Decline in gas prices will make it impossible to maintain the current level of gas production, much less increase this production – in order to strengthen the energy independence.
As of today, Ukraine’s own gas production covers only 2/3 of gas needs — production is estimated at 21 billion cubic meters, 11 billion cubic meters are imported.
The position of the Head of the gas business of “Naftogaz Ukrainy”, Andriy Favorov, is that the current price of gas, which is below market, does not allow the company not only to increase its own production, but even to maintain the current level.
“Naftogaz” imports gas, a significant portion of which the company is obligated to sell below the market price under PSO conditions. Under the PSO conditions 3.7 billion cubic meters are being sold, it costs the company $8 billion annually. Andriy Favorov, the Head of the gas business of NJSC “Naftogaz”shared these data at a meeting with journalists.
For the growth of production the price increase is needed
Natural reduction of gas production is 1–1.1 billion cubic meters per year, which arises due to depletion of wells. For a long time, new mining licenses were not issued. Thus, for the period 2008–2011, “Ukrgazvydobuvannya” did not receive a single mining license. Then this process was resumed, but not for a long time – in 2018 only one license was issued to the UGV under the terms of the auction.
According to Favorov, due to the non-issuance of licenses, the country receives less than 1 billion cubic meters of production. Given that the UGV has already completed the 20/20 program in terms of production at the old fields – the drilling volume was increased by 1.8 times (from 173 thousand meters in 2015 to 313 thousand meters in 2018), they also began to carry out hydraulic fracturing (0 in 2015 – 173 hydraulic fracturing operations in 2018).
“The fact that the UGV team kept production at the current level is an achievement in itself”, Favorov said. By our estimates, in order to stand still, UGV should invest 29 billion UAH per year. Just to maintain the current level of production at 15.5 billion cubic meters. These funds include the purchase of equipment, new machines for high-quality drilling, etc.”
“UGV is a golden goose, but it should be fed, allocated funds for drilling, seismic, new technologies, etc. Because for the current “Urals”, which are on the balance sheet, drilling of 5 km wells is too much”, Favorov shared his opinion.
The price of gas should include investments in the production
The Head of the gas division presented the pricing structure for a cubic meter of gas, and noted that “Naftogaz” is the only state owned company that pays 75% of free money in the form of dividends to the Cabinet of Ministers:
“The state takes 5.91 UAH out of 8.55 UAH per each sold cubic meter. The state budget receipts 75% of the retail price in taxes and dividends. But the situation is even worse – the import price of gas is 10.5 UAH (and we import 4 billion cubic meters), the shareholders, who are all citizens of Ukraine, lose 2 UAH per cubic meter”.
The share of investments should be included in the gas price. And “Naftogaz” thinks that to maintain the current production level, 2.1 UAH in the cost of each cubic meter have to be allocated for investments. To increase the production volumes this share should be 2.9 UAH with every cubic meter sold.
NJSC proposes a new finance allocation formula.
“If our dividends level after taxes and expenses is 30%, we have enough money to develop production. In this way, we will increase tax revenue and decrease import”.
According to Favorov, a single way for Ukraine to energy independence is increasing own gas production due to the economic situation, which it experiences now. And the increasing is possible if the gas prices are commercial prices.