Ukraine has outlined a series of licensing rounds through online auctions and production-sharing agreement (PSA) tenders in ongoing efforts to reduce its dependence on natural gas imports. The 2019 licensing rounds offer 42 onshore blocks covering nearly 12,000 sq miles.
Government officials have improved the fiscal regime, simplified the permitting system, and adjusted the rules for access to gas and oil reserves to increase Ukraine’s upstream attractiveness to international oil companies.
The licensing rounds are being offered in stages. The State Geological Service of Ukraine released 30 onshore petroleum blocks for sale in online auctions on public trading platform ProZorro.Sale.
Fig. 1 shows the licensing offerings for 2019 plus valid exploration and production licenses.
The 2019 first round, announced Dec. 6, 2018, offers 10 blocks in six regions, covering more than 1,120 sq miles.A second round, announced in London Jan. 29, offers another 7 blocks in five regions, covering over 621 sq. miles. Bidders were asked to submit applications within 90 days with the online auctions scheduled for Mar. 6 and May 2, respectively.
In addition, the Ukrainian government approved PSA tender terms for 12 onshore blocks covering more than 8,200 sq miles. PSA tenders are expected to be announced in February or beginning of March, at which time bidders will have three months to submit their applications. The onshore blocks hold both conventional and unconventional resources.
Royal Dutch Shell and other IOCs showed interest in Ukraine during 2010-12, particularly in the possibility of developing unconventional gas resources (OGJ, June 6, 2013, p. 54). But changing market conditions caused Shell to pull out of a May 2012 PSA. Shell was the winning bidder for the Yuzivske PSA in the Kharkiv and Donetsk regions of Eastern Ukraine. Resources were estimated at 4 trillion cu m of gas, trapped primarily in tight sand formations. Estimated exploration costs were at least $20 million.
Shell and state-owned Nadra Yuzivske were each to hold a 50% interest with Shell to be the operator. However, Shell withdrew from the project in 2015, citing high costs and dropping commodity prices.
The 2019 Ukrainian PSAs are the first to be offered since then. As of Feb. 1, EP Holding (EPH) was working to gain Shell’s stake in the 2012 Yuzivska PSA. Ukrainian government officials expect to finalize that as soon as EPH submits a bank guarantee that EPH can invest $200 million.
In a different deal, EPH agreed to drill at least 15 exploration wells within 5 years. Finalization of the pending agreement remains subject to approval by regional councils and an anti-monopoly committee.
EPH currently holds 90% interest. Its partner is Nadra Yuzivska, which represents Ukraine in this legacy deal. EPH’s subsidiary, Nafta, will operate the project. The Slovak Republic owns 25% interest of Nafta. EPH holds 75% interest.
Government officials also see opportunities to redevelop legacy fields. Mature fields require technologies and expertise from international service companies. State-owned UkrGasVydobuvannya (UGV) has signed multiservice agreements with Schlumberger Ltd., Halliburton Corp., Baker Hughes GE, and Weatherford.
UGV also seeks additional cooperative partnerships under Production Enhancement Contracts (PEC) to develop depleted fields and unconventional formations. The PEC tender was launched in October 2018. Results are scheduled to be announced in May.
Ukraine produced more than 21 billion cu m (bcm) of gas in 2018, one of Europe’s largest outputs, yet still depends heavily on imported gas. The Ukrainian government is prioritizing domestic production to reduce imports and enhance energy supply security.
GAS SUPPLY, DEMAND
Gas accounts for 35% of Ukraine’s energy mix. In 2018, Ukraine consumed 31.5 bcm, making it the seventh largest consumer in Europe. Imports accounted for 34% of 2018 domestic consumption.
The Energy Strategy of Ukraine estimates future gas demand at 30-35 bcm/year until 2035.
Prices for Ukrainian gas are in parity with imported gas prices, ensuring profits for gas producers. In 2018, the average wholesale price for Ukrainian gas was $9.20/MMbtu.
Ukraine has 905 bcm of gas reserves across two proved petroleum basins with another 408 bcm estimated resources. The reserves-production (R-P) ratio is nearly 45 years compared with an average European R-P of 12 years.
Fig. 2 shows gas production by region and by company in Ukraine. Producers operating in Ukraine believe they can produce most proved, undeveloped reserves through improved recovery methods and by expanding existing fields with satellite fields.
