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In search of the owners of gas networks

03 March 2021

How the ownership structure of gas distribution systems changed in the past three years

In search of the owners of gas networks

The “tariff crisis” of early 2021 has revealed a number of problems in the Ukrainian energy sector. Experts discussed both the reasonability of wholesale pricing based on import parity and the justifiability of raising the gas distribution tariffs.

In the context of the latter, the ownership of distribution networks again got on the agenda: how much do communities have to pay for gas deliveries via the networks they own? And besides, who owns them, exactly? Communities? The state? Oblgaz companies?

Ukrainian Energy has already found out that answering this question isn’t always easy. Certain amalgamated communities have only begun gathering the archive documents that could prove that a portion of networks is owned by the community. The networks themselves, as a complex technological system, were created by various entities, and most of them not by their operators (oblgaz companies).

At the same time, the situation with state-owned gas pipelines is clearer: in 2017, updated agreements on operation of gas distribution systems were made with certain oblgaz companies, including annexes to these agreements listing the state-owned assets (gas pipelines, gas control points, etc.) transferred to the balance of oblgaz companies and prohibited from alienation (under these agreements). However, most agreements on commercial use of networks are dated back to 2012-2013.

Finally, oblgaz companies are required to report to the regulatory agency, on an annual basis using the report form No 8a, about the ownership structure of the gas pipelines transferred to them, and this information is then published in the NEURC’s annual reports. Moreover, the requirement concerning annual inventorying of state-owned property is set forth in the relevant order of the Energy Ministry. Therefore, changes in the ownership of gas distribution networks can be traced today even in their dynamics.

So, who owns the networks?

According to data by the NEURC as of 2019, almost 290 thousand kilometers of distribution networks was accounted for on the balance of gas-DSOs, including 190.8 thousand km (66%) owned by the state, 24.3 thousand km (8%) owned by communities, 52.2 thousand km (18%) owned by gas-DSOs, and 22.7 thousand km (8%) categorized as “Other”. Detailed information, itemized by gas-DSOs, is provided in the infographics below.

An unnoticed “transition”

It is worth noting that the ownership structure changed quite drastically in 2019: the length of networks owned by territorial communities decreased by 49% (or by 23.5 thousand km) comparing to 2018; on the contrary, the length of networks owned by gas-DSOs increased by 108% (or by 27.1 thousand km). The length of state-owned gas pipelines has somewhat declined, from 194.5 thousand km in 2018 to 190.8 thousand km (or by 2%). The length of gas pipelines categorized as “Other”, i.e., privately owned by other legal or natural persons.

A look at the data itemized by oblgaz companies reveals that these trends are driven by changes in the ownership structure of a small number of gas-DSOs.

For example, Ternopilgaz: in 2019, the length of networks owned by this gas-DSO increased from 75 to 3,935 kilometers, while the length of networks categorized as “Other” went up from 0 to 3,484 kilometers. At the same time, the length of state-owned gas pipelines has drastically decreased, from 10,226 km to 2,697 km, while the length of community-owned pipelines increased from 0 to 45 kilometers.

Another example is Khmelnytskgaz. In 2018, this gas-DSO owned 1,261 kilometers of networks, and in 2019 this figure rose to 8,599 km. Apparently, the “enrichment” took place at the expense of community-owned gas pipelines, because in 2018, there were 8,470 km of them while in 2019, none.

There are several other similar oblgaz companies, where the ownership of a significant portion of networks overflew from communities to the gas-DSO:

Dnipropetrovskgaz (-1106 km of community’s networks / +1109 km of operator’s networks),

Zakarpatgaz (-1520 km of community’s networks / +1528 km of operator’s networks),

Kyivgaz (-1647 km of community’s networks / +1650 km of operator’s networks),

Kyivoblgaz (-7930 km of community’s networks / +8014 km of operator’s networks),

Khmelnytskgaz (-8470 km of community’s networks / +7338 km of operator’s networks),

Rivnegaz (-2952 km of community’s networks / +2989 km of operator’s networks),

Khersongaz (-2882 km of community’s networks / +2883 km of operator’s networks),

Sumygaz (-2383 km of community’s networks / +2417 km of operator’s networks),

Chernivtsigaz (-3322 km of community’s networks / +3339 km of operator’s networks).

An especially interesting case concerns the reports by Khersongaz, where in 2017 a large portion of state-owned gas pipelines was first transferred to communities and thence to the gas-DSO. A careful look at the data could suggest that these reports contain a banal error – the figures were simply mixed up. However, it seems that the error wasn’t noticed and wasn’t corrected.

