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Why Ukraine's gas production is declining and not going to grow?

Author : Olena Holubeva

Source : 112 Ukraine

Despite the promises made by Ukrainian top officials a few years ago, Ukraine was not able to achieve a significant breakthrough in the matter of providing its needs with gas extracted from domestic mineral resources. Moreover, in 2019, production even declined by 1.4%
09:30, 12 February 2020

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Officials assured that by 2020 the country would completely abandon gas imports, but we did not come close to this level: with a consumption of 29.8 billion cubic meters production amounted to only 20.7 billion cubic meters. The largest gas producer in the country - Ukrgasvydobuvannya - according to the 20/20 program was supposed to reach 18.3 billion cubic meters by 2019, but it has produced only 15.5 billion. There are no grounds for optimism yet: no significant breakthrough is expected in the next year or two.

How gas production declined in Ukraine

The intentions of Ukraine to become an energy independent state by the end of 2020 were repeatedly voiced by representatives of the previous government, Volodymyr Groysman, Petro Poroshenko, Igor Nasalyk. All of them claimed that during 2016-2020 our country will be able to abandon gas imports. But, despite the fact that gas consumption has fallen due to the worsening economic situation, domestic production volumes are still far from its level. According to ExPro, citing data from the Ministry of Energy and the Environment, over the course of 2019 the volume of natural gas consumption in the country fell by 8% to 29.8 billion cubic meters. Such reduction rates were record-breaking over the past 10 years: 2018 year consumption was relatively stable between 32.2-32.4 billion cubic meters. It is noted that metallurgical enterprises reduced consumption by 4.4%, sugar factories - by 29%, population - by 14%.

The total gas production, according to the IV quarter digest of Association of Gas Production Companies, in 2019 decreased by 1.4% to 20.7 billion cubic meters. The reduction is due to the updated strategy of Ukrgasvydobuvannya – UGV (it accounts for about 70% of total production) for exploration and production of gas, the text of the digest says.

It is worth saying that the issue of UGV production volumes is one of the most resonant today. And this is understandable because billions of investments were allocated under the company's promises to significantly increase production volumes. The six-figure sum of the company ex-head Oleg Prokhorenko's official salary was also impressive. In accordance with the 20/20 program, under which investments were allocated, the UGV was supposed to increase the production of natural gas from 14.5 billion cubic meters in 2015 and 2016 to 15.2 billion cubic meters in 2017, 16.5 billion cubic meters in 2018, 18.3 billion cubic meters in 2019 and 20.1 billion cubic meters in 2020. And now, apparently, it will be difficult to find out if we are talking about commercial gas or gross production.  

The reason for the growth of production volumes was the cooperation of private owners with state-owned companies to develop mothballed wells. In addition, effective work with the existing fund, which included capital repairs and intensification methods, in particular hydraulic fracturing, was noted by the executive director of the Association of gas producing companies. As an example, he recalled Ukrnafta, which has no opportunity to invest in the drilling of new wells, but it showed growth of more than 7% due to overhaul of wells and conducting operations to stimulate production.

Last year, Ukrnafta produced 4.7% more oil and condensate than a year earlier and increased gas production by 7%. In 2018-2019 it conducted 24 hydraulic fracturing operations, completed an overhaul at 281 wells, and 150 operations to stimulate production. In 2019, the company removed 121 wells from inaction, receiving an additional 259 thousand tons of oil and condensate and 224.7 million cubic meters of natural gas.

At the same time, an unresolved problem for the company remains historical tax debt, which for many years has been holding back its opportunities for development. The company has repeatedly stated that they spend money on servicing tax debt (constantly increasing fines and penalties) instead of investing in production and drilling. At the same time, Ukrnafta spent twice as much on servicing debt than on investments. As a result, only one well was drilled last year.

Should we expect an increase in gas production?

In 2020, Ukrgasvydobuvannya will strive to maintain gas volumes at the level of 2019. “In July, the company announced an update to its production strategy. Taking into account global changes in the international gas market, namely a 50% drop in gas prices on world markets and an increase in liquefied natural gas (LNG) supplies to Europe, major global gas companies adjusted their business strategies, and the Ukrainian Naftogaz group was no exception," the press service of the UGV says.

According to the implementation of the updated strategy, the UGV plans for 2020 are to maintain the volume of marketable gas at the level of the previous year.

Ukrgasvydobuvannya said that they would continue to implement partnership projects launched in 2019, in particular, on concluding PEC (production enhancement contract) contracts (concluded with oil and gas companies that own modern technologies to stimulate production) to increase the volumes extracted at depleted fields in the West region. They will also "attract experienced international players to participate in competitions for the production sharing agreements." As you know, UGV attracted the Canadian Vermilion for this form of cooperation.

Also, the company officially announced its interest in shelf gas production, which it had not previously commented on: “The Black Sea shelf has significant potential for increasing Ukrainian gas production. For Ukrgasvydobuvannya, this is one of the promising directions. Today there are a large number of companies that are successfully developing the Gulf of Mexico and the North Sea. Ukrgasvydobuvannya is ready to attract world-renowned partners to work on the Ukrainian shelf, but the state must ensure a stable regulation base.

