Commodities 2021: Ukraine makes new upstream push as gas output falters

London — Marking the start of a new year, Ukraine has finally signed off on a handful of production sharing agreements with local players designed to give the country's faltering gas output a new boost.

Ukraine in 2019 began a wide-reaching program of new license tenders through bid rounds and PSA tenders, resulting in the award of dozens of new gas development permits.

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But finalizing contracts has taken longer than expected, with Canada's Vermilion Energy pulling out of the process despite having been awarded two PSAs together with state-owned Ukrgazvydobuvannya (UGV) -- a wholly-owned subsidiary of Naftogaz Ukrayiny -- in mid-2019.

Ukraine's gas production has been steady at around 20 Bcm/year for the past 25 years despite well-publicized efforts since 2010 to boost domestic production and eliminate import dependency.

Total Ukrainian gas production in 2020 is estimated at 20.2 Bcm, down 2% year on year.

Ukraine's new acting energy minister, ex-Naftogaz official Yuriy Vitrenko, said on his official Facebook page Jan. 6 that the falling gas production in Ukraine was a cause for concern.

"Here are problems that need to be solved immediately," Vitrenko said.

He blamed state-owned producers for the fall, pointing to a 5% decrease in their output compared with a 7% rise in production by private companies.

New investment

Ukraine still imports significant volumes to help meet demand of some 25 Bcm/year, with total imports from Europe last year amounting to 15.9 Bcm, around two-thirds of which was injected into storage facilities.

Part of the problem for boosting gas output has been red tape holding up new gas development projects, but the Ukrainian Prime Minister Denys Shmyhal sees the new PSAs as a "vital" first step to boosting domestic gas production.

"The signing of oil and gas agreements will demonstrate to international investors that Ukraine is attractive for investment and that the government is fulfilling its commitments," Shmyhal said following the PSA signings on Dec. 31.

PSAs were signed with UGV for four blocks (Buzivska, Balakliyska, Berestyanska and Ivanivska), and with local players DTEK Oil & Gas for the Zinkivska blocks, Geo Alliance (Sofiyivska), and Zakhidnadraservis (Uhnivksa).

"For the first time, the government is signing agreements for seven gas-bearing zones with the winners of open and transparent auctions," Shmyhal said.

He said the PSAs would see investment of some Hryvnia 12 billion ($425 million).

Roman Opimakh, head of Ukraine's state geological service, said the signing of the PSAs was an "important" event, with work at the blocks expected to lead to an increase in production and reduction in imports.

Naftogaz, meanwhile, is also set to begin development work at Ukraine's largest shale gas field, Yuzivska in the eastern of the country, having taken over Nadra Yuzivska, the license holder for the project, in December.

Yuzivska is estimated to contain 4 Tcm of gas and may be capable of producing 20 Bcm/year within the next 15 years, according to government estimates.

The project was originally meant to be developed by Shell, which signed a PSA with the government in January 2013.

However, Shell exited in June 2014 shortly after the start of the conflict between government forces and Russia-backed separatist groups in eastern Ukraine.

Gas release program

As part of the approval to take over at Yuzivska, Naftogaz has also agreed to market more gas on Ukraine's energy exchange in a bid to keep the country's gas market competitive.

Naftogaz chief operating officer Otto Waterlander, writing on LinkedIn, said it would add liquidity to the Ukrainian market.

"[There will be] more volume to trade between buyers and sellers creating an even better market and price formation," Waterlander said.

Naftogaz agreed to sell 15% of its own gas production on the Ukrainian energy exchange, UEEX.

"The initiative is an effective lever to mitigate potential risks to competition if Naftogaz significantly increases gas production after the start of development of a new subsoil area," it said in a statement.

Naftogaz CEO Andriy Kobolev added: "According to European practice, even if 10% of production is sold on an exchange, it ensures the appropriate level of competition in the market. We have offered increased commitments of 15% of our own production. This is a clear signal to all players that the Ukrainian gas market is developing on the principles of transparency."

Waterlander said the commitment allowed Naftogaz to acquire the Yuzivska block, one of the largest areas of prospective gas production in Ukraine.

"We can now accelerate its development. Naftogaz plans to connect first gas from this region to the transport network already this month," he said.