Ukraine E&P: The Tale of Vanco
There was a smile on the face of Dr. James Bown, President, Vanco Prykerchenska (VPL), as he recalled his last appearance at the Ukrainian Energy Forum. "It was almost year ago to the day, I stood on this spot and promised I'd return to give you an update on the Prykerchenska project, so here I am."
His smile was likely one of relief, following Vanco's trials and tribulations in their exploration project in the Black Sea Region of Ukraine.
VPL’s original production sharing agreement with the Ukrainian government was signed in 2007 to explore and develop oil and gas deposits in the Prykerchenska block. Changes to the Government meant a revoking of the agreement, which resulted in years of international arbitration. Now, it looks like things have finally been patched up and VPL can move forward, according to Dr. Bown.
"This year I can give you the very best news," he said.
"On the 29th of November 2012, Vanco Prykerchenska and the government of Ukraine signed a settlement agreement that essentially ended our long-running dispute."
Straight after this, the Stockholm Arbitral Tribunal issued a Consent Award, which incorporated the settlement agreement. "Under the award, there were no winners, no losers, and everybody ends up friends. The Consent Award was issued on 28th of December and officially closes the arbitration case. What's next is that we're going through the legal formalities to complete the entire process of the settlement agreement, which should be completed by the end of March 2013," explained Dr. Bown, who added, "So, my dear friends and colleagues, we've done it."
He described the reaching of the settlement as a "triumph of patience, persistence and determination," characteristics which he said oil and gas investors or indeed any investors in Ukraine needed to possess or develop in order to establish successful businesses.
What had made the difference after such a long stalemate? he asked.
"Firstly, the government led by Prime Minister (Mykola) Azarov proposed back in Q2 of 2010 that VPL and the Government should start discussions that would lead to an amicable solution. We said from the beginning that we didn't want to arbitrate; we wanted to negotiate. But repeated requests fell on deaf ears, until the Azarov government came in," explained Dr. Bown.
"Secondly, the Government clearly turned on what I would call 'political will' to get things done in the energy sector.”
He said it was still a continuing process, but welcomed the signing of Shell's PSA and the expectations for Chevron and the ExxonMobil consortium.
"It's no longer VPL out there alone to be shot at," he remarked. "We now have some very big friends around."
He then offered some background on VPL's Prykerchenska Project, recalling that some considered the Black Sea the last great unexplored deepwater oil and gas region on earth.
Then, Dr. Bown presented an 'elevation model' of the Black Sea, revealing the great differences between its shallow and very deep waters. He indicated where VPL's Prykerchenska Block was and said it comprised 13,000 square kilometers.
"It's worth remembering that the Prykerchenska area is still the only hydrocarbon area of Ukraine’s Black Sea that's covered by a signed production sharing agreement."
According to him, VPL's original concept for exploration of the area was that it would be an 8-year program that progressed in three phases and included one year of shooting 3D seismic, and the drilling of six deep water exploration wells.
"In those days," he recalled, "we estimated that the exploration would cost around $330 million."
Then, he presented what he said was VPL's current thinking.
"In the first three years, we estimate that, in Year One when we'll be shooting 3D seismic, it will cost $40-60 million. Year Two we'll be processing and analyzing that and selecting two well locations, and Year Three we have to drill two wells - so that's the first 3-year period. We're estimating now that each deepwater well will cost more than $150 million.
"Do remember that if there's no commercial hydrocarbons as a result of that well, there's no asset value - it's all losses," he added.
Dr. Bown said that based on global statistics the chances of success of the planned wells was no better than 17-20%. "It's an extremely risky and extremely expensive business only doable in Ukraine within the framework of a PSA; there's no other way of taking those risks," he explained.
He said that that situation had not been helped by recent experience in Turkish waters of the Black Sea: deep, expensive wells had been failures.
"So we have to be brave, we have to know what we're doing and analyze things in great detail to move forward. Nobody said the exploration business was easy, but it's certainly dramatic and exciting."
He reported that the Prykerchenska Project had an initial 30-year life with a 20-year extension option, and that the state would get about 70% of the total value of project, but without fronting any money or taking any risks.
Dr. Bown concluded, "Vanco will get somewhere around 30% - that seems to me to be a very good deal for Ukraine. A successful Prykerchenska Project will obviously lead to more and more exploration of the deep waters of Ukraine’s Black Sea.
"Ukraine's deep Black Sea will make a massive contribution to the country's energy independence and to its economic security."