rules of the game

Energy revenge

16.08.2013 | Ivan Petrov

Preservation of government control over Ukraines gas transit grid is a symbolic victory over the countrys entire period of independence

Over the 22 years of the nations independence the government managed to not lose control over the atomic energy sector as did Armenia and preserved control over the gas transit grid (GTG) -- unlike Belarus. Whether such policies fostered the economic development of Armenia and Belarus is a question

As for Ukraine, preserving control over its atomic energy stations allows for cross-sectional subsidization of its weaker coal mining and thermal energy sectors thanks to cheap electricity generated by its atomic energy stations.

To add to that, preserving control over the GTG allows the state to count on no less weighty strategic dividends. First of all, this implies several billions of dollars a year in proceeds from transit. Secondly, which is even more weighty is that this allows Ukraine to attract billions in long-term investments into the country that are needed to develop new inland and maritime oil and gas fields. If the state would lose control over its main pipelines and underground gas reservoirs, major investors would not have guarantees of direct access to the system of sale of the drilled products. Moreover, nobody is interested in drilling resources to later hand them over to a competitor for transit.

So far, very few companies have managed to take advantage of Ukraines possibility of offering such guarantees. Shell exploration, which assumed responsibility for additional exploration and development of new resources in eastern Ukraine, including shale gas fields in the Yuzov region and several dozen traditional natural gas fields in the Dnipro-Donetsk Basin (DDB), became the pioneer in this segment. Optimists believe that by 2020-25 the efforts of Shell Exploration will compensate the deficit of Ukraines gas balance thanks to the reduction of extraction of gas on the Shebelinsk gas field that was once the largest in all of Europe. Extraction on these fields fell from 5.4 bn cubic meters in 2011 to less than 400 mn cu. m. in 2012. The initial investments of Shell will be US $200 mn and the total sum of investments in the future could reach up to US $10 bn or more.

So far, investments into the resources of the DDB and the entire Eastern gas and oil region in Ukraine have not reached this level. At the moment, there are 170 small mines that over the years of Ukraines independence had become the hubs of the countrys oil and gas refining industry.

From 1991 to 2005 domestic crude oil was not refined at Ukraines largest oil refineries. Today, nearly 100% of the crude oil is again being refined at Ukrainian plants. This was because all of Ukraines largest oil refineries were in a deep depression. As a result of the policy of the former Russian owners of these refineries, they were not modernized after the post-privatization period of 1999-2012. Today, the plans of the Ukrainian government to invest money in order to revive national oil refineries that failed to compete with similar refineries in Belarus, Russia, Lithuania and Romania are quite realistic and even a reason for optimism.

However, such changes require serious investments. If the refineries are indeed modernized, this will be a major breakthrough in energy independence. At the moment, the share of import of petroleum products to Ukraine is more than 60%.

By preserving operational and proprietary control over the GTG Ukraine will be an attractive target of investment into the development of the Black Sea shelf. Until now, Ukraine has managed to attract only one major investor in the shelf the consortium of Shell, ExxonMobil, Petrom and Nadra Shelf, which in 2012 was granted the rights to the Skifskiy section of the shelf. The first stage of its exploration will be completed in 2015, though there are plans to hold a tender for rights to the neighboring Foros section with estimated reserves of 35-40 bn cu. m. by the end of this year. By 2015-2016 the results of the exploration of the Prykerchenskiy section adjacent to the Foros section that was granted to Vanco Prykerchenska Ltd. with estimated reserves of 100 bn cu. m. in 2007 will become clear. This will allow Ukraine to explore the richest section of its shelf specifically, Pallas and Val Shatskoho, which have estimated reserves of 75-157 bn cu. m. and 150-170 bn cu. m., respectively.

A part of Val Shatskoho is situated near the Ukrainian-Russian maritime border on the Russian side. The deliberate unwillingness of Russia to delimit the maritime border with Ukraine and Georgia has a direct impact on the low rate of exploration of the richest part of the Black Sea shelf.

The Tuzla crisis in 2004 and the Russian-Georgian war in 2008 also had a negative impact on this issue. It became quite obvious many years ago that investors in this region are a thorn in the side of the Kremlin. Given this, exploration of small oil and gas deposits by 2017-2020 has become the most important task. The first are the Odesa and Bezymyany fields with reserves of 22 bn cu. m., which Ukraine began exploring in 2012, despite the exorbitant investments by the state-run company ChornomorNaftoGaz (CNG). After that CNG will begin exploring Ukraines only petroleum deposit Subbotino, which has reserves of 100 mn tonnes.

All the aforementioned reserves are drop in the bucket for Ukraine as the registered annual capacity of its oil refineries exceeds 14 mn t of oil per annum, while the consumption of gas remains at the level of 46-49 bn cu. m. a year.

At the same time, if CNG does not fall into debt after major purchases and remains financially independent, its role in the drilling of oil and gas in the Black Sea will significantly grow. In the first half of 2013 with an 11% aggregate decrease in the extraction of gas in Ukraine the aforementioned investments allowed for a 35% increase in extraction.

On the whole, such achievements would not have been possible had Ukraine in the most difficult times surrendered to external pressure and lost control over its main gas pipelines and underground gas reservoirs. We can only hope that this will not happen in the foreseeable future.

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