Page 6 - FSUOGM Week 06 2020

FSUOGM COMMENTARY FSUOGM
Ukraine’s report card for 2019
Gas production fell last year, defying the government’s high hopes, and Ukraine remains heavily reliant on fuel imports
UKRAINE
Ukraine’s drive to become gas self- sufficient has hit a setback.
UKRAINIAN gas production slid 1.4% in 2019, despite efforts by authorities in recent years to encourage upstream investment and make the country energy self-sufficient.
Output totalled 20.7bn cubic metres (bcm) in the year, down from 21 bcm in 2018, according to data published by national gas company Naf- togaz last week.
Just over three years ago, the government announced an ambitious plan to ramp up national production to 27 bcm by 2020, from just 20 bcm. This target was seen as a stepping stone towards Ukraine eventually producing enough gas to fully satisfy domestic demand, and possibly having some spare available for export.
It became clear some time ago that these expectations were overly optimistic.
Ukrgasvydobuvannya (UGV), a subsidi- ary of Naftogaz and by far Ukraine’s largest gas producer, was to play a central role in the gov- ernment’s strategy. UGV set its own goal of pro- ducing 20 bcm of gas by 2020, up from 14.5 bcm in 2015.
UGV is set to fall far short of this target, pro- ducing only 14.9 bcm of gas in 2019, down from 15.5 bcm in the previous year. Many of the com- pany’s oldest fields such as Shebelynkske reached peak output in the 1960s and 1970s and are now nearing depletion. UGV had hoped to discover new fields to replenish reserves, but has com- plained that the government took much longer than planned to begin holding subsoil licensing rounds.
Ukraine finally kicked off its first licensing contest in March 2019, followed by several more later that year. Officials have praised the rounds for being fair, competitive and transparent. But they were met with only a tepid response from investors. A total of 43 blocks were offered, but only 28 attracted bids. And only four were won by international investors, despite Ukraine’s expectation that there would be considerable foreign interest. UGV picked up the lion’s share of the licences.
Nevertheless, these awards are very likely to lead to new discoveries, provided that operators adhere to their work obligations. Given the time- frame required to bring resources into develop- ment, though, this is unlikely to affect Ukrainian production in the medium term.
Private gas companies working in Ukraine
such as JKX Oil & Gas, Regal Petroleum and others notably performed better than UGV last year. Naftogaz estimates that they contributed 4.6 bcm of gas in 2019, up from 4.4 bcm in the previous year.
The decline in production was outpaced by a sharp fall in Ukrainian gas consumption last year, of 7.7% to 29.8 bcm. Naftogaz said warmer weather was to thank for this decrease. Gas and gas-derived heating supplies to households saw the biggest reduction.
Despite lower demand, Ukraine’s gas imports nevertheless grew by 35% to 14.3 bcm, as the country injected record volumes of gas into storage in preparation for a potential cut-off in Russian gas transit. This disruption did not occur, as Russia and Ukraine were able to agree a new transit contract before the expiry of their previous one at the end of last year.
Ukraine buys its gas from Slovakia (9.2 bcm), Hungary (3.7 bcm) and Poland (1.4 bcm). It has not bought any gas directly from Russia in more than four years.
Oil sector
Attaining independence from gas imports is seen by the Ukrainian government as a national priority. Of less pressing concern is the country's heavy reliance on fuel imports.
Ukraine was a major centre for oil refining in the Soviet Union. But in the decades since the country’s independence, most of its refineries have shut down, unable to compete with cheap fuel imports primarily from Belarus.
Ukraine currently produces petroleum products at two locations: the Shebelynka gas processing plant and the Kremenchuk oil refin- ery. Together these facilities produced around 900,000 tonnes of gasoline, 813,000 tonnes of diesel and 284,300 tonnes of LPG. However, this amounts to only 19% of the domestic fuel market, with the remainder supplied with imports.
There are currently no active plans to expand either of these facilities, or develop new refiner- ies. As such, the current state of affairs is here to stay for the foreseeable future.
Ukraine produced 1.99mn tonnes (40,000 barrels per day) of crude oil in 2019, up 5.7% year on year. This is not enough to cover domes- tic demand, and so the country buys oil from overseas, primarily from Azerbaijan.™
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w w w . N E W S B A S E . c o m Week 06 12•February•2020