Naftogaz without wealth: Why did state take away gas and oil fields from its company?

Author : Olena Holubeva

Source :

Naftogaz of Ukraine finally lost its special permit for the extraction of gas and oil in our country. As it became known to, on December 14 the Supreme Administrative Court rejected the appeal of the company, leaving in force the decisions of previous instances, adopted on the basis of MP Serhiy Kaplin’s appeal. Thus, after completion of all formalities, the rights to develop gas-oil-bearing areas Budyshansko-Chutovska, Obolonska and Pisarevska will again be put up for tender
22:45, 2 January 2018

112 Agency

Background of the issue

On December 14th, the Supreme Administrative Court issued a Decision on a rejection of cassation appeals of the Poltava District Council and Naftogaz of Ukraine, leaving the Resolution of the Kyiv District Administrative Court dated September 13, 2017, and the Resolution of the Kyiv Administrative Court of Appeal of November 14, 2017, without changes. According to these decisions special permits for the use of subsoil resources on oil and gas bearing plots Budyshansko-Chutovska area (Special Resolution No. 4063 dated October 31, 11), Obolonska area (No. 4062 of October 21, 2011) and Pysarevska area (No. 4,294 from December 29, 12) in the Poltava Region. The State Service of Geology and Mineral Resources of Ukraine

canceled on December 1 these special permits, the press service specified. Naftogaz sent a cassation appeal to the Supreme Administrative Court on December 4, 2017.

As you know, these are the only special permits for Naftogaz to develop gas-and-oil areas in Ukraine. "These areas Naftogaz has inherited from the predecessors of the current leadership of, it can be said that by chance," said ExPro Consulting director Gennady Kobal. According to him, special permits for the fields were issued to "Naftogaz" even when its head was Yevhen Bakulin. He led the company from March 1, 2007, to December 2007, and then from March 2010 to March 25, 2014, after which the head of the state company was appointed current leader Andriy Kobolev. While Bakulin was in charge of the company, drilling was actively conducted in the fields, and mainly private companies drilled. Gennadiy Kobal remembers: "It was a" black hole ", huge funds were invested in exploration and drilling, but no positive result - there was no gas production. "

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The director of ExPro Consulting noted that in essence, Naftogaz is a management company and it should not engage in gas production itself. For this, there are Ukrhazvydobuvannia, Chornomornaftogaz, Ukrnafta in its structure, which specialize in extraction. And the company actually fought for the special permits only because the sites (for which they were issued) are interesting for Ukrhazvydobuvannia, which has to fulfill the Ukraine 20/20 plan (assumes an increase in the volume of natural gas production from the current 15 billion cubic meters to 20 billion cubic meters of natural gas in 2020, which should ensure the country's energy independence, - Ed.). "A couple of years ago, these three sites might to transfered from Naftogaz to Ukrhazvydobuvannia, but it turned out that it was not such a simple process." One company had to abandon special permits and only after that it could be transferred to another company under the law.

"All three fields are rather small in terms of proved reserves on a global scale, but they are promising for Ukraine, they are comparable to most of the new structures." In Ukraine, large fields of traditional natural gas haven’t been opened for many years, "the executive director of the Association of gas companies Roman Opimah said.

The press service of "Naftogaz" specified that on three sites the company, starting from 2018 until the end of the special resolution, planned to extract 69.6 billion cubic meters of gas and 10.7 million tons of oil and gas condensate, which would be "a serious contribution to the implementation of the government program" Ukraine 20/20. "" The implementation of "Naftogaz" works planned for 2017, linking to receiving of special permits, only on Budyshcansko-Chutovska license area, which is the most explored, would allow already in 2018 to provide production of about 100 million cubic meters of gas and 190 thousand tons of oil, "the press service of the state company said.

Naftogaz stressed that "the decision to annul special permits of the company will definitely lead to a decrease in potential hydrocarbon production in Ukraine in the coming years": "This threatens the energy security of Ukraine and will cause losses to the state company of about 800 million UAH that have already been invested in the field. It will also lead to a shortfall in state budget funds (about 148 billion UAH), local budgets of territorial communities of the Poltava region (7.4 billion UAH)" .

Plans for 2017 envisaged investments of about 1.1 billion USD in the geological study of all three areas, the press service specified.

Let's note, the share of state Ukrgazvydobuvannia today accounts for about 75% of gas production in Ukraine, the rest is extracted by private companies.

Opinion of the court

The history of cancellation of Naftogaz special permits for the development of oil and gas areas began in December 2016 with the deputy Serhiy Kaplin in the State Company Geonadra. The deputy asked to apply measures regarding the abolition of special permits. On January 31, 2017, the Poltava Regional Council passed resolution No. 357 on the suspension of special permits. On its basis, Geonadra on March 13, 2017, issued an order to stop the validity period of the special permits of Naftogaz. "It should be noted that the decisions of the Poltava District Council and the appeal of the People's Deputy Kaplin did not contain sufficient grounds, supporting documents, an analysis of the state of affairs and relevant materials regarding violations allegedly committed by Naftogaz in the license areas. In particular, in Order No. 124 it was not specified which actions of Naftogaz or inactivity are regarded as violations. There was not specified either specific norms of laws or by-laws, as well as clauses of the agreement on conditions of use of fielgs, or programs for it, which were allegedly violated by the company, "the press service of Naftogaz said.

