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Ukraine opens arms to upstream investors

The country has large untapped gas reserves and wants foreign partners to help unlock them

Ukraine offered a further tranche of onshore blocks on 29 January, as it seeks to revive the fortunes of an upstream gas industry that has struggled to realise its potential since the end of the Soviet era. The government hopes to lure fresh interest through revamped sector legislation and greater business transparency, but international investors are likely to proceed with caution, at least until after presidential elections at the end of March.

Since December, 17 onshore blocks have been made available via so-called "e-auctions" and 12 blocks via PSAs. The PSAs are open to foreign and domestic investors, while the auctioned blocks are open only to domestic companies. In total, 42 onshore blocks, covering 20,000 km2, are due to be offered in 2019 licensing rounds, according to the government. Operators will have three months to put in bids, once the blocks are officially offered.

Ukraine's gas production fell from 20.5bn cm in 2014 to 19.9bn cm in 2015, but has since risen, reaching an estimated 21bn cm in 2018, according to the Association of Gas Producers of Ukraine.

Industry officials say modernisation and improved efficiency have helped turn the industry around. However, much gas sector infrastructure remains antiquated, dating back to the Soviet era, so fresh injections of funding and expertise are needed to locate and extract new reserves to replace those from depleted fields.

Government-supplied data suggests the country has proven reserves of some 1.1trn m3, but the figures are subject to debate. Long-time foreign participants in the sector told Petroleum Economist that reserve estimates for swathes of the country's gas-prone acreage, which rely on historic Soviet-era data, may not be accurate, and are better taken as indications of possible rather than proven reserves.

Locating what data already exists for some of the acreage on offer may also be a challenge, they say. While efforts have been made to digitise the results of old seismic surveys for perusal by potential investors, much of it remains archived on paper and is not easily accessible.

Foreign firms, including Schlumberger and Weatherford, are already operating in the country as service providers. State gas producer UGV is seeking further partnerships via production enhancement contracts to boost production from mature fields.

Improved investment framework

Kiev knows it will be a challenge to lure investors to a country that has been prone to political instability, along with allegations of corruption and poor business transparency

The blocks are mainly located close to the country's fringes, towards the eastern and western borders. Some of those in the west are close to territory controlled by pro-Russian groups, who seized it in fighting following the ousting of pro-Russian president Viktor Yanukovych in 2014. That serves as a reminder that Ukraine still has to work hard to convince investors that it is a secure investment destination, regional observers say.

The country has been seeking to reduce its dependence on Russian gas supply, following Russia's annexation of the Crimea and involvement in hostilities in eastern Ukraine. Russia's efforts to reduce Ukraine's importance as a gas transit route by developing the Nord Stream 2 pipeline project in northern Europe has added another level of mistrust to an already fraught relationship.

Source: Petroleum Economist

Government and gas industry representatives promoting the licensing opportunities to investors in London on 29 January were upbeat on prospects, despite the challenges. They said legislative, fiscal and sub-soil rights reforms, along with moves towards greater transparency, made the sector competitive with the rest of the region as an investment destination.

"Parliament has fulfilled its obligations in terms of upstream. Everything that was promised was done," Olga Bielkova, deputy head of the fuel and energy committee in Ukraine's parliament said at the forum. "I don't think we can improve anything in terms of legislation… The gas market law is exactly the same as it is in Europe."

Officials also believe the presence of international oil traders, such as Trafigura and Engie, in the Ukrainian market is reassurance that the local gas market is an open one into which producers will be able to sell their output at a fair price.

There are also hopes that the country's under-utilised gas storage infrastructure—originally built to accommodate transit gas from Russian gas fields—could make Ukraine well positioned to acts a swing producer for the European market in the future.

Transparency drive

The decision to make the auction of blocks to domestic buyers an online process is being portrayed as evidence of commitment to eliminate corruption in reaching gas deal. Officials say the use of online applications ensure all aspects of deals are recorded and remove the need for a layer of bureaucrats with the power to slow the process down.

Ukraine joined the Extractive Industries Transparency Initiative in 2013, as economic reforms—including those in the upstream industry--began. Those reforms were slowed down during the period of instability preceding the 2014 presidential election.

The run up to the forthcoming election, scheduled for 31 March, has been less febrile.

Ukrainian officials are adamant that all the main candidates are keen to see the upstream sector revitalised and would continue with reforms.

"The expectation is only that we need to increase our production of gas, unlike it was five or six years ago when a good deal with Russia was what would bring you a presidential seat," Bielkova told potential investors.

However, some investors will prefer to wait until the winners' upstream policies become clear.

Electoral uncertainty

Bielkova conceded uncertainty surrounding the election was likely to interrupt business plans, even if the country's political environment is calmer than It was five years ago. She is a member of the PPB party of incumbent president Petro Poroshenko. He faces stiff competition from, among others, former prime minister Yulia Tymoshenko.

Tymoshenko has been leading in early polls, with Poroshenko—who won more than half the note in 2014—trailing well behind. She was a leader of the country's 2004-05 Orange Revolution, who was later jailed by Yanukovich, a former ally who narrowly beat her in the 2010 presidential election. He was ousted following a popular uprising in 2014, paving the way for Poroshenko's election.

Tymoshenko is regarded as a populist, who has strong support among Ukrainian nationalists. She is standing on a pro-EU, pro-Nato platform, but her decision, when prime minister, to sign a 2009 gas deal which sharply increased the amount Ukraine paid for Russian gas, dented her reputation with some Ukrainians.

Other candidates, such as Volodymir Zelenskiy, a comedian well-known in the country, have also been registering strong support in some opinion polls. But Ukraine watchers note that polls have been well wide of the mark in the past and the outcome of the election is hard to predict. 

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