Oil and gas production in 2014

February 3, 2015

2014 was a real trial for the Ukrainian oil and gas industry. There were some significant events that radically changed the market, especially gas one. After the occupation of the Crimea Ukraine has lost control over the state company Chornomornaftogaz and the Black Sea shelf, where two new floating installations operated. Ukraine lost almost 2 billion cubic meters of gas annually, or 10% of production. The rest of the production facilities were located on the occupied Donbass territory, there were minor losses – 50 million cubic meters. Overall production totaled 19.8 billion cubic meters in 2014, which was 460 million cubic meters or 2.4% more than in 2013 – excluding Chornomornaftogaz.

State Companies

16,850 million cubic meters or 85% of production were accounted for public companies in 2014. It was the most difficult year for Naftogaz of Ukraine, which lost control over Chornomornaftogaz. Significant funds were invested in the development of the Crimean company. Two self-elevating drilling rigs were purchased, which began operation in Odessa and Bezimenne fields. Due to the commissioning of these fields in the years of 2013-2014 the company increased production by 40%.

In the moment of occupation, in March 2014, Chornomornaftogaz had the largest increase in production, and overcame Ukrnafta according to volume of gas production in 2014. Executive Management was changed several times for less than a year in Chornomornaftogaz. Sergey Beym was CEO in the company, owner of a small network of filling stations in the Crimea without experience in the mining industry.

The company was working only for the Crimean consumers and it managed to avoid serious problems associated with capture of property of Ukraine at the moment. However, Naftogaz repeatedly stated its intention to return the seized property via the court. The development of the Crimean Company was out of the question in that current situation, not to mention the investment in the development of offshore fields. Chornomornaftogaz and its Executive Management was able to only wait for the court decision whose result was easy to predict.

Difficult year was for Ukrgasvydobuvannya Public Company. Chairman of the Board Yuriy Borisov left the company in 2013, a close loyalist of disgraced businessman Dmitry Firtash, who was then under house arrest in Austria. Ukrgasvydobuvannya was headed by Sergey Kostyuk in March, who worked for many years in the realization department of the company. He managed to improve the situation with the sale of petroleum products and liquefied gas, which brought the company the main income and profits.

However, it became clear before the summer that Ukrgasvydobuvannya lost any government support, Ministry of Energy and Coal-Mining Industry and Naftogaz. The main task – to increase the purchase price of gas – was not fulfilled. Ukrgasvydobuvannya requested to increase the price up to 800 UAH per thousand cubic meters, but the government decided that 349 UAH without VAT was enough for the development of production.

 

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However, gas price for population increased significantly starting from May 1 – from UAH 1,089 to UAH 4,011, depending on consumption. Development was out of the question at all if no change in the purchase price of gas for Ukrgasvydobuvannya.

The production of state company amounted 15.1 billion cubic meters in 2014 – exactly the same as in 2013. Its part, 800 million cubic meters, came to joint ventures – JV – with dozens of private companies. 80% of JV production was on the largest of them – Karpatygaz with subsidiary of Swedish Misen Energy.

Ukrgasvydobuvannya major production losses occurred in the Lugansk region, where the company had several industries. In April and May armed bandits robbed drilling. Employees had to be evacuated, and all work stopped. The company estimated production losses amounted 50 million cubic meters or 0.3% of total production.

There were also problems in 2014 in the segment of joint activities. The change in Ukrgasvydobuvannya management led to the reconsideration of work conditions. There were demands to transfer all produced gas to Ukrgasvydobuvannya.

The problems were solved till summer, and several major projects in June and July were able to implement with Karpatygaz. Two previously started projects on construction of booster compressor stations – BCS – on Rozpashnivske and Skhidnopoltavske fields, both in Poltava region were completed.

Thus, joint activities could significantly increase gas production. Ukrgasvydobuvannya believed that the construction of these stations was the fastest way to increase production. Payback period for individual projects was less than a year.

About 80 fields in Ukrgasvydobuvannya are at the final stages of development, where BCS can be successfully implemented. However state company did not have money for the BCS construction, those projects were mostly implemented within the frames of JV together with private company Karpatygaz.

The situation in Ukrgasvydobuvannya was worse with oil and condensate production.

Production was decreased by 110 thousand tons, or more than 17% to 533 thousand tons last year. That was the worst result in 15 years. The production decrease was explained by the company as the depletion of major gas condensate fields.

The result of liquid hydrocarbons production decrease was a rapid decrease of oil production on Shebelinka Gas Processing Plant.

The situation was worsened by supply stop of Chornomornaftogaz resource that was processed on Shebelinka. Nowadays the factory was loaded with almost half of its capacity and upgrading perspectives were less.

Gas Production Volume in Ukraine in 2014

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Despite the difficulties in 2014 there were good news in Ukrgasvydobuvannya. The company opened two small fields.

