Interview with Taras Burdeinyi, Chief Executive Officer, Ukrainian operations, Burisma Holdings

November 6, 2014

The company of ex-Minister of Ecology Nicholai Zlochevski complains that it is necessary to review not only the results but also the investment program if keeping the current tax regime, when the rate of rent for the use of mineral resources is 55%.

Burisma Holdings is, probably, one of the most controversial companies operating in the market of hydrocarbon production in Ukraine. Former Minister Nikolai Zlochevsky related to it, who has been called the owner of the company; his position has contributed to a lot of business expansion – the original assets, the company “Esko-Pivnich” at the end of 2013 has included the four largest private gas producers. The company also has long advocated former Polish President Aleksander Kvasnevsky.

Should the origin of the Burisma be controversial, this company does a good real work – produces gas, which is lacking in the country. Burisma Holdings CEO for Ukrainian operations Taras Burdeinyi has spoken with Delo.UA about the Ukrainian gas production costs, reviewing the company’s plans in the new tax environment and the relationship with the shareholder.

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Who is the owner of Burisma Holdings? What is the structure of the company?

Burisma Holdings is a holding comprising four operating companies which are engaged in mining and production of hydrocarbons. It is Energy and Service Company “Esko-Pivnich”, “Pari”, “First Ukrainian Petroleum Company” and “Aldea”. Subsidiaries has been working since 2002, and consolidation of assets itself within the group has taken place in 2006-2007. Nicholai Zlochevsky is the founder and the ultimate beneficiary of Burisma Holdings. We have never concealed the ownership structure of the company, and it can be easily checked in official registries.

How did Burisma Holdings working conditions with the change of government in Ukraine?

We have always separated business and politics. The company has never been, and does not currently have joint projects, including cooperation agreements with government agencies. All wells which we operate are owned by the company, so the change of the political regime has had no effect on our operations. On the contrary, new development strategy has been approved and management team has been renewed in 2013, and this year the Board of Directors have been involved foreign experts, including US high-level experts who have professional experience and skills in a variety of ways. As a result, we have begun to produce larger, more invest and develop the company with the best international corporate standards.

Many media relates rapid growth of the company with opaque obtaining permits for subsoil use, considering that Nicholai Zlochevsky has been the Minister of Ecology in 2010-2012.

I guess it’s hard to believe, but the conditions for our companies have not differed from others. In addition, there is one important point which everyone forgets today. In December 2010, a decree on administrative reform has been signed, the results of which, instead of the Ministry of Environmental Protection has formed three executive authority with direct subordination to the Cabinet of Ministers – the Ministry of Ecology and Natural Resources, the State Ecological Inspectorate of Ukraine and the State Service of Geology and Mineral Resources of Ukraine. It is in the competence of the latter and has been a part of the issuance of special permits for subsoil use, while the Minister of Ecology has had no influence on this body. It should be understood that the process of obtaining a license is not dependent on any person. The commission includes representatives of more than 40 different agencies, including the Prosecutor General’s Office. In addition, you must obtain permission from the local authorities and the state to compensate for the cost of geological information. This is a long and costly procedure that must be kept.

Licenses do not provide themselves high earnings. There is a long and complicated process between a permit for subsoil use and removing the first cubic meters of gas. It includes exploration, studying geological data, drilling of exploration and appraisal wells, only then – design and drilling of possible production wells. All it takes at least 2 years.

What is the cost for you to drill one well?

It depends on a complex of factors, and there is no single clearly derived figure. What important is the area, the quality of the geological information, the degree of knowledge, development of infrastructure, the cost of equipment used, etc. For example, we drill now the well to a depth of 6 km in one of our fields. It has already invested 250 million USD, an additional 400 million USD spent on geophysical research area which it is located in. We understand that investing significant resources into the development of “the future” using modern American drilling equipment, attracting experienced team of drillers from the States, who consult our experts. We have recently purchased three batches of American-made wireless seismic equipment, which we are using to study explored areas without any negative impact on the environment and ecology. We follow the technological changes in the industry and use the latest equipment, which allows to increase the speed of drilling wells to a depth of 2900 m up to 25-28 days. This is five times faster than the market average. On Rakytnyanske field we operate the most technically advanced well in Ukraine –there are located just 2 wells where production is carried out simultaneously from two horizons. In October, we completed the construction and put into operation a plant for recovery of methanol. That allows us to reuse up to 85% of methanol, widely used in the process of natural gas production. Currently this product is not produced in Ukraine, before we have bought it at Severodonetsk “Azot”, and more recently, our country is forced to import it from Russia. After analyzing the situation, it has been decided to provide all our complex gas with such equipment, and, if necessary, we can pass the experience on the implementation of this technology to other companies.

