€150 million to upgrade Urengoy-Pomary-Uzhgorod pipeline which can pipe gas from both western Europe and Russia
The European Bank for Reconstruction and Development (EBRD) is taking another major step forward in its plan to support the Ukrainian economy. The EBRD and Ukraine have agreed financing to upgrade and repair a key section of Ukraine’s gas transmission system, the western part of the Urengoy-Pomary-Uzhgorod pipeline.
The loan agreement for up to €150 million has been signed today in Brussels by the EBRD’s Managing Director for Energy and Natural Resources Riccardo Puliti and the Minister of Foreign Affairs, Pavlo Klimkin.
EBRD’s Riccardo Puliti said: “This project is one of the cornerstones of the EBRD reform-anchoring and crisis response package for Ukraine. This is not only a project about modernising infrastructure but, through the conditions inserted in the financing documents, an opportunity to improve the corporate governance of both NAK Naftogaz and Ukrtransgaz and to contribute to the overall transparency of the energy sector in Ukraine”.
He stressed that Ukraine, with the largest gas storage capacity in Europe and a key transit system, could potentially become an important European energy centre: “Transparency and openness are the basic conditions for Ukraine to re-establish itself as a major European energy hub.”
Ukraine’s Minister of Foreign Affairs, Pavlo Klimkin, said: “This project is an extremely positive development for Ukraine and another proof of the tangible support we are receiving on our way to reform. The money will be invested in making one of Ukraine’s key gas transmission routes more energy efficient, robust and secure. By financing this project, the EBRD is investing in strengthening the energy security of the entire region.”
Maroš Šefčovič, Vice-President of the European Commission responsible for the Energy Union, said: “I very much welcome the signature today between the EBRD and the Ukrainian authorities for the loan to modernise the Ukrainian gas transmission system. This complements the loan agreement signed between the EIB and the Ukrainian authorities on 1 December 2014 and, together with the recently launched European Commission-World Bank Trust Fund on the reform of Naftogaz, is a very significant step forward in ensuring that the Ukrainian gas transmission system remains a reliable transportation route.”
The Urengoy-Pomary-Uzhgorod pipeline transports gas from Russia towards European markets and also allows for reverse gas flows from the EU to Ukraine. The EBRD loan will be on-lent by the state of Ukraine to Ukrtransgaz, a wholly owned subsidiary of NAK Naftogaz, the national oil and gas holding company. Ukrtransgaz operates a system of pipelines and also underground gas storage facilities.
The EBRD’s financing will enable Uktransgaz to make important upgrades and repairs to 120 km of the pipeline, increasing its efficiency and safety. The Ukrainian government estimates that gas loss during transportation will be reduced by a fifth. The financing will also support the modernisation of a gas compression station in the town of Romny, Ukraine.
As part of the project, Ukraine’s government has committed to reforms in the gas market that will help move the sector towards best practice with respect to market-based principles and liberalisation. The EBRD’s financing is offered subject to further improvements in transparency and corporate governance within both Naftogaz and Uktransgaz.
The modernisation project is expected to cost up to US$ 600 million in total. Apart from the EBRD’s €150 million, the European Investment Bank (EIB) is also providing financing of €150 million, and NAK Naftogaz will provide an equity investment of €166 million. The procurement for both the EBRD and EIB facilities will be done under the EBRD’s procurement rules and will be open to all potential bidders.
In 2014, the EBRD has significantly stepped up its engagement in Ukraine, increasing the amount of financing and engaging strongly in policy dialogue, including the Anti-Corruption Initiative. The Bank has also established a multi-donor fund to support reforms aimed at the investment climate, anti-corruption, the banking sector, and energy security.
The EBRD is the largest financial investor in Ukraine. To date, the Bank has committed over €10 billion in about 340 projects in the country and expects to invest around €1 billion in the national economy in 2014. This loan takes the total EBRD investment in Ukraine this year to nearly €900 million.