Ukraine appears to have taken a major step in the process of opening up, reforming and strengthening its natural gas sector.
On Dec. 6, Ukraine began, in earnest, the long-awaited process of opening up the country’s natural gas production, by beginning the auctioning process for exploration and extraction rights at 30 onshore reserve sites.
The auctions will take place online, through the state’s transparent bidding system Prozorro, according to the Association of Gas Producers of Ukraine, or AGPU.
Initially, ten blocks of land have been readied for electronic auctions that will end in March 2019 while another twenty packages of oil and gas-rich blocks are still being prepared.
Eight blocks up for lease are located in the northeastern Dnipro-Donets basin, while one is in the western Carpathian region and another near Odesa, situated on the North Black Sea Basin. The first ten blocks being readied for licensing are estimated to contain 86.25 billion cubic meters of natural gas and 16.3 million tons of liquid oil, according to the AGPU.
For private and state-sector actors alike, it’s a welcome opportunity to take part in open, electronic auctions: something they have been demanding for years.
Prosperity and energy independence
Recently, experts and energy executives have been saying that Ukraine badly needs to advance and strengthen reforms in its natural gas sector, adding that it’s vital in order to boost the prosperity and energy independence of the country.
Other experts have said that Ukraine, by boosting its own domestic extraction and production of natural gas, can also strengthen the energy security and independence of nearby European countries too.
If it eventually becomes a major exporter of natural gas – as most analysts expect it eventually can and should – Ukraine can play a critical role in helping Europe to wean itself off of politically problematic Russian energy.
The biggest challenge for Ukraine, however, has been extraction and production in a sector that’s widely regarded as being plagued by corruption and dominated by a powerful, state monopoly.
Production here is still seen as very underwhelming by most analysts, at 20 billion cubic meters produced annually, despite having some of the world’s largest proven and estimated reserves.
Ukraine’s gas production numbers have hardly moved in the years since 1991’s independence. It still lags behind the likes of Myanmar, Bangladesh and Trinidad and Tobago in terms of production, even though experts estimate that Ukraine has huge, untapped reserves.
In comparison, and topping the global rankings, the United States extracts and produces almost 800 billion cubic meters of natural gas annually, while Russia produces about 635 billion.
By implementing key reforms – such as the gradual introduction of open, electronic auctioning of licenses – that set free Ukrainian companies to explore, drill and produce, Ukraine can significantly increase production to a level where it’s not only energy self-sufficient, but also able to become an exporter of gas to Europe and beyond.
More importantly, perhaps, such reforms can attract the resources and expertise of multinational energy companies, ready to invest in Ukraine under the right circumstances.
“Texas of Europe”
It can be considered high praise if a Texan, visiting your country, speaks enviously of your energy sector.
Which is why U.S. Secretary of Energy Rick Perry drew attention in November when he highlighted and championed Ukraine’s potential to become a gas-exporting powerhouse.
“Ukraine is unique in the sense of where it finds itself in the world at this particular point in time,” Perry said, at a Nov. 13 event organized by the U.S.-Ukraine Business Council in Kyiv.
“Not only can they be a major supplier (of liquefied natural gas) through Poland… and then supplying Europe from there, but the potential for exploration and production in Ukraine – this is quite a statement from me – but Ukraine would be the Texas of Europe,” he said, quickly grabbing headlines the next day.
While the U.S. remains the world’s number one producer of oil and gas, Perry says that recent geological surveys show that Ukraine could possibly have larger gas reserves than the U.S., most of it still untapped. And according to Perry, plenty of American energy companies are “interested” in working with Ukraine.
Some of the world’s largest oil and gas companies, Shell, Chevron, Eni and ExxonMobil, entered the Ukrainian market before and committed to invest millions of dollars. But, without the proper business climate, they had to close down as they couldn’t realize their potential.
Extraction and attracting international companies remains a so-far insurmountable challenge, but key reforms could change that.
“We’re trying to persuade such international energy companies to come to Ukraine,” said Oleksandr Romanyuk, Chief Operating Officer of UkrGasVydobuvannya, or UGV, the country’s state-owned gas enterprise.
UGV, a 100 percent subsidiary of Naftogaz, dominates the natural gas sector in Ukraine, accounting for about 75 percent of all production, while small and medium-sized enterprises from the private sector are squeezed to the sidelines and take the remaining twenty-five percent, about 10 percent up since 2014.
“Globally, Ukraine is currently in about third or fourth place in terms of deposits of natural gas… we have about a trillion cubic meters of conventional natural gas under the ground,” he told Kyiv Post, adding that the size of unconventional and offshore deposits – not shale gas in the rock – is still unknown, and needs to be measured.
Realistically, Ukraine is almost certainly not in third or fourth place globally, in terms of natural gas reserves – more likely closer to tenth place, according to proven reserves data published by British multinational oil and gas company BP: but the extraction potential in Ukraine, and the opportunity in so-far undiscovered reserves, is still immense.
“Ukraine can be the Texas of Europe, and Poltava, if I can say so, can be Houston – we have a lot of gas under the ground, but it needs to be measured,” added Romanyuk. “And for companies to extract it, the conditions for access to new greenfield projects need to be free and fair.”
Corruption hindered extraction
“Big players have looked at Ukraine many times,” he added. “But they’re not interested yet.”
UGV, for their part, say that they have been doing their best to increase production but are being held back by corruption, regionalism and red tape.
“Last year, we reached our highest production capacity in the past 24 years – our gas field production was up 4.4 percent, growing faster than the economy in general,” Romanyuk said, adding, however, that local authorities in Ukraine are hampering their efforts to further increase production by failing to grant new licenses, seemingly preferring to keep their gas in the ground.
“From 2005 until 2015, UGV was given zero new greenfield sites (for exploration and extraction), while the private sector was allocated 150 new licenses,” said Romanyuk.
One famous example is private company Burisma Holding, owned by Mykola Zlochevsky, the former energy minister under Viktor Yanukovych, who is accused of hogging extraction permits while he was minister from 2010 until 2012.
According to Romanyuk, this – what he openly calls corruption – has been a leading factor in deterring Western companies from moving into Ukrainian gas, although he adds that Russia’s destabilizing war against the country, bureaucracy and the overall complexity of Ukraine’s licensing system have also been big factors.
“Regional councils should be removed from the decision-making chain and the decision should be made by the market instead, by open electronic auctions for bidding on licenses to land plots,” he added.
Private sector opportunities
“Of course, we advocate for the development of the private sector,” said Viktor Gladun, CEO of Poltava Petroleum, a medium-sized, British-Ukrainian venture that has specialized in resurrecting abandoned gas wells and now produces 173 million cubic meters of liquefied natural gas annually.
“The resources are definitely here and Ukraine should be an interesting market for international investors, especially from the U.K. and U.S. – they can bring the technology, experience and people: we just need the political will to make it happen,” he said.
According to Gladun, large-scale privatization throughout the state-dominated sector, as well as open, transparent auctions for new licenses are needed to attract international investment.
“State monopoly of the gas sector is not sustainable and, instead of being 80 percent state, it should be 80 percent privatized – preferably broken up into small and medium-sized companies, locally-owned by producers with a proven record,” he said, adding that the state can never be as efficient as a private enterprise.
As for becoming the Texas of Europe: it’s a bold ambition, but within reach, according to bullish gas executives here in Ukraine.
“We have the deposits, larger than the needs of Ukraine for annual gas consumption, and alternatives are catching up and becoming more viable – Ukraine should become an exporter,” Romanyuk said.
“The question is not if – it’s when.”