Related: Ukraine imports liquefied gas that came from sea terminal in Poland

The Association of Gas Production Companies noted that in addition to the existing well stock and traditionally developed areas, Ukraine held a series of oil and gas auctions and tenders last year, for which a record number of blocks with a total area of ​​29,000 square km were put up. As a result of 5 rounds of auctions 19 sites were sold, 14 of which were acquired by Ukrgasvydobuvannya, one site was bought by a foreign investor, the Slovak Nafta company, and the rest - by domestic independent enterprises. In addition to oil and gas auctions, 13 blocks were put up for other contests. For 9 contests, the approval of texts of agreements between investors and the Interdepartmental Commission is ongoing. According to the law, agreements must be concluded within a year after the announcement of the winners of tenders.

It is worth noting that the process of concluding production sharing agreements is delayed in connection with the lawsuits that are ongoing in relation to the two sites. As reported, one of the areas has become the subject of litigation. So, the company Ukrnaftoburinnya, which is owned by Igor Kolomoisky, Vitaliy Khomutynnik, and Pavlo Fuchs and filed the appeal on Zinkovska Square, was not recognized as a winner. It won the court’s cancellation of the clause for competitive conditions, which may jeopardize the results for other areas.

In addition, on December 13, 2019, the UGV filed a lawsuit to annul the decision of the Interagency Commission to determine the winner on Varvinska Square. "Based on the results of the statement, the court opened the proceedings and scheduled a preparatory hearing. The company hopes for an unbiased review of the case and a lawful and fair decision regarding the repeated objective consideration of applications by the interdepartmental commission in order to ensure equal rights for potential investors and receive the most benefits from the agreement concluded. The offer of Ukrgasvydobuvannya regarding Varvinska Square meets the minimum requirements approved by the Cabinet. The company has offered an investment of 1.5 billion USD and the work program on the 750 sq km of 3D seismic,"- the message reads.

Related: Oligarch Kolomoisky wants more: Privat group aims to rise Ukraine's diesel, gas prices

Note that the winner on Varvinska Square was the Aspect Energy company, which submitted an application together with the Sigma Bleyzer Foundation, which has long been operating in Ukraine. Its founder Mikhail Blazer emigrated to the USA in 1978, and from the 90s began to do business in Ukraine. The Association of Gas Production Companies then reported that Aspect Energy (headquartered in Denver, Colorado, USA) specializes in hydrocarbon exploration and has a fairly successful portfolio of various projects in the USA, also operates in the Middle East and Central Europe. Between 1998 and 2010, Aspect and its partners invested more than $ 1 billion in the drilling of 525 wells. The success rate was 60%, and the total stock was 20 billion cubic meters of gas.

Aspect is one of two foreign companies that are now showing interest in the Ukrainian subsoil. Others keep a respectful distance. Slovak Nafta also won the auction and bought through its subsidiary Nafta RV a license (for 20 years) for Vatazhkovska Square (near Poltava). "The decision on drilling will be made based on the results of geophysical work. If there are no delays with permits and approvals of individual government bodies, we expect that the first reserves can be confirmed within two to three years," the company said.

It is worth noting that work in other new areas will also not begin earlier. “Since the areas were sold last year, companies will only be able to start working on them after an environmental impact assessment, which usually takes at least 6-8 months. Before obtaining this conclusion, gas producers have virtually no right to carry out any work. Therefore, if we talk about those sites that were sold in the first round in spring 2019, then the winners only in October-November completed the EIA procedure (environmental impact assessment, ed.). Accordingly, the first except work (in particular, seismic, which precedes the drilling of exploration wells) can start only in the first quarter of this year", - said Artem Petrenko.

UGV also reported that 3-4 years pass from the moment of obtaining a special permit to a new area until receiving the first cubic meters of gas. "Now, the available geological information and the decision regarding the need for additional geological studies are being considered on the sites that the company acquired in 2019. In accordance with the data obtained, the drilling of exploration wells will be planned." At the same time, given the significant drop in gas prices on international markets and the high cost of drilling new wells, Ukrgasvydobuvannya revised approaches to the selection of wells for drilling. "The company analyzes the economic feasibility of production projects in accordance with the new market conditions and selects only the best wells where there is confidence in the return on investment."

Given the low gas prices, investors and private gas producers are more likely to optimize their plans.

***
Unfortunately, all this is clear evidence that promises in gas production are the one pleasant thing. Projects are implemented within 3-4 years, so you can safely take budget money and not be afraid of responsibility: no one asks us for unfulfilled promises. The programs, in the end, can be reviewed, and officials who received millions of salaries can be fired without any assessment of the implementation of their KPI and punishment for their non-compliance. This is especially true on the eve of March when the contract with current Naftogaz executive board of Andriy Kobolev expires. It cannot be ruled out that it will not be extended, and new people will be put at the helm of the same Ukrgasvydobuvannya who will again promise energy independence, production gains and other benefits for multi-billion investments in the foggy future. Experience shows that this should be taken with skepticism, as well as statements by officials regarding the creation of a positive investment climate and conditions for foreign companies wishing to produce gas in Ukraine.

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