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The second year in a row a positive tendency regards increase pf gas production by private companies is being suspected. Such trend encourages sponsors to invest money in the industry. The answer is in an interview with Artem Petrenko, the Executive Director of the Association of Gas Producers of Ukraine.
What were the results of the gas industry before entering 2020?
In 2019, growth by independent producers amounted to 5.05%, compared to 2018, and reached a record 4.6 billion cubic meters of gas. Such results were achieved primarily due to the implementation of incentive taxation for drilling new gas wells, which began to operate on January 1, 2018. Over two years of this point, more than 200 wells were laid, a third of which were drilled by private gas producers. It is worth noting that the growth of gas production by independent companies occurred under unfavorable conditions in the world, which are associated with a significant reduction in gas prices (the decrease reached a ten-year low).
What are the results of oil and gas auctions and PSA tenders?
Last year was a landmark for the industry precisely thanks to oil and gas auctions and tenders, as a result of five rounds of bidding on the ProZorro. Sale platform, overall there were provided 19 licenses for use of subsoil: 14 were acquired by Ukrgasvydobuvannya and one was bought by the Slovakian investor Nafta, the remaining four were given to domestic independent enterprises. In addition to auctions, last year 13 blocks were put up for tenders for the conclusion of product sharing agreements (PSA). The winners of 9 tenders have already been approved by the Government, among them there are domestic and foreign investors from Canada and the USA. Now the process of harmonizing the texts of agreements is underway. Let me remind you that the minimum obligations of gas producers during the first five years include investing $430 million and drilling almost 40 wells. In an optimistic scenario, investments could reach $1.5 billion.
Also last year, the Dolphin shelf block was put up for the PSA tender, but subsequently its holding was canceled. The association has repeatedly noted that the competition was not provided by international standards, was organized in a hurry, the deadline for submitting applications was artificially reduced to two months, which is catastrophically small for such a project. In addition, all this happened during a period of political turbulence. We are glad that the Government listened to us and decided to cancel the tender. Now we expect the announcement of a new one, it is possible that the shelf block can be divided into several smaller areas.
In early February 2020, the names of the companies that submitted applications for PSA competitions in 3 sections became known. Among the applicants are domestic enterprises Ukrgasvydobuvannya (an application in partnership with the Canadian company Vermilion Energy) and DTEK Oil&Gas, as well as foreign investors from the UK and Central Europe. Within two months, the Interdepartmental Commission should evaluate the offers of applicants, select winners and recommend them for approval by the Cabinet of Ministers of Ukraine.
What are the PSA functions?
The competition for the conclusion of product sharing agreements is a state tool for choosing the most optimal investor with a clearly established list of its obligations regarding the program of work, investments and the state's share in profitable products. Unlike the auction, where license is issued for 20 years, the agreement is provided for 50 years. By the rule, PSA tenders have several features, among them for example, larger acreage of put in fields, such projects are more difficult to develop and require significant investments. The agreement provides that the investor gives part of the extracted products to the state. Hence, if under normal licensing conditions the company produces natural gas, pays taxes and sells 100% of the products for profit, then on the terms of the PSA - part of the products (in monetary or natural equivalent) granted to the state.
The Government determined that according to the competitive conditions, the state's share in profitable products cannot be less than 11%. But what percentage will it be - the investor writes himself. The investor will become the winner of the competition if he has the interesting offer and has the best conditions for the program of work and investments. Because for the country the most important thing is to get the maximum income and increase gas production. If you look at the applications of the winners of 9 tenders, then the interest offered by them, which will be transferred to the state, is higher than the established ones and reaches from 12% to 35%, depending on the block.
What initiatives will you have to work with in 2020?
Now active work is underway on the writing of the New Subsoil Code. As you know, in December, the President signed a decree according to which a new version of the Code should be prepared within six months. A consortium of European companies is working on the project with the active participation of the Association, the Geological Survey of Ukraine, the Ministry of Energy and Ecology, specialized services and business communities. Updating the Code has taken a long time. The document should comply with the best international practices and combine all issues of subsoil use for their effective use. There are also a number of governmental initiatives that should contribute to the development of the industry, attract new investors and increase gas production. We are talking about ensuring maximum transparency, in particular in the procedure for holding PSA competitions and selecting winners. We support this idea in every way.
In addition, there is an established legislative proposal to control the so-called dornmant licenses. The Association has always supported the effective use of Ukrainian subsoil, but it is necessary to approach this issue more comprehensive in order that investors do not suffer as a result. Businessman who invests in gas production and pays taxes cannot be identified with unscrupulous ones who received special permits in most cases for speculative purposes, without even an idea to develop blocks.
Gas producers also pay attention to the acute problem associated with the receiving of blocks for the extraction of hydrocarbons. Unfortunately, companies (both private and public) increasingly face unscrupulous land users who block access to subsoil areas.
What kind of mood among the business do you see in particular?
Business supports those reforms that are aimed at the development of the gas industry. The key for investors is the stability of fiscal policy, the invariability of the rules of the game and the further steps to achieve energy independence.
Source: https://cutt.ly/ItqTfDv