Ukraine Can Be 75% Energy Independent in 5 Years, Says Alan Apter

Natural Gas Europe had the pleasure to speak with Alan Apter, Chairman of the Board of Directors at Burisma, an independent oil and gas company, operating in Ukraine since 2002. Apter said that Ukraine’s gas production can easily increase under two conditions: i. the success of tight gas, ii. a stable and predictable regulatory regime and political context. “It is just a question of whether you have a repeat of what we saw with Yushchenko and Tymoshenko, who were never able to function together as a team, and therefore laid the ground for Yanukovych to come back. Will that happen? So far, it is looking positive” Apter said.  

Your company recently sponsored an event in Brussels, what are your three main messages?

Well. One is that if Ukraine has the right regulatory and pricing taxation regime, Ukraine has a lot of gas to develop on its own. To do so, you will need to foster the private sector involvement, both with independent companies like ours but also with the international majors. Second that Ukraine will never be entirely free of imports, but that the support of the EU in creating some flows from the West has worked well to Ukraine’s advantage, encouraging Gazprom to be reasonable with Ukraine and the EU to create some price tension there. Having said that, we would like to see a situation where Ukraine is paying European market price, and add a premium to that from both the East and the West.  Third that eventual privatisation of the state monopoly is going to be critical to reach the maximum potential for the sector and hopefully that will be on the political agenda.

So you see coordination between independent companies and Naftogaz? 

Yes, we do.

So what are the obstacles and hurdles there?

Well, first, things have improved very significantly over the past year to where when the government first raised the extraction tax so dramatically and then for a period said that all industrial consumers had to buy from Naftogaz and not from the private sector. Since those days, the dialogue has improved significantly. I think its effort on the part of both parties: the president, the prime minister, Naftogaz and the private sector. It is up to all parties to have a regular dialogue and reach a resolution that is fair to everybody.

Let’s imagine a case of unbundling, privatisation and a new tax law. How would you see Ukraine. Do you think that, in 5-10 years time, Ukraine might be 75% energy independent?

I think so. I think that the only caveat is that, because that would require the input of non conventional gas - tight gas which is somewhat easier to extract than shale, if tight gas does not prove viable, it is a different story. 

How does Shell come into this picture? 

Well, you have to follow the press on that. Some reports suggested that Shell at this stage would prefer to exit. I think that could change if the elements [unbundling, privatisation and a new tax law] were all right.

So, you don’t think it is a problem of exploration and production. Do you think that Shell’s decision is related to the regulatory framework?

Yes, I think there needs to be a greater political stability in the country, and greater certainty and predictability of regulation, and then there should not be a reason why if not Shell, other international majors, are interested.

You are basically saying the future of the gas industry in Ukraine depends on the stability of the government itself, right?

Of course.

Do you see it as a likely scenario, or do you think there might some elements, some factors putting this stability into question?

Well, it is always difficult to predict politics, but the two key parties represented by the President and the Prime Minister, while they have their differences in opinion, have seemed to function  reasonably effectively together. Well, if that continues, or one of those parties gains more dominance, I think so. The former Party of Regions, which had been Russian leaning, is pretty much a spent force. It is just a question now of whether you have a repeat of what we saw with Yushchenko and Tymoshenko, who were never able to function together as a team, and therefore laid the ground for Yanukovych to come back. Will that happen? So far, it is looking positive. 

In case of a Nord Stream II project, in case Ukraine was put aside in terms of transit routes, the Prime Minister of Ukraine said that the country would lose something like 2 billion dollars a year in revenues. Do you think that this might positive news for independents, for companies like yours? What’s your personal view on the declaration of the Prime Minister?

I am not very deep into that, because my focus have been on our company, which does not look to exports. I would guess that this process would take time. I also think that the two countries - Russia and Ukraine - will always have an interest in maintaining stability between them. I am not sure the transition will be a very fast one, but again the transportation is not an area I am an export of.

Going back to the upstream, what about Eastern Ukraine? Do you think that the fields in this part of the country, which is obviously rich in gas, would be used?

Of course. Yes, they have been absolutely active, because the great majority [of those fields] is just west of the demarcation line.

Yes, but that is also the region where a couple of months ago we saw some political problems between the central government and the regional government.

Well, I can only say that, from the point of view of operations, they continue all along.

What’s your view, what are you asking, and what are you trying to achieve there?

Just to have clear rules of the game, and to recognise the role that the private sector can play in helping Ukraine achieving energy independence. 

What about your plans? What are your targets and timelines?

Well, we have dramatically increased our production over the past five years. We have gone from something like 2 thousand boe a day to 14 thousand boe a day. 

You are saying you increased your production seven folds in the last five years?

Obliviously right now we are doing less investment, because with the current taxation regime, it is hard to make the proper return. We demonstrated that, as other colleagues in the private sector, we can bring to bear the latest technology, the most efficient production. So we hope that the government will, by next year, have put in place a tax regime that takes into account the government’s interest, but also enables us to make a sufficient return that we and the other private sector producers can ramp up again.

Are you also asking them to discount and to consider the political risk?

No, we as a Ukrainian company, unlike the international majors, we are there, we are going to operate, we are not leaving. We are used to deal with that. Our company already went through Yushchenko, Tymoshenko, Yanukovych, so we continue to plot ahead as long as we can make a decent return on our investment. 

Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci