Naftogaz is capable of replacing 2 billion cubic meters of natural gas.

Eight months ago, the new management of Naftogaz Ukrainy declared that the company would rely only on the production and supply of fossil fuels, namely gas, and that Naftogaz Ukrainy was entering the stage of survival. That is, the transition to a multi-energy business model has been stopped, and green businesses have been put on hold.

What preceded this:

At the end of 2021, NJSC Naftogaz of Ukraine began to realize an ambitious goal - to become the largest generator of heat from biomass, RDF (waste) and biogas by 2027 and to ensure the replacement of about 2 billion cubic meters of natural gas, which gives Ukraine the opportunity to almost completely abandon the use of natural gas for central heating, replacing it, in particular, with biomass, biogas and RDF (waste). I would like to note that replacing natural gas is much cheaper and faster than increasing its production.

The implementation of these projects took place on the basis of the subsidiary Naftogaz Bioenergy, which was reorganized to create an effective operating model for the construction and management of heat and power infrastructure facilities using biomass, biogas and RDF.

During the year, the team of the Naftogaz Bioenergy office worked on projects for the construction of 9 bio CHP plants in eight regions of Ukraine and successfully implemented two projects for electricity generation (Lviv, Hrybovychi landfill) and heat generation (hero city of Okhtyrka).

On November 30, 2022, Naftogaz Bionergy launched its first (pilot) project in Okhtyrka - a biofuel-fired thermal power plant.

Usually, projects of such a large capacity are implemented within 18-20 months, but Naftogaz did everything in 96 days. And this is despite the fact that the peak of installation, construction and commissioning works occurred during massive rocket attacks (October-November 2022).

Thanks to the heroism of our Armed Forces and the heroism of our thermal power engineers, who were sometimes forced to work under bombardment, we completed the task.

The company was lucky with its equipment. As of August 2022, it had already been manufactured, but was intended for another customer. However, since the hero city of Okhtyrka suffered greatly and could have been left without heat in the winter, this equipment was provided to Ukraine. The project's capacity covered 100% of heat users in the city of 48,000. The risks of heat shortages were fully hedged.

The pilot in Okhtyrka proved that in fact, in 100 days, we can create a facility that will replace about 20 million cubic meters of gas per year in the heating system. Moreover, our resources (the companies that ensured the implementation) would be enough to build three or four similar projects simultaneously.

In parallel with Okhtyrka, a project portfolio for the construction of cogeneration CHP plants (generating both electricity and heat) was formed in Zhytomyr, Chernihiv, Khmelnytskyi, Kropyvnytskyi, Ternopil, and Lviv. These projects have already reached the ready to build stage. By October 15, 2023, Naftogaz Ukraine planned to supply electricity and heat to all these cities - a total of about 250-300 MW. This would make it possible to provide alternative heat to up to 40% of the population of Zhytomyr or Chernihiv.

In partnership with the private group of companies Clear Energy, a pilot project of a 625 kW biogas power plant operating on the basis of a solid waste landfill in Lviv region was implemented in 46 days (April-May 2022) during active hostilities. This is an example of how business should work despite difficult times.

Thanks to the biogas power plant, 38 hectares of landfill, which emits millions of cubic meters of harmful landfill gas, have become a source of energy for surrounding households.

The plant is capable of generating 2,645 thousand MWh per year, replacing more than 800 thousand cubic meters of natural gas.

This makes it possible to provide electricity to about 735 households and at the same time reduce carbon emissions by about 30 thousand tons per year. Thanks to the project, more than 2 million cubic meters of methane, which is 30 times more harmful than carbon dioxide, will not be released into the atmosphere, and millions of cubic meters of landfill gas from 38 hectares of landfill will become a source of energy.

In a short period of time, from winter 2021 to spring 2023, we have done a lot: we have studied and developed programs for the modernization of district heating in ten major cities of Ukraine, and we have concluded that we can really close the issue of gas substitution in district heating in five years. We developed a viable program for such a transition, developed its implementation strategies and action plans, and realized that we had all the necessary resources. We created an energy developer company, which is the only effective tool in Ukraine capable of successfully implementing energy projects of the highest complexity. We have formed a serious project portfolio.

