Today, in Ukraine, exchange trade in gas may hardly be called developed. Less than 10% of all gas traded on the market is sold there. At the same time, 70% of this small amount falls on one participant: Naftogaz of Ukraine. The churn rate (product turnover indicator) is about 1, which is five times lower than, say, in the Austrian market. In addition, interstate gas trade is extremely limited, as gas exports are totally prohibited, and the existing conditions and regulations in the domestic market are not attractive for non-residents.
As a result of the closed market in 2022–2023, we saw a drastic drop in gas production by private companies — from 5 to 3.7 BCM, or by 26%. No investor will make serious investments when there are no prospects for product sales, or they are extremely risky and depend on the market actions of one monopolist who is not interested in competitors.
Many Ukrainian experts and government officials believe that in wartime, liberalization of the energy markets is inappropriate, exports should be prohibited, and the market power of one monopolist is the only possibility of reliable supply to consumers.
I will disagree. In 2022, the Kremlin launched a real energy war against the EU countries — first with its ultimatum demanding unacceptable payments in roubles, and then, by undermining three branches of the Nord Stream 1 and 2 gas pipeline system. The EU faced a challenge unprecedented in its history, as before the large-scale Russian aggression in Ukraine, its dependence on Russian gas reached 42%, and the almost instantaneous cessation of Gazprom supplies was fraught with a collapse of the European economy.
However, in these extraordinary circumstances, no one in Brussels, Berlin, or Paris thought of curtailing stock exchange trading, banning exports, introducing price caps for households at a level that does not cover suppliers’ costs, or creating a single monopolist, like Naftogaz of Ukraine. If the Europeans decided to resort to traditional Ukrainian recipes for "stabilization" of prices, I can't even imagine what would happen to the EU economy, because under such a recipe, its economy would have stable prices but no gas.
Brussels did not turn to the Ukrainian "market" methods but adopted a package of extraordinary decisions REPowerEU to diversify supplies and accelerate the "green" transition thanks to the development of RES and energy conservation projects. The liberal rules of the game remained in effect, and some correlations aimed at limiting individual cases of speculation and joint purchases of gas in relatively small volumes did not affect the principles of competition, on which the modern EU energy markets are built.
Its reaction to the Russian "gas war" at first whipped up prices, which led to the redirection of US and Qatari gas carriers from the Asian and Pacific market to Europe, since the European market has become premium for global LNG. The EU also launched measures at energy saving, by 15–20% in 2022, and stepped up introduction of new projects in the RES sector. As a result, the market gradually normalized and prices went down. The liberal EU market model defeated the Russian Federation in the gas war, which the Kremlin certainly did not expect.
In Ukraine, the situation with gas self-sufficiency is much better than in the EU. Our state has not bought Russian gas for more than eight years, and according to the Naftogaz of Ukraine, in 2023, it did not depend on gas imports at all. The internal market uses domestic resources. Even if we assume that in the coming years there will be a deficit of 10–20% due to the growth of the economy and implementation of gas power plant construction projects, it is simply impossible to compare it with the EU dependence on imports at a level of 87–90%, with domestic production at about 40 BCM, and consumption at a level of 350–370 BCM.
That is, due to the availability of domestic gas resources and minimal dependence on imports, extremely favourable conditions have been created in Ukraine for the gas market liberalization in the interests of consumers and the development of exchange trading, as its integral component.
The best guarantee of resource availability lies not in the even more closed Ukrainian market as a "thing in itself" but in its European integration through market coupling. In this context, there is no alternative to the creation of liquid exchange trading in accordance with the EU directives, which Ukraine is obliged to implement as part of its strategic path to the European Union.
The European market model does not provide for administrative restrictions in interstate trade. This means that the Ukrainian gas market should become part of the common EU market, which operates under uniform rules. There should be no separate Ukrainian market functioning in specific local conditions, incomprehensible to the investors and European traders. It is also important to note that correctly adjusted market exchange mechanisms will not hinder but on the contrary, help fill the PSG by both residents and non-residents.
It's high time to understand that only the European trajectory, not local amateur activities, can attract investments to gas production. The entire practice of the monopoly of Naftogaz of Ukraine, fostered by many Ukrainian governments, shows that this company, instead of promises to raise gas production, can really only raise debts on the market, exceeding UAH 200 billion now, while gas production by the so-called Naftogaz of Ukraine Group fell from 17.6 BCM in 2000 to 14.2 billion BCM in 2022.
Actually, in that period, the existing monopoly model of the market never allowed production in excess of 21.5 BCM/year by state and private companies. It was and remains the main impediment for the gas industry development. The facts show that the main contribution to the growth of production over the past 25 years was made by private companies, which increased it from almost zero to 5 BCM/year.
I believe that 21–22 BCM/year is the cap for the existing model, despite the fact that Ukraine has some of the largest recoverable gas reserves in Europe, amounting to about 900 billion cubic meters. Under the condition of introduction of the liberal European gas market, Ukraine can increase production to 25–27 BCM/year by 2035, and to 30 BCM/year by 2040.
It is important to note that the concerns of government officials and parliament members about free interstate trade are ungrounded. Under normal, transparent and competitive market conditions and its integration in the EU market, there will be no imbalance of the internal market, on the contrary, its stability will grow. This is evidenced by the operation of the Ukrainian electricity market.
Exactly its timely synchronization with ENTSO-E made it possible to maintain the power system integrity and meet the minimal needs of consumers, despite the destruction of 70% of the entire generation by the Ruscists. However, the model of the electricity market should still be improved, in particular, with the elimination of administrative restrictions (price caps) for commercial imports.
In my opinion, the main deterrent factor of the European integration of the Ukrainian gas market is the outdated thinking, with vestiges of Soviet ideas about the economy on the part of state leaders and a large part of society. We should not wait for better times for reforms, because they may never come. The best time for the necessary transformations is always now.
