Development of the Ukrainian Energy Exchange for gas ... · OBJECTIVE: To create reliable, transparent and efficient energy technologies and tools for trading energy resources in

Ukrainian Energy Exchange

Development of the Ukrainian Energy Exchange for gas trading according to European standards

www.ueex.com.ua

Ukrainian Energy Forum 2018, Kyiv, Ukraine

OBJECTIVE: To create reliable, transparent and efficient energy technologies and tools for trading energy resources in the spot and term markets, domestic and foreign markets of Ukraine, taking into account the specifics and features of energy markets functioning, tasks and steps towards their liberalization.

Ukrainian Energy Exchange is a leader in the Ukrainian exchange market

Today CE "UEEX" trades: 15-20% of the LPG market 3-5% of the oil products market of Ukraine 6% of the coal market of Ukraine 1 place among 40 accredited sites (exchanges) for the sale of insolvent banks property - ProZorro.sale

Oil products

LPG

Natural gas

127 thousand tons 1,8 billion UAH

994 thousand tons 21 billion UAH

350 thousand tons 5,24 billion UAH

147 million cubic meters

1,117 billion UAH

2 million tons 5 billion UAH

Trading volumes of UEEX

Results 2016-early 2018:

Registered > 600 companies

Concluded > 17 000 exchange

transactions

Sales volume > 34 billion UAH

In 2017, through the clearing system of CE "UEEX" were held:

collateral enrolment 1 062 965 915 UAH,

collateral transfer 387 577 207 UAH,

collateral returned 675 388 708 UAH,

Total number of cleared trading sessions 418.

All operations on spot operations clearing were successful, 100% of concluded exchange transactions ended in full compliance with obligations and actual delivery of the goods

CE UEEX trading instruments

4

Contracts on spot (export, import, domestic market) Contracts on forward conditions (export, import, domestic market), for a period of one month, quarter, half

a year, year Forwards on differentials (TERM contracts) (export, import, domestic market) Spot Contracts and Differentials (spot and forward conditions) with quotations linked to Thomson

Reuters, Platts and Argus, where participants trade for a premium / discount on the date of delivery / payment of the goods.

Since 2016, UEEX was the first in Ukraine to begin trading TERM quotation-based contracts to Platts and Argus on the domestic market and export. Formulative pricing trades are a transparent mechanism that can be used by government and large companies to plan procurement volumes in the long run.

PP BETS has been developed taking into account own and international experience, peculiarities of energy markets and interests of participants. It provides protection of economic competition, anonymity, minimizes possible manifestations of corruption. Access is also possible from mobile devices.

The server part of the PP BETS is located in the modern up-to-date Uptime Institute Data Center Site Infrastructure Standard TIER III. Provided with the highest IT security standards.

Electronic trading system

CE UEEX operates a clearing system and a risk management system for executing transactions, which, among other things, provides provision of warranty to participants before trades and the establishment of trading limits on them. CE UEEX constantly works to improve the system for greater convenience of its users.

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www.ueex.com.ua

Exchange quotes of CE UEEX have already been recognized by the market and state authorities as price guides in energy markets.

Individual participants use them in their direct contracts.

In order to increase transparency of the oil products market and create transparent market indicators, UEEX closely cooperates with

AMCU, DFSU and the Ministry of Energy and Coal Industry, as well as with world-wide information and analytical agencies, in

particular Thomson Reuters, Platts, Argus. Together with Thomson Reuters, a project to calculate netback value on the petroleum

market is being implemented, using exchange quotes to determine a level of import parity. Trading results are published, in

particular, by the Ministry of Energy and Coal Industry, Thomson Reuters, Argus, Enkorr, Oilnews, Nefterynok.

Exchange quotes

Focus on growth

7

For the last year, CE UEEX has shown a clear dynamics of rapid growth of sales volumes, number of participants and expansion of spectrum of functional areas and services. The Commodity Futures Trading Commission (CFTC), the central government body of the United States for overseeing the implementation of the Law on Commodity Exchanges, gave a positive assessment of CE UEEX, which managed to achieve high results in such a short period of time.

