Ukrainian gas production: low start or the beginning of a dive?

Whether to say goodbye to Ukrainian gas production, or to hope that the state will support it, and how should it do it – Energy Club together with the Association of Ukrainian gas production companies held an online conference on the topic "Ukrainian gas production: What incentives are needed for the industry today."

Energy Club experts explained why the state and society should be imbued with the problems of gas production. Without regard to gas prices, the development of Ukrainian gas production is one of the key factors in Ukraine’s energy and economic security. And it is also one of the most investment-attractive industries.

“This is a complex industry, which is characterized by a large macroeconomic multiplier of investments, which allows creating significant added value for the economy. Including through infrastructure development and job creation both in the industry itself and in related ones,” said Andrii Kostrytsya, President of Energy Club.

Gas production is also very technologically intensive, which is important for the development of the scientific and technological potential of domestic business and the development of innovation.

It is necessary to look for ways to develop gas production in Ukraine together, to form a high-quality, transparent state policy in the industry, he stressed.

Experts, people's deputies, representatives of the ministry, investors and businessmen discussed the current state of affairs and shared options for solving problems.

The stage of Ukrainian gas industry and what state support it needs

The Association of gas producers in Ukraine sees the situation quite clearly. The executive director of the Association, Artem Petrenko, said that the oil industry was going through difficult times. First of all, due to a significant reduction in hydrocarbon prices in the world, the coronavirus pandemic and the deepening crisis. There are big risks of curtailing investment programs. And this is dangerous, including for the state budget – oil and gas companies are its main fillers.

A reduction in the oil and gas industry is a reduction in jobs and service orders. In addition, this is a weakening of the energy security and independence of our state – we will have to buy more hydrocarbons abroad.

Therefore, the Association offers the Ukrainian authorities a series of steps that, if do not save gas production, will at least significantly support it. In particular:

- the introduction of incentive measures to extend production from unreserved new oil and gas wells and investments in them;
 - creation of a stimulation package for the development of hard-to-recover and unconventional fields that are not currently being developed in Ukraine;
- preservation (extension of the term) of stable fiscal taxation and preservation of stimulating rent for drilling oil and gas wells.

“We insist that the industry needs government incentives to continue and attract investment in the future. Without steps by the state, one cannot expect any further drilling of wells and exploration in the fields, because the oil and gas industry is extremely risky,” said Petrenko.

And the sooner these innovations were introduced, the better for the industry, he said. This will help maintain investment activity and avoid undesirable complications.

Produce-invest or not: what the gas producing companies say.

Representatives of Ukrainian gas producing companies agreed that there are problems. However, on their part, the situation does not look so terrible, at least among the largest gas producers such as Naftogaz and DTEK Neftegaz.

According to Oleksandr Romaniuk, Director of the Exploration and Production Division of Naftogaz Group, the company is revising its investment programs, capital investment and operating expenses, downward due to a reduction in gas prices.

Other problems include the impossibility of holding public hearings before starting a new drilling, the longer and more difficult way of attracting partners through public procurement.

Gas production in Ukraine is surviving, but does not flourish

Despite this, Romaniuk noted, the company completed the first quarter with a minimum lag, almost at the same level as last year.

According to him, Naftogaz, together with Expert Petroleum, continues to work with depleted fields, attracting foreign direct investment. The company also identified up to 20 critical measures to maintain production, which will create the effect of stabilization and build-up onshore infrastructure facilities in the future.

Now Nafogaz has begun developing a 5-year plan to stabilize production and increase it. It involves focusing mainly on exploration, the search for new fields and deposits. In this regard, the signing of production sharing agreements (PSA) is very important, said Romaniuk. In addition, they are important for Naftogaz: stimulating rent, especially for unconventional deposits that are not developed, access to the shelf and land.

DTEK Neftegaz was generally ready for the crisis,” said Ihor Shurov, CEO of the company.

He said that DTEK Neftegas has a certain margin of safety due to its productivity and deep expertise, the latest technologies. And it continues to implement drilling programs.

