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Slovak company Nafta is interested in the Yuzivska gas field in Ukraine, its press service has reported to 112.ua. "We might confirm our interest in getting the license for Yuzivska gas field, but as negotiations with partners continue, we cannot disclose all the details," the company said in reply to our request.
Nafta has told that it already has experience in Ukraine, in particular in a joint (with American Cub Energy Inc.) project on the Uzhрorod gas area (301.4 sq. km). Since July 2016, these Slovak and American companies have been implementing the joint project. During this time they have conducted the 3D seismological studies on an area of 118 square kilometers. Based on the interpretation of the obtained data, the prospects for drilling do exist: the work is scheduled for the third quarter of 2018, Nafta’s press service notes.
Having more than 100 years of experience, Nafta is a leader in the field of exploration and production of hydrocarbons in Slovakia. The company also owns underground gas storage facilities for natural gas in the country with a total volume of 2.74 billion cubic meters.
Chairman of the board of the state Ukraine National Oil Company Nadra Ukrainy (which owns 99% in Nadra Yuzivska - the only investor in Yuzivska gas field, - Ed.) Yaroslav Klymovych told 112.ua that cooperation with Nafta began in 2014: "And in early 2015, a Memorandum of Cooperation between our companies was signed. We have presented some prospective projects in the Carpathian region, as well as the Yuzivka project."
Klymovych has also added that after receiving Cabinet’s approval, Nafta will be the majority shareholder of "Yuzgaz BV" (a project company founded by the Emerstone Energy SCSP private equity fund, - Ed.) at the time of the conclusion of the production sharing agreement. State Nadra Yuzivska must assign 90% of its participation in the production sharing agreement on the Yuzivska gas field in favor of this company.
Yaroslav Klymovych stated that after Nafta’s entering the project, a new Production Sharing Agreement (PSA) will not be signed; the parties of the agreement will just change (Nadra Yuzivska will be replaced by Yuzgaz BV). Also, according to the chairman of the board of Nadra Ukrainy, "certain economic indicators (PSA, - Ed.) will change due to changes in the economic situation (falling prices for hydrocarbons and hostilities in the east of Ukraine.) According to the original version of the PSA, investment obligations for the Yuzivska gas field amounted to about $ 400 million.
Map of the Yuzivska gas field
August 4, 2016, Nadra Yuzivska and Yuzgaz have appealed to the Cabinet for getting consent to the transfer of rights. December 5, Interdepartmental Commission has approved the drafts of additional agreements on the Yuzivska PSA, which formulate the transfer of some rights and amend the agreement. The draft of the relevant decision will be submitted to the Cabinet of Ministers, Klymovych specified.
This is a production sharing agreement on the Yuzivska gas field, which was signed by Ukraine, Shell Exploration and Production Ukraine Investments BV (daughter of Dutch-British Shell) and Nadra Yuzivska on January 4, 2013. At that time of Yanukovych’s presidency, Eduard Stavytsky held the post of Minister of Energy and Coal Industry. According to the media, then 25% of Nadra Yuzivska belonged to Stavytsky. The agreement was signed for 50 years (with the possibility of extending the term by agreement of the parties).
In 2015, Shell withdrew from the Nadra Yuzivska project and announced about the continuation of the investor's obligations under the PSA on Yuzivska gas field. And this right was retained for it.
According to Klymovych, investors intend to carry out an ambitious program of prospecting for the first five-year search period. It will be aimed at early extraction, a comprehensive study of Yuzivska gas field. At the same time, Yuzgaz BV wants to implement a drilling program on at least four different promising oil and gas fields, whereas the previous program assumed coverage of only three areas. Nadra Ukrainy subcommittee specified that 15 wells will be drilled on four sites.
"If all the conditions are agreed, the PSA is concluded and the conditions necessary for starting work are fulfilled, the investor will make every effort in the coming months to re-interpret the data and start fieldwork as early as possible in 2018. The first gas could be received in 2019-2020, which will support the government's plan to achieve Ukraine's energy independence - the 2020 Program," Klymovych noted.
Yuzivska gas field is located in the Donetsk-Prydniprovsk valley (in Kharkiv and Donetsk regions), where many enterprises are engaged in gas production. Almost 80% of the proven Ukrainian reserves are concentrated there, Roman Opimakh, executive director of the Association of Gas Producers, told 112.ua: "The prospects for this sector are quite promising, but the company will have to invest substantial funds in geological exploration. As far as I know, Nafta has a sufficiently mobile and professional team, and it fully meets the criteria for investor selection in Yuzivska gas field. For Ukraine, it is important to promptly attract a professional mining company with an impeccable reputation, good experience, and sufficient investment capital. If Nafta gets the right to invest in the Yuzivska gas field in a transparent and understandable way, this will be a mega-successful event for Yuzivska gas field and for the whole gas production system of Ukraine," the Director of Association of Gas Producers of Ukraine Danylo Maydanik adds.