Growth rate of the trading sessions number for 2016-2017

Major participants of the UEEX exchange trading

92

12 0 0

14 0

159

26

108

47

66

12

2016 2017

8

In its report "Pathway for Establishing Gas Hub in Europe" DiXi Group recommended the Ukrainian government to carry out natural gas trading through CE UEEX as an exchange with the necessary experience, technical support and good market recommendations. Since 2017, UEEX has begun electronic exchange trading in natural gas on decade and monthly terms (Month-Ahead).

Major participants of natural gas trades:

Natural gas trading on the conditions of forwards with a discount spot price is actively developing, which gives participants

the possibility of a guaranteed volume of supply with binding prices to the formula. This tool can become a basis for future

futures contracts in the energy market of Ukraine.

Also, natural gas trades with a point of transfer in underground storage facilities and trading in import resources for non-

residents are carried out.

CE UEEX on the natural gas market

Over 120 companies have been accredited for natural gas trading

On April 27, the first trades in natural gas with the use of differentials technology were held on CE "UEEX"

Example of calculation, UAH with VAT

CE UEEX on the natural gas market

10

2

7 5

2

6

3

10

3

7

13

23

29

32

0

5

10

15

20

25

30

35

Number of sessions

The dynamics of trading sessions number growth in 2017 - January 2018

0

5000

10000

15000

20000

25000

0

20

40

60

80

100

120

Traded volumes thousand cu m Number of trades

Number of transactions Number of participants

The dynamics of growth of natural gas traded on CE UEEX

Natural gas quotations on CE UEEX

Results of CE UEEX trading in comparison with prices for European hubs

Results of natural gas trading on CE UEEX

6000,00

6500,00

7000,00

7500,00

8000,00

8500,00

9000,00

9500,00

10000,00

10500,00

TTF Gaspool NCG UEEX

CE UEEX is constantly developing new analytical tools for clients such as netbaks - prices of European brokers brought to the Ukrainian border taking into account logistics and all taxes and fees.

Development of international gas markets

Джерело: TGE

Energy exchanges in

Europe

EU Regulation № 312/2014 aims to support the development of a competitive short-term wholesale gas market and liquidity, concentrating balancing operations of participants (including the GTS) on trading platforms, whose operators are usually exchanges.

The development of short-term gas trading on hubs and exchanges in Europe is one of the leading market instruments and is inspired by the Third Energy Package

As of 2016, there are 16 gas hubs in the EU, with only nine of them having information on more or less significant volumes of trades. The remaining hubs are existing only nominally. At these points, natural gas and derivatives are traded on 11 European exchanges. 12

Trade development in European natural gas markets

Country Energy exchange Gas hub

Northwest Europe

UK InterContinental Exchange (ICE) NBP, TTF France Powernext PEG Nord, TTF

Germany European Energy Exchange (EEX) TTF, NCG, GASPOOL

PEGAS – регіональна біржа (об’єднання EEX та Powernext)

NBP, GASPOOL, NCG, PVS, PEG Nord, TRS, TTF, ZTP,

ZEE Austria Central European Gas Hub GAS Exchange

(CEGH GAS Exchange) CEGH GAS

Denmark Gas Point Nordic (GPN, раніше – Nord Pool Gas)

GTF, NPTF

Italy Gestore Mercati Exchange (GME) PVS/PVS fin Central and Eastern Europe

Poland Polish Power Exchange (POLPX) POLPX Czech Republic Central Czech Gas Exchange

Source: ACER's Annual Report on its activities under REMIT in 2013, ICE, Thomson Reuters, NC G Mature On the way to mature Weak Not active

Developed market countries, such as Austria, Belgium, Denmark, Germany, the Netherlands, Luxembourg, have already introduced exchange trading at a level that allows balancing the system using only short-term standardized products (Second ACER-ENTSOG Report, p. 52) and not applying the procurement of the balancing services of the GTS operator and using relevant exchanges where the standard products are traded with the time interval in the "daily" market or in "day ahead" market.

