If Ukraine is to attain its goal of energy independence by 2020 it will need to raise its current gas production from 20 billion cubic meters per year to 28-30 billion cubic meters annually over the next four years. Meanwhile, Ukraine’s total gas production has remained flat in 2015 and 2016 – and indeed over the entire past quarter century. Something clearly has to change quickly.
Despite the current situation, not only is gas independence achievable, Ukraine has the potential to produce more gas than it will need and thus become a new gas supplier to Europe in the foreseeable future.
The experience of North America over the past decade is particularly instructive. Since 2005 annual gas production in the United States grew by 250 billion cubic meters (a 50 percent increase) after decades of stagnation.
There has been a veritable revolution in the technology and know-how of oil and gas extraction in North America, a revolution now spreading throughout the world. Over the past 10 years, well drilling and completions efficiency of the Bakken, Eagleford, Permian, as well as other tight oil plays has increased on average by 15 times and, in some cases, by as much as 33 times. Thus while productivity has increased sharply, unit costs have plummeted.
Ukraine’s significant resource potential is undeniable. Its conventional gas reserves are estimated by the government to be close to 1 trillion cubic meters. Ukraine’s reserves life (reserves to production ratio) is thus approaching 50 years, compared to 11 for the United States and 15 for the European Union.
Meanwhile, drilling efficiency in Ukraine is still significantly lagging, as it continues to use outdated technology and Soviet-era field development practices. There is clearly a great deal of scope to rapidly increase gas output provided Ukraine can more than double its current annual investment in gas production of $600-$700 million and make use of the best technological solutions North America has to offer.
But this will mean grabbing the attention of foreign investors who specialize in applying cutting edge technology in hydrocarbon production. That, in turn, means moving quickly to improve Ukraine’s investment conditions. The priority is a reduction of the currently uncompetitive production tax rates. The proposal of the Association of Gas Producers of Ukraine to reduce the current marginal tax rate on gas production from 29 percent to 12 percent for new investments would put Ukraine on the map for global energy investors and operators. With a competitive tax rate, international investors become active participants in further reform of investment conditions. Without a competitive tax rate, investors remain on the sidelines, uninterested and inactive in further energy reforms.
Other reforms needed
And further reforms are needed
The next step is to reduce entry barriers to new investors by changing how gas production is regulated. Permitting must be simplified and streamlined, field development rules need to be updated to reflect modern technology and practices and upstream data must be made accessible to all investors. The goal should be the creation of transparent, equal investment conditions for small private investors — a market with no special deals for anyone. Small and medium sized companies – innovative, flexible and with an appetite for risk – were the reason for the production surge in North America.
The supermajors made no net production contribution to America’s shale revolution, and it would be illogical to expect anything different in Ukraine. Smaller independent companies are what Ukraine needs most to develop its plentiful, but often technologically challenging remaining gas potential. Many active companies will also create a competitive market for oil field services and bring down costs.
JKX Oil & Gas was Ukraine’s first foreign investor in the gas sector starting in 1994, and remains an active participant in the fight for energy independence for Ukraine. Our recently updated field development plans focus on the Rudenkivske field in Poltava. With technically recoverable reserves of 600 billion cubic feet (17 billion cubic meters), it could produce 1 billion cubic meters annually by 2020 – a significant potential contribution to Ukraine’s strategic goal.
But Rudenkivske is also a reflection of the challenge for Ukraine: full field development will require the drilling of 135 wells and a total investment of $660 million over the next 5-7 years. To attract such investment, Ukraine needs action, not words, to create the necessary investment conditions. JKX will bring the capital and technology to start our own gas revolution, but Ukraine also needs to do its part.
Tom Reed is CEO of JKX Oil & Gas, one of the oldest private oil and gas producers in Ukraine.