How many fields are now developing the company? How much gas was produced last year and which data are planned to meet till the end of the year?

Currently, the company’s portfolio has 20 licenses for hydrocarbon production in the major oil and gas basins of Ukraine – the Carpathians and the Dnieper-Donets, 10 of which are now being developed. Over the past five years, our average annual growth rate of natural gas production was 62%. The level of production in 2013 amounted to 460 million cubic meters of gas, and for the first nine months of this year – 494.4 million cubic meters of gas. At the end of 2014 we plan to cross the limit of 700 million cubic meters of gas. There is still an open question for us whether we can produce in 2015 a planned “billion”. While maintaining the current tax regime, when the rate of rent for the use of mineral resources is 55%, we will have to review not only the results but also the investment plans for the next period towards a significant reduction.

What is the cost of gas production in your fields?

Approximately $ 340-345 considering $ 200, which goes to rent. Now earning is about $ 15-20 on a thousand cubic meters, which makes our business low-profit. This is the effect from almost three times of increasing the tax burden on private companies since August this year. You can analyze the statements of public companies that conduct their operations in Ukraine and to see that some of them show a negative profitability after the introduction of increased rate rates.

What part of your well is covered by the discount factor with respect to rental rates?

Under the law, these are all new wells that have been launched after the first of August. By the end of the year the number of such wells from our company will make up to ten. But these are wells which solutions have been adopted to increase the rent. If the tax changes come into force earlier, the number of new wells would be significantly less. Even with a de jure right to benefit, to take advantage de facto of this extremely difficult because of bureaucratic red tape required to confirm the status of these wells. In any case, we hope that the tax regime will return to previous levels.

What kind of profit for the year did you plan and how revise it with change of rent rates? How have investment plans changed?

Last year, the company’s revenue amounted to 1.5 billion USD, while the volume of investment of about a billion UAH. This year, the total investment will amount to about 2 billion USD, and the amount of revenue will increase more than doubled. This allows to remain a major player on the extraction and steadily increase production.

Does the company calculate work options in the case of fixing high rates of rent on a regular basis? Are gas producers trying or not to bring their arguments and calculations to the government?

We have prepared two scenarios for the next year. The first is basic, and is consistent with our strategy for 2015 adopted by the Board of Directors at the beginning of 2014. It suggests putting 28 new wells and the amount of investment at the level of 3 billion USD. This would leave us on the production volume of more than 1 billion cubic meters of natural gas per year.

The second scenario is pessimistic. If the rent is fixed, we will have to concentrate on ongoing projects that need to be completed, as well as the operation of existing wells which debits are naturally reduced, thereby reducing the volume of production of the company. The number of new wells will be reduced to 5-7 per year – that is how much is needed to maintain production. And the investment will amount to 400-500 Mio. UAH. We will have to completely stop exploration and study of new areas because the higher rate of rent makes such projects impractical.

The situation is similar at other companies in the market. Our colleagues in the public gas companies with assets in Ukraine have announced the revision of investment programs and partial decommissioning projects. It is important to understand that the bowels has characteristic to be depleted, and constant infusions in mining and drilling are required. Today, companies have limited access to financial resources and market loses development perspectives without these funds. Gas producers are trying to bring their arguments through the media, workshops, round tables, international experts, but a strategic decision remains for the Government.

What is the company’s share in the Ukrainian gas production?

Burisma Holdings produces a quarter of the total production of independent gas producers in Ukraine. We plan to increase the share to 30% in the coming years. But we want this to happen at the expense of balanced growth across the industry, not by reducing the production of our competitors. We are continually exploring opportunities and promising fields, look, what projects can be participated, what to offer, and where changes are needed. We can produce more under condition that there would be problems with sales. For example, we have faced with a situation in the summer when Kharkovtransgas just did not let our gas into the pipe, which forced us to reduce production by 500-600 thousand cubic meters of gas per day, or about 15 million cubic meters per month. This is monthly consumption of the regional center in Ukraine.

Whom do you sell your gas?

The main buyer of our gas is “ArcelorMittal Kryviy Rih”. Their leadership has conducted an audit of our business, and signed a contract to supply 50-70 million cubic meters of gas per month in 2014-2015 years. The price, at which we sell gas, corresponds to the market, focused on price NKREKU discount. Among our customers there are also chemical enterprises in the Odessa region and the largest traders of the country, which have already formed long-term relationships. Now we are working to expand the pool of end-users.