Naftogaz Group shares the concern of Prime Minister Volodymyr Groysman regarding the progress in the implementation of the Concept of Oil and Gas Industry Development approved by the Cabinet of Ministers of Ukraine in 2016. According to this program, gas production in Ukraine would be increased up to 27.6 billion cubic meters in 2020. At the same time it was planned to reduce the demand of Ukrainian consumers for this type of fuel to the same level due to the introduction of the energy efficiency programs. As of year-end 2018, gas production in Ukraine reached 21 billion cubic meters, and demand for gas amounted to 32 billion cubic meters.
The pace of the implementation of the Concept approved by the Government, both in terms of increased gas production and its more efficient use, does not correspond to the approved schedule.
Large-scale geological exploration to discover new deposits was the first area in implementing this Concept. However, the Government’s plans to increase domestic gas production were disrupted due to the systematic obstruction to obtaining permits for subsoil exploration and development. Both JSC Ukrgasvydobuvannya and private companies actively engaged in production activities have been deprived of the possibility to obtain licenses for new areas for several years.
Program 20/20: plan and current situation
In 2018, Ukrgasvydobuvannya as a company of Naftogaz Group produced 15.5 billion cubic meters of gas, including 14.1 billion cubic meters of commercial gas. Ukrgasvydobuvannya is the largest gas producer in Ukraine and ensures 73 % of Ukrainian gas production.
In 2016, Ukrgasvydobuvannya adopted a plan to increase its own production to 20 billion cubic meters by the end of 2020 within the Government Concept. When approving the program the Government expressed its readiness to support the Company in its implementation, because this required coordinated cooperation of Ukrgasvydobuvannya, Naftogaz, central and local authorities.
The Company had to achieve its ambitious goal of increasing production through two main areas: production stimulation on existing deposits and production on new deposits.
Ukrgasvydobuvannya successfully implemented the first component of Program 20/20. In particular, during the last four years, the drilling meterage has almost doubled, the hydraulic fracturing program (from 0 to 300+) has been introduced and intensively develops, the number of coil-tubing operations has unpredictably increased (from 4 to 1400+), more than 500 operations in wells have been performed.
As for the geological exploration, eight new deposits have been discovered, 3D seismic survey volume has tripled, and the resource profile for existing deposits has been increased by 38.6 billion cubic meters for the first time since 2015.
1,000 units of equipment have been modernised, accounting for 30% of the total Ukrgasvydobuvannya’s fleet, 20 new modern drilling rigs for own fleet and 15 drilling rigs of international contractors for drilling outsourcing have been contracted over these four years.
Due to these activities, Ukrgasvydobuvannya succeeded in compensating the natural decline in production and reached a total increase in production (including compensation for natural decline) for 2015-2018 by 5.35 billion cubic meters. Natural decline of 1.2 billion cubic meters of gas per year has been compensated for previous year. The Company has also reached increase in production from 14.5 billion cubic meters in 2015 to 15.5 billion cubic meters in 2018.
Program 20/20: 1 billion cubic meters of gas have not been produced due to lack of new licenses
However, the implementation of the second part of the Program was stopped due to the third-party actions beyond the control of Ukrgasvydobuvannya and Naftogaz. Production boosting requires active exploration and drilling on new deposits. In particular, Ukrgasvydobuvannya expected to obtain 80 new licenses during 2016-2018. For his purpose, it submitted more than 170 document packages, but only 17 have been approved. The applications for subsoil development were rejected on more than 60 occasions and no approval was obtained in the Poltava Region as the key region over the past three years. In 2017, the Company obtained only 4 licenses, in 2018 – only 1. Ukrgasvydobuvannya repeatedly drew the attention of the Cabinet of Ministers of Ukraine and the state to this fact.
Tax burden and lack of financing: only UAH 0.34/cubic meter out of UAH 8.55/cubic meter is available for investing in production
The issue of ensuring sustainable financing of increase in gas production in Ukraine, which requires investment at the level of about UAH 29 billion per year, remains unresolved. Naftogaz Group is the largest taxpayer in Ukraine ensuring more than 15% of budget revenues.
At the same time, the current tax regime stipulates that almost UAH 6 are directed to the budget in form of taxes and dividends out of the gas price for the population of UAH 8.55/cubic meter. After deduction of the expenses for gas transportation and distribution, for covering losses from imported gas sale at a price below purchase one, as well as due to significant debts of gas distributors-intermediaries, only UAH 0.34 per cubic meter sold is available for Naftogaz for investment into development of gas production. It is required to invest UAH 2.1 per each cubic meter sold in order to maintain production at the current level, and not less than UAH 2.9/cubic meter to ensure sustainable growth of production.
Naftogaz Group confirms its readiness to closely cooperate with the Government and other authorities of Ukraine to achieve our common goal of ensuring the energy independence of Ukraine. Naftogaz hopes to cooperate with the Government to solve the above issues.