Ukraine is currently facing a looming financial crisis concerning its gas prices and supply chain, particularly with Naftogaz, the state-owned oil and gas company grappling with dire financial health. Prime Minister Denys Shmyhal, at a recent meeting led by the Anti-Crisis Energy Headquarters, highlighted substantial infrastructure damage due to Russian attacks, exacerbating the country’s energy troubles. Among the potential solutions, the government is now contemplating revising the gas prices supplied for electricity production, directly addressing Naftogaz’s deteriorating financial condition.
Government’s Consideration and Meeting Highlights
At the February 18, 2025, meeting of the Anti-Crisis Energy Headquarters, the Cabinet of Ministers scrutinized the prices of gas that Naftogaz supplies for electricity production. This review aligns with concerns over Naftogaz’s weakening financial status. The agenda also covered the progress of the current heating season and the preparation for the forthcoming winter. Prime Minister Denys Shmyhal underscored the urgency of protecting and repairing critical infrastructure facilities damaged by Russian attacks. These facilities include the gas transmission system, underground gas storage (UGS) facilities, and gas extraction sites crucial for the country’s energy stability.
The discussions aimed at fine-tuning the strategy for the current and next heating seasons. Participants in the meeting were especially focused on devising a gas balance strategy for the new heating season. Various stakeholders, including representatives from the Ministry of Energy, as well as state and private companies, presented their reports on the levels of Ukrainian gas extraction and the storage status in UGS facilities. A unified agreement emerged on the necessity of consistently increasing domestic gas production to buffer against potential shortages and ensure a stable energy supply. Additionally, Naftogaz has now been tasked with developing an effective gas import strategy to mitigate any anticipated deficits in the gas transmission system.
Gas Balance and Domestic Production
Participants in the meeting, including major stakeholders such as the Ministry of Energy and representatives from state and private companies, began the crucial task of drafting a gas balance framework for the upcoming heating season. Reports revealed varying data, but they solidified a consensus on the critical need to consistently boost domestic gas production. This step is deemed essential to offset any future gas shortages and maintain a reliable energy supply. Furthermore, Naftogaz was given explicit instructions to devise a comprehensive gas import strategy to address any potential shortfalls within the gas transmission system.
The focus on increasing domestic gas production is directly associated with ensuring a smooth transition through the next winter period. With the threat of supply chain disruptions still looming, Ukraine needs a consistent and enhanced domestic production mechanism. This approach should involve accelerating extraction activities and exploring technological advancements to maximize output from existing resources. The collaborative efforts of state and private entities are pivotal to materializing these objectives. Bolstering domestic production would not only stabilize the internal energy market but also provide a reliable “safety cushion” against global market fluctuations.
Critical Gas Reserves Situation
Oleksii Kucherenko, an MP and first deputy head of the Verkhovna Rada Committee on Energy and Housing and Communal Services, has been vocal about the alarming situation regarding gas reserves in the UGS facilities. Despite discrepancies in data from various entities, including the Ministry of Energy and the Gas Transmission System Operator, the consensus remains on the necessity to import significant gas volumes to avert a crisis. By the close of the current heating season, it is anticipated that reserves in the UGS will be critically low, with projections estimating approximately 5.2 billion cubic meters of natural gas remaining by the end of April.
Given these projections, it becomes imperative for Naftogaz to replenish its reserves by an additional 8 billion cubic meters over the year. This target is essential to ensure that the company’s strategic “safety cushion” is restored well before the next winter kicks in. Starting from May, this injection into UGS must be executed within a concise six-month timeframe. The urgency of this measure cannot be understated, considering the role gas reserves play in stabilizing the energy sector and preventing potential blackouts during peak winter months. The strategy for replenishing these reserves should encompass both domestic production and importing options to meet the target efficiently.
Replenishing Gas Reserves
To secure a successful and operational winter season, Naftogaz is tasked with replenishing its gas reserves by a minimum of 8 billion cubic meters within the current year. This volume is necessary to ensure that an adequate “safety cushion” is available before the onset of the next winter period. The replenishment process must commence in May with the objective of achieving this target by November. Fulfilling this goal is critical for the company’s ability to manage demand fluctuations and maintain a stable energy supply during the colder months. The emphasis on achieving this target highlights the importance of strategic planning and coordinated efforts across various sectors.
Drawing on domestic production capabilities, while also enhancing the import strategy, will be key to meeting these reserve requirements. The development and implementation of a robust plan to inject the necessary volumes into UGS within six months is vital. Collaborating with both public and private sector stakeholders will ensure that the strategic objectives are met. By addressing the current critical reserve situation promptly, Naftogaz can potentially bypass severe supply constraints and maintain operational effectiveness through the coming winter season. This concerted effort should also include technical advancements to optimize storage and extraction capacities, ensuring sustainable energy security.
