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Burisma and the case for Ukrainian energy independence

The reserves are there, but the government needs to help out, says the head of the country's largest independent gas producer

Kiev-based Burisma is striving to help Ukraine to become energy self-sufficient almost two years after the country stopped buying gas directly from neighbouring Russia.

The drive to stimulate domestic energy output is critical to Ukraine's desire to break the Kremlin's grip on oil and gas supply as the two countries remain locked in conflict over control of the resource-rich Eastern region.

Vadym Pozharskyi, advisor to the board at Burisma, Ukraine's largest private gas producer, believes energy independence must be achieved to safeguard the country's future as a sovereign state as well as its stability and prosperity.

"Over the past few years, the Ukrainian government has done more to boost domestic gas production than over 25 years of Ukraine's independence, but this does not mean that reforming is over," Pozharskyi told Petroleum Economist in an interview. "There are still a lot of technical and legislative issues brought up for today's market debate, including fiscal policy changes, which will help the country attract both financial investments and new equipment."

Burisma's own contribution so far has been modest—but is growing fast. Among Ukraine's independent natural gas producers, it boasts a 30% market share. Output rose 9.4% last year to 1bn cubic metres.

"This year, we plan to reach 1.5bn-1.8bn cm," said Pozharskyi. "We also expect that independent gas producers will manage to increase gas production levels from the current level of 4.1bn cm a year to 6bn cm/y."

Burisma says further growth hinges mainly on a recent pledge made by prime minister Volodymyr Groysman to reduce tariffs to a fixed flat rate of 12% from the beginning of 2018.

The drive to stimulate domestic energy output is critical to Ukraine's desire to break the Kremlin's grip on oil and gas supply

But Ukraine's overall gas output is barely budging. In 2016, production ticked up just 0.5% to 20bn cm.

Since launching in 2002, Burisma has become the largest gas producer in Ukraine and consists of four operating companies, all exploring and producing hydrocarbons. It has also expanded operations to Germany, Mexico, Italy, and Kazakhstan.

The firm earned press coverage following several appointments to its board of directors, including Hunter Biden, son of former US vice president Joe Biden, and former Polish president Aleksander Kwasniewski. While in office, Biden visited the country no less than six times, although he insisted his regard for Ukraine was nothing to do with his son's business activities.

Notwithstanding the Biden link, Burisma has close ties to the US corporate and military complex. The group has purchased equipment and technology from leading US corporates such as Halliburton and Caterpillar.

The company's owner is reportedly Nikolai Zlochevsky, a former member of the Party of Regions headed by ousted ex-President Viktor Yanukovych, and a former ecology minister in the Yanukovych government.

In 2014, UK officials froze London bank accounts containing $23m as part of a probe into money laundering. However, UK courts ordered the SFO in January this year to unlock the assets and all cases against Zlochevsky were subsequently thrown out in London and Ukraine.

Pozharskyi said the investigation proved the $23m was generated from selling the group's "non-core assets" rather than Zlochevsky's private money. "The funds had been frozen by the SFO on the request of the Ukrainian side, which didn't provide any evidence," he said. "Due to this connection, the court stated to reimburse the company with all expenses due to the lawsuit.

The vast majority of Burisma's production volume comes from the Dnieper-Donets basin, which contains 67% of the total natural gas reserves in Ukraine. This huge area stretches from the north to the east, but the company insists that operations have not been affected by the three-year conflict with Russian-backed separatists.

"Burisma doesn't currently own any assets in the vicinity of the military operations," said Pozharskyi. "All of our companies operate in a normal mode."

Shale push

In its next step to boost production, Burisma is turning to hydraulic fracturing after acquiring two fleets last year from US company ProPetro. Five successful fracking jobs have been performed this year and Burisma hopes to reach 10 by the end of 2017. According to Pozharskyi, the two fleets can do more than 100 fracking jobs a year.

Ukraine is presumed to have Europe's third-largest shale gas reserves at 1.2 trillion cm. Burisma declined to comment on speculation that one of the motivations for the Kremlin's involvement in the Ukrainian conflict has been to stifle the development of shale gas. Both Shell and Chevron decided to freeze and pull out from their shale projects in Ukraine after conflict flared up.

"The development of shale deposits is not a priority when the proven and confirmed reserves of hydrocarbons in the country are still very poorly exploited," said Pozharskyi.

As a private company, Burisma isn't obliged to release any financial statements. However, management insists it is profitable, debt-free and most revenue is reinvested in growth of the business. Pozharskyi said Burisma will spend UAH3bn ($100m) this year to develop existing gasfields and drilling new wells.

Over the long term, Ukraine has the potential to become a major gas producer, which may eventually result in the country becoming a net exporter. It possesses enormous gas reserves, which can be exploited by using fracking to ramp up production.

However, Pozharskyi says this growth can only be reached through government stimulus to encourage exploration and production, such as a further decrease in the extraction tax.

0.5% - Growth in Ukraine's gas output in 2016

Ukraine used to meet its gas needs entirely from Russian imports. The country has not bought gas directly from Russia since November 2015 and it now imports from Europe instead, mainly from Slovakia—which sends back the gas it imports from Russia.

But Ukraine's energy "independence" from neighbouring Russia refers only to Russian gas imported for domestic consumption. The transit of Russian gas to Europe is a different matter until Russian monopoly Gazprom builds alternative pipelines with its Western partners.

Ukraine scored a significant victory in its battle against Gazprom on 31 May after a Stockholm arbitration rejected almost $35bn of take-or-pay claims by Russia's gas-export monopoly. For its part, Gazprom said the legal action against Ukraine's state-controlled Naftogaz over a contract for the sale and purchase of natural gas in 2009-2019 "is an interim stage in the arbitration proceedings".

Regardless of the final outcome, Pozharskyi said the completion of the trial will constitute the beginning of a new active phase of internal gas market reforms and the launch of the process to unbundle the gas transmission and storage functions from Naftogaz.

"This will create a basis for the energy security of the country and the development of a competitive gas market in Ukraine providing an equal access to the gas infrastructure for all participants of the gas market," he said.

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