The competition for Dolphin was originally made with the idea of trying to steal – what if it could work. Oh, it didn’t – Olexander Kharchenko

Kosatka.Media interviewed Olexander Kharchenko, Director of the Center for Energy Research.

In view of the surge in lawsuits following the results of the competition for the selection of a winner for the Dolphin offshore site, we publish the first part of the conversation with Olexander.

Mr. Kharchenko told how he assesses the results of competitions on the production sharing agreement (PSA) and auctions for the development of new fields, as well as what prevents Ukraine from attracting major global players in production sector.

How do you rate competitions for a production sharing agreement (PSA)? Were the results expected?  

I believe that the result we have is the product of a healthy compromise. It is a compromise between the instinct of self-preservation and the common sense of the members of the commissions and external influence. It could be much worse. But in order to achieve the result that ultimately has turned out, it was necessary to fight a lot.

What do you think about the protracted competition on PSA for the Dolphin field, which at the moment ended only with threats of lawsuits in the courts regarding the choice of the winner?

I believe that the competition was originally made with the idea of ​​“let's try to steal, but what if it could work”. Oh, it didn’t.

The Dolphin PSA is a very interesting story. Firstly, the fields, for which UGV has large and well-grounded claims, were put up for competition. And as I understand it, the company won the courts, therefore – what are the reasons to put these fields for the competition?! But even less, I understand something else – who can come for real participation in the competition for the fields, while another company entitled to these fields won this right in the court! This is absurd.   

It turns out that on the one hand, there is a company that wants to invest $200 million (but there is no other option where to invest it), and on the other hand, a state-owned company, which is not interested in the pace of resolving the judicial issue at all. Two years later, or two years earlier – UGV will win the court. They can sue for a long time. But there is another option to invest $200 million. You can come to NJSC and agree on a joint venture in another greenfield. What's the point of this Dolphin?!

Does it make sense for companies to enter Ukrainian offshore projects based on today's realities?

Regarding the prospects, I think that they exist. But I think this is not easy. As far as I know, in Romania – this is one offshore field – Shell, on the one hand, is actively working, and on the other hand, there is no commercial production yet. The work has been going on for 5 years. Therefore, no one can say whether offshore developments will be successful. Do they need to work? Yes. How exactly? The answer must be sought.     

But if these fields on the shelf had been given away to the UGV once, then it seems to me, at least, the logic should be observed. Firstly, it is necessary to put up fields that does not belong to UGV, for additional competitions and not altogether. And secondly, it’s necessary to unblock the opportunities for UGV. After all, the company cannot agree on cooperation with anyone. If UGV management comes to someone with a proposal to jointly develop their offshore areas, they will receive an answer: “but your government put up these fields for the competition!”

Dolphin specifically in the current format does not fly. Absolutely. It doesn’t even flap its wings – it doesn’t have them. I will repeat: an intention to steal was the logic.

Were onshore PSA competitions launched with the same logic?

It was the same with PSA. They already brought it to the commission for signing – who gets what. But at that moment a large public scandal rose and managed to bring it all down.

Why do we need competitions when there are auctions? After all, there is generally the idea that PSAs are unnecessary, especially onshore, as local companies themselves are quite capable of coping. What do you think about it?

If the choice is between competitions and auctions, I will always choose auctions. But I will say following. Does the world practice PSAs? Yes, it does. Is this the most effective way? No, it isn’t.

Actually, the PSA format is understandable to everyone in the world. But most countries have realized that PSAs are not the best option for them. It is good for the companies with which they agree, but for them it is bad. Ukraine signs an agreement for 50 years, gives its land, but who knows what conditions will be in 10-15 years? Maybe this agreement will be completely unprofitable for us, but we have already taken these risks and we live with them now. Most countries try to act differently – to transfer the maximum of risks through the auction form or create a joint venture with a clear risks sharing.   

And I think that auctions are needed to be held, where the most attractive options for possible deposits are. And where the chances are 50/50, you need to conduct targeted negotiations that will lead to some kind of joint ventures. Moreover, I believe that so many international companies will not go to any competitions or even any auctions in Ukraine. Just on principle.

What is the integrity of refusing to participate in the auction?  

Often, when an international grandee is invited into the competition, he replies: “I am invited around the world without the competition, and here I will participate in the competition?!” And they can be understood. When there is a choice between Mexico with large fields, which are enough to negotiate, agree on the conditions and sign an agreement, and Ukraine, which has a three times smaller field, and you also need to participate in the competition. Then the company estimates the labor costs for participating in this auction, and for negotiations with Mexicans somewhere in a decent resort, and makes a decision, it is clear which one.