According to Nadra Ukrainy, Yuzivska gas field might be rich in natural gas reserves, shale gas, central-basin gas, methane, oil, condensate, and coal deposits. Potential reserves of the area are estimated at 148 billion cubic meters of natural gas, 3200 billion cubic meters of shale gas/gas of the central-basin type. The annual output of this gas field might be more than 10 billion cubic meters. Its total area is 7 886 sq. km (for comparison: the area of the Uzhhorod gas area, where Nafta and Cub Energy are currently working, is only 301.4 square kilometers.
"Considerable part of both foreign and domestic mining companies are interested in the Yuzivska gas field. This interest only confirms the prospects of Yuzivska gas field," Maydanik stated. According to him, "probably, it can be argued that Shell (on June 10, 2015, it abandoned the previously signed agreement on the division of products at the Yuzivska gas field - Ed.) did not find large reserves of unconventional gas in the Yuzivska gas field that would correspond to their expectations and appetites . But still, there is a significant potential for the production of traditional gas."
According to Nadra Ukrainy, the depth of productive layers on the Yuzivska gas field is 2.5-5.5 km. According to the expert of the oil and gas industry Andriy Zakrevsky, in Ukraine, the construction of a 3-4 km deep production well costs $ 5.5 million, 4-4.5 km - $ 9.6 million, 5-5, 5 km - $ 14.2 million. According to Maidanik, the cost of drilling a well 5 km deep in Ukraine is about $ 7-10 million. "The smaller is the depth on which the gas reserves lie, the higher is the cost of the deposit development," Director of Association of Gas Producers of Ukraine stressed. At the same time, most companies in Ukraine have to work with gas reserves, which lie at a depth of more than 4 km. 30% of resources out of Ukraine’s 290 gas fields (1.1 trillion cubic meters) lie at a depth of 5-7 km, according to the materials of Nadra Ukrainy.
Formally Shell has realized the right to unilaterally refuse from the Yuzivska PSA in connection with the "long-term action of force majeure conditions and a significant change in circumstances." July 15, 2014, the company reported on the force majeure due to the situation in eastern Ukraine (active hostilities), and a year later it withdrew from the project.
"The main reasons for Shell's exit from the Yuzivska gas field project were the global drop in oil prices and it was decided to review the global investment program. At the time they entered Ukraine, the price of oil was $ 100 + per barrel, and gas was $ 450 per 1,000 cubic meters," Maidanik notes. In 2014, the oil collapsed to $ 40 per barrel. At that time, investment obligations on the Yuzivska section of Shell amounted to about $ 400 million, Maidanik said. Annexation of Crimea and military actions in Donbas have strengthened Shell's determination to withdraw from the gas production in Ukraine.
Our interlocutors in one of the state companies suppose that the "hand of Russia" is involved in the exit of the Dutch-British company. Shell is implementing a number of large-scale projects in the Russian Federation: it has a large filling network, as well as oil and gas production projects. In particular, the company owns a 27.5% stake in Sakhalin Energy, which is developing the Piltun-Astokhskoye and Lunskoye fields on the northeastern shelf of Sakhalin Island. The project also includes the construction of a liquefied natural gas (LNG) plant. The majority shareholder in the project is the Russian Gazprom, which owns 50% of the shares and 1 share in Sakhalin Energy.
"Russia and Ukraine are significantly different in terms of the hydrocarbon production: most of the developed oil and gas fields in the Russian Federation are large deposits, which have no analogs in Ukraine. Moreover, such oil and gas reserves lie at a relatively shallow depth (up to 4 km) and are conventional reserves. Ukraine, in turn, has small deposits, most of which are already depleted and require modern, expensive mining technologies. A large part of the reserves of the Ukrainian deposits are unconventional, and total economic cost of production largely exceeds the similar value of hydrocarbon production (taking into account all geological risks) in Russia," Maidanik said to 112.ua.
Well # 17. European and Ukrainian record holder - 6750 m
The expert is convinced that due to natural features, the total cost of gas production in Ukraine (taking into account the investment component, all taxes, and geological risks) can reach up to $ 150-200 per 1,000 cubic meters. At the same time, the cost of gas production in Russia will not exceed $ 40 (at most fields). On the other hand, Russia spends a lot of money for transportation, as the deposits are usually located in remote areas.
All this largely explains the different profile and "caliber" of foreign mining companies operating in Ukraine and Russia. Director of Association of Gas Producers of Ukraine explained: "In Russia, these are large international corporations that are ready to invest hundreds of millions or even billions of US dollars. In the case of Ukraine, medium and large profile investors are interested in them; they are ready to invest up to $ 100 million per field."
