LONDON – Ukrainian politicians, lawyers and energy company executives courted international gas producers at the Ukrainian Gas E&P Forum in London on Jan. 29, as the country continues along the path to developing its untapped gas reserves, which are widely believed to be substantial.
The conference allowed prospective investors to learn more about Ukraine’s recent, landmark move to auction off exploration and production rights for 30 onshore sites with underground gas reserves. Bids will go through the electronic procurement site Prozorro, where 17 of the gas-rich blocks have already been listed and the remaining 13 will be added soon.
The auction is scheduled for March 6 and the blocks have a combined area of 4,630 sq km.
Investors will also be able to take part in production sharing agreements with the Ukrainian government on 12 additional onshore blocks, whose tenders will be made public in late February. These 50-year partnerships will allow investors to own up to 70 percent of the production rights.
“These 12 sites are a very ambitious project for us,” deputy minister for energy and coal Nataliya Boyko told the Kyiv Post. “Ukraine is waiting for investors. The economy is growing and in 2019-2020, we expect an even greater growth.”
Some international representatives were optimistic but others remained skeptical, citing incomplete geological data and Ukraine’s ongoing problems with state monopolies and tax law.
“Ukraine has a high potential energy market, though there are areas of improvement,” said Ramil Maharramov, the deputy general director for finance and economic planning at drilling equipment provider Socar AQS.
Olga Bielkova, the deputy head of the Verkhovna Rada’s energy committee, tried to allay concerns, telling forum attendants that Ukraine’s “gas law is exactly like Europe’s now.”
Untapped Potential
Ukraine has some of the largest proven gas reserves in Europe. However, much of its onshore and offshore potential remains untapped and unexplored.
The nation’s gas production has remained steady at around 20 bcm per year for the past 25 years, with 20.9 bcm produced in 2018. In comparison, Ukraine used 28.5 bcm in 2018, making it Europe’s seventh-largest gas consumer. The pending auctions are part of a plan to become gas independent by 2020.
With Russia’s controversial Nord Stream 2 gas pipeline into the heart of Europe going ahead, Ukraine and Europe both look to reinforce their energy independence. Experts say that a substantial investment into Ukraine’s gas production could frustrate the Kremlin but also aid the whole European region in eventually pivoting away from Russian energy dependency, assuring joint energy security.
For Ukraine, becoming a net gas exporter can also ensure a dependable revenue stream and greater control over pricing. Although a net importer of natural gas, on Jan. 30 the country restarted exports of its own natural gas to Europe after 15 years, sending the relatively small amount of 5,000 cubic meters to Slovakia, seemingly to demonstrate to the Ukrainian gas sector how easily it can be done.
“Today Ukraine buys gas in Europe and, accordingly, the European market sets the prices, affecting the price in Ukraine,” Bielkova told Kyiv Post. “The more gas we produce in Ukraine, the less we will be under the pressure of European prices.”
But expanding production will require international investors, who remain concerned about the state monopoly on hydrocarbons. UkrGasVydobuvannya, or UGV, a subsidiary of the state-owned oil and gas monopoly Naftogaz, accounts for 75 percent of Ukraine’s natural gas extraction.
Companies also complained about what they say is insufficient geological data available on the sites that Ukraine wants to auction. Without this data, investors can’t conduct necessary soil analyses and risk assessments.
Ukraine has recently revealed some but not all of the geological data on these blocks, as the State Geological Service is still crunching the numbers.
“(Getting this data out) will be very challenging for the ministry and the State Geological Service because the volume of data is incredible and we are trying to bring in more digitization and openness, but it takes time,” said Boyko.
Regulatory Questions
Investors are also looking at government reforms. In order to make the country more attractive, the Ukrainian government took steps to improve its fiscal regime, simplify the licensing system and liberalize gas prices, according to Bielkova.
“I don’t think we can make any more improvements in terms of legislation at this time,” she said.
Not everyone is convinced, including Graham Tiley, Shell Ukraine’s exploration portfolio manager. Shell is involved in a legal dispute with the Antimonopoly Committee of Ukraine over alleged anticompetitive behavior.
“How can you ensure that these amazing laws will work properly?” Tiley asked.
Socar AQS was more optimistic but raised a concern about Ukraine’s tax regime.
“If you are bringing a $30 million drilling rig to Ukraine, you will have to pay $10 million in taxes,” he told Kyiv Post. “The government needs to launch more flexible conditions for oil and gas service companies. For operators, you already have the PSA regime, which is good.”
Bielkova said that judicial reform is ongoing and will take time. She aimed to reassure investors that the upcoming presidential elections in March will not damage the energy sector.
“Every top presidential candidate is aligned with massively increasing gas production in Ukraine. Each one claims that it is his or her task,” she said. “This is the priority, unlike 5-6 years ago.”
Bielkova encouraged investors to speak their mind, so that Ukraine could find solutions.
“We want you to tell us your concerns today so we will be able to work on it upon our return to Kyiv,” she said.
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