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GAS PRODUCTION GROWTH CURVE IN UKRAINE. Should one expect records next year

Andrey Zakrevskiy,

Director General of NEWFOLK OGCC LLC

Gas Production Growth Factors 2013-2014

In the period from 2013 to 2014, private gas companies in Ukraine showed a 35% increase in production. Let us see into factors that tended.

Explaining this process, we often talk about the political factor as the key one. Actually, during this period, affected by circumstances, politicians lost interest in the gas business, and they stopped testing the industry to destruction. As it turned out, measures for the selective sale of gas for consumers, as well as the monopolistic position of Naftogaz, blackmail with insurance reserves, etc. were simply put on the shelf until later. During 2013, all this took a back seat, and private companies began to show significant growth in gas production.

If you look deeper into the situation, other factors can be identified. Besides the fact that during the year the government stopped playing with the legislation, production growth was preceded by two whole years of premium gas prices. Whatever they say, gas price in Ukraine at that time was one of the highest in the world and there were predictions of even greater growth. During 2011-2012, the price of oil was also going up and was parity-bounded.

Thus, the first factor of production growth is politics, the second one is the price.

The third factor, one of the shaping and connecting the first two, is that at that time the companies changed their owners. Owners replaced each other not only between the internal elites, oligarchs and business groups, but there were changes in the structure of companies that played the stock market.

At that moment, RegalPetroleum lost its licenses, which were purchased by another business group, the owners of KUB-Gaz changed each other several times. It is worth noting that every change of owner was followed by increase in production.

During this period, the leader of the Ukrainian oil and gas market was Poltava Petroleum Company, which showed an example of how to deal with Western investors, with the exchange, to interact with the government and the law.

Thus, the growth of 2013-2014 happened not coincidentally.

The last factor that affected the growth was the service market sufficiency, although it was preceded by the crisis of 2008–2009, which negatively affected the service companies.

A decade separates us from those times: at that time, the 3D machines were still fairly new, the pumps that Ukrnafta acquired were still in good condition. The number of services was sufficient to ensure the growth of private companies.

 

Why the problems still are with the implementation of the "20/20" program?

As it is known, Ukrgavydobuvannya’s plan figure was adjusted downwards in the current year. The main reason was the failure to receive licenses for new sites.

But why, in general, do private companies fail to largely increase their share in natural gas production? Mostly, due to poor supply of services. Old machines became outdated even more, cementing units of foreign companies were taken away, coiled tubing and fracturing fleets are broken and appeared on the territory of Ukraine occasionally until completely disappeared in 2014-2015.

What is happening now? At the end of last year, Ukraine accounted for 15 coiled tubing units. Now there are 20 of them. Until recently, no state-owned company had a single operating unit in. Now there are two dozen of them, and so now the improved recovery program is carried out as part of the projected measures. 

Now two foreign companies operating at Ukrgazvydobuvannya’s facilities have powerful fracturing fleets and, thus, this program is also implemented.

Why is the drilling program failed and why is the hydraulic fracturing program delayed? Upon tendering, during the year we were prohibited to import fracturing and coiled tubing equipment. Similarly, it was the delay with the conclusion of contracts with service contractors.

Now one can argue about whether it will be possible to complete the "20/20" program. In our opinion, one needs to drill only 12 million-plus wells to complete the program.

At the moment, Ukrgazvydobuvannya already has 20 modern machines, and maybe the program will be completed next year. Now daily gas production in Ukraine finally reached the level of 2014, that is, reached the peak we talked about earlier. Thus, Ukrgazvydobuvannya’s increase in production by 1 BCM overlapped the volume we got from Crimea.

Do we have an opportunity to get a 35% growth next year?

If it comes to Ukrgazvydobuvannya, the answer will be positive minus risks.

Risks, above all, are political. Next year there will be presidential elections and all these Chinese and German drilling rigs can be sent somewhere to the Sumy region, where they will be annexed as was the case with our platforms in Crimea. But this is the only risk.

Ukrgazvydobuvannya is currently strenuously solving the problems with underfunding. Ukrgazvydobuvannya team is up for jerk.

Are private companies ready to make a breakthrough in production?

This question is open-end. Private companies are now in the situation they appeared three years ago, they have zero growth, sometimes even negative.

