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Why natural gas production does not increase in Ukraine?

Author : Olena Holubeva

The outcome of the Ukrainian gas industry in the last three years shows an unattractive picture. Despite the declarations of the authorities, in recent years not a single major foreign investor has been able to enter the country. Permits for the work on best deposits were concentrated in the hands of the Ukrainian oligarchs and state-owned companies, while about a third of them fell into the hands of speculators. The result is sad, experts say: the government program to achieve the country's energy independence and the rejection of gas imports by 2020 has almost failed
19:30, 22 October 2018

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Fields only for Ukrainians

The domestic gas industry is able to offer a variety of investment projects and attractive working conditions to foreign partners, according to a press release to ‘Ukraine: Natural Gas Production. Playbook 2018’ investment research recently presented. As the booklet’s creators explained, its goal is to attract foreign investors to the gas production industry of Ukraine.

But after all, we have seen quite a few declarations of intent in recent years. And what is the result? For three years, not a single gas producing company, especially a foreign one, was able to get into our country. Since 2014, no new production-sharing agreement was concluded, Gennady Kobal, director of ExPro Ukraine, said in an interview with 112.ua. “Only those operating on the Black Sea shelf with Exxon, DTEK (became party to the agreement instead of Vanco International) remain. They do not carry out any work due to the proximity of the occupied Crimea and the military threat from Russia.”

"Over the past years, Ukraine did not come up with investment proposals. There were practically no contests. Look at the number of special permits (for the development of promising oil and gas areas) issued in recent years. Even if special permits were issued, foreign companies didn’t receive them. Now we first come out with proposals,” Yulia Kovaliv, head of the office of the National Investment Council acknowledged at the Playbook 2018 presentation.

According to the data presented in the Playbook 2018, almost 80% of natural gas in Ukraine is mined by the state-owned Ukrgasvydobuvannia and the semi-state Ukrnafta (Igor Kolomoysky maintains control over the company). Private companies account for no more than 20% of production. And among them are all the same people: DTEK of Rinat Akhmetov, companies controlled by Igor Kolomoisky, Regal Petroleum – a member of Smart Holding of Vadym Novinsky , Geo Alliance of Viktor Pinchuk, Burisma of Mykola Zlochevsky. The companies usually associated with the current Interior Minister, Arsen Avakov, have also entered the gas production sphere.

Another part of special permits is concentrated in the hands of resellers - the companies that get them hold until the time it will be possible to resell them. And no work is being done on the fields. The number of "sleeping" special permits is about a third, the chairman of the State Service of Geology and Mineral Resources of Ukraine, Oleg Kirilyuk said. According to him, the issued special permits can be annulled only on the basis of violations identified during the inspection. For three years, a moratorium on such inspections was in force in Ukraine. Inspections were resumed only in March. But the procedure is "very difficult," explained Kirilyuk. In the case of violations authorities issue a prescription and give the time to correct mistakes. Only if the violations are not corrected, then the action of the permit can be suspended and go to court for cancellation. The chairman assured that the process of identifying unscrupulous holders of special permissions may take more than one day, but his department will cope in a year. "I think that in a year we will not have" sleeping "special permits," Kirilyuk assured.

Situation with special permits in Ukraine

Among the main reasons that restrain entry of companies, in particular foreign ones, into the oil and gas mining industry experts point out the lack of auctions for the sale of special permits. "For a year in Ukraine, no bidding was held. At the same time, about 90% of all fields’ permits were issued outside the auction, which indicates the dominance of double standards," the booklet of the Association of Gas Production Companies of Ukraine says. According to the association, in 2015 only 484 special permits were sold at auctions, while 1364 were issued outside of it, in 2016 the ratio was 657/1962, and in 2017 it was 0/2319.

At the same time, in 2015-16, when the auctions were still held, large gas areas were not sold, says Gennady Kobal. “Ukrainian oligarchs have long taken the best areas,” he says, and notes tha, “almost ideal conditions, perhaps the best in Europe, have been created in the gas industry in recent years.” Only our oligarchs have been using them for now. "We have excellent fiscal conditions. Last year decreased the rent for gas production, and from 2018 - for oil production. The rent for gas condensate production should decrease even more since the New Year. We have very good conditions for potential investors, but no new deposits to offer them, "said the director of ExPro Ukraine.

"Another important point that has slowed down the development of the gas industry is the environmental impact assessment (EIA). The industry fully supports the observance of environmental standards and the harmonization of Ukrainian legislation with European ones. But, unfortunately, due to bureaucracy and inadequate preparation of the Ministry of Ecology this procedure was delayed by the EIA and the work of the regional state administrations was blocked, which led to the fact that many gas companies had to postpone the drilling and the implementation of their projects. Currently, the environmental assessment procedure works, but it still takes a rather long period of time - up to 6 months,” Roman Opimakh, executive director of the Association of Gas Production Companies of Ukraine told 112.ua

112 Agency

Many companies had problems obtaining an assessment regarding the impact on the external environment. Kobal agrees: "In particular, the Slovak company Nafta was forced to postpone the drilling of the first well in the Uzhgorod gas area to a later date." Note that Nafta is also interested to enter into a production sharing agreement on Yuzovska Square instead of Shell. The company applied for the necessary approvals to the Cabinet of Ministers on August 4, 2016. There is still no final decision on this issue.