In practice, we have proven that we are able to replace 100% of gas in a large city with a population of 48 thousand people in a critically short time.These new business processes in the national company, which traditionally dealt only with gas, led to a discussion on what a modern Naftogaz of Ukraine should look like and what its role could be in decentralizing generation facilities and demonopolizing the heat market.

As a result of these discussions, a transformation strategy was developed, but the change of the company's top management last fall led to the suspension of the programs that transformed the company.

What prompted such a drastic change?

Perhaps because Naftogaz Ukraine defaulted in the summer? Or maybe it was due to the suspension of the gas substitution program in district heating?

First of all, default is not bankruptcy. And it was not Naftogaz Ukraine that failed, but the state that decided not to pay on the Eurobonds.

In the fall, the company had tens of billions of hryvnias in its accounts, and the state owed Naftogaz about UAH 50 billion. The company has more than 11 billion cubic meters of its own gas in storage, which is up to $20 billion at import prices. This information is available because it is public.

Secondly, these eight projects did not require large funding from the company. After a year of active work on attracting investments, we managed to reach an agreement with one of the leading European banks that Naftogaz would invest only up to 20% (actually, the ready-to-build stage), with the remaining 80% coming from borrowed funds.

Third, several of these projects were to be financed by cities. For example, Lviv. Yes, it was a year-end payment for the thermal power plant we built, but certain financial instruments made it possible to do this painlessly for the company.

It is clear that there is a war, and the economic situation is very difficult. But there will be a victory and we need to rebuild the infrastructure now. We will have to make a green transition and create a decentralized energy architecture. This is a global trend. This is what President Volodymyr Zelenskyy emphasized in his address to the Parliament in December 2022.

If we want to really guarantee energy security and safety, relatively speaking, each district center should have its own cogeneration facility that will produce heat and energy for its own consumption.

International investors want to invest not in the banal risky and anti-trendy topic of gas production, but in new markets for heat and electricity from alternative energy sources, in modern green technologies, and in trendy transformations that are part of the global transformation of the EU economy (Green Deal).

I recommend that you look at the analytical reports of Ernst & Young or KPMG to see where investors want to go.

The reconstruction of Ukraine after the end of hostilities will be the largest economic project in Europe. This opinion was expressed by our President, and I truly believe in it.

This course has been declared by the leaders of many of the world's leading countries, their governments, and international financial institutions. But hoping that the funds will be distributed like pies is just plain stupidity.

The main problem may be the availability of projects at the ready-to-build stage: professionally developed and approved project documentation in accordance with the law, positive conclusions of relevant expert reviews, etc. The preparation of such projects can take 24 months or longer. Without them, no one invests a single penny. That is, we no longer have to hurry, but must work in an anti-crisis mode 24/7.

By the way, this problem will be typical for all critical infrastructure projects.

For me, it is a shock and wildness that Naftogaz of Ukraine, for which the heating sector is an understandable and not a foreign market, has completely stopped filling its project portfolio in terms of gas substitution. I am very concerned about this. I see this as a great risk of delaying the post-war recovery, especially in such a global, socially important and problematic market as heat supply.

Instead, Naftogaz of Ukraine announced its intention to increase gas production to 19 billion cubic meters in 2023.

I believe that over the next 20 years, natural gas will certainly play an important role in the country's energy security.

But it should still be a transitional fuel in the processes of decarbonization and greening of the economy.

The "green" transformation of the EU economy (Green Deal), the so-called fourth energy transition, will deeply transform all oil and gas companies without exception, and this is already a reality. The world is at the "beginning of the end" of the fossil fuel era.

Demand for oil, natural gas, and coal will peak by 2030.Consumption of the three main fossil fuels will start to decline this decade due to the rapid growth of renewable energy.Without understanding and, most importantly, without action towards decarbonization, it is impossible to synchronize a Ukrainian company, even a powerful one like Naftogaz Ukraine, with the EU economy. Or do we not want to join the EU anymore?

Accordingly, NJSC Naftogaz of Ukraine can increase gas production to meet the needs of the population, but it is Naftogaz of Ukraine, as a national company, that must take care of the development of production and supply of new green energy products and services to ensure the transition from the model of fossil fuel production and supply to a multi-energy business model. Such a business model is modern and complies with international standards, and it will help to easily synchronize with the newly transformed "green" EU energy market.