Network code of balancing came into force from 10.10.2015. National regulators may continue its implementation by April 2019 (according to the ACER-ENTSOG II report, EU countries that do not yet have a trading platform, introducing transitional balancing measures, set its introduction date not later than 2019). 13

Virtual hubs Exchanges Excess of price on TTF, USD/thousand cub m

Hub development index

26,2

36

4,9 4,6 3,7 1,6 1 0,1 0,8 0,4 0

10

20

30

40

NBP (UK) TTF(Netherlands)

Zee (Belgium) CEGH ВТП NCG+Gaspool(France)

PEG Nord Peg Sud Peg TIGF PSV (Italy) VOB (ChechRepublic)

Churn

14

11 11

6 5

2 1

-1 -1 -2

-3 -3 -3 -3 -4

-5-4-3-2-10123456789

101112131415

ACER evaluation of hubs

14

Source: EFET

Gas hubs in Europe

15

Balancing system in accordance with EU Regulation No. 3 12/2014

Settlement of inbalances by users of the system independently through trade notofications to the GTS operator, if this did not happen:

Trading platform (exchange)

Trade participants and GTS trade according to the rules of

the exchange

Balancing platform

Is created as a result of the absence of an exchange, or its small liquidity. The

GTS operator is a contractor of all transactions.

Procurement of balancing services *

An alternative to the balance platform. The GTS operator, on the basis of a tender,

concludes a contract for the provision of balancing services for a period not

exceeding 1 year. Short-term standardized products traded on the exchange

or or

Title product (on VTP, uniform nomination for the whole day); Locational product (at a certain point, uniform nomination for the whole day); Temporal product (on VTP, hourly nomination per day); Temporal locational product (at a point, hourly nomination per day).

Balancing services

GTS operator under the contract sells / buys gas for balancing tender winner.

Fee for the imbalance

Fee for ensuring the neutrality of the GTS operator

Ensuring credit risk management

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EU Regulation No. 3 12/2014, which establishes the Network Code of Balancing in the GTS

"(5) Network users should be responsible for balancing their filings against their offtakes, in accordance with the rules of balancing on trading platforms designed to improve trade between users of the network and the GTS operator. GTS operators carry out residual balancing of the GTS network, which may be necessary.“

"(11) National regulators and GTS operators should take into account best practices and make efforts to harmonize processes for the implementation of this Regulation ..., ACER and national regulatory authorities should ensure that the balancing rules will be implemented in the Union territory in the most efficient way."

"(11) National regulators and GTS operators should take into account best practices and make efforts to harmonize processes for the "(4) "Trading platform" means an electronic platform provided and serviced by a trading platform operator and through which traders

can add and accept, modify and review gas supply and demand orders that are necessary to meet short-term fluctuations in gas supply and demand, in accordance with the rules and conditions established for the trading platform and on which the GTS operator carries out trade in order to carry out balancing operations.

ACER Report on the implementation of the Network Code of Balancing

The idea of the Code is that users and the GTS will trade on a trading platform using the same products, increasing market liquidity. Large or developed markets usually prefer and use exchanges more efficiently to address credit risks through full financial clearance.

In some cases, trading and balancing platforms work in parallel on a specific VTP, as in Germany or Poland. In the presence of several platforms, liquidity is distributed across these platforms, but developed markets have introduced exchanges offering title products (Denmark). On a large British market, volumes are sufficient to support 3 brokerage platforms and exchanges used by the GTS for residual balancing.

For some countries that use GTS operator’s platform as a trading platform, there is a requirement to review economic efficiency of using this system with the transition to more advanced and efficient exchanges.