Ownership structure of Khersongaz’s gas distribution networks in 2015-2019, km

 

 

Length of

state-owned

networks

Length of

community-owned

networks

Length of

gas DSO-owned

networks

Other

Total

2015

5322

0

22

62

5405

2016

-

-

-

-

-

2017

1474

2952

54

915

5395

2018

1474

2946

64

1000

5484

2019

1474

64

2947

1000

5485

 

The reverse “outflow”, from private to community ownership, was observed in 2019 only with regard to two operators: Odesagaz (+5037 km of community’s networks / -4980 km of gas-DSO’s networks) and Kharkivgaz (+3131 km -3087 km).

…mass transition of gas pipelines from community to private ownership within certain regions, without any attention from mass media, looks strange, to say at least. Perhaps, there is a “quiet” privatization in the works…

At the same time, according to the Law of Ukraine on Local Self-Government, alienation of community-owned property belongs to the exclusive competence of village, town and city councils and could be approved solely at plenary sessions of the councils concerned. Therefore, verification of information about transition from community to private ownership (or vice versa) necessitates a meticulous work with the minutes of meetings of the local councils concerned, which is yet to be done.

At this point, let’s just note that mass transition of gas pipelines from community to private ownership within certain regions, without any attention from national media, looks strange, to say at least. Perhaps, there is a “quiet” privatization in the works, but on the other hand, the reasons for such drastic changes could be somewhat more prosaic: the data in the NEURC’s annual report for 2019 could simply contain an error: the columns indicating the length of networks owned by communities and by gas-DSOs were mixed up. A comparison of the corresponding figures for 2018-2019 could serve as an indirect proof of this hypothesis.

Length of networks owned by communities and by gas-DSOs in 2018-2019, km

Gas-DSO

2018

2019

Community-owned

Gas

DSO-owned

Community-owned

Gas

DSO-owned

Vinnytsiagaz

5751

2621

2735

5836

Volyngaz

754

232

237

755

Hadiachgaz

445

5

5

445

Gazovyk

0

0

0

0

Gazpostachservis

119

17

17

119

Dniprogaz

96

127

230

96

Dnipropetrovskgaz

1443

335

337

1444

Donetskoblgaz

46

23

24

51

Zhytomyrgaz

1060

68

102

1066

Zakarpatgaz

1664

136

144

1664

Zaporizhgaz

302

182

189

302

Ivano-Frankivskgaz

28

4751

4782

28

Kyivgaz

1875

227

228

1877

Kyivoblgaz

8274

323

344

8337

Kirovohradgaz

0

71

71

0

Korostyshivgaz

0

0

0

0

Kremenets UPRG

0

0

2

0

Kremenchukgaz

0

71

74

0

Kryvorizhgaz

774

19

19

774

Lubnygaz

45

52

52

45

Luhanskgaz

19

263

268

45

Lvivgaz

626

402

445

698

Mariupolgaz

0

15

15

0

Melitopolgaz

14

0

0

14

Mykolaivgaz

775

1475

1487

775

Montazhnyk

0

4

4

0

Odesagaz

1627

6607

6664

1627

Poltavagaz

0

232

234

0

Rivnegaz

3252

270

300

3259

Sirka

0

0

11

0

Spektrgaz

0

9

9

0

Sumygaz

2489

97

106

2514

Ternopilgaz

0

75

45

3935

Ternopilmiskgaz

0

32

45

0

Tysmenytsiagaz

15

13

14

15

Umangaz

0

317

317

0

Kharkivgaz

1179

4307

4310

1220

Kharkivmiskgaz

0

142

147

0

Khersongaz

2946

64

64

2947

Khmelnytskgaz

8470

1261

0

8599

Cherkasygaz

0

17

19

0

Chernivtsigaz

3389

65

67

3404

Chernihivgaz

294

139

142

294

Shepetivkagaz

0

5

5

0

As we can see, the figures appear to have “traded places”, some of them even with the accuracy of one kilometer (see: oblgaz companies highlighted in bold font). We shall leave it for the reader to decide whether it’s an error in the regulatory agency’s report or indeed the “redistribution” of ownership.

By the way, according to the NEURC’s annual reports the only case when the length of state-owned networks has drastically increased in 2019 concerns Donetskoblgaz (from 6562 to 10,165 km). However, the aggregate length of gas pipelines of all forms of ownership has also increased along with this figure: from 7812 km in 2018 to 11,421 km in 2019. We can assume that the data for 2018 simply did not include the length of gas pipelines in the government-uncontrolled territory, whereas in 2019, it was again included to general indicators.

