Ukraine: restructuring the Ukrainian gas transportation system

CMS Cameron McKenna,
Kyiv, Ukraine, Wed, Sep 10, 2014

On 14 August 2014 the Parliament of Ukraineadopted the law “On BringingAmendments to Some Laws of Ukraine with Respect to Reforming the System of Management of the UnifiedGas Transportation System (the“GTS”) of Ukraine” (the “Law”). The Law followsthe Government’s plans to change the ownership structureof the GTS by offering European and American investors up to a 49% share in the company. Currently both the GTS and the underground gasstorage facilities (the “UGS”) are operatedby Public JSC “Ukrtransgaz”, which is a 100% state-owned company.

The Law is pending the President’s approval and its text has not yet been officially published. However, we do not expect the final text to substantially differ from the draft Law, where the main concepts are as follows:

·     The Law expressly allows transfers of the state-owned GTS and UGS assets to a commercial entity(-ies)for lease on a paid basis, subjectto the following conditions:
o    the assets shall be leasedfor a fixed period of time;
o    the commercial entityshall not be entitledto further dispose of such objects;
o    the commercial entityshall be performing the functions of GTS and/or UGS operator;
o    the assets shall beleased for the purposes of performanceandmust be used in accordance with the obligations accepted by Ukraine under the Protocolon the Accession of Ukraine to the Energy Community (as signed on 24 September2010 and ratified on 15 December 2011); and
o    the assets shall be leasedunder an agreementaccompanied by a due account of the principles of economicsafety, with the terms and conditions of such agreement to be approved by the Government.

· The Law provides that the functions of the GTS operatormay be performed by a commercial entity established and owned exclusively byeither:

o the State of Ukraine(including via Naftogazof Ukraine); or

o a joint venture,where the State (or Naftogazof Ukraine) holds no less than 51% and the investor(s) owns the remaining share.

Such investor(s) must:
o    be owned and controlled by residents of the EU, the US or members of the Energy Community;
o    be an operator of a gas transportation system or a member of the GTE (Gas Transmission Europe);
o    be certifiedin accordance with Article 10 of the EU Directive № 2009/73/EС concerningcommon rules for the internalmarket in natural gas and Article 3 of the Regulation (EC) No 715/2009on conditions for access to the natural gas transmission networks; and
o    have at least 5-years experience in managementof a gas transportation system in the European or American market.

· The Law provides that the Ministryfor the Energy and Coal Industry of Ukraine may take the decision to separate functionsof the operator of UGS fromthe functions of the GTS operator. The UGS may be operatedby a commercial entityestablished and ownedexclusively by either:o the State of Ukraine;or

o by a joint venture,where the State holds no less than 51% and the investor(s) owns the remaining share.

Such investor(s) must:

o be owned and controlled by residents of the EU, the US or members of the Energy Community

· The Law provides that theGTSand UGS Operator(s) shall be selected according to the resultsof tenders held by the Government. However, the winners and potentialoperators will still have to be approvedby the Parliament of Ukraine.

LAW: the Law of Ukraine “On BringingAmendments to Some Laws of Ukraine with Respect to Reforming the System of Management of the UnifiedGas Transportation System of Ukraine”dated 14 August 2014 (based on the Draft Law No 4116a).