Let us start with RegalPetroleum. We see that the sufficiency of financing and equipment leads to a 60% increase in gas production over the past year and a half. The company has enough services and financing to work effectively. But RegalPetroleum, with all due respect, is a small company.

Ukrnefteburenie, DTEK - their growth is also associated with the sufficiency of services and financing. How can they develop in the future? While it is difficult for us to imagine.

No qualitative changes, except for those taking place a year and a half ago, happen so far. A year and a half ago, growth was due to the arrival of the team of Ivan Gafich and Alexey Raptanov, which led to the discovery of new fields, an increase in the rate of drilling.

The arrival of the team of Vladimir Novikov played an important role for Ukrnefteburenie. With the arrival of Victor Dudzich at RegalPetroleum, four wells were drilled - two successful wells, another two - open to question. Adequate financing also worked out.

KUB-Gaz and PPC got into a situation of pullbacking from high standards. Consultants, who were paid tens of thousands of dollars, disappeared, and the new team, as practice shows, needs two years to prove themselves. KUB-Gaz got into the general flow of the development of Burisma, which no one can predict yet.

These companies, however, have enough equipment to grow. Will it happen next year? We would like to believe in good and wish PPC and Esco-Pivnich good luck.

As for drilling, Belarusians now cooperate with DTEK, Ukrnefteburenie interacted with Croatian contractors... who else? There is almost no one left to do that. At the moment, the most important drilling contractor is Igor Stefanishyn’s Ukrbursevis.

The machines of the Zasyadko mine also entered the market, one of them at USBC-1. But this is definitely not enough. Even for the eastern region of Ukraine.

New look at the oil and gas business

As for Western Ukraine, the company Horizonty shows the way for all energy companies. The reason is very simple. Companies that look at this business are calculating the risks and considering what they should do – take on agriculture, solar energy or long-term investments that will make a profit in only two years.

We see how the investment competition inside DTEK makes this company develop.

We observe the appearance of new service companies BTF-Coiled Tubing, UNGS.

We also see how Igor Stefanishyn, DC Ukrburservis, consistently develops his equipment stock.

Deflation of the cost of oil and gas workers in Ukraine

A while back, a large number of the oilfield services market specialists merged into Ukrgazvydobuvannya, resulting in private companies’ shortage of qualified personnel, which forced them to raise wages. Visa-free regime caused labor outflows from Eastern Ukraine, companies had to compete in wages not only with Ukrgazvydobuvannya, but also with Polish and Baltic companies.

A situation has arisen on the market when universities failed to prepare professional personnel, and private companies did not pay attention to skill improvement of low-level personnel.

Companies raised wages, lured workers away from each other, but the quality of specialists was still the same. The so-called deflation happened. Similarly, because of monetary deflation, the hryvnia costs more against the dollar just because it is not enough on the market. The same thing happened with the oilfield services market specialists. There are only few of them, they are expensive, but their efficiency is low.

Push-pull

Next year will be the year of elections, and companies that work in the oil and gas sector of Ukraine should understand that without attracting from abroad or creating their own new service companies and not trying to enter the private market to sell their own company for evaluation in terms of geology, managerial audits, etc., they tend to stagnation. Previous successes that occurred in the oil and gas market are all related to the resale and arrival of new teams, re-evaluation of the existing strategy, it was this re-evaluation that gave significant breakthroughs.

Now in Ukraine there is a need for curvature equipment: from MWDs to special programs.

Lack of nitrogen plants, a complete disaster with cementing units and with well cementing in general.

Well completion market is out of the development at all.

About 14 coiled tubing units are in short supply, there is not a single heavy snubbing unit.

Cable systems for geophysical work and selective perforation run short.

No specialized well development departments were created in state-owned companies and there are no such offers on the private market. And this is a significant piece of cost.

Modernization of Ukrgazvydobuvannya’s equipment for internal and external reasons is half done: blocking of tenders, non-flexible contracting policy and a lack of resources at the end of the year.

Now the management of the companies does not revise business processes and strategies. It seems to those companies that are growing that the strategy does not need to be revised, but there are assets that are not developing and need to be sold not in order to get some money for them, but only to see how much they really cost and that future investors show how to develop them. In this, in our opinion, there is potential for growth.

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