What about transparency and all other democratic values ​​and equal opportunities? And how will such “agreements” cause a public reaction without any tenders, competitions and auctions?

You know, I don’t expect special tantrums in this case.

There is such a thing called American anti-corruption legislation. And when you cooperate with a company that works in the States, any employee of this company understands that if something unclean comes up, he will simply be imprisoned. Of course, during the negotiations, the companies will bargain, they will fight for the business, for the quality of this business, but they will not deal with corruption. Just because it is physically dangerous, and not because they are so white and fluffy. And there are many cases where corruption is found. More than when it doesn’t. Because the rules work.

Let's understand that a business that will invest money is not interested in our transparency. Business is interested in results, not transparency for transparency.

In Ukraine, we have driven all our anti-corruption activities to the other extreme so much that today it’s very difficult to work qualitatively. Indeed, we cannot invite the grandees, because they are more expensive. They are technically better and more advanced, but more expensive. And since the issue of price in tenders and auctions is a determining one, we cannot invite big players.

It turns out that conditions prescribed for both auctions and PSAs exclude the fact that some global companies will come to our country?

They do not exclude, but complicate the process as much as possible.

Imagine, we come to Shell and say – participate in the competition for the development of Dolphin. And there are still Russian boats? Also, the trial? No thanks, we have already participated once. And any large company will say “no”.

 A manager who can choose a field around the world – in Nigeria, in the Congo, Mexico, Peru, anywhere – will not participate in our auction, and even more in a tender. He is not interested. His headache from participating in our auctions does not pay off. Even if he has a lack of projects, he will look for them in those places where there is no such headache.

And secondly, Ukraine is also small, our scale is more inferior. Yes, we are the third largest oil and gas producer in Europe, but we are small. We do not have projects of an Arctic scale – when they invest $10 billion, and get a normal exit. Our investments are smaller: $100 million, $150 million. For majors this is a small scale, and for those who could participate in such projects, the desire to go to Ukraine and deal with auctions is minimal.

You can’t imagine what kind of problems UGV faces when they come and say: “Oh great, Halliburton! Take part in a tender for drilling in our Ukraine. We even have money, only take part in the tender”. And in response they hear: “No, thanks, we don’t need it”.

They will not even participate, because the Chinese will definitely win the tender. They understand that with their qualifications and equipment, at a price with the Chinese, they will not be able to compete. The result is capable, but not the price. That's all.

What to do to attract international partners in production in such conditions?

I sincerely believe that it is necessary to develop work with state-owned companies. We have a large state-owned company, where we need to finally install corporate governance and give it the opportunity to implement joint projects. This mitigates risks to some extent and reduces the cost of international partners entering our market. They share risks with a state-owned company, which is easier for them.

Especially in our country. When a new government arrives, it can say that “we did not accept what were before, we promised you nothing”. This is the worst thing for investors. And such realities of our country, including reducing the cost of proposals – no one want to take the risk of big money.

It turns out that joint ventures with a state or even just a local company can be much more attractive than PSAs, for example, with the same tax discount?

We still have a very moderate tax credit; we don’t offer anything fantastic.

Any options that will allow a foreign investor to come in and work in cooperation with the state are possible. From my point of view, this is very important. Because in such cases, UGV and Naftogaz can be a good “steam train” – they know how to work with our bureaucracy, they know all the procedures, they understand how to go through the line of licenses and they have a knurling mechanism. And provided that the Western partner brought the technology and some of the money to implement this – it is an ideal situation. Because we do not have much technology, to put it mildly.

Vermilion comes in together in a project with UGV. In fact, these sites are not particularly interesting for them. The company technologically specializes in producing deep gas from depleted fields. Without the prospects of expanding the business, they would not have entered here – a scale is too small. Actually, Vermilion enters Europe – this is their strategic move. The company bought Total's business in France, started drilling in Romania, started a project in Hungary, and Ukraine was close by. But there are few companies like Vermilion that are ready to develop business in Ukraine.

It is necessary to work long and hard to raise interest in Ukraine among international extractive industry companies. In addition, you need to come up with procedures that are acceptable to them. Because, once again – they don’t have much desire to go with huge packages of documents for our auctions. The headache is strong enough, and it is not worthy. 


To be continued …

Tags: Naftogaz, hydrocarbon production, Ukrgazvydobuvannya, gas production

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