Revising Preferential Gas Prices
Amid the discussion on improving Naftogaz’s financial health, one prominent topic was the potential cancellation of preferential gas prices provided to electricity producers. This consideration involves revising the public service obligation (PSO) mechanism, which currently allows gas to be supplied at significantly lower rates to electricity producers compared to the market price. Presently, electricity producers purchase gas at a rate of 10.5 UAH per cubic meter, whereas the market price on the Ukrainian Energy Exchange has exceeded 21 UAH per cubic meter, including VAT. The PSO mechanism also benefits households and various institutions with gas prices substantially below market rates.
The PSO mechanism, while beneficial to certain segments, has exacerbated Naftogaz’s financial difficulties. Oleksii Kucherenko pointed out that maintaining these preferential prices significantly strains Naftogaz’s finances, leading the Prime Minister to direct the Ministry of Energy and the state regulator (NERC) to address this pressing issue. Sources confirmed ongoing discussions aimed at introducing changes to the PSO mechanism to rectify existing market distortions. Revising or potentially eliminating the PSO mechanism could provide much-needed relief to Naftogaz and contribute to stabilizing the gas market overall. It would also address the financial imbalance created by enabling certain investors to purchase gas at reduced rates and sell electricity at market prices.
Financial Strain on Naftogaz
Naftogaz’s financial strain is profound, with the company teetering on the brink of insolvency, unable to secure loans without state guarantees, and increasingly dependent on government support for day-to-day operations. The primary beneficiaries of preferential gas prices under the PSO mechanism are investors engaged in distributed gas generation. These investors can leverage the low-cost gas to generate electricity, which they then sell at elevated market prices, further worsening the financial health of Naftogaz. This practice not only distorts the market but also places an excessive burden on Naftogaz, with its debts continuing to spiral upwards.
Eliminating or significantly revising the PSO mechanism for electricity producers is a potential solution that could improve both the gas market dynamics and Naftogaz’s financial standing. Such a move would also incentivize Ukrainian gas extraction companies to ramp up production efforts. These companies are currently stifled by restrictions on exporting gas due to the ongoing conflict, limiting their revenue potential. By establishing a more balanced pricing mechanism, market forces could drive growth and contribute to a more financially stable energy sector. With a recalibrated PSO mechanism, Naftogaz could reduce its debt load and enhance fiscal responsibility.
Market Distortions and Production Incentives
Eliminating the preferential gas prices for electricity producers under the PSO mechanism could pave the way for significant improvements in the gas market. By addressing market distortions, the elimination of PSO would create a more level playing field for all entities involved. Notably, it would incentivize Ukrainian gas extraction companies to increase their production levels, as these companies currently face prohibitions on exporting gas due to the war. This limitation has stymied their ability to capitalize on higher market prices abroad, indirectly contributing to domestic supply constraints and Naftogaz’s financial woes.
A recalibration of the PSO mechanism could stimulate domestic gas production, encouraging both state and private companies to invest more in extraction activities. These efforts would not only enhance Naftogaz’s financial viability but also contribute positively to the overall energy security of Ukraine. Encouraging increased production could also lead to the development of new technologies and methodologies, aimed at maximizing extraction efficiency and output. Furthermore, aligning domestic production with market demands rather than artificially suppressed prices would foster a healthier economic environment, reducing dependency on state aid and external financial interventions.
Production Growth and Criticism
Total gas production in Ukraine, encompassing both private and state-owned companies, reached 19.1 billion cubic meters by the end of 2024. This marked an incremental increase of 400 million cubic meters compared to the previous year. However, despite this modest growth, the production outlook for 2025 remains bleak. Market participants and MPs have levied criticism against Naftogaz for its poorly conceived pricing policies, which aim to attract large natural gas consumers but often result in financial imbalances. An incident in December illuminated these issues when Naftogaz sold 200 million cubic meters of gas from UGS at a discounted price significantly lower than the market exchange rate.
This policy decision led to Ukrtransgaz purchasing imported gas at higher prices to meet the shortfall, exacerbating Naftogaz’s financial distress. These pricing strategies have drawn ire from various stakeholders who argue that such actions undermine market stability and compound the company’s existing fiscal challenges. The focus must shift toward implementing pricing strategies that reflect market realities, ensuring fairness and sustainability. A robust pricing model could stabilize revenue streams, reduce the need for state intervention, and enhance Naftogaz’s capability to manage its debt and operational costs effectively.
Audit and Strategic Adjustments
Ukraine is currently confronting a significant financial crisis concerning gas prices and supply chains, particularly affecting Naftogaz, the state-owned oil and gas corporation, which is struggling with severe financial issues. Prime Minister Denys Shmyhal, during a recent Anti-Crisis Energy Headquarters meeting, emphasized extensive infrastructure damage caused by Russian attacks, worsening the nation’s energy woes. To mitigate this situation, the government is exploring the possibility of revising gas prices used for electricity production, targeting the weakening financial state of Naftogaz directly. This potential adjustment is intended to help stabilize the company’s finances and improve the overall energy supply chain. The crisis underscores the need for resilient solutions to ensure a steady energy supply amidst ongoing external aggression and internal financial struggles.
