where it was physically impossible before.

Rent issue

Positive news for the sector was the change in the approach to the taxation base of gas production. With the beginning of the war, the rent was significantly increased and tied to the prices on the European market, which was quite turbulent all this time, not without the participation of Russia.

As a result, the ban on the export of Ukrainian gas and the decrease in consumption within the country led to the fact that gas production became unprofitable for many companies, because the companies were forced to pay rent at European prices, although they sold gas in Ukraine at a price many times lower than in the EU. This approach was unfair, and it is very important that it was changed thanks to the adoption of draft law No. 7732. Now the rent calculation is temporarily tied to domestic gas prices. This decision of the state will enable companies to invest in the industry and stimulate an increase in gas production. At the same time, it is critically important to preserve the progress and results achieved in recent years on the natural gas market.

The full-scale war and the resulting energy crisis in Europe proved that it is necessary to strengthen the energy security of the region, and we need to maintain domestic gas production and stimulate its increase. I am convinced that after the victory, in the coming years, Ukraine will be able to become energy-independent, and then become an exporter of gas to the EU.

Tough season

The coming winter will be difficult and unpredictable for our country. Saving energy resources as much as possible, in particular gas, is the slogan of this heating season both for Ukraine and for the whole of Europe.

By the beginning of October 2022, 14 billion cubic meters of gas were pumped into underground storages. We also have 2.2 million tons of coal in our warehouses. For comparison: last heating season, the country used 19.4 billion cubic meters of gas, and the industry consumed almost 6 billion cubic meters of them.

This year, gas consumption will drop significantly due to the destroyed industry and mass displacement of people. According to the Association’s calculations, the demand for gas from industry during the full-scale war decreased by more than 50%, in the first months the drop reached 70%.

The Ukrainian industry used to be the main consumer of gas produced by private companies. However, with the beginning of full-scale war, the Russians destroyed or damaged many industrial facilities, and as a result, a number of gas producers were unable to sell their products due to lack of demand for them. Among the sectors most affected by the war are the agricultural, mining and metals complex, and the chemical industry.

Today, there is no shortage of natural gas for industrial enterprises on the market. At the same time, unfortunately, we state that a quick recovery of demand will not occur at least until our victory. After all, the war caused significant losses to industry, especially in the east and south of the country, and it will take years to restore them. For example, losses in the steel sector alone are estimated at 40% of pre-war capacities. There is also a problem with the export of finished products and raw materials.

According to the Ministry of Economy, the drop in Ukraine’s GDP for 9 months of 2022 is estimated at the level of 30%. They note that continued hostilities, further attacks on production facilities, infrastructure and residential buildings, as well as uncertainty about the duration of the war are holding back further development and postponing active reconstruction.

Potentially, with the available gas reserves, the replenishment of underground gas storages in the coming months and the help of our partners, Ukraine will quite realistically survive the winter without significant complications. But we should not forget that we are dealing with a terrorist country, so we need to prepare for different scenarios. In particular, it is possible to stop the transit of Russian gas through Ukraine, as well as massive attacks on energy facilities, which is exactly what we have seen in recent days.

As for gas transit, of course, its suspension will be an extraordinary situation for Ukraine and the EU, but at the same time it will mean the collapse of the Russian monopolist. Gas supplies to Europe now take place only through our gas transportation system, and Russia’s closing the tap is a shot in the foot. As the Operator of the gas transportation system of Ukraine stated, our country is ready for such a development of events, and in the event of a stoppage of transit, the gas transport system will operate in reverse mode.

It is impossible to predict the actions of the occupiers, as it is unrealistic to predict the situation at the front – and this will directly affect the passage of the heating season. Of course, the authorities are considering various scenarios and, accordingly, will promptly respond to problems. We all need to prepare for the worst, but at the same time hope for the best and do everything to win.