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Products in European natural gas markets

Operative balancing Short-term standardized products Traded on VTP (ownership transfer to VTP) TSO can not enter all products

Tim

e a

sp

ec

ts

Local aspects

during the gas day (until the

end)

during a certain period of time in D

without (re-) nominations required at

particular points

(re-) nominations needed at a particular

point

Title products

Locational products

Temporal products

Temporal locational products

Title products: applied to the portfolio from the beginning of the gas day D - if a trade is carried out on the gas day D-1; or - to the portfolio from the moment of trade confirmation - if a trade is carried out during the gas day D. Local products: = title product + participant, for entering (re) nomination (s) at the specified point (s). Temporal products : for a portfolio over a period of time in gas day D. Temporal locational products: = local product; and (re) nomination (s) that must be made within a certain period of time during the gas day D.

In order to decide what balance action should be taken, the TSO must follow the sequence: 1 - Title products 2 - For different occasions: Locational products; Temporal products; Temporal locational products 3 - Physical balancing

Gas volumes on the main European hubs and gas prices on the TTF hub

Source: ACER, OIES

Price TTF, right scale

Other

National regulators, in order to increase liquidity and transparency of prices, put KPI's demands to the GTS to reduce share of short-term natural gas market traded on GTS trading systems in favor of exchanges.

An Exchange operates a short-term market in cooperation with the GTS on information provision and a Clearing Center whose functions may be carried out by the Exchange, which minimizes transaction costs of natural gas market participants and improves the efficiency of operations and their activities in general.

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Volume of trading in Europe continues to grow due to the liberalization of markets and changes in contractual structures. Volume of trading in the years 2008-2016 (OTC and exchange) amounted to 400%. The total volume of trading in 2015 gas year was 4 trillion cubic meters

On separate hubs, 30-40% of gas is already sold using exchanges. Changes in the transition to exchange are reflected in price lowering

Only exchanges provide guarantees of transactions execution, automatic clearing and risk management system

Balancing of the market on the trading platforms operated by the GTS has shown its inefficiency and disadvantage for participants (such platform always has a higher marginal price).

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Trade in the European gas market

How to create a liquid hub: 1. Free access to infrastructure. Involve a large number of participants. 2. The first stage - intense regulation, the second stage - complete self-regulation of the market. 3. Availability of timely information on physical flows and other necessary data. 4. Balancing. 5. Strict compliance with contract terms on VTP. 6. Liberalization of retail prices. 7. Creation of exchange physical futures provides greater market access, especially for non-physical players (who will close their trading positions before the delivery date).

In the transition from oil indexation to competitive pricing of "gas-gas", there is a need for reliable benchmarks, which enable participants not only to determine the price in contracts of a new type, but also to manage risks.

There are 5 basic requirements for successful trading:: liquidity volatility transparency volumes of trades anonymity

The main difference between the European OTC market and an exchange is the central counterparty (clearing and guarantee)

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Exchanges play a vital role in the development of the raw material market and perform 5 important functions: pricing, transparency, flexible price policy / delivery, material balance and financial risk management.

Value of exchanges for developed markets

Typically, exchanges tend to futures contracts only if there is a fixed real market, which is based on it. Under the condition of the existence of both markets on an exchange, a participant gets the opportunity to manage financial risks of own portfolios in one place. Due to the fact that exchanges are regulated markets, they are obliged to ensure full transparency of all their actions: traded products, sales volumes and prices. Current wholesale price can be seen in real time. Exchanges are the most effective tool for balancing gas zone, for example, in case of NBP OCM, which traded on the ICE-Endex platform. Due to the possibility of clearing (and transfer of the transaction (for clearing)) and - to trade without intermediaries, in order to avoid insolvency risk of the counterparty, share of exchange trading has increased, especially in the UK, but also on the continent. Perhaps the most important function of an exchange is the possibility of separating financial transactions from physical ones (as opposed to traditional European long-term contracts linked to oil, which combine "two in one"). In "new style" contracts, the physical volume is consistent with duration of the contract, while the price of gas is determined at the time of delivery in accordance with the market rate, often at an exchange rate. It provides the opportunity to manage risk of price changes through a reliable regulated market through hedging and bidding

Prospects for the exchange natural gas market in Ukraine

The Energy strategy of Ukraine for the period up to 2035 outlines the task of increasing the share of exchange trading in energy resources.

