On 13 October 2015, the Cabinet of Ministers of Ukraine introduced changes to the Procedure on Establishing Security Reserves of Natural Gas (the "Procedure), significantly increasing the amount of required reserves. The changes entered into force on 24 October 2015 and will apply for all gas suppliers as of 1 January 2016.

According to the revised Procedure, all gas suppliers, including gas producers, will be obligated to maintain gas security reserves equal to their contractually anticipated gas supply for the following month. 

This requirement does not apply to gas sold by suppliers under special obligations (i.e., PJSC "Naftogaz" and suppliers to households (consumers)).

Suppliers must pump the gas into storage and maintain storage at their cost (borrowing money if needed) and may purchase gas to fulfil the reserve requirement if they are short on gas supply at the given time. Until such time as Ukraine unbundles its gas system, storage would take place at the underground reserves tanks of PJSC "Ukrtransgas" (also the transmission system operator or TSO).

Suppliers will have the right to sell gas only if they maintain the necessary security reserves evaluated on a monthly basis.  If suppliers request (nominate) a certain volume of gas for monthly transport by the TSO and such volume exceeds the amount of gas in storage, then nominations are approved by the TSO only to the extent of available security reserves as recorded by the TSO.

If a supplier has a negative imbalance of gas (when the volume of gas actually consumed by customers of the supplier exceeds the volume of transmitted gas), it is obligated by the 7th day of the following month to cover such imbalance by covering the deficit of gas from the volumes of gas it has as  security reserves. If the supplier does not proceed by such deadline, the storage operator (so far, also PSJC "Ukrtransgas") shall unilaterally withdraw gas from such supplier in the amount required to cover the negative imbalance.

Please note that according to the statements of the representatives of the Regulator and the TSO at a  conference arranged by our Firm on 29 October 2015, it is very likely that the requirement to arrange bank guarantees to cover suppliers' imbalances in the amount of 20 percent of monthly gas supplies under the Gas Transmission System Code will be repealed in the light of the TSO's new right to use a supplier's security reserves to cover imbalances according to the discussed changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.