Will Ukraine have enough gas in 2022?

Author : Olena Holubeva

Source : 112 Ukraine

Ukraine sums up the disappointing results of the past year: gas production in the country fell by 2.2% to 19.79 billion cubic meters
23:20, 6 January 2022

 Import fell six times. This created the threat of a deficit, due to which industrial enterprises could stop in the country. Already in the first quarter, it is necessary to import from 2 to 6 billion cubic meters of gas, but neither Naftogaz nor the state budget has money for this. Billions of dollars will also be needed to pump gas in April: Ukraine will come out of the heating season with such empty storage facilities as in no other year.

Why is gas production falling in Ukraine?

In 2021, a turning point came: if gas production in Ukraine did not grow until 2020, last year it completely decreased by 2.2% to 19.79 billion cubic meters. 

Related: Gazprom's gas exports increased in 2021, company expects record-high earnings

ExPro reports this is the lowest in a decade. A year earlier, 20 billion cubic meters were produced. m. The same amount of gas was produced in 2014, which became the starting point for revolutionary transformations, including the ambitious goal of reaching a production volume of 27 billion cubic meters. m by 2020. This would allow Ukraine to completely abandon gas imports.

As has repeatedly reported, no one has been held responsible for the failure of the "20/20" strategy approved to achieve this goal. Even the perpetrators have not been named. And this despite the fact that within the framework of the strategy, the subsidiary of Naftogaz was literally pumped up with billions of state support from the budget. Only during 2016-2018, about 1,3 billion USD was spent on the implementation of the program with practically zero emissions as a result of the increase in production.

Journalist Volodymyr Dolnik touched upon the serious topic that short-term successes on the path to energy independence and supposedly achieving the 20/20 goals in some years were associated with the application of the "depletion" technological regime, which gives a temporary increase in production volumes, but leads to a rapid watering of wells and complete cessation of their operation. In simple terms, a valve is opened at the well to demonstrate a record in the reporting period, and then it is closed, which gives a temporary increase in production. If this is true, then the Ukrainians were lied to for many years, and in fact, no one thought to discover new fields, drill new wells. At least, not exactly in the volumes that Naftogaz drew in the presentations. Until now, there have been no public investigations of these facts - the uncomfortable topic was simply hushed up.

Another scandal, which also did not go public, is associated with the drilling of well 888 at the Shebelinskoye field. Hundreds of millions of Ukrainian taxpayers' funds were spent on this project; one of the most expensive service companies, Schlumberger, was attracted as a contractor. Drilling the well was a foundational arm of a production rescue plan called Trident, which replaced the failed 20/20 strategy. With its help, Naftogaz intended to open a new horizon at Shebelinka, a unique field discovered by Soviet geologists and has been developed since 1956.

The authors of the idea hoped to find a new one under the old field, with even larger gas reserves. As a high-ranking official from Naftogaz told, they were guided by the data of Soviet geologists, which were extracted from the archives. A miracle did not happen: no gas was found in the volume that was expected on the deep horizons of the field depleted to the limit. They buried the money.

Related: EU proposes to recognize nuclear power plants and gas as green energy

The main reason for the decline in gas production in 2021, as well as the lack of growth in the previous year, was the reduction in the public sector. Naftogaz subsidiary Ukrgasvydobuvannya produced only 13.66 billion cubic meters of gas, which is 4%, or 570 million cubic meters, less than a year earlier. Last year, gas production grew only in the private sector. The interest of private companies in gas production in recent years has been stimulated by high gas prices: the Ukrainian market, largely through the efforts of Naftogaz, remains premium, tied to "import parity."

Again, in simple terms: gas, the production of which costs 0,3 USD, is sold at 1,8 USD / cubic meter. Few are allowed to the fatty "pie". Despite all the promises of liberalization, openness, and accessibility, Ukrainian natural gas reserves remain the domain of oligarchs and political elites. The leading gas producers in the country are the companies of Akhmetov, Kolomoisky, Zlochevsky. The gas business is actively developed by the co-owner of ATB-Market Gennady Butkevich, Korosten oil trader Serhiy Tyshchenko, father of the head of the Lviv Regional State Administration Zinoviy Kozytsky, and this is not a complete list. People's deputies hold licenses for gas fields directly or through dummies.

There is no reason to hope for a change for the better in 2022. The only foreign investor that Ukraine can boast of is the Slovak holding EPH (NAFTA). We have officially signed two agreements with the company for the division of production at the Okhtyrskaya and Grunevskaya areas. Before that, the Slovaks had been trying for almost five years to get the opportunity to invest in the development of the Yuzivska area, but as a result, the authorities decided to transfer it to Naftogaz without a tender. However, all these are projects in the "green field." You should not count on a quick return on them. In the next few years, companies will only be exploring areas. There is still a long way to go before commercial gas production if its reserves are confirmed.

President Volodymyr Zelensky also gave up the promising Black Sea shelf to Naftogaz. At the same time, the state-owned company, which performs the function of restraining prices for gas and heat for the population in order to maintain the rating of the president who showed such generosity, does not have enough funds to develop an expensive project. Officially, Naftogaz promised to start drilling in the shallow water of the shelf at the end of 2022 - at the beginning of 2023. The deep-water part of the shelf remains a distant prospect for the state-owned company.