The plan of priority actions of the Government for 2017 envisages the development of legal acts for trade in natural gas at the exchanges (operators of trading platforms).

From April 4, 2017, the Order of the MFU No. 292 "On Approval of Amendments to Certain Regulatory Acts of the MFU" came into force on February 27, 2017. The Order allows storage of imported gas in "customs warehouse" regime and involves the use of backhaul operations - the next step for the integration of the Ukrainian GTS into the European GTS.

Prior to this, on February 4, 2016, with the adoption of the Law of Ukraine "On Amendments to the Customs Code of Ukraine on Creating Conditions for a new Natural Gas Market Model" No. 994-VIII, the Verkhovna Rada of Ukraine adopted a decision to grant PJSC "Ukrtransgas" the right to carry out gas substitution through backhaul operations.

Within the framework of the work on ensuring trade in natural gas on the exchanges created by the Order of the Ministry of Energy and Coal Industry dated 10.3.2016, No. 627, a draft Law "On Amendments to Article 2 of the Law of Ukraine" On Public Procurement " was drafted.

NKREKP prepared Order No. 1437 dated 27.12.2017, which approves amendments to the GTS Code, approved by the NKREKP Regulation No. 1378/27823 dated 30.09.2015, and aligns the GTS Code in accordance with Regulation No. 312/2014, in particular, the notion "gas exchange "- commodity exchange (trading platform).

Legislative initiatives:

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Prerequisites for the exchange gas market:

Ukraine and the IMF are working on issues of changing gas tariffs for industry and population. The government insists on the fairness of price formation without any corruption manifestations. This can be realized by selling a share of free volumes of PJSC "Ukrgasvydobuvannya" on an exchange, or a full transition to exchange trading of state-owned companies (in case of the adoption of the updated version of the "PSO Regulation", which provides for the sale of natural gas by the state owned enterprises with the use of transparent s exchange mechanisms of trade. (According to the market segments, the provisions of the PSO Regulation, the volume of gas use amounted to 16.8 billion cubic meters).

Competition between European and Russian gas has led to lower gas prices for Ukraine. Already there are more than 384 gas suppliers, of which more than 30 work with import resource. There are more than 50 private gas traders in the market, about 20 active ones. Private traders in 2017 imported 1.8 times more gas than in 2016 - 5.4 billion cubic meters against 2.9 billion cubic meters. In 2017, 67 companies imported gas to Ukraine (in 2016 - 34 companies).

Creation of a gas hub in Ukraine. Traders will be able to store up to 15 billion cubic meters of gas. Poland, Slovakia, Czech Republic, Hungary, Italy and Turkey are interested in storing their reserve in Ukraine, a memorandum signed with Italy and Slovakia on the possibilities of joint management of the Ukrainian GTS.

Exchange should trade in standard products with a time interval on the "intraday" market and in the "day ahead" market. Exchange may hold auctions for the sale of gas storage operator services, auctions for the sale of operators of the gas transportation system services of gas storing in the pipe, auctions on the distribution of capacities at the interstate level, and auctions for the sale of free capacities by market participants.

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23

An example, to avoid mistakes in the construction of the Ukrainian market model:

1.Liquid trading platform - exchange.

What Ukraine needs to ensure trade in EU standards

Takes into force Resolution No.

