INTERVIEW: Ukrnafta to boost hydrocarbons output as Ukraine targets energy independence

Ukrainian oil and gas producer Ukrnafta is planning significant hydrocarbons output growth, as Ukraine targets fuel independence, executive vice president for corporate strategy and development Denys Kudin told S&P Global Commodity Insights.

Russia's invasion of Ukraine has exacerbated problems linked to a decline in output of oil and oil products that began in the mid-2000s.

Since the conflict started in February 2022, attacks have hit key energy infrastructure, and forced the country to seek alternative fuel suppliers, exposing the risks of insufficient domestic production to the industry and broader economy.

As part of a government strategy, state-backed Ukrnafta is now aiming to double hydrocarbons production to around 100,000 b/d of oil equivalent by the end of 2027. Of the current 50,000 boe/d output, around 30,000 boe/d is oil, and 20,000 boe/d natural and petroleum gas.

"Ukrnafta's production has been declining since 2006 when we had a last peak of 121,000 b/d. Our ultimate goal is to reverse the trend," Kudin said.

Ukraine has extensive hydrocarbons reserves and resources, estimating them at more than 2 billion mt of oil, and more than 2 Tcm of gas.

Accounting for around 60% of Ukrainian oil output, Ukrnafta plans to increase production in 2023 by around 5% year on year to 28,921 b/d. It is targeting a 3% increase in gas production.

New production

Ukrnafta is targeting oil production growth at 21 mature fields -- 10 fields in the Carpathian basin in the West, and 11 in the Dniprodonetsk basin in North Eastern Ukraine.

"There are drilled wells there, and on the ground infrastructure, and they're fully ready for production increases," Kudin said.

The company is in talks with foreign investors to join PSAs to develop the projects, which include a discounted royalty tax of around 2% for oil, and 1.25% for natural gas. This compares to normal rates of 31% for oil, and 29% for natural gas, Kudin said. In return, partners will be required to sign up for significant investments in a limited timeframe, and commit to increased volumes of drilling and 3D seismic in project development plans.

The company estimates that a five-year development plan for the projects will cost between $1.5 billion-$2 billion, of which half will be covered by Ukrnafta and the remainder by foreign private investors.

Kudin said that 27 exploration and production companies from the EU, the UK, the US and Canada are currently studying field data with a view to joining projects.

"Definitely the North-East oil fields have higher potential," Kudin said, adding that around half of the companies that have expressed an interest are only looking at fields in the West, and the other half are considering the West and the North East.

The North Eastern assets are closer to the conflict zone, however, carrying greater security risks.

Domestic demand

Kudin said that all additional crude production will go to the domestic market, as Ukraine bids to cut imports and boost its fuel independence.

In the last 20 years Ukraine has seen a major decline in domestic crude processing, and now imports up to 80% of domestic product demand.

Until 2004 Ukraine covered all domestic demand with products from its six refineries. When Russia invaded Ukraine in February 2022, the Kremenchuk refinery and Shebelinka gas processing plant were still operational.

The plant, as well as others that had been idled before the war, has repeatedly been targeted by Russian attacks.

"We are overpaying up to $2 billion for fuel imports, while we could process it inside the country, so the ultimate goal that the government has for Ukrnafta is to reach fuel independence for Ukraine," Kudin said.

Ukraine primarily imports oil products from the EU, including Poland, Greece, Bulgaria, Romania and Slovakia. In 2022 it started to import from further afield, with supplies coming from the US, India, China and Morocco. Deliveries are made via Baltic countries, the Amsterdam-Rotterdam-Antwerp region, Romanian and Croatian ports.

Kudin said these imports are secure, due to growing supply diversity, as well as a move away from purchases on the spot market to long-term contracts since the war began.

"Importers have understood how dangerous it is to buy everything on the spot market, because you're overpaying premiums if some emergency occurs," he said.

In the immediate aftermath of the invasion, Ukraine suffered severe shortages of light liquids on the market, but was able to diversify supply sources in three months.

"Our task is not to let the situation repeat in future, Kudin said. "That's why Ukraine must become self-sufficient in oil and gas production."