In addition, they stressed that the civil service issued an order to stop the operation of special permits without a scheduled or unscheduled inspection, what violated the provisions of the Law of Ukraine "On the Basics of State Supervision (Control) in the Sphere of Economic Activity" and the Procedure for State Geological Control approved by Cabinet of Ministers of December 14, 2011.

Indeed, when such events occur (Kaplin's appeal with serious accusations against Naftogaz), they should be accompanied by a check-up at the place of the supervisory authority, Roman Opimakh said to "In this case there was no verification: such unilateral decisions of the state rather negatively affect the investment climate of the industry. "

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The press service of "Naftogaz" also informed that the court " did not indicate in the court decision the arguments and evidence submitted by the state company, which led to incomplete clarification of the circumstances of the case and inconsistency of the court's conclusions with the actual circumstances of the case."

The press service of Geonadra confirmed that on December 12, 2016, they received an appeal from Kaplin. "In it, the People's Deputy pointed to information about the unsatisfactory state of the exploratory wells, as well as the activities of Naftogaz, which is not aimed at comprehensive work to find oil and gas faster. On the contrary, it was aimed at delaying the work for non-transparent obtaining by management state company of more than two billion hryvnias to activities for the state-owned company to search for and extract hydrocarbons, "the press service of Geonadra informed.

It was also mentioned in the appeal that Naftogaz failed to fulfill the obligation to drill one search well (6,000 meters) and two reconnaissance wells (5,000 meters) during 2013-2016, following a set of detailed geophysical and other studies, because of what the obligations regarding the production of hydrocarbons were not fulfilled, according to the Geological Survey Program approved by Supplement No. 2 to the Agreement No. 4063 dated October 31, 2011, for the implementation of the Special Permit issued to the Budyshcansko-Chutovska area.

Exploration wells No. 100, No. 101 Runovshchina, as well as well No. 110 of Runovshchina since 2013, have not been preserved and are under pressure, which is a violation of activities with respect to oil and gas production and could lead to negative consequences for the environment, safety and health of Poltava residents region, Kaplin asserted. In his appeal, he accused Naftogaz that it "spent considerable funds for the implementation of the preparatory work provided in paragraphs 1-4 of the Work Program, without starting drilling of two reconnaissance wells (planned for 2014-2016) and compiling project of research and industrial development at the Budyshcansko-Chutovska area, was told at the press service of the State Company Geonadra.

At the same time, the press service of Naftogaz said that the program of work at the Budyshcansko-Chutovska license area "was carried out with considerable speed, as a result of which 3 fields were discovered - 2 of gas and one of oil." "On the balance sheet of Naftogaz there are 3 production wells, which due to the cancellation of the special resolution it was forced to leave," the press service said.

Naftogaz reported that 799 million UAH were invested in the development of three sites as a whole. In particular, the funds were directed to geophysical studies, geological and thematic works, drilling wells, laboratory studies of core wells.

What's next?

At the same time, the well-informed source of in the government admits that special permits from Naftogaz can be stopped in the interests of People's Deputy Igor Kononenko, who has an interest in the mining sector and contacts with prominent players in the market.

According to Opimach, according to the current legislation it is impossible to pick up the plots and take them out in a package for auction. "The special permits for their development by law are canceled and further issuance of land plots at the auction involves the reconciliation procedure again, including with the regional council. The entire procedure, if we are talking about a standard auction, can take about 9 months, "said to the executive director of the Association of Gas Producing Companies. Opimah also said that if a new auction or tender for these fields is announced, Naftogaz or Ukrgazvobuvannia can also participate in it and the law does not prohibit it.

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However, if the fields were planned to be left in the ownership of state-owned companies, this whole story would not exist. For sure, now control over them will pass into the hands of private earners.

Let's note, in Ukraine in sphere of gas extraction there are no large international company of those which earlier showed interest to it. Now the industry is controlled exclusively by Ukrainian oligarchs. Moreover, the greatest successes in the field were achieved by companies which owners had additional financial resources obtained in other areas of activity. In particular, Rinat Akhmetov (DTEK) and companies controlled by Igor Kolomoisky were successful. It should be noted that the company Regal Petroleum, Geo Alliance of Viktor Pinchuk, Burisma of Mykola Zlochevsky. Also recently, the companies that are supposedly associated with the current Minister of Interior Arsen Avakov have entered the gas production market. In particular, these are Granulit and Energy 95. Domestic oligarchs are interested in acquiring rights to develop fields, with hope that in the future they will be able to resell them to foreign companies, or leaving their proprietary rights, earn on rent, told a well-informed source: "Foreign companies with access to serious financial resources, seeing opacity and corruption in the field of gas production in Ukraine, are not in a hurry to enter the country. "

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