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Artem Petrenko, the Executive Director of the Association of Gas Producers of Ukraine, shared insights about natural gas prices for businesses this autumn, the quantities of gas purchased from private gas producers by the state-owned "Naftogaz," and whether we will have enough domestic gas this winter, in an interview with "Business Telegraph."
On production volumes
— What gas production volumes do you expect from private producers by the end of 2023?
— Information about production, storage volumes, and other sector indicators are classified according to the decision of the National Commission for State Regulation of Energy and Public Utilities (NERC). This decision was made during the first months of the full-scale war. The Association possesses internal analytical data, but unfortunately, we cannot disclose the figures due to energy security concerns. According to preliminary estimates, the overall volume of private production this year is expected to remain at the level of the previous year (4.2 bcm). However, due to the ongoing war, there are high risks that constant attacks by the Russians may slightly decrease production volumes. The main production regions are Poltava and Kharkiv regions. Specifically, the Kharkiv region remains unpredictable due to its proximity to the frontline.
— Besides the war, what other factors are influencing private production?
— Private production has specific features, such as working in reservoirs with ultra-deep wells over 5 kilometres deep. This means that the output remains stable after a certain period following drilling, but reserves gradually diminish. To compensate for this natural decline, new wells need to be drilled. However, in the conditions of war and constant shelling, drilling becomes difficult and risky, as drilling sites could become attractive targets for terrorists. I must say that the amount of drilling activity before the war and now is incomparable. Additionally, for over a year, private companies faced difficulties in gas sales. Due to numerous attacks, industrial gas consumption reduced significantly - by 70% in the first months of the war and later to 50-60%. Companies found themselves in a difficult situation because they were producing gas but had nowhere to sell it as they lost a significant portion of their customers.
On gas consumers of private production
— Who are the primary consumers of gas from private production?
— Industrial enterprises.
— So, the industry is supplied with gas produced by private companies?
— Exactly. Before the war, the key buyers were metallurgical plants, pipe manufacturers, chemical, food, processing, and light industries, and small and medium-sized businesses. Extensive industrial facilities consumed most private gas, particularly in eastern Ukraine, including cities like Mariupol and Dnipro. From the first days of the war, the industry suffered destructive attacks by the Russians, leading to the destruction, damage, and occupation of many facilities.
— What decline in demand do you observe currently?
— The war is ongoing, and missile attacks continue, resulting in additional losses and destruction. The industry is either producing much less or has halted production altogether. Unfortunately, our preliminary calculations show that industrial gas consumption this year will be lower than last year.
On exports
— Export could support sales. Are you working towards unlocking it?
— Immediately after the Russian invasion, independent companies faced issues with sales. On the one hand, there was a decline in demand from the industry, and on the other, gas exports were banned for energy security reasons. Understanding all possible consequences, the Association had ongoing discussions with the government and Naftogaz regarding the purchase of Ukrainian gas and the possibility of export, at least partially. Purchase began two months ago, which improved the sales situation. As for partial export, the government is not yet ready to lift the ban. However, it is essential to keep the situation under control, analyse the gas market both within the country and in Europe, monitor trends, and continue discussions on the possibility of partial export in the future.
On Naftogaz gas purchases
— What is the situation with Naftogaz purchasing gas of Ukrainian origin?
— The Association has repeatedly appealed to the government and Naftogaz to resolve this issue, and negotiations were lengthy and challenging. Only at the end of April this year they partially listened to us, and the process started moving forward - Naftogaz began purchasing gas. This will allow independent companies to continue investing in the sector and might incentivize increased production. Last year, Naftogaz bought only 253 million cm of gas. In just two months since the auctions started at the Ukrainian Energy Exchange this year, Naftogaz has already purchased over 720 million cm of gas. This significantly improves the sales situation. I believe that purchasing gas is one of the effective and essential mechanisms to support companies, the sector, and the overall economy during wartime.
— What quantities of gas do private companies prefer to sell?
— At the beginning of this year, there were over 1.5 bcm of unsold gas in underground gas storage facilities. Moreover, companies continue to operate, and there are current production volumes. So, all companies are interested in selling their gas since it allows them to invest in new drilling, repairs, plan new projects, and pay royalties to the state and local budgets.
— Are private companies satisfied with the gas price proposed by Naftogaz? It is lower than the European price. What volumes does Naftogaz purchase?
— I cannot comment on prices. As for the purchase volumes, initially, Naftogaz declared that they planned to buy 18 million cm daily, but the figure may be adjusted according to the needs. Now, we see bids for over 40 million cm. Daily auctions are held, and the purchase volumes vary every day. As I said, over two months, more than 720 million cm - this, in my opinion, is a normal trend, and it is essential to maintain it.
About imports
— Will we really manage without importing natural gas this season?
— It's a government decision. We see that "Naftogaz," and the government aim to get through this winter without importing gas, relying solely on Ukrainian production. We support these intentions and hope it will be so. Companies continue to work, pay taxes, and support the army and local communities. Everyone is doing their best to bring victory closer. The Russians couldn't destroy the industry last year and won't succeed this year, either. After the war, the industry has good prospects for development and increasing gas production.
About competition and gas prices
— During a conference in Slovakia, you discussed the capacities of Ukrainian gas storages for Europeans. Isn't this competitive with private companies in Ukraine?
— This is not about competition but energy security and trust in Ukraine. Until February 24, 28 countries and over 750 non-residents stored their fuel on Ukrainian territory. Currently, European storages are already filled by over 75%, and total capacity can theoretically be reached by the beginning of autumn. Considering this, Ukraine can offer foreign companies storage capacities located near the western border. Another advantage is the price, as our tariffs are the lowest in Europe. I believe that injecting gas into Ukrainian UGSs is primarily a powerful signal of support, showing that even during the war, European partners and businesses trust us and believe in Ukraine's victory. This will undoubtedly improve our country's business image on the international stage.
— You mentioned significant volumes — 10-15 bcm of gas from the EU. Will storing these volumes affect internal commercial gas prices?
— Additional gas volumes that may come to our UGSs will not impact the market's price dynamics. Gas is more expensive in the EU, and foreign companies will be interested in selling it where it's more costly. This is an entirely regular practice. So, they can only use our underground storages to keep, but they will sell the gas in Europe.
— The Chairman of "Ukrenergo," Volodymyr Kudrytskyi, announced using natural gas for electricity production to prevent blackouts. Will gas from private production be involved?
— It could be a good story. The Association always advocates for transparent market conditions, so if they are provided, companies will be interested. If there is another consumer, we are all for it.
— Will natural gas prices for businesses increase in autumn? By how much?
— Typically, the cost of natural gas increases during the heating season due to higher demand. However, we are preparing for a new heating season, which will likely occur under war conditions again. Therefore, demand and the situation on the front line will significantly influence the price. If the Russians attack industrial and energy facilities again, enterprises won't be able to operate without electricity. And if there's no power, gas consumption will decrease. So, I will be very cautious in making predictions — in a stable industrial operation, gas prices may increase, but not significantly, no more than 10-20%.
Interview conducted by Natalia Kabash