1437. Introduction of daily balancing

12/27/2017 Regulation No. 1437 "On Approval of

Amendments to Certain Decisions of the NKREKP

Regarding the Introduction of Daily Balancing in the

Natural Gas Market"

From 1.05.2018, testing of the

information platform of the GTS Operator with

the involvement of natural gas market

players should begin

From 1.05.2018 CE UEEX launches

trading platform and clearing

system

Testing The GTS and the exchange interact

Successful market model: Operator of Information Platform - GTS; Trading platform operator - Exchange

From the beginning of October 2016, in Hungary, gas (Day Ahead and Within-Day) could be traded in two venues at the same time: FGSZ, CEEGEX (TSO and Exchange), since the exchange started working later than the balancing market started trading. ACER voted for trading on the exchange. The Hungarian MEKH regulator expressed dissatisfaction with the simultaneous operation of two closely related platforms, and instructed two companies to work towards creating a single balance platform in

the country, observing the principle of the lowest total cost. MEKH stressed that the European model is that the settlement of imbalances is carried out mainly, and first of all, on the gas exchange.

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2. Purchases of natural gas for balancing needs (including PJSC "Ukrtransgaz") should be carried out by concluding short-term contracts in accordance with the EU Regulation No.312 / 2014. PJSC "Ukrtransgas" now buys through the РroZorro system, which takes a long time and makes it impossible to buy on a daily basis for balancing. According to Resolution No. 1437 of 27.12.2017 (amendments to the GTS Code), from May 1, 2018, the GTS operator will have to carry out balancing activities through the purchase and sale of natural gas at the trading platform (commodity exchange) during the day seven days a week.

The project is in compliance with the EU Directives 2014/24 / EU and 2014/25 / EU, which regulate the procurement procedure in the EU and whose provisions for the procurement of standardized products (including natural gas) on commodity exchanges should be implemented in Ukraine by the end of 2018 (Order of the Cabinet of Ministers of Ukraine dated February 24, 2016, No. 175).

What Ukraine needs to ensure trade in EU standards

The draft law "On Amendments to Article 2 of the Law of Ukraine" On Public Procurement“ will remove obstacles for introduction of daily balancing in Ukraine, implement the EU Regulation No. 312/2014 and the NKREKP Resolution No. 1437 of 27.12.2017.

4,12

6,69

1500

1260

010020030040050060070080090010001100120013001400150016001700180019002000

-

2,00

4,00

6,00

8,00

10,00

12,00

14,00

НАК Нафтогаз України НАК Нафтогаз України

млрд. грн.без ПДВ млн. м³

25

Exchange trades with natural gas on CE UEEX show

more efficiency than the purchases on ProZorro. This

confirms the price advantages and the ability to

purchase 24 hours a day, 7 days a week NON-STOP.

PJSC "Ukrtransgas" volumes of purchase on ProZorro, 2017

8000

8200

8400

8600

8800

9000

9200

9400

9600

9800

10000

Ціна НАК Нафтогаз передплата Ціна НАК Нафтогаз післяоплата

NCG TTF

GSP Біржа

Прозорро ПАТ "НАК"Нафтогаз України" Прозорро ТОВ "ЕРУ ТРЕЙДІНГ"

Trade

26

The market it should be (SPOT) and what UEEX will provide

Financial risk and non-

delivery risk

Trade

EXCHANGE

Exchange Clearing

Фізичне постачання

GTS

Clearing. The Exchange provides necessary information to the Exchange Clearing Center to carry out daily clearing and settlement of financial and other obligations. Types of margins, algorithms, procedure for making settlements, types of collateral accepted, are determined by the Exchange Clearing Center. Supply. The Exchange Clearing Center transmits information on the gas supply (trade notifications) received from market participants on the results of the relevant transactions, directly to the operator of the GTS. Risks in clearing and risk management system in the clearing organization: Exchange and Clearing Center: counterparty credit risk, operational risk, legal risk, system risk.

Thank you.

Regards, Oleksii Dubovskyi Chairman of the Exchange Committee CE "Ukrainian Energy Exchange" 01001, Kyiv, Khreshchatyk st. 44a [email protected] ueex.com.ua

UEEX works to ensure that the Ukrainian gas market conforms to European standards and develop for customers in order to meet

the highest European level of exchanges!