Shale Gas in Ukraine - Turning Enthusiasm into Results
David Messina, Executive Director, Hutton Energy, noted a renewed enthusiasm for onshore hydrocarbons activity in Ukraine, which he said had not been involved in much exploration and production for the last 20-30 years. But he also asked a very tough question, noting a similar amount of enthusiasm that had been experienced in Poland about its shale gas resources.
"How do you maintain that enthusiasm and energy that's been built up in the last 12 months to make sure the industry moves forward, that companies continually be attracted to Ukraine with the opportunity to find hydrocarbons?" he asked the delegates at the Ukrainian Energy Forum in Kiev, Ukraine.
"What we've seen in the last 12-18 months is, the audiences get smaller and, to some degree, the interest starts to fade, so there's a real challenge that this group of people in the room and others really embrace the current enthusiasm and turn it into results," he stated.
He provided a brief introduction to his company, Hutton Energy, explaining that the Europe-focused oil and gas company using new US technology to unlock hydrocarbons in onshore Europe. "We're a private company, we've got approximately 1.3 million acres in Poland, and we have activities in a number of other European countries, including Ukraine."
Mr. Messina explained that the founders of Hutton had an enormous amount of first-hand experience in the US and in Canada and were involved in the early plays in the Marcellus shale, experiences which were replicated in Canada.
"We're looking to use those same experiences - good and bad - to unlock some of the potential here in Europe. Obviously, the situation's very different; some of the opportunities are greater in some respects, but some of the challenges are far greater as well. So it's really a completely different strategy that we're using; the strategy we're using to identify the rocks is the same, but the strategy to turn that opportunity into success is much more difficult and, in some cases, will take much longer," he noted.
There were lessons to be learned from Ukraine's immediate neighbors as well as from other countries in Europe further west, according to him.
He spoke of Hutton's 1.5 million acres which were at various stages of activity in Western Europe.
Messina recalled, "It's interesting that, within about a 12-month period from mid 2009 to mid 2010, we started this process of developing those assets."
Pointing to a slide in his presentation, he said there had been no activity at all in that area. Moving further to the east, into Poland, which he said had the same starting time, there had been more success. "We've been able to get on and develop some of the assets," he said.
"What we have now, across Europe and globally, is an enormous amount of opportunity which has been unlocked by the technology that's been developed - horizontal wells and fracking - that has really changed the exploration game globally. What we have now is lots of opportunities where different companies are focusing their interests and their assets and their money.
"It's a competition," he continued, "as we haven't seen this level of activity in the oil and gas sector for many many years. All of a sudden we have companies gearing up - the majors as well as smaller companies - trying to prioritize where they do their work and where they spend their money."
Western Europe, said Mr. Messina, was obviously not very attractive for the moment; Central Europe had been the site of activity, like in Poland, and what he termed the "emerging eastern area" which included Ukraine.
"The country that enables some of those things to happen with minimal resistance is really going to come out ahead," he said.
"There's an opportunity there for Ukraine while Western Europe works out what it wants to do with its onshore oil and gas, but I'm not sure how long that will last. Once a policy decision is made in that area, I think we'll see things change rapidly," Mr. Messina opined. "So, we really do have a window of opportunity here to be attracting players, companies and money to develop some of these resources."
Looking back on the activity in Poland since 2009, he reported that about 40 wells had been drilled, of those about 10 had been fracked, with only 2-3 horizontal wells having been drilled and fracked. "That's an enormous increase from what's been happening in the last decade, but it's a lot less than what actually needed to be drilled in that same period to develop Poland as a reasonable success story. And while it has the rocks, although the proof will be in the pudding, it has the stable political environment - it's part of EU - it doesn't have a regulatory framework that enables the oil and gas industry to be able to develop the asset.
"So while Poland got a 3-year head start on Ukraine, it still has another 12 months before the new regulations will be imposed, which would enable the industry to move ahead at a pace that it needs to. So, again, there's an opportunity."
There was an enormous hydrocarbon opportunity in Poland, Messina said, but "unless we can drill the wells, understand the regulatory environment, it doesn't matter what kind of will, money, expertise that companies have, you cannot develop the opportunity."
He called it particularly frustrating" as an operator and said this was an opportunity for countries like Ukraine to quickly develop and build off of the exciting news in the country over the past six months.
In terms of what Hutton Energy was doing in Ukraine, he explained that it was in a joint venture with Iskander Energy, a Canadian company with a similar technical team that was taking Canadian experience and transferring it to opportunities in Ukraine.
"Recently, it was announced that Shell has been awarded a PSA and I think it's been a big milestone for Ukraine to make progress on PSAs - it's been a long time in coming. What it does at a domestic level is start to bring some of the service providers in country that Ukraine currently lacks. And it really is the bigger companies - Shell, ExxonMobil, Chevron and others - that provide the critical mass to move the service providers, a key part of any developing industry."
He added that the services necessary were quite specific and required new rigs and a whole range of infrastructure to support them.
"From a global perspective, Ukraine is now being taken more seriously as far as the opportunity it's presenting within the oil and gas sector," he said of the arrival of the IOCs. "And I think that's a big step forward from the last decade."
With Iskander acting as the operator for Hutton, a well had been drilled last September, reported Mr. Messina.
"While the process took a little longer than anticipated, it was nice to just be able to get something done. In other parts of Europe we can't do anything with similar licenses. While some of the processes can be improved, it's refreshing to know that with hard work you actually can get work done in Ukraine. I think the challenge is improving those processes as quickly as possible, so that you move past some of your competitors, seeking attention form the international oil and gas industry and finance industries to help you develop those assets."
He said that community engagement was a critical part of getting anything done, regardless of the country. "Unless you have regional support, education, you won't get your well done on time or without any problems," he explained.
"Ukraine is like anywhere else, you can make things happen, but can only get community support if you invest the time, education and resources at a community level," he said.
Regarding exploration, he said it was up to the government to provide the appropriate environment, including the fiscal environment, political stability, regulatory environment (which he said was more critical than the other two).
"If you can prove up the asset, you can take a higher risk on those other two issues; if you can't get any work done, you can have the best fiscal environment, most political stable country in the world, but if you can't prove your asset you have zero value," he explained, saying there were lessons to be learned in Ukraine's neighbors..
From 2005-10, he recalled that North America had created an environment of those three things.
David Messina concluded, "It's about creating the right framework and I think that's absolutely critical. The country that does that first will be able to capitalize on what is a growing focus in the sector at the international level into onshore unconventional development. Obviously the rocks need to be there, but the money will go where it can be invested quickly and efficiently, and the first several countries to do that will maximize the short-term opportunity we're seeing in unconventional gas development."