Nonconformity of data by the NEURC and the Energy Ministry

We also compared the length of state-owned gas distribution networks according to data from the NEURC’s annual reports with the similar indicator obtained from annexes to the agreements on commercial operation of networks between the Energy Ministry and oblgaz companies.

The data from two different sources basically coincides. However, there are certain oblgaz companies in which the actual length of state-owned networks is much smaller than that stated in the commercial operation agreements (it especially concerns Hadiachgaz, Ternopilgaz, Kirovohradgaz, Kremenchukgaz, Mariupolgaz and Khersongaz). At the same time, these agreements state that the property mentioned in the annexes thereto (including gas pipelines) cannot be alienated or privatized.

It is also worth noting that the annex to the commercial operation agreement with Chernivtsigaz PJSC states at the end that “after this agreement is signed, the list of state-owned property used by the enterprise (oblgaz company) on commercial operation terms can be changed by making additional agreements to the agreement and shall be defined on the basis of annual inventorying of state-owned property, which shall be taken in accordance with Ukrainian law.” It is unclear whether this clause is contained in the documents for other oblgaz companies, but if it’s applicable, any change in the length of state-owned networks should have been accompanied, one way or another, by an additional agreement containing an updated list of the relevant state-owned property. Based on data by the Energy Ministry, no new additional agreements were made after January 2018, yet the length of state-owned networks used by certain oblgaz companies has sharply decreased since then.

So, who presently owns the gas pipelines, which according to commercial operation agreements should have been owned by the state? The example of Ternopilgaz was already mentioned: in 2019, the ownership of a large portion of pipelines was transferred to the operator or became categorized as “Other” (if data by the NEURC is correct). As for Hadiachgaz, a portion (445 km) of networks became the property of communities in 2017, and another portion (540 km) became categorized as “Other”.

Kremenchukgaz’s indicators raise questions: according to data by the NEURC, the length of state-owned networks in 2015 matched the agreement’s figures (1512 km), but in 2017, this figure was 669 km, while the length of networks categorized as “Other” reached 2178 km (the similar figure for 2015 was 64 km). Therefore, the total length of networks of all forms of ownership has increased from 1587 km in 2015 to 2916 km in 2017.

A detailed story of changes in the ownership structure of distribution networks managed by Kremenchukgaz is shown in the table below.

Ownership structure of Kremenchukgaz’s gas distribution networks in 2015-2019, km

 

State

ownership

Community

ownership

Gas-DSO’s

ownership

Other

Total

2015

1512

0

10

64

1587

2016

-

-

-

-

-

2017

669

0

69

2178

2916

2018

670

0

71

2180

2921

2019

671

74

0

2183

2928

 

While in the case of Kremenchukgaz there were almost 1400 km of mysteriously “appearing” networks, Mariupolgaz saw 300 km “disappearing” – most likely, because the most part of the Novoazovsk Raion, which this operator serviced, is presently not controlled by the government. Nevertheless, these 300 km were included to the annex to the commercial operation agreement (which contains data as of 31.01.2020).

Ownership structure of Mariupolgaz’s gas distribution networks in 2015-2019, km

 

State

ownership

Community

ownership

Gas-DSO’s

ownership

Other

Total

2015

2085

0

0

0

2085

2016

-

-

-

-

-

2017

1730

0

0

0

1730

2018

1716

0

15

0

1731

2019

1715

15

0

0

1730

 

A legislative gap could also be the reason for these discrepancies. The NEURC’s data concerning ownership structure is compiled on the basis of data provided by gas-DSOs themselves, whereas information about state-owned assets on file in the relevant register of the State Property Fund and included to commercial operation agreements is provided by gas-DSOs on the basis of inventorying. At the same time, the Law of Ukraine on the State Registration of Proprietary Rights to Immovable Property and Encumbrances Thereupon explicitly indicates that state registration is not required for certain components of gas distribution networks.

Accounting data is needed to audit the condition of networks

An analysis of data suggests a conclusion that even after the “saga” with the updating of commercial operation agreements in 2017 the problem of accounting distribution networks and their ownership structure remains on the agenda. Public authorities and expert community must pay greater attention to this problem, because in order to efficiently manage the available assets (privatize them, provide for lease, concession or free use, etc.), one has to clearly understand which ones of them are owned by the state and communities.

Solution of this problem would indirectly bear upon the transparency of tariffing the gas distribution service.

Moreover, without a quality accounting of assets, the next step, which is important for consumers and the retail gas market, i.e., audit of the condition of distribution networks, will be hard to take.

Andrii Ursta, Junior Analyst at DiXi Group


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