Ukraine has a well-developed gas pipeline system with surplus capacity, which is used both for domestic gas distribution and for transporting Russian gas to Europe.
The state-run transmission system operator ensures third-party access to gas pipelines under equal, non-discriminatory, and transparent terms in line with European energy laws.
The National Regulatory Commission sets gas transportation, distribution, and storage tariffs using Regulatory Asset-Based (RAB) methodology and based on the European entry-exit booking capacity approach.
Ukraine has no restrictions or special duties on gas imports or exports, and gas exports to central Europe were scheduled for January. No trade permits are required.
Rigs are readily available in Ukraine, where 150 onshore gas wells were spudded in 2018. A qualified local workforce, wide range of services, and existing supply chain for pipes and cement also ensure companies can increase gas production volumes quickly. Yet, Ukraine needs additional IOC investment and technology to reach its production potential. The Ukraine Parliament enacted upstream reforms in 2018 to attract more international investment.
Ukraine revised its taxation system for onshore gas wells drilled in 2018 and later to help attract investors from outside Ukraine. Currently, gas produced from such wells is subject to 6% or 12% royalties depending on depth of reserves.
The government guarantees the stability of these rates through a 5-year stabilization clause. Five percent of the royalty payment is allocated to local communities’ development to motivate their cooperation with industry.
Ukrainian regulators simplified a prescriptive, outdated permitting system by signing a deregulation law which cut government red tape and updated exploration and production rules. This streamlining means production could start 18 months after licensing.
Parliament also approved an Extractive Industries Transparency Initiative (EITI) covering international standards of public reporting. Government officials adjusted reserves-access and transparency rules by authorizing online auctions, improving public access to geological data, and liberalizing companies’ turnover of geoscience information to the government.
Ukraine offers three main hydrocarbon basins: Dniepr-Donets basin, Pre-Carpathian basin, and the North Black Sea basin. Almost all production comes from onshore fields.1
The Dnieper-Donestsk region in eastern Ukraine is developed with several thousand gas, oil, and condensate wells. Companies have found gas in depths ranging 5,000-5,800 m and oil as deep as 4,500 m. The Association of Gas Producers of Ukraine (AGPU) reports 244 conventional oil and gas fields producing in this province.
The Pre-Carpathian (Foreland) basin in Western Ukraine covers 7,500 sq km and reaches the borders of Hungary, Poland, Slovakia, and Romania. AGPU reports 116 conventional oil and gas fields producing in this area.
The North Black Sea basin is less explored, with 42 oil and gas fields, including 15 offshore fields, AGPU reports
About 95% of gas production and most onshore oil and gas reserves are concentrated in eastern Ukraine, primarily in the Kharkiv and Poltava regions. Of Eastern Ukrainian reserves, 73% are found at depths of 3,000 m or deeper. In Western Ukraine, 65% of reserves are found above 3,000 m.
The 17 blocks offered in Round 1 and Round 2 and 12 PSAs blocks are in proved petroleum provinces with well-developed midstream infrastructure and completed seismic surveys. License terms for 16 of the concession blocks call for 20 years of exploration and production, the final block calling for a 5-year exploration period. All PSAs block have 50-year duration, unless otherwise agreed by the parties.
The web site GoUkraineNOW outlines the geology and overview for the auction and PSA blocks.2
Ukraine officials offered large parcels in known petroleum provinces to give oil and gas companies a better chance to find discoveries.
The table shows the three biggest PSA blocks in eastern Ukraine are Varvinska, Sofiyvska, and Ichnyanska. Most gas in this petroleum basin is trapped in the Carboniferous section below a lower Permian salt seal.
1. Association of Gas Producers of Ukraine, “Ukraine National Gas Production, Playbook 2018.”
2. Gas and Oil Ukraine Now, “Ukraine 2019 licensing rounds: A big attraction for oil and gas investors,” www.goukrainenow.com
Roman Opimakh is executive director of the Association of Gas Producers of Ukraine (AGPU). Opimakh previously advised the Minister of Energy of Ukraine. During 2011-15, he worked as a coordinator for oil and gas at the Economic Reforms Center where he supervised various energy projects. Opimakh obtained an MS (2006) from the Institute of International Relations of Taras Shevchenko National University of Kyiv. He later participated in a 1-year Hubert H. Humphrey Fellowship Program at Michigan State University and completed his professional affiliation with the Center for Energy Studies at Louisiana State University.