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“Ukrgasvydobuvannya is capable of doubling gