Ukrainian Gas Producers Are Reducing The Country’s Dependency On Russia

March 2, 2017

Ukraine occupies a small, but significant, position in the global energy market. In March 2014, the increasing tensions between Ukraine and Russia caused energy prices to rise to multi-month highs.

Stakeholders in the global energy market likely remember Ukrainian President Petro Poroshenkoä’s warning:

 “The Russian military forces…may at any time be used for attacking our territory, and threaten our borders…The threat of a full-scale war on Russia’s part has not disappeared.”

Of course, the possibility that Russia, a leading oil and gas producer, could go to war with Ukraine, caused oil and gas prices to soar, because the geopolitical instability from the war could hamper Russia’s ability to produce critical energy commodities. At the peak of the tensions, Brent Crude soared to a $111.41 per barrel high and U.S. crude jumped to $104.65 per barrel. Additionally, gas prices also soared over this period.

 

Ukrainian firms are working hard to increase oil and gas outputs

In the last couple of years, Ukraine has been trying to get a bigger foothold as a significant stakeholder in the global energy market. Since 2012, Ukrainian private gas producers have tried to increase natural gas production by 50%. Ukraine is not content with being in Russia’s shadow inasmuch as the global energy market is concerned.

Now, Ukrainian oil and gas companies have been making massive investments to increase their production in order to reduce dependency on Russia. For instance, Burisma Group, the largest independent gas company operating in Ukraine, with a 30% of the market share, has consistently been increasing its production volumes.

 

Nikolay Zlochevskyi, Burisma’s President, revealed that “In 2016, Burisma Group took several important steps to increase production and strengthen the energy independence of Ukraine.”  He also noted that “the Group has committed to investing $100 million (3 billion hryvnias) in 2017 and started drilling four new wells including in Karaykozivske and Veselkivske fields, with a total of twenty planned for this year and a combined depth of 100 kilometers.”

 “Burisma produces billions of cubic meters of gas, pays billions hryvnias to the State budget and invests billions in gas production. We are going to continue, Zlochevskyi added.

Companies like Burisma will allow Ukraine to increase its production volumes, and they would help to strengthen Ukraine’s energy independence.

The country’s crude oil production output has been gaining some momentum and could still rise. The World FactBook ranks Ukraine in the 24th position in the global energy market with proven natural gas reserves of 1.104 trillion cubic meters.

In addition to the potential increase in production volume, which would increase revenue streams for the country, Ukraine remains the major route for transporting Russian natural gas to be sold Europe. In fact, Ukraine earns about $3 billion a year in transit fees on the Russia energy products that passes through its borders for onward delivery to Europe.

Can Ukraine make a dent in the global energy market?

The global crude oil market is experiencing a serious conflict of interest from different stakeholders. On the one part, OPEC is trying to reduce the supply of crude oil in order to force oil prices up. On the other side, U.S. shale oil producers are pumping out oil to undermine OPEC’s effort.

The demand and supply dynamics of crude oil has started shifting towards a balance after OPEC succeeded in getting its member nations and some other oil producing nations to agree to production cuts. Russia is one the non-OPEC members cutting crude oil production in order to end the supply glut that has weakened oil prices for much of the last three years.

However, U.S. shale oil producers are already ramping up production in order to counterbalance the reduced supply from OPEC’s cut. In addition, OPEC excused some member nations such as Libya, Iran, and Nigeria from the supply cut; hence, it is quite possible that there will not be much reduction in the available supply of crude oil in the near term. It is a little too hard to know where Ukraine stands but Ukrainian producers seem to be leaning towards increasing their oil output to undermine Russia’s alliance with OPEC.

That being said, Ukrainian oil and gas companies could move to increase their oil output at these favorable levels, which would further bolster earnings and revenues, as well as Ukraine’s traditional energy independence.