Ukraine’s gas production starts looking up: after the Cabinet of Ministers has adopted an appropriate decision in mid-December, Slovakia's NAFTA company came very close to becoming an operator in a production sharing agreement (PSA) on Yuzivska gas field, Ukraine’s largest oil and gas field. With the help of its main shareholder (EPH), it might enter the project and become the first foreign investor in Ukraine who has concluded PSAs in the field of gas production after the revolution. Until recently, the leading positions in gas production in Ukraine belonged only to state-owned companies and companies of Ukrainian oligarchs. Director of the NAFTA Representative Office Lyubomir Kopchik unveiled the peculiarities of doing business in Ukraine, how NAFTA offered to buy “dormant” licenses, and about ties with Ukraine’s political elite
What should NAFTA do to begin work on the search and production of gas at Ukraine’s Yuzivska gas field?
In 2016, Yuzgaz B.V. has won the tender, which was to determine the PSA side at Yuzivska gas field (in 2015, the British-Dutch Shell left the agreement due to the hostilities in eastern Ukraine, - Ed.). Central European Energy Group ЕРН is at the stage of completing the transaction for the purchase of the Yuzgaz company. We expect this to happen in January 2019. For the acquisition of Yuzgaz, a subsidiary of EP Yuzivska B.V. was registered in Holland. Legal procedures are now being completed, an agreement with the current owners of Yuzgaz (entrepreneurs Yaroslav Kinakh and Timothy M. Elliott) has been reached. The technical operator of this project will be NAFTA a.s., which is part of the EPH group. At the meeting of the Cabinet of Ministers, an updated version of the PSA was also approved.
Will you be the sole owner of Yuzgaz after the purchase transaction is completed?
We will be the sole owners of 100% of the company. Initially, the owners (Yaroslav Kinakh and Timothy M. Elliot) negotiated on the sale of only 50% of the share. Then we turned to a discussion of the model of 66% of NAFTA - 34% of the current owners.
Our opponents, who did not find time to meet with us at the professional level to discuss the project, have found time to come to the press conference.
And kicked up a fuss?
I can't call it a fuss...
But they were negative towards the press conference, right?
They are negative about this project and the tender itself. (As a result, Yuzgaz B.V. became the main contender for being an investor. Politicians and experts noted that the company has no experience in gas production, - Ed.) We thoroughly studied the tender, and our specialists confirmed compliance with international standards and norms. We communicated with Nadra Yuzivska and saw that specialized organizations, individual companies and even more than a dozen foreign embassies in Ukraine were more than sufficiently informed about its conduct. Direct negotiations were held with many leaders of the market. As a result, Burisma Holding (one of the largest gas producers controlled by Mykola Zlochevsky, - Ed.) and Balkash Petroleum B.V. (Vitol subsidiary) participated in the tender. The bidders did not attempt to dispute the Yuzgaz victory.
I’ve heard that joining the NAFTA project was made possible by the fact that your partner is Poroshenko’s associate Igor Kononenko...
This is a rumor.
Do you personally know Kononenko?
I know him, but he does not know me.
Coming of NAFTA outside Slovakia became possible thanks to the EPH holding, which became a shareholder of the company in 2013. A new strategy was approved and the decision was made to concentrate on working in individual European countries. Currently, NAFTA is most active in Ukraine, Germany, and the UK. EPH itself is among the ten largest energy companies in Europe. The total installed capacity of generating facilities, including two NPPs located in Slovakia, exceeds 24.3 GW, and the annual production of electrical energy reaches 100.2 TWh. The group is the managing partner of the Slovak gas transmission system, which also includes Eustream (the company is a party to a consortium of investors claiming to manage the Ukrainian GTS, and provides gas reversal to Ukraine, - Ed.).
How did you decide to become Yuzivska gas field developer?
We have been engaged in Ukraine since 2013. Until December 2016, we had meetings with the majority of private players in the country and, of course, met with almost all the government operators. Quite often, these were simply non-professional people who carry some papers, talking about stocks, explored back in the Soviet Union, and try to sell them for fabulous money.
Have you negotiated with semi-state "Ukrnafta" company?
No. This is the most difficult company in the sector of state-owned mining companies in Ukraine... Due to the confrontation of shareholders in Ukrnafta, we did not consider it as a possible partner, therefore we did not enter into negotiations with them. Perhaps, Ukrnafta is the only company in the public sector that we did not try to work with.
What did 3D seismic analysis on Uzhhorod field show?
We are going to drill three exploration wells. I believe it will be possible in the spring already. Pipes are delivered. Now we are waiting for the issuance of permits and receiving an assessment of the impact on the environment. We wanted to start drilling work in the second half of 2018, but not everything depended on us.
What is the basis of your confidence in the availability of reserves in the Yuzivska gas field? Because I have heard skeptical relations of specialists regarding it.
We view this project as greenfield. And in this case, really, you do not need to shout that they "gave half of the stocks to foreigners." Shell has drilled 2 prospecting wells near Yuzivska gas field before leaving, and none of them showed commercial reserves. By the way, this was also one of the factors that made them decide to leave the project in Ukraine.
There are about 60 old mothballed wells there. We still do not even know their state of affairs thoroughly and are just planning to start studying. These wells, apparently, were drilled in Soviet times. Unscrupulous people are trying to blame us for saying that all we are going to do is re-launch the old foundation and start pumping gas. But this has nothing to do with reality. As part of the license, there are already some promising areas, which belong to a state-owned company and which are being extracted. And we will certainly work and explore individual opportunities. We will see if it is possible to carry out a deep overhaul, intensification. We will try to get everything we can from the old fund as soon as possible. But! In parallel, a comprehensive geological study of the area will be carried out: site selection, 3D seismic surveys, interpretation, and development of medium and long-term work plans.
We believe in success, because, as I said, the former shareholders of NAFTA (E.ON Ruhrgas, Gaz de France) have seriously improved the technological level of the company. In the past 15 years, our company has about 50% drilling efficiency. That is, every second well has a flow rate. In the industry, the standard figure is 15-30%. We have been producing gas since 1913 and have 105 years of experience. In addition, Slovakia, where our company works, is clearly not Kuwait. But we have been efficiently producing gas for 105 years: people at NAFTA know how to produce gas, to the last drop.
Gas reserves in Yuzivska gas field are located at a depth of 3-5 km?
Approximately yes. But NAFTA in Slovakia has experience with drilling in truly different depths. The deepest well that we have drilled is 6,5 km, so we are ready to work at great depths.
Do your colleagues, foreign gas companies, consider your consent to invest in Ukraine rash? What are their main concerns?
Instability. You probably remember what happened with the rental payments: they were suddenly increased, then lowered... The success of NAFTA at Yuzivska gas field is still a great beacon. Investors’ interest in Ukraine has markedly declined, but it is not that difficult to switch from a state of waiting to the activity mode. So everything is in your hands...