Geological information is still unavailable

An important component for the arrival of new players on the market is the discovery of geological information, notes Roman Opimakh: "Not a single foreign mining company will make a positive decision on the implementation of an oil and gas project without studying and analyzing geodata." At the same time, geological information in modern understanding is not available in Ukraine. "Today, all geological data, and these are 175,000 volumes of reports, most of which are from Soviet times, are stored in Geoinform in printed form. For the outside world, this information is practically non-existent. Yes, any enterprise can apply and read this information directly in archives, but a potential investor from abroad cannot do this while sitting online at a computer. This is undoubtedly a big problem, because many countries around the world have long ago converted their geodata to electronic format. The same thing needs to be done in our country - to select, digitize and process information by posting it on online resources, "said Opimakh, adding that" the level of opacity in the process of providing access to geological information in Ukraine is evidenced by the recent scandal with one of officials prosecutors suspected of selling geological information. "

"About 70% of all available geological information we have only in paper form. All this volume must be digitized. Even with proper funding, this process will take at least a year or two. As far as I know, foreign grants were allocated for these purposes and part of the work was done, but there is still a lot of work,” agrees Gennady Kobal.

112 Agency


In July, the government adopted amendments to Resolution No. 423, which implies the discovery of geological information and the liberalization of its turnover (the issue of transmission to other entities). According to the document, the state geo-information will be provided free of charge, and the investor will compensate its cost after winning the auction and receiving a special permit, Opimakh said. "This is an important document for the industry, but unfortunately, it has not yet been published," he said.

Foreigners do not lose hope

Despite the situation in the gas industry, interest from foreign companies is not declining, Yulia Kovaliv noted.

“Against the background of legislative changes, in particular, the introduction of stimulating rents for drilling new gas wells, facilitating permitting procedures, the interest of foreign gas companies to Ukraine has increased significantly,” said Roman Opimakh.

In support of his words, he cites the following: representatives of about 20 companies, half of which are foreign, came to the presentation of the PEC (production enhancement contract which implies the cooperation with gas producing and service companies in depleted fields).

Vadym Bodaev, head of the Sigma Bleyzer Foundation in Ukraine, spoke about the founding of an investment fund worth $ 250 million by foreign investors who are interested in gas production in Ukraine. At the same time, it has not yet been able to start work. “When a foreign investor, after reading all the advertisements, comes to Ukraine, he asks the only question: who should I negotiate with to start a (gas production) business? We don’t have an entry point to come and start investing money and work honestly”, said Bodaev at the presentation of the Playbook 2018.

The State Geoagency, in turn, continues to make promises to hold new auctions for special permits, including electronic ones. Oleg Kirilyuk said that the State Service of Geology and the Subsoil of Ukraine will hold three auctions by the end of the year to provide sites for oil and gas. The closest auction is scheduled for October 25th. For now, these will be auctions without electronic bidding: it has not yet begun to operate. Such auctions promised to be held in late December, in January and February.

Is the 2020 program failed?

As a result, Ukraine has come to disappointing results, experts say. It was not possible to achieve growth in gas production in the country, despite numerous declarations of the authorities. The government-initiated program for achieving energy independence and the rejection of gas imports by 2020 was on the verge of failure.

But the authorities do not recognize this. Note that even in the opening remarks of Prime Minister Volodymyr Groysman, published in the Playbook 2018, it is said about plans to realize the strategic goal and make Ukraine energy-independent, refusing to import gas by 2020.

“Unfortunately, the implementation of the program is already doomed, and there is no chance to fulfill it. It was clear from the very beginning that the expectations were, to put it mildly, too high. When such a task was declared, it was already clear that it would be extremely difficult to accomplish and now it is clear that this is absolutely impossible. The declared production volumes should have been growing at the level of 8-10% per year. Over the past 3-4 years they have not managed to reach such rates in one year," ExPro Director Gennady Kobal said.

"According to the government's concept for the development of the gas industry, it was planned that Ukraine would become energy independent in 2020. Even if it does not happen in 2020, it will happen in 2022," said Opimakh being more optimistic.

Energy independence can only be achieved "by increasing the share of private companies in production, but through really fair auctions and a fair procedure for issuing gas production licenses," said Lubomyr Vasunnyk, the head of gas and energy market research at Derzhzovnishform state company. “At the same time, the operational efficiency of state-owned mining companies can be significantly increased, and measures in this area need to be carried out continuously. Depending on the success of these measures, actual gas production in Ukraine can increase from 15 to 24 billion cubic meters by 2030”, he said. Today, about 20 billion cubic meters of gas are mined in the country annually. Our imports are at the level of 14 billion cubic meters (at the end of 2017).

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