Malokrynkivske gas and condensate field, was in the Kharkiv region. According to assessments result of the Ukrainian Institute of Natural Gas Resources experts total reserves were 500 million cubic meters of gas.

Olshychne oil field was opened in the same with reserves of 500 million cubic meters. Besides, it was also drilled 45 new wells; three of them were high rate.

Another state monopoly Ukrnafta showed stable poor results.

Oil production was 1.9 million tons, decrease 7%, gas – 1.7 billion cubic meters, decrease almost 9%. Main events around Ukrnafta in 2014 were related to the government’s attempt to return control over the company. There were several attempts to hold a meeting of shareholders, but the Government did not achieve the expected result.

Adoption of the law on joint stock companies was failed too, which should help the country to put Ukrnatfa under control. The law was voted in, but there were serious mistakes made in the wording of the document.

Successful projects were implemented in the framework of joint activities in 2014. Drilling of seven wells with the company Gals-K was completed in Hnidentsivske field. Two of them had an initial production rate of 40 tons per day, the rest ones – 10-20 tons.

Although the field was operated more than 50 years, oil production was not reduced. Four wells more are planned to drill in 2015. However, that was perhaps one of the few successful projects, which Ukrnafta was involved in. Overall, the volume of Ukrnafta drilling was minor. Hence there were disappointing results in the production.

Private Companies

According to the results in 2014 private companies produced 2,950 million cubic meters of gas, which was 622 million or 27% more than in 2013. Oil and condensate production was increased by 1.8% to 308 thousand tons. Production of condensate was increased and oil production was decreased.

However, a huge problem of the sector was hidden in good results. Since August, the taxes for private companies were increased significantly. Rent payments were increased from 28% to 55% of the gas in the production of 5 thousand cubic meters and from 15% to 28% in the production of more than 5 thousand cubic meters.

It was predicted that the rent increase would be temporary, but the government extended the rules for the year of 2015 that buried the last hopes of private investors.

Rapid increase in taxes resulted in that gas production turned from profitable business into risky. Companies faced with decrease of income, which served as a source of investment. Many projects were left without funding, some of them were closed. The rates of production growth were decreased by the end of the year.

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The market leadership among independent gas producers was captured by two companies, which had half of all private gas. That was Naftogazvydobuvannya PrJSC, which was part of DTEK of businessman Rinat Akhmetov, and Burisma Holdings of former head of the Ministry of Natural Resources and Environment Nikolay Zlochevskyi.

First place was taken by Naftogazvydobuvannya. It increased production in one and half: gas – up to 750 million cubic meters, condensate – 30 thousand tons. The key to success was eightfold increase of drilling – 34 thousand meters against 4 thousand meters in 2013, and workover operations of wells, which the company had 12.

Olefirivska gas processing plant was commissioned, which allowed to connect the new well and ensure stable operations of the company.

According to Naftogazvydobuvannya information it was invested in the development in 2014 UAH 1.4 billion of its own funds, while the company paid UAH 1.8 billion taxes – almost twice more than a year before. It should be noted that almost all gas was extracted from the depth of more than 5 thousand meters and the rent was 28%.

Burisma Holdings was on second place for volumes, which increased the production in one and half, to almost 700 million cubic meters. The company was accounted for a quarter of total private production.

Holding comprised four operating companies engaged in mining and hydrocarbon production, including Energy service company “Esko-Pivnich”, “Pari”, “First Ukrainian Petroleum Company” and “Aldea”.

Holdings owns 20 licensed areas, average daily production in November-December was 2,1-2,3 million cubic meters per day. The company drilled a lot, most of all in the market and added about 20 wells for a year.

Last year was a turning period for the company. Burisma approved a new development strategy, updated management structure. The board of directors included Western experts. The dynamic growth allowed Burisma Holdings to become market leader.

Good perspectives for the development of production were provided by company reserves that were 768 thousand BOE. Audit of reserves was held by international company DeGolyer & MacNaughton.

Third place among independent companies took KUB-Gas, which surpassed Geo-Alliance in 2013. The company increased production by 20% to 336 million cubic meters. Major work was carried out on Olginske and Makiyivske fields in Lugansk region.

Tysagas Company owned by Cub Energy, mastered Ruthenian-Komarivskyi field in Transcarpathian region. The company drilled two wells. The volume of production was small – 20 million cubic meters per year, but daily production exceeded 100 thousand cubic meters per day by the end of 2014. This was three times more than in 2013.

Geo-Alliance came down to the fourth place controlled by Natural Resources. The company has reduced production by 15% to 250 million cubic meters. Two years ago, 25% of Geo-Alliance was bought by Arawak Energy. There were plans on modernization and investments, but the company did not have special achievements there still.