In my opinion, Naftogaz of Ukraine, as a national company, should be the engine of modernization and professionalism in the energy sector of Ukraine, be the leader of the "green" transformation of the Ukrainian energy sector, in particular, during the resilience in the war and post-war recovery of the energy sector. At the same time, Naftogaz Ukraine should not look towards solar and wind power generation, but move to where it is a major player, where there is a national problem, namely the heat supply sector, decarbonizing and modernizing it accordingly.

Why is this important? Because NJSC Naftogaz of Ukraine should not slip to the level of a gas station! A national company must solve national problems!

This is the only way to do it! National companies, when there is a war, when private business is destroyed, must solve national problems first and foremost, and not think about survival, while demonstrating minor and non-priority "green" areas such as sun-wind...! One such problem is heat supply: these are multibillion-dollar debts of district heating companies that have never been and will never be paid in full. For example, in previous years, district heating companies could not pay for the consumed gas to Naftogaz, because heating tariffs are lower than the cost of the gas they were supplied with; this is a "scheme" with gas theft, which is corruption on an unprecedented scale; these are artificially low tariffs that kill heat and electricity producers; this is the absence of a central heating market as such, because it is monopolized by local "solvers"; these are destroyed networks with enormous losses...

We need to act today! I would even say that yesterday. And not to hide behind the false policy of survival... Survival is the wrong way. I quote President Zelensky: "Rebuilding Ukraine is not only about what needs to be done after our Victory, but also about what needs to be done at this time." The key words are "at this time"!

I reiterate that Ukraine is capable of completely abandoning gas for home heating in three to five years.

A third of the gas supplied by Naftogaz of Ukraine is used for district heating. Imagine the volume of substitution we are talking about.

The reality and, most importantly, the success of substitution is demonstrated by the already achieved shares of heat generated from renewable energy sources, mainly biomass, in most EU countries: Sweden (66%), Estonia (58%), Finland (58%), and Latvia (57%). On average in the EU, this figure is 23% of the total energy used for heating, and it is constantly growing: from 12% in 2004 to 23% in 2020.

What about Ukraine? In 2020, biomass replaced approximately 5.2 billion cubic meters of natural gas, which is about 15% of total pre-war consumption. Additionally, another 20 billion cubic meters of natural gas can be replaced, mostly by agricultural biomass. We have it, we have a lot of it, and its harvesting is a huge sector for regional development and job creation. This is another strong argument in favor.

In the pre-war period, Ukraine consumed 30 billion cubic meters of natural gas and had 20 billion of its own production. That is, we imported about 10 billion cubic meters. We have enough biomass to replace all imports and half of our natural gas production.

What investments will this require?

The investments are substantial. To replace 2 billion cubic meters of gas, investments will amount to approximately USD 2 billion. THE INVESTMENT WILL BE APPROXIMATELY USD 2 BILLION.

By using the biomass we have, we will be able to hedge the risks that there may be no gas or that gas prices will soar, as they did a year and a half ago when we experienced a situation where gas cost 2,300 euros. But the state gave it to people for 7800 UAH. Can you imagine the difference in price and the losses we incurred? For example, it is much more profitable for the state to sell its own gas for a lot of money on the spot, rather than burn it for nothing to heat homes, accumulating debts. Or to produce mineral fertilizers, which, by the way, is something that the leadership of the Ministry of Energy is very active in promoting, and which is very appropriate, since we are an agricultural country and there is a great shortage of fertilizers in the world, and we have a network of Nitrogen plants. Let's burn biomass, of which we have huge amounts, rather than spending money that could be spent on defense, on restoring and modernizing the economy.

If it is so promising and more profitable than gas, why is biomass generation currently unprofitable and is being discussed on every corner?

Because the heat tariff and gas price for households are artificially low. We understand that the tariffs are three times lower than the cost of production. There is a moratorium on raising tariffs for commercial enterprises, which is the main source of income for heat producers. In addition, most heat-consuming companies have suspended operations due to the war.

Last week, in my interview with Apostrophe, I focused on the readiness of heat generation facilities and the entire heat supply sector for the 23/24 heating season.

All heat generation in Ukraine is unprofitable due to artificially low tariffs.