Although the company’s plans require clarification, Shurov noted that investing in gas production has to be unambiguous, but competently, reasonably and balanced.

“Without investing today, tomorrow it will be possible to put paid to the entire industry. Gas production is very inert, and having stopped development now – then it will take years to recover. And Ukraine’s self-sufficiency in gas, as a strategic goal, can be forgotten,” Shurov said.

He agreed that the state should provide support for the gas industry. And it has to be doubly interested in responsible investors, to "protect them."

“We do not understand why, for example, the process of signing PSA is so slow. We are doing everything possible to keep production and maintain jobs,” said General Director of DTEK Neftegaz.

Read also: Prospects for global and Ukrainian energy in the post-crisis world: experts’ opinions

On the situation with the signing of production sharing agreements and plans of the Ministry

Yurii Boyko, Deputy Minister of Energy, tried to answer questions from gas producers. In particular, he assured that the Ministry shared the point of view that oil and gas production is one of the strategic directions and industries and requires unambiguous support.

He said that the following issues are now on the agenda of his department:

- resolving issues on the simplification of obtaining permits for registration of a land plot,
- reducing the time for obtaining special permits,
- introducing a stimulating rental rate for gas production from new wells (figures 6 and 12% are considered, depending on the depth of deposits),
- establishing a transparent procedure for the implementation of geological information, creating a catalog on geological information and a clear procedure for buying geological information that is in state ownership,
- simplifying the procedure for granting or renewing special permits.

The deputy minister did not specify at what stage all these processes will occur, as well as the specific time period when everything will work is also not announced.

The Ministry of Energy promises to introduce a stimulating rental rate for gas production from new wells

 Talking about PSA, Boyko agreed that this is almost the only mechanism for attracting investment in the industry, especially where hard-to-reach reserves require significant investments due to difficult geological conditions.

He said that a competition was held for 9 projects, and a decision was made by the Cabinet of Ministers on July 5, 2019 regarding the determination of the winner.

On April 1 of this year, the interdepartmental commission approved the conclusions regarding another 3 fields – Akhtyrskyi, Ichnyanskyi and Hrunivskyi.

“Work meetings are held to discuss the terms of the contracts almost daily. We hope that with the exception of two, in the time period established by law, we will reach the successful finish – and this is July 7 this year. The Varvinskyi field, which is likely to be blocked due to the lawsuit of Naftogaz according to the definition of the winner in this area, is in doubt. Ukrnaftoburinnya mining company was recognized as the winner at the Rusanovskyi site. The company left the negotiation process due to changes in price indicators in the natural gas market,”said Boyko.

It remains to believe in the hope of the Ministry that they will "come" by July 7th.

The State Service for Geology and Subsoil plans to attract investors

Roman Opimakh, Chairman of the State Service for Geology and Subsoil of Ukraine, boasted a number of tasks that his department is working on. And he assured that, despite the slowdown in the activity of subsoil users who initiated the revision of work programs, the postponement of certain deadlines – they are welcomed, especially those who are large tax payers.

Regarding the work carried out by the Service, Opimakh reported that he focused on three areas: restoring and building confidence in the Service, open to business, as well as attracting investment and modernization.

The steps voiced by the chairman of the State Service for Geology and Subsoil do not look like a breakthrough in investment attractiveness, but “catching up with the train”: they opened the Single window of the subsoil user to provide advice and reduce the number of failures at the request of subsoil users. They created a single center for calculating the cost of special permits instead of three institutions. Together with the Ministry of Energy, they are reviewing the form of geology control checks to remove duplicate functions. And they are moving to a transparent calculation of the cost of special permits – they want to make it in the form of an electronic calculator, where each of the subsoil users will be able to check the cost of a special permit. This is important, of course, but this is a normal activity of the department, and not a world breakthrough.

Among the other achievements that Opimakh boasted of: they were opening a geological database, they created a data-room.

“In February, the European EPH holding won 2 fields after visiting the data-room and getting to know the information,” said Opimakh.