It is not worth waiting for the interest of new foreign investors in gas production in Ukraine in the near future. The Ukrainian government has already firmly entrenched a toxic reputation of unpredictable people. Until this situation changes, the money of the world majors of the industry will not go into the country. Direct interference by the Office of the President in the affairs of Naftogaz, attempts by Bankova to manage the market by setting gas prices by directives, do not add to the optimism of the situation. The decision to oblige private gas producers to sell 20% of gas at preferential prices to food industry enterprises increased the distrust of not only foreign but also domestic gas workers.

Related: Cabinet of Ministers limits gas price for producers of social products

Ukraine faces gas deficit

In 2021, Ukraine also significantly reduced gas imports. Last year, imported gas was six times less than in the previous year - 2.6 billion cubic meters. m. Mostly 89% of the volumes - due to the virtual reverse, that is, by replacing the volumes with "Gazprom" gas, which was taken from the Ukrainian territory. Physical imports fell 64% to 1.5 billion cubic meters. m from Hungary, by 97% to 285.3 million cubic meters - from Slovakia and by 95% to 78.6 million cubic meters - from Poland.

It should be noted that the search for those responsible for the reduction in gas imports remains the main topic of media battles between the previous and current leadership of Naftogaz. And it is clear why: by the end of the heating season, Ukraine faces a shortage of "blue fuel" due to low reserves in underground storage facilities.

The GTS operator has already warned about "irreparable consequences" for the gas market in the absence of additional purchases "starting from February 2022". The expected deficit during the peak cold snap in January-February may amount to 128 and 240 million cubic meters, respectively, in March, the deficit may reach 1.1 billion cubic meters of gas. As reported earlier, market participants estimate a possible gas deficit at 3.6 billion cubic meters. m until the end of the heating season.

Note that the head of OGTSU Serhiy Makogon confirmed in an interview that the lists of priority disconnections from gas to industrial consumers have already been drawn up. They are in all regional gas companies. In the event of a critical situation, the Ministry of Energy will apply restrictions on these lists. That is, since January, even enterprises that remain afloat, with a gas price of 2 USD / cubic meters can directly "fasten" the gas.

Related: Ukrainian milk producers threaten to close their plants due to catastrophic gas prices

As of January 1, natural gas reserves in UGS facilities decreased to 13.5 billion cubic meters. Ukrainian gas storage facilities are filled by 43.6% against 76% in January last year. According to the estimates of the ex-head of Naftogaz, Andriy Kobolev, in order to avoid a deficit, Ukraine should import from 2 to 3 billion cubic meters in the first quarter. Since Naftogaz has no money to buy it now, the state should allocate funds for the purchase from the state budget. At current gas prices, we are talking about an amount of $ 2-6 billion. Unofficially, sources close to the authorities say that in order to avoid a catastrophe, it is necessary to import 5-6 billion cubic meters of gas.

Ukraine will leave the current season with extremely low gas reserves in the region of 6 billion cubic meters. m in an underground storage facility. This is a technological minimum that cannot be raised. This has not happened in a single year before.

Reduced transit and opportunities for virtual reverse

Gas transit in the Ukrainian GTS decreased by 25% compared to 2020 to 41.6 billion cubic meters. m. Last year, the capacity of the Ukrainian pipe was used only by 30%. Note that Gazprom did not reduce pumping volumes below the current contractual obligations - 40 billion cubic meters. m in 2021. The Russian company additionally booked 4.4 billion cubic meters at monthly and daily auctions but used only a part of this volume. In general, Gazprom exported 185.1 billion cubic meters to non-CIS countries of gas, which is 5.8 billion cubic meters more than last year, including through alternative gas pipelines.

Related: Ukraine to limit gas price for bread production companies

The contract for pumping Russian gas with Ukraine was signed until 2024. At the same time, no consultations on the prospects for its continuation have been held so far. The inaction of Ukrainian officials in this direction cannot but cause alarm, because, without Russian gas, Ukraine will be deprived of the opportunity to carry out a virtual reverse.

In this situation, the only way to prevent a catastrophe in the energy sector and preserve the gas transmission system (GTS) of Ukraine is to create a gas consortium with the European Union and Russia. As you know, the Ukrainian authorities have hopelessly failed the previous three attempts to create a gas consortium.

A difficult year and high gas prices await Ukrainians

Experts say that the main problem of Ukraine is not even the current heating season, with all its intensity, but preparation for the next one. Already in April, the country should start pumping into underground storage facilities. At the same time, due to the production of the state-owned "Ukrgasvydobuvannya" until October, it will be possible to pump only 3 billion cubic meters. m of gas. Another 6-7 billion cubic meters of gas will have to be imported at a price that for the summer will not fall below $ 500-600.

This means that not only industry but also the population should not rely on low gas prices this year. The authorities will be forced to raise prices. At the final press conference of Naftogaz, the chairman of the board, Yuriy Vitrenko said that the prices of annual contracts for the population will be revised in relation to those that will be formed after the end of the heating season.

Related: Nord Stream 2 launch would lower gas prices in Europe, - Putin


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