However, there is a crucial caveat. For Naftogaz of Ukraine, biomass projects have never been and are not unprofitable. The state buys gas at UAH 100 and sells it to the population at UAH 8. It receives minus 92 hryvnias. These are losses that have accumulated catastrophically and will never be repaid. If we stop buying expensive gas and replace it with available cheap biomass, the payback period for these projects is up to four years. This is a profitable program. I repeat once again: the national company is obliged to solve national problems, and these are problems with heat supply and the modernization of district heating companies.

I am very surprised by this sharp turnaround of Naftogaz of Ukraine from gas substitution. We have already done a lot, and now we have turned around and gone in the opposite direction.

In order to sell gas to district heating companies at UAH 7,420 for heating the population, the state transfers more than UAH 200 billion of taxpayers' money to Naftogaz from the budget. In my opinion, such a price for gas does not motivate the efficient use of gas, and this is a detriment to the state.

Some politicians and experts are campaigning for "state" gas for the needs of the population at the cost of production. Is this realistic?

Most political forces have been harping on the theme of "state-extracted gas to the population at cost", additionally covering this populism with slogans about the country's energy security in order to win on the energy front, throughout the entire period of Ukraine's independence. It is the populist politicians who want to satisfy their political ambitions who deceitfully fuel the desire of some of their voters to get cheap gas by selling it "at cost".

This is a myth! Just like the myth that this production is enough to cover all the needs of the population.

When Ukrainians are being "zombified" by the gas issue, they are not being told that in order to sell them gas, a tremendous amount of work has to be done, which significantly affects the cost of gas.

It includes:

- administrative costs of companies in the chain from well to consumer;

- payment for the use of subsoil (rent);

- production costs for gas lifting and treatment (Lifting cost);

- depreciation charges;

- fee for entry into the GTS;

- expenses for geological and seismic works;

- impairment of oil and gas assets;

- cost of gas lifting from the well;

- maintenance and management of industrial and main gas pipelines, underground storage facilities;

- difference in the level of field efficiency, which reaches four times or more;

- economic costs of raising capital for investments that ensure the production of this gas;

- investment in exploration and development of the field in the form of geological and seismic works, exploration and production drilling, construction of ground infrastructure.

And much more.

All of the above is accompanied by production and technological gas consumption (PTC).

Most gas is consumed by households directly and through district heating. That is why the state sets tariffs for gas supply infrastructure operators at a level significantly lower than economically justified. Imagine that in addition, you also need to subtract the cost of transportation. And subtract the consumption by budgetary and religious organizations, as these are also the needs of the population. It's horrible...

To summarize.

In fact, according to the above, gas is not that cheap. Also, state production is not enough even now, and the lower the price, the higher the use, the more gas will be in short supply. This is a proven fact.

Add to this the problem of subsidization, which today makes gas the cheapest type of energy for the population in Ukraine. This is a kind of self-deception. Of course, at such a gas price, it is unprofitable to replace or insulate housing, in fact, it is not profitable to do anything from an economic point of view. It is profitable to just sit and burn gas mindlessly. This is a "suicide" position. For the economy, this is a terrible, I would say fatal blow, the consequences of which society will feel in a few years! Already today, the amount of hidden subsidies at the current gas price is UAH 842 billion. This is a huge tragedy for Ukraine. Generating companies will be the first to suffer in this situation. They have already been almost destroyed by this policy.

I think it is important for Naftogaz of Ukraine to stay away from this political scam called "state-owned gas is given to the population at cost". But declaring a single-vector focus (gas production only) means that the company is already involved in this populist game.

For the national company, in terms of the inevitable "green" transformation into a modern energy company in line with Ukraine's accession to the EU, the fact of neglecting gas substitution programs is nothing more than harm, a shot in the foot...

P.S. On August 14 this year, Mr. Oleksiy Chernyshov for the first time in his term publicly spoke about the transformation of Naftogaz Ukraine. Let's hope that his colleagues from the company's top management are ready to change something... or is it true, or is it again for reporting purposes...

Quote:⚡

""Of course, turning Ukraine into an energy hub is about more than gas. Today, hydrocarbons are our core business, but the Company has already embarked on the path of transformation from a classic oil and gas company to a modern energy company. The green energy projects we have launched will help strengthen the country's energy security and achieve climate neutrality in the future. ✊"