Oil and Gas Condensate Production Volume in Ukraine in 2014

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The top five leaders were closed by Poltava Petroleum Company controlled by British JKX, with gas production of 249 million cubic meters. Growth was – 12%. The situation was worse with oil and condensate production – decrease up to 43 thousand tons, or almost 30%. The company was unable to maintain production at the depleted fields.

The drilling of deep wells in Yelyzavetivske field should be marked as important projects in 2014. The company has suffered from increasing rents. JKX Board of Directors declared about the need to reduce capital expenditures in order to compensate the additional production costs and tax of 10 million dollars in 2014. In 2015, the company stopped all drilling works.

Another major player in the market was Smart Holding owned by Vadim Novinsky. Holding was represented by three production companies: Regal Petroleum, Prom-Energo Product and Ukrhazvydobutok. The total production volume in 2014 was 190 million cubic meters of gas, equal to the level of 2013.

Production of condensate slightly increased. The declared ambition of “Smart Holding” in the oil and gas market remained unfulfilled.

As for small market participants it should be noted Lviv company Goryzonty owned by businessman Zinovy ​​Kozitskiy. It was a conglomerate of companies and firms, which, in addition to mining assets, including geological and service enterprise.

Lviv Regional Council approved to companies affiliated with Goryzonty six oil and gas areas in Lviv region. The volume of production was small, about 1 million cubic meters per month. However, the company finished drilling of two wells in late 2014, which should begin production after testing.

PSA Projects

Hopes for gas production implementation projects in Ukraine in 2014 evaporated. In December 2014 the company Chevron announced its withdrawal from Ukraine. The Americans decided to withdraw from the draft production sharing agreement – PSA – from Oleska area development. Their rejection from the project in Ukraine was a complete surprise, since the central and local authorities declared their support to the project.

Officially, neither Chevron, neither the government did mention the reason of rejection, but sources close to negotiations indicated one main reason: the desire of the Ukrainian authorities to exclude from the project SPK-GeoService company, which is considered the pet project of former Minister of Energy and Coal Industry Edward Stavitsky.

The Americans allegedly admitted impossible to meet the request of the Ukrainian side and refused to revise the terms of the agreement. Review of the agreement for foreigners was a troublesome matter as it was required to approve all details at Management Board level.

In addition, an important factor was the perspective of court proceedings. Obviously, Chevron decided not to risk and just rejected from the troubled project.

Recently it became known that PSA project for Yuzivska area development by Shell company in Donetsk and Kharkiv regions was suspended. That time it was largely due to military operations being conducted directly or closely to objects.

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Western Ukraine was the most stable region of the country politically and economically. Local government supported the PSA, and the price of gas, unlike oil, remained high. On the other hand, the economic and political situation in Ukraine was extremely complicated and did not encourage foreign investors.

Oleska Area development agreement was one of four prepared by government of Mykola Azarov and the second after PSA Shell on Yuzivska area, which managed to conclude. Two such agreements on the shelf failed to conclude, due to the occupation of the Crimea.

Anyway, no agreement could be implemented. It could be mentioned here the fate of the first PSA of ​​the US company Vanco at Prykerchenska shelf area. The competition, organized by the government of Yuriy Yekhanurov in 2006, after years of court proceedings did not get anywhere.

Chevron last example confirmed once again that Ukraine remained a very risky country for investments, particularly in the energy sector. Therefore, any plan of Cabinet of Ministers to attract foreign investment was doubtful.

The representatives of environmental organizations who actively fought against PSA could be the only satisfied with Chevron decision. At least they answered their expectations.

Gas balance

Taking into consideration the complexity of the economic situation and increase in gas prices for all consumers, its consumption decreased sharply in Ukraine – to 42.6 billion cubic meters. This was 16% less compared to 2013.

The largest decrease occurred in the industry – from 20.1 billion cubic meters to 15.7 billion cubic meters. Gas consumption by the population decreased from 16.8 billion cubic meters to 15.1 billion cubic meters, district heating companies – from 8.3 billion cubic meters to 7 billion cubic meters. Process losses at transportation decreased from 4.3 billion cubic meters to 3.7 billion cubic meters.

Excluding such data in the Crimea, gas use in the rest of Ukraine decreased by 14%. In addition, Naftogaz reported that the share of import sources of gas used in Ukraine decreased from 55% to 46 % in 2014. Part of needs was filled from reserves in underground storage.

However, 2014 was a turning period for the domestic gas market. The growth of production and consumption led to the decrease of Ukrainian gas share in balance close to 50%. If the trend continued, the volume of domestic production would exceed import amount for the first time in the history of Independence.

However, the overall state of the industry remained difficult and uncertain. After short revival the mining industry began to decline again. If the situation does not change in the next few months, Ukraine will reduce domestic production. Under these circumstances, energy independence is out of the question.