Maidanik also notes that Ukraine is a country with high risks for any investment. Therefore, a segment of our investors are companies that are willing to take risks and have experience of mining in regions with complex geological, economic, and political conditions.
In addition to Shell, another giant of the global oil and gas industry, Chevron (the second largest in the US after Exxon Mobil), entered Ukraine in 2013. It has signed a PSA for Oleska gas field (6 324 sq. Km). In 2014, Chevron unilaterally broke the agreement with Ukraine: the only investor of the site remained LLC Nadra Oleska.
Chevron, just like Shell, left due to a set of problems, in particular, due to the drop in oil prices from $ 110 to $ 40. Another reason was military operations, Roman Opimakh said: "They could not find a common language with the authorities, they were not supported. How could you persuade investors to invest in a multi-billion dollar project that is not supported by the authorities?"
The executive director of the Association of Gas Producers of Ukraine stressed that "if an agreement with a reputable investor on the Yuzivska gas field is signed, this will be the first deal with a foreign mining company in the last 4 years (after the exit of Shell and Chevron from Ukraine). We are confident that if the project with one company is successful, then other investors will come to Ukraine as well."
Only state and local oligarchs are involved in the sphere of hydrocarbon production in Ukraine, and they have reduced the production volumes. According to the Association of Gas Producing Enterprises, in 2017 the volume of gas production in the country was 20.5 billion cubic meters, which is 2.4% more than a year earlier, but 2.4% less than in 2013 (21 billion cubic meters).
The increase in production in 2017 is visible thanks to the state companies: Ukrgazvydobuvannya (+ 4.4%) increased to 15.2 billion cubic meters, Ukrnafta has decreased the volume of production (-15%) to 1.1 billion cubic meters in 2017. Private companies reduced production by 0.4% (4.13 billion cubic meters). Private companies include DTEK of Rinat Akhmetov, as well as companies, controlled by Igor Kolomoisky (who, incidentally, controls Ukrnafta). It should be noted that the company Regal Petroleum of Vadim Novinsky's Smart Holding, Geo Alliance of Victor Pinchuk, Burisma of Mykola Zlochevsky are also represented on the market. Recently, companies that are supposedly associated with the current Interior Minister Arsen Avakov have also entered the gas production sphere.
Roman Opimach said that in previous years, the private sector in gas production showed significant growth: in 2015, volumes increased by 20%, but already in 2016 they slowed down to 7%. The executive director of the Association of Ukrainian Gas Producers said that the main reason for the slowdown was an unprecedentedly high tax burden on the industry in 2014-2015. "This load is atypical for any of the import-dependent countries (Ukraine has imported 14 billion cubic meters of gas in 2017 - Ed.)," he said.
Association of Gas Producing Companies notes that the state does not propose the new licenses on the development of the gas fields. Auctions for their sale in the past year were really small.
The situation might improve due to a reduction in the tax burden on the hydrocarbons production. In addition, since January 1, 5% of the rent for the development of local communities is reduced. This is expected to motivate the regions to engage in a constructive dialogue with the sector.
The situation will improve if the bill No. 3096-d "On Amending Certain Legislative Acts Relating to the Facilitation of Certain Aspects in the Oil and Gas Industry" is adopted in the second reading. Experts predict that the implementation of the norms of this draft law will allow shortening the terms of licensing procedures for 18 months.
Experts and market participants are quite skeptical about Nafta's gas production projects in Ukraine. They believe that the Ukrainian oligarchs will never agree to give the foreigners such a tasty pie.
Ukraine’s current industrial gas market allows selling gas to enterprises very profitably, sometimes these prices are even higher than in Europe. Of course, local mining companies have a significant advantage over import traders. At least they do not pay the entrance tariff on the border(12.47 dollars for 1 thousand cubic meters).
So, Nafta might be just a guise for the development of Yuzivska gas field, and the real beneficiaries of the project would be absolutely different people. It is not excluded that they just want the European company to invest in high-quality geological exploration of reserves. This is extremely important in the field of gas production, but at the same time is the most capital-intensive stage.
It is noteworthy that in the case of Nafta, the deal is achieved through Yuzgaz BV, and information on what proportion would belong to the Slovak company is not disclosed. 112.ua has directly asked whether Nafta will have partners in Yuzgaz, and Nadra Ukrainy presidium replied that "since this issue is the subject of the relationship between Nafta and Yuzgaz, we think it would be logical to apply directly to these companies."
112.ua has sent a request to the press service of Yuzgaz, and we will publish the company's response in case it is provided.