In a month, the heating season is to start in Ukraine. However, the date is subject to changes, and there are rumors already that its start may be postponed to November 1, due to the need to save energy.
“We have pumped 16 billion cubic meters of gas into storage facilities already. Taking into consideration the reverse flow from Slovakia, we expect the storage amount to reach 17.2 to 17.5 billion cubic meters by November 1,” Minister of Energy and Coal Industry Yurii Prodan said recently about the energy supply for the winter. Therefore, the official maintained there would be enough gas. The success of this project depends on the extent to which the planned reverse gas flows from Europe will materialize. We already have issues in this field.
Chairman of the board of Ukrtranshaz Ihor Prokopiv said that Poland had stopped supplying gas to Ukraine on September 10 due to reduced supplies from Russia. “The Poles ordered 11 million cubic meters for the day, but the Russians confirmed only 7 million cubic meters, that is, 4 million cubic meters less, exactly what we were to get in the reverse flow,” he told The Day. Prokopiv believes that the amount of gas required is really not that large, and the Polish side promised to find the resource in the domestic market in two days, so there is no threat to the Ukraine-bound reverse flows. In addition, he said, the consumption of the blue fuel had decreased in this country. “In connection with the events in the Donbas, including stoppages of the region’s industry, we have significantly reduced consumption. We consumed 73 million cubic meters of gas per day in 2013, but now the figure is only 47 million. Our forecast shows that should the reverse work, we will have gone through this winter more or less successfully. We should make it until April,” Ukrtranshaz’s chief concluded.
According to deputy chairman of Naftohaz Ukraine Oleksandr Todiichuk, Russia understands the effectiveness of the reverse flows, that is why it is blocking them. “It is too early to draw any conclusions about the Polish reverse. We will get a more complete answer in a few days. I think that everything will be okay. We all remember how hard the fight was in Slovakia. The fact that Ukraine has agreed on five billion cubic meters in the reverse flow from that country, increasing to eight billion in spring, signifies our victory,” he maintained. An anti-crisis committee was holding its meeting at the Polish Sejm’s premises on September 11, tasked with deciding on the fate of the reverse flow and responding to Russia’s actions.
Todiichuk believes that if push comes to shove, Ukraine will go through the winter successfully with help of gas supplied via LNG terminals.
“These terminals are now operating at 30 to 40 percent of their capacity. They can be turned on [to work at full capacity. – Author]. However, of course, it will change the price. The price will rise, according to the law of the market. Nevertheless, they are physically using their underground storage facilities,” he believes.
However, another source, looking more realistic, is increasing domestic gas extraction. “It is hard to do now, because the existing deposits are depleted by 70 percent and need considerable investment, amounting to billions of hryvnias. Naftohaz lacks this money, as utilities’ arrears prevent the company from contracting loans,” Todiichuk explained.
Chairman of the board of Ukrhazvydobuvannia (the largest state-owned gas extraction enterprise) Serhii Kostiuk told The Day that investment in gas extraction amounted to about 3.5 billion hryvnias per year, but it was not enough. According to his calculations, the industry needs 1.5 to 2 billion hryvnias in additional investment. However, they cannot get it because investors do not want to invest without a prospect of profit. “How can you make profit if your selling price is lower than production cost? Who is going to invest in this country? Creating new joint venture and selling gas to industrial consumers at the expense of domestic consumers? This is not an option,” he concluded. Kostiuk noted that the total gas production of his company was 15.1 billion cubic meters a year. Ukrhazvydobuvannia could easily increase the output by 1 to 1.5 billion cubic meters in two years, he explained, provided two billion hryvnias were invested.
Will the government increase investment in the source that offers the real chance of breaking Ukraine’s dependency on imported gas? Naftohaz managers can only shrug. As Todiichuk explained to The Day, it was already mid-September, but the budget bill had not been revealed yet, so it was not clear how much of investment the company could expect next year.
If the state company has its doubts about investments in gas extraction, the private sector has already determined that no money will come, thanks to an increase of taxation of oil and gas industry (bill No. 4309a), which cleared the chamber on July 31. Let us recall that its consequences include increasing the rate of mineral resource duty for deposits of gas at depths up to 5 kilometers from 28 to 55 percent while that for deposits occurring at depths exceeding 5 kilometers has been increased from 15 to 28 percent.
“Before this measure, our tax burden was about 60 percent. That is, if the revenue was, say, 100 hryvnias, 60 percent went to pay taxes, while 40 percent covered costs of developing gas production, purchasing new equipment and more. Now the tax component has reached 80 percent! Therefore, there will be no investment next year. Our investors have told us that they will not spend a dime more in this country,” general director of KUB-Haz (the third largest private gas producer in Ukraine) Serhii Panchuk told The Day when describing his company’s investment plans. When asked whether that meant that the company would not invest at all in 2015, he responded in the affirmative. “Where would we get money for it? The company will develop the already explored resources,” he explained. According to Panchuk, KUB-Has produces more than 1 million cubic meters of gas per day. He told us they had planned development spending at 400 million hryvnias this year. “However, we are, on the one hand, sucked dry by the separatists, and on the other, by our dear government. Both try to strangle us. They wonder whether we will survive. Clearly, they will get no gas with this approach,” KUB-Haz’s general director said in his conversation with The Day, when describing the prospects of domestic gas extraction industry.
This fact is confirmed by other companies. “Out of 2,000 of Ukrnafta’s wells, just 10 percent are gas ones. We have sought to drill as few new gas wells as possible for the past five years, even though theoretically there is potential for an increase in our company’s gas output. Why have we not increased it? Because of the lack of support from the government in solving some problems. Yes, Ukraine has high debit gas wells, but we cannot run them at full capacity, and operate them only in the winter when there is consumer demand. Why do we not run them at full capacity? To supply this gas, we need new pipelines, which requires land allocation. Corruption in this field is just awful. The state is to some extent totally disinterested in developing domestic gas production, and therefore does not lend its support when we need to solve many issues to improve extractive industries’ working environment, in this case for oil and gas industry,” deputy chairman of the board of Ukrnafta for drilling and geology Volodymyr Prokopiv told The Day when explaining the problems facing domestic production. According to him, Ukrnafta produces 1.9 billion cubic meters of gas annually. To increase production, it needed to invest a lot of money, he explained. “For example, one well is drilled for 1 to 1.5 years and extracts about 100,000 cubic meters of gas per day. If it is to matter, any increase should involve at least 10 wells that will give 1 million cubic meters of gas per day in combined output, or 350 million cubic meters per year. To develop so many wells, we need 1 billion hryvnias! It means we need to borrow it somewhere, which is especially difficult when the state support is as I have described it,” deputy chairman of the board of Ukrnafta for drilling and geology told us.
Government should provide comprehensive support to domestic gas production development instead of hiding its head in the sand, president of the global research center Strategy XXI Mykhailo Honchar believes. In particular, we have significant potential hidden in unconventional gas. Moreover, according to the expert, we should cooperate with Poland in developing it.
“It is so because Ukraine and Poland have the opportunity to create a kind of ‘methane belt of Europe.’ The current annual gas production rate of 25 billion cubic meters, of which 20 are extracted in our country, and 4 in Poland, can increase to estimated 59 to 155 billion cubic meters in 15 years. By the way of comparison, Gazprom is now exporting to Europe on average 150 billion cubic meters per year,” Honchar told us about highly accessible potential resources.
