Only three of 10 fields offered at Ukraine's recent international upstream licensing round were awarded and none went to overseas firms. Ukrainian gas producers association AGPU's executive director, Roman Opimakh, discussed how future rounds might be made more attractive and the country's wider drive to achieve energy independence in a recent interview with Argus. Edited highlights follow:
How much upstream investment is needed in Ukraine's gas sector?
According to our estimates, $1.4bn was invested in 2018 and we expect that figure to reach $2bn next year. But this could increase dramatically if new investors are attracted to the country. Ukraine has outlined a series of oil and gas licensing rounds, offering over 20,000km² of onshore acreage in different regions. And the Black Sea shelf should be opened for competitive bidding soon.
Why were only three licences sold through the first licensing round?
In general, the AGPU considers the results pretty successful and really positive. There was fair competition between participants, the online bidding process was transparent and balanced — we consider that a great achievement. The starting price for all 10 blocks was 45mn hryvnia ($1.66mn) and the final price secured for three was HRN141mn — a very good result for national budget.
And all winners are now obliged to conduct seismic surveys of at least 25pc of the licence area and to drill at least one commercial well within four years. This should help to avoid a previously common situation, with companies securing licences but not starting work, simply waiting for a chance to sell them on.
As for the remaining seven blocks, we have analysed the process, gathered feedback from a number of upstream investors and arrived at some possible reasons for the lack of bids — and potential changes to the system.
Access to geological data, particularly to seismic surveys and well logs, must be simplified through the establishment of physical and online data-rooms. And legacy data processing by oil field service companies would provide a professional overview of the blocks on offer, which should increase investor confidence.
An expansion of the licensing process timeline is needed — bidders now have only 90 days to evaluate the blocks on offer, which usually it is not long enough. The state geological service (SGS) could publish a list of all available blocks on its web site, with initial prices, to allow investors to conduct their own research, before the SGS nominates selected areas for upcoming auctions.
Eventually, the determination of the auction bid price and the methodology for calculating it will have to be modernised, and a process devised for the discounted re-offer of blocks that received no bids at the next auction. And there is proposal to allow international companies with no presence in Ukraine to bid, with a requirement, if successful, to establish a representative office in the country within 1-2 months in order to receive the licence.
Will these changes be made before the next licensing round?
Some of these areas will be improved and others will not — some require legislative changes and this will take time.
What growth in Ukrainian gas production does AGPU predict this year, taking into account an expected increase in drilling?
We expect a 5pc rise in output in 2019, compared with 2.5pc growth last year, with improved results from private-sector producers and state-owned companies. [The private sector accounted for 21pc of production of 20.9bn m³ last year.]
Why not more, if drilling activity has increased?
Our forecast is usually conservative, because the success rate of drilling, particularly appraisal wells, depends on a number of geological risks.
What is the average drilling success rate?
It depends — at the exploration stage, it could be 35pc, if it is a well-established brownfield it could be as high as 90pc.
It has become obvious that Kiev's 20:20 strategy for state-owned Ukrgazvydobuvannya (UGV) — Ukraine's largest gas producer — to reach 20bn m³/yr by 2020 will be not fulfilled. What is a realistic timeline for UGV to hit this target and for Ukraine's wider ambition of achieving energy independence?
We believe that the country is on the right track and that Ukraine can achieve gas production of 27bn m³ by 2022.
Why did the 20:20 programme fail?
There are several reasons. The strategy required amendments to fiscal, permitting and other legislation within six months, but, in practice, it took 18 months — a one-year delay. The launch of new licensing rounds was expected to begin much earlier and the industry lost more time there — no licence auctions were held during the 657 days to December 2018. In addition, UGV applications for a number of new blocks in Poltava were rejected by the regional council.
Is there political risk for Ukraine's gas industry from the country's forthcoming presidential and parliamentary elections?
AGPU has studied carefully the programmes of all the leading candidates and all of them consider the development of domestic gas production as a strategic priority. No-one has said — "we will sign a new supply deal with Gazprom and will forget about domestic gas production". I do not think any of candidates will backtrack once elected as president.