Ukraine's Export Potential Faces Hurdles

(Corrects import volume, para 4)

Ukraine's reserves ought to make it a considerable gas exporter but the political will has so far been missing, the bureaucracy is painfully slow and changes to the tax regime have deterred investors, delegates at the IP Week conference in London heard February 22.

"A 55% royalty and selling only to [state monopoly] Naftogaz won't work. Nobody will invest," the CEO of independent JKX, Tom Reed, said. The rate has come down now but it is still unstable and still uncompetitive, he said.

While Ukraine's current production of 20bn m³/yr has barely changed since the break-up of the Soviet Union, before the discovery of Yamal reserves in western Siberia it was much higher and can be revived. The government is looking at annual output of no more than 27bn m³, but this could go up to 40bn m³/yr, Reed said, based on seismic analysis done on Ukrainian data in the US. This though would require US-style industrial hydraulic fracturing with shorter stages and proppants.

This would allow it to meet its 30bn m³/yr of domestic demand and export 10bn m³/yr. Instead, last year Ukraine imported just over 11bn m³, none of it contractually from Russia. Of that, Naftogaz Ukrainy imported 8.2bn m³ and other companies 1.9bn m³.

One of its licence areas, Rudenkivske, has 2.8 trillion ft³ of gas in place, he said; using US technology, the recovery factor would rise from under 2% today to between 25% and 50%; the lower end of that would mean over 600bn ft³ output, generating $3bn of revenue; "and this is not unique for Ukraine," he said.

The company still has some legal issues to sort out with Kiev, he said, but the aim is to "put it all behind us. There are a few details to tidy up" and then the company "will be ready for Rudenkivske." There may have been a lot of struggles but there is also a lot of money to be made, he said. 

Reed has held the post for almost exactly a year; the previous board was voted out in a cash-free coup by Russian and Ukrainian business interests. Since then, the company's offices in Kiev and Poltava have been raided by police, which JKX regards as harassment.

After the latest raid on January 24, it said it "supports the intention of the government of Ukraine as expressed by Prime Minister Volodymyr Groysman on 23 January, 'to declare war on everyone who hampers entrepreneurs creating new jobs and the government leading the country out of absolute poverty.'".

JKX has had setbacks in the courts too, pressing claims it inherited from the old management. It is pursuing repayment of excessive rental payments but in early February an international court rejected its claim for $168mn, awarding it just $11.8mn plus costs of $300,000, while finding that Kiev was in breach of some elements of a UK-Ukraine bilateral investment treaty.

In a statement February 7, Reed said the company "will continue to defend its position in the Ukrainian courts in all outstanding cases. At the same time, the company intends to begin a dialogue with the government of Ukraine in order to satisfy the terms of the award and reach a mutually beneficial outcome. We will call on the Ukrainian government to secure support in creating an environment in which JKX can execute its recently finalised field development plans, invest in gas production and assist Ukraine to achieve energy independence.”

JKX also has upstream positions in Hungary and Russia.

William Powell