March 2016

www.naftogaz-europe.com

www.naftogaz.com

@NaftogazUkraine

Ukraine’s gas market: opening for investments

by gas consumption (~34 bcm)

by gas production (~20 bcm)

by proven conventional gas reserves (640 bcm)

by underground storage capacity (31 bcm)

by gas volumes stored (17 bcm)

by gas volumes transmitted (100+ bcm)

by reserves-to-production ratio (30+)

by Russian gas volumes transmitted to EU (67 bcm)

Notable position in each segment of gas business

Ukraine: one of Europe’s top gas markets

2

#1

Top 3

Top 5

Key achievements in 2015

Diversification and

security of supply

• 2.4 times

reduction of

gas imports

from Russia

• Stable gas

supplies for

Ukraine and

the EU

Gas market

reform

Operating

efficiency

Transparency and

accountability

• 3EP-compliant

gas market law

• Deregulation of

commercial

market

• 7.5 times

growth in

private imports

• Operating

profitability –

first in 6 years

• Improved debt

collection and

revenues

• Largest taxpayer

• Corporate

governance

reform launched

• First detailed

annual report

• Procurement

system reform

3

2013 2014 2015

Europe

Ukraine has effectively diversified its gas imports

Russia

92% 74% 37%

Cooperation with EU for security of supply

7.5 times more gas

imported by private

companies in 2015

(1.1 bcm)

10+ private importers and

direct buyers, incl.

ENGIE (GDF)/ERU,

ArcelorMittal

4

Gas market reform

Implementing newest EU legislation in Ukraine

The significance of this law is hardly

explainable at this moment. Gas issues

are at the centre of the Ukrainian society

and politics. This law will substantially

change both in a positive way Janez Kopač

Energy Community Secretariat

April 2015 • Adoption of 3EP-compliant gas market law

• First standard European interconnection agreement

signed by Ukrtransgaz with Hungary

• Adoption of 3EP-compliant secondary legislation:

network codes, rules of supply, tariffs, SoS rules, etc.

• Market opening and adoption of public service

obligations protecting vulnerable customers

• Adoption of RAB-based entry/exit tariffs

4Q 2015

4Q 2015

June 2015

December 2015

Operating efficiency

• Radical move to market

prices for households (on

average 4x increase) and

direct subsidies

• Transparent tendering and

procurement procedures to

eliminate corruption

• Improved payment

collection and debt

recovery from major financial

groups

• Improved operating and

legal framework

New managerial approach and improving regulatory environment

Operating profit/loss, UAHbn

Net loss, UAHbn

Operating profit* for the

first time in 6 years

4,5

-63,5

-7,3

-25,1

-90

-18,8

-100

-80

-60

-40

-20

0

20

2015 2014 2013

*non-consolidated 6

Corporate governance reform: OECD standards

Government,

ministries

Old structure Approved structure

Naftogaz

executive board

Cabinet of

Ministers (tbc)

Naftogaz

executive board

Independent

supervisory board

• Political agenda vs. economic

rationale

• Vague segregation of authority

• Nomination and remuneration issues

• Business-focused strategy in the

interests of ultimate shareholders

• Clear responsibility, improved control

• Merit-based HR policy and market

level remuneration

Transparency and accountability

First annual report explaining strategy, market conditions and results

Transparency and accountability

Improving efficiency and building trust through transparency

By providing this loan to

Naftogaz, we are not

only helping to

strengthen energy

security in Ukraine but

we also foster the

reform agenda in the

energy sector making it

more open, transparent

and efficient

Philip Bennett

EBRD

• Successful cooperation with

EBRD, EIB, IFC; constant

monitoring by IMF

• Eliminating opportunities for

corruption in procurement by

Prozorro and new tendering

rules

• Boosting transparency of

operations and information

quality (audits, revaluations,

regular reporting)

Investment opportunities in Ukraine’s gas industry

Transmission

Co-manage Europe’s largest GTS

Upstream

Develop Europe’s top 3 gas reserves

Trading and supply

Sell directly in Europe’s top 5 market Storage

Benefit from Europe’s largest UGS

10

Watch https://www.youtube.com/watch?v=DF6Sr2KTVuA

UGV intends to produce 20 bcm/y by 2020

2016 2020 2019 2018 2017

21

18

14.8 14.5 15

12

0

20.0

18.4

16.5

Base Exploration on existing fields

Exploration on new fields

Tight gas

Intensification Other

Estimated US$3bn investment program till 2020

11

Planned gas production levels, bcm/y

Potential partners: up to 49% share in new companies

Ukraine

Cabinet of Ministers

through Naftogaz

State Property

Fund

Transmission SO

Partner

Storage SO

or

EU/US

Partner

Minority

interest

Minority

interest

Majority

interest

Majority

interest

TSO ownership unbundling

in compliance with 3rd EP

EU and US companies invited

as partners in transmission

and storage business

State retains asset ownership

Prior condition: corporate

governance reform based on

OECD standards

Independent and fully

empowered boards for the

unbundled operators

Ownership Governance

12

Wrap-up

Security of supply

and gas market

reform

Operating

efficiency

Transparency and

accountability

13

Gas upstream

(privatization)

Gas transmission

(TSO unbundling

and partial

privatization)

Gas storage

(partial/full privatization,

individual strategy per asset)

Ukraine progresses in reforming its gas market and Naftogaz:

Reform opens unseen investment opportunities in:

naftogaz.com | naftogaz-europe.com | @NaftogazUkraine