Now the State Service for Geology and Subsoil is working with USAID to create such a data-room for future competitions for the conclusion of production sharing agreements. They also created a register of protocols of the State Commission for the Protection of Subsoil. Together with the Ministry, a catalog of geological information is being finalized – each investor will be able to find open data. There are now about 1000 protocols out of more than 6000.

Work on electronic auctions is also going on. 24 objects are oil and gas fields of 140 assets. 9 of them have already been auctioned. A dialogue is being held with potential investors on the relatively painful issue of the Black Sea shelf.

Together with the Ministry, the rules for the development of oil and gas fields are finalized, they want to allow reserves to be assessed according to international standards, and reduce the time for organizing auctions from 120 to 30 days.

The head of the State Service for Geology and Subsoil also did not indicate the time framed of the tasks announced – when everything will work fully. Apparently, for the Service this is a process, not a goal.

Legislative initiatives of the Verkhovna Rada to stimulate domestic gas production

The deputies who attended the conference looked like the most optimistic about gas production, although they recognized the existence of problems.

People’s deputy of Ukraine Olha Belkova honestly said in response to a moderator that there are currently no legislative initiatives of the Committee to attract investment in the gas sector. But the People’s Deputy believes that this is "not bad" because, in her opinion, the Ministry of Energy should form an answer to the challenges in gas production.

Belkova added that she believed that most of her colleagues did not understand the importance and criticality of the situation in oil and gas production. Although difficulties exist all over the world.

People's deputy Andrii Zhupanin was more specific. He emphasized what the Rada has already done for the gas industry.

“We defended the rental rate, which was adopted back in 2018 at the level of 6% and 12% for new wells for natural gas production. There was a proposal to make changes, but we managed to defend the existing rules. We also managed to cancel the approval of regional councils to begin work. In particular, this is a story about when the Poltava Regional Council refused 60 times,” said the People's deputy.

He also assured that lawmakers are working to reduce the tax burden on gas companies. According to him, there are two initiatives: to establish rental rates at 6% and 12% not only for gas, but also for oil and gas condensate, and the establishment of similar reduced rates of 6% and 12% for wells that will be withdrawn from conservation. Also, according to him, "the issue of production of unconventional hydrocarbons will be discussed.”

“Regarding the first two initiatives, I’m more confident. Regarding unconventional hydrocarbons – there may be abuse. Companies can say that it used to be an ordinary well, and now it is unconventional, and they need even lower tax rates,” the People's deputy explained.

Talking about PSA, Zhupanin believes that "in this direction we are moving quite quickly." Because the main goal of state representatives is to ensure that the conditions under which land will be provided for long-term use –for 50 years, on very favorable terms, where the rental rate is 2% - is beneficial to both the state and the investor.

He did not specify whether our lawmakers will reflect on the terms of PSA for all these 50 years.

The Verkhovna Rada promises to reduce the tax burden on gas producers

What investors are waiting for

Investors have a different understanding of the phrase “fast enough” than our people's deputies. Head of the office of the National Investment Council of Ukraine Olha Mahaletska said that the signing of production sharing agreements was a very important signal for future investors. And the delay with the fact that we have not yet signed the current 9 agreements is not good for us.

She also clarified that investors are interested in new auctions for the sale of special permits.

“These are foreign companies that are members of the National Investment Council. In particular, they are interested in Dolphin, the shelf. We look forward to announcements – when this happens in the country,” she said.

Among other legislative initiatives that can facilitate investment in the oil and gas industry, she noted the so-called law “On Investment Nannies”.

It looks like there are ways to effectively support Ukrainian gas production. Moreover, they are clear, understandable, and all interested parties agree with them. And even no one is against it. The only thing is that our authorities coincide “fast enough” with the realities and translate into concrete actions before it is too late.

Tags: The Cabinet of Ministers, gas, DTEK, Naftogaz, gas production, drilling, Public Service of Geology and Subsoil of Ukraine, investments, well, The Ministry of Energy

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