Top four reasons Ukraine’s gas production is so low
Ukraine’s reserves of natural gas are 13 times higher than
domestic annual demand. Yet the country has to satisfy one-fourth of that
demand with imports, which undermines its national energy security.
The country has at least 350 billion cubic meters of natural
gas buried deep inside its soil, but it manages to extract just over 20 billion
cubic meters annually, falling short of demand by at least 6 billion cubic
meters — and historically much more — yearly.
In fact, the country has not been able to meet that demand
without importing any gas for the last three decades, even though domestic
demand fell from 118 billion cubic meters in 1991 to 26 bcm today.
Industry players led by the state have been exhausting the
same resources for years, investing very little in the extraction and adopting
investor-unfriendly policies. For some time, it was simply easier to import gas
from Russia.
“Ukraine’s gas industry has not received enough attention
for many years,” said Artem Petrenko, executive director at the Association of
Gas Producers of Ukraine. “The country was focused on gas imports, but not on
encouraging the development of its own gas production.”
Politicians & oligarchs
Ukraine’s gas production industry relied heavily on
Ukrainian oligarchs, who were able to easily get exploration licenses for gas
fields by taking advantage of their close ties with state officials. Meanwhile,
other market players, including international companies, hardly stood a chance.
In 2018, nearly 80% of natural gas in Ukraine was produced
by UkrGasVydobuvannya — a subsidiary of state-owned oil and gas giant Naftogaz
— and by Ukrnafta, controlled by billionaire oligarch Ihor Kolomoisky.
Billionaire oligarch Rinat Akhmetov’s DTEK, pro-Russian
businessman Vadym Novynsky’s Smart Holding, ex-Ecology Minister Mykola
Zlochevsky’s Burisma and billionaire oligarch Victor Pinchuk’s Geo Alliance
together produced the remaining 20%.
In addition, the national company only purchased modern
drilling equipment last year. Previously, workers used obsolete well drilling
machines made in the 1960s.
“It’s like asking a Zaporozhets car to fly to the Moon,”
said Favorov, referring to the make of a low-cost two-door car produced in the
Soviet Union.
In 2016–2018, UkrGasVydobuvannya spent around $1.6 billion
on infrastructure, drilling and new equipment, something that the company
hadn’t done in the past three decades.
The company also started to attract foreign companies, such
as Canadian oil and gas company Vermilion Energy, and participate in tenders
for production sharing agreements. However, Favorov still forecasts that
UkrGasVydobuvannya’s natural gas production will fall by 27%, meaning that the
firm’s output will only reach 14.6 billion cubic meters, instead of 20.1
billion expected in 2020.
Private companies will also face a similar problem: 20%
underproduction this year.
Overregulation
Many foreign companies have faced serious problems: They
report difficulties in obtaining or renewing their licenses to extract gas
here, and they suffer from outdated laws governing equipment procurement.
In 2017, for example, the State Service for Geology and
Subsoil held only one auction for oil and gas blocks. Meanwhile, barely known
companies received licenses for another 30 gas-rich sites without any auction.
Many of those licenses were concentrated in the hands of so-called resellers,
companies that acquire licenses in order to sell them at a higher price in the
future.
“It was called a license famine,” said Amir Kilani,
representative of the Xinjiang Beiken Energy Engineering natural gas drilling
company from China.
Roman Opimakh, head of the State Service of Geology and
Subsoil, agrees on the challenges: “It was difficult to come to the market and
buy a ‘ticket’ in a transparent way.”
It was also difficult to renew already existing licenses
because of local city councils. But Opimakh says government has started to
impose transparent procedures. Just recently, for example, it ended one of the
most notoriously corrupt areas: the awarding of licenses through local city
councils.
“Finally, there is zero-tolerance for corruption in this
agency,” said Opimakh.
Outdated post-Soviet regulations were also among major
barriers until recently, according to Steve Baldwin, executive director at
UkrGasVydobuvannya. “Procurement was very difficult in the sense that a
national oil and gas company had to buy the cheapest. But the cheapest is not
the best,” Baldwin said.
In addition, in 2018, Ukraine decreased the rent for new
wells from 29% to 12% of the value of gas extracted from the wells with a depth
to five kilometers and from 14% to 6% for gas from deeper wells.
“It is a positive moment,” lawmaker Gerus said. “But it
hasn’t added any substantial growth so far.”
“It was an industry for a close circle,” said Andriy Gerus,
the head of the energy committee in parliament. And it was a circle that wasn’t
investing. “Oligarchs don’t like to invest in risky projects since there is a
possibility that you spend $10 million and won’t find enough gas reserves,”
Gerus explained.
Because of corruption, “foreigners haven’t felt comfortable
working in such conditions,” Gerus said.
Depletion
UkrGasVydobuvannya is Ukraine’s largest gas producer. In
2019, it extracted 14.9 billion cubic meters. Still, top officials have
repeatedly criticized the company for failing to meet gas production targets
set by the government — to produce 20 billion cubic meters by 2020.
And the situation will get even worse, says Andriy Favorov,
who heads the integrated gas business at UkrGasVydobuvannya’s parent company
Naftogaz.
Over 80% of the largest 16 wells operated by
UkrGasVydobuvannya have already been exhausted and the pressure in these wells
— an important indicator for gas extraction — has dropped to very low levels.
“It’s becoming very difficult and very expensive to get the
gas out of the ground,” said Favorov. “We are running out of our reserves.”
One of the most challenging spots — and ironically the
richest — is the Dnipro-Donetsk basin, where UkrGasVydobuvannya has been
extracting gas for the last 70 years, Favorov says. The gas reserves there are
coming to an end.
“We can’t continue to expect that the licenses that we
obtained and developed in the 1950s are going to produce the same amount of gas
in 2020,” said Favorov.
UkrGasVydobuvannya’s strategy includes deeper drilling to
find larger gas reserves under already existing fields, tight gas production
and sea shelf exploration.
The primary goal of deeper drilling (down to six kilometers)
is to search for more gas at the Shebelynka site in Kharkiv Oblast. Favorov
says there is a 30% chance of finding immense gas reserves.
Secondly, UkrGasVydobuvannya plans to start the production
of tight gas — the type of gas from a relatively impermeable reservoir rock.
This hasn’t been done in Ukraine yet.
Favorov believes that hydraulic fracturing technology, or
fracking, doesn’t have any adverse ecological effects and sees such claims as
propaganda by competitors to preclude Ukraine from getting its natural gas to
export markets.
However, according to Scientific American magazine, this
technology requires huge amounts of water to be injected underground. For that
reason, it can threaten local water supplies.
Previously, Greenpeace reported that the wastewater from
fracking in the United States had been linked to livestock and family pet
deaths across the country as chemicals used in this technology have negative
effects on health and can even cause cancer.
Thirdly, if UkrGasVydobuvannya gets a license, the company
plans to start developing the Dolphin oil and gas fields, roughly 9,000 square
kilometers on the Black Sea shelf, which faces no obstacles from landowners.
“Dolphin for me is a driller’s dream. It’s a massive block,
the one we’ve never seen before… It’s equal to 42 offshore blocks of the Gulf
of Mexico and has massive potential,” said Baldwin.
At the same time, the Russian maritime fleet threatens,
located 10–20 kilometers from where the company would like to start drilling.
“Obviously, the Russian Federation is not shy about
violating all international laws,” said Favorov. “But we don’t have the luxury
not to try. This is Ukrainian gas, these are Ukrainian opportunities and it’s
something we need to do.”
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