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It is time for Ukraine to start working on LNG legislative framework

Small scale LNG (SSLNG) has recently demonstrated great potential especially for Central and Eastern European countries which are looking to diversify their sources. Poland and Lithuania already have some good projects to show. As well as Croatia where the first small scale LNG reloading operation was carried out at the Krk terminal earlier in May.

Now it is other countries’ turn to follow these examples. Countries like Estonia, Latvia and Ukraine. Quite interesting is the case of Ukraine which, even if it doesn’t have any LNG terminal is joining in the regional and global momentum. Speaking at the CEE SSLNG conference organised by Alj Group and which took place online on 2-3 September, Yaroslav Petrov, partner at Ukraine’s law firm Asters noted that the country needs an implementation of the regulatory framework.

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Yaroslav Petrov, courtesy of Asters.

“The existence of a regulatory framework is critical to have the LNG market fully functioning,” Yaroslav Petrov and Marta Halabala, senior associate at Asters tell CEENERGYNEWS. “In Ukraine, there is the Law On Natural Gas Market which regulates the LNG functioning on the higher level. However, a number of regulatory acts shall be developed by the Energy Regulator, in particular, the LNG Installation Code. In addition, according to the Law of Ukraine On Natural Gas Market, the LNG operator has not been established, and, as a consequence, there is no interest for the Energy Regulator to adopt the license conditions for LNG operator.”

They went on to say that on a political level, Ukraine is trying to resolve issues related to the LNG supply.

“Therefore, as soon as we get some progress in that respect, the legislation should be adopted,” they continue. “Taking into account natural gas prices rise, the LNG deliveries from the Middle East to the US seem like an option for Ukraine and Europe to be less dependent on Russian supplies of natural gas.”

“Therefore, we think that this is the best time for Ukraine to start working on LNG legislative framework.”

Actually, there were some ideas for an LNG terminal that was supposed to commence operations back in 2016, but the project never saw the light. For Mr Petrov and Mrs Halabala, the issue is more technical and political than legal.

“If we speak about LNG terminal on Ukraine’s biggest port – Odesa, now there are two issues,” they explain. “The first issue is that Turkey does not allow to bring LNG to Ukraine via the Bosphorus channel. The second is that there still no understanding on the technical capacity of such terminal, meaning the unloading infrastructure for large LNG tankers, storage and regasification facilities.”

However, there are also many other barriers, from a legislative point of view, for energy investors when entering the Ukrainian market. Among them, of course, are general ones, which concern all investors: the rule of law and progress with judicial reform.

“As legal consultants, we mainly use international arbitration as dispute resolution in different types of transactions and agreements to exclude exposure of our clients to Ukrainian courts,” Mr Petrov and Mrs Halabala underline. “As for specific energy barriers, we should mention an absence of a well-developed capital markets’ sector related to energy commodities trading.”

“Moreover, transition strategy towards a low-carbon economy is still not fixed in any legislative acts and it may give investors some uncertainty.”

Earlier in April, the Gas Transmission System Operator of Ukraine (GTSOU) was looking at the LNG terminal in Croatia which, with a throughput capacity of 2.6 billion cubic metres per year could become a potential new source of natural gas supplies for Ukraine. However, challenges remain when it comes to importing LNG from Poland. As the General Director of the GTSOU was explaining during the CEE SSLNG conference, there is a technical necessity to reconstruct the compressor station and complete the construction of the gas pipeline in Poland in order to have the technical possibility to supply gas from the north of Poland (Świnoujście) to the border with Ukraine.

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Marta Halabala, courtesy of Asters.

“However, Poland is less interested in such reconstruction as Ukraine is not a natural gas exporting country and Poland is diversifying its natural gas supplies by additional sources (from Norway via the Baltic Pipe, which is at the final stage of construction),” note Mr Petrov and Mrs Halabala. “Ukraine has also something to offer” Poland can use the interconnector to store natural gas in Ukrainian gas storage facilities to balance the power system during peak loads.”

The future of LNG and natural gas cannot be separated from the growth of renewable energy sources. The experts from Asters law firm recall that unfortunately, there were not many developments since August 2020, when the latest changes on reduction of the green tariff support system have been introduced.

“In August, the Ministry of Energy of Ukraine introduced a draft law on a feed-in-premium (FIP) support scheme for renewable projects instead of fixed payments under the green tariff,” they say. “This instrument should help resolve the liquidity issue surrounding the Guaranteed Buyer (an off-taker) and reduce the reliance of renewable energy producers on the Guaranteed Buyer as their only source of cash flow.”

In conclusion, in Mr Petrov’s and Mrs Halabala’s opinion, Ukraine should continue to support renewable energy projects as these are critical for the energy transition. Moreover, they underline, only renewable energy can be used to produce green hydrogen.

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