Related Articles
Forward article link
Share PDF with colleagues

Ukraine ‘must revamp gas-investment rules’

Keen to boost production from its substantial domestic gas reserves, including sizeable unconventional deposits, to reduce its reliance on Russian imports, Ukraine is the subject of protracted talks with Gazprom

But a new report suggests that, if the country wants to realise that ambition, it must embark on a substantial overhaul of its investment framework.

Ukraine could triple gas production to 70 billion cubic metres a year (cm/y) by 2035, but only if annual investment in the sector can be increased tenfold, to $10 billion, according to a report produced by IHS Cera at the request of the Ukrainian energy ministry. The new production would include extensive output from tight-gas sands, shale-gas deposits and coal-bed methane (CBM) reserves, as well as conventional gas finds, both on and offshore.

But IHS says investors could be put off by an uncertain and confusing investment framework. While a new law governing the domestic gas market, adopted in July 2010, represents a step forwards, the consultancy says more must be done. “Although Ukrainian legislation affecting the gas sector has seen positive changes in the past 18 months, the overall regulatory environment for investors remains complex and extremely challenging,” it says.

The report – Natural Gas and Ukraine's Energy Future  – finds that frequent changes in the exploration and production (E&P) permitting process over the last three years has created a perception among investors of legal and regulatory instability. Meanwhile, it concludes, the permitting framework is flawed and ambiguous to an extent that means potential investors may decide that compliance is too time-consuming, or even impossible. The report added that customs-clearance procedures for imported equipment remain cumbersome and expensive.

IHS suggests a number of policy changes, including the unbundling of the integrated gas sector into distinct upstream, midstream (transport and storage) and downstream (distribution and marketing) segments.

Actions proposed

Attracting $10 billion a year of upstream investment would require a series of changes in the terms open to investors, it says. Those include increasing the duration and acreage for licence awards; introducing robust procedures for conversion of existing exploration permits into production permits; and significantly extending the time allowed for submission of bidding documents at licence auctions.

Unconventional-gas E&P should have a special set of rules, given the differences involved in developing the resource compared with conventional natural gas. Access to exploration data should be made easier and procedures for importing equipment should be simplified and made cheaper.

Downstream, measures suggested by IHS include price liberalisation, and promoting and legislating for more competition between suppliers.

Momentum is already growing in the fledgling unconventional-gas sector. Last year saw the country’s first successful reservoir stimulation using hydraulic fracturing, by Poland’s Kulczyk Oil on its acreage in the eastern region of Lugansk. ExxonMobil, Shell, Eni and TNK-BP have all signed agreements with the government relating to unconventional exploration.

Vadim Chuprun, deputy head of state-owned Naftogaz, has said Ukraine wants to produce as much as 5 billion cm/y of shale gas by 2020. The government has claimed the country could hold shale gas reserves of 2 trillion cm and CBM reserves of 225 billion cm.

Russia talks

Ukraine’s cash-strapped government will be anxious to attract as much foreign investment as possible to its gas sector, so the country can wean itself off supply from Russia’s Gazprom. In 2009, Ukraine signed a 10-year supply deal with Russia, which government now wants to modify, claiming the original terms were too onerous.

The government says it could unilaterally reduce Russian imports to the 27 billion cm it needs this year from last year’s 40 billion cm. But Gazprom says it must abide by the supply deal and import 52 billion cm as planned. Gazprom has said it could discount the cost of gas sales in return for a stake in Ukraine’s gas-pipeline network, which transits Russian gas to European markets, and for which Ukraine is paid transit fees. Ukraine has so far refused to allow that.

Last week, the latest in a series of talks between the two sides, which have stretched out over months, ended without resolution. On Friday, Gazprom said it would bring forward the start of construction of its South Stream pipeline, which would supply Russian gas direct to Europe and bypass Ukraine, to the end of 2012, rather than next year as originally envisaged.

Also in this section
Rosneft strikes again in the Arctic
13 August 2020
The Russian oil firm has added more reserves to its ambitious Vostok Oil project
Latest licensing rounds
13 August 2020
The industry's most comprehensive list of current and recent rounds for onshore and offshore licences
Inaugural Somali regulator plots confident course
11 August 2020
Newly appointed Somali Petroleum Authority chairman and CEO Ibrahim Ali Hussein speaks to Petroleum Economist about his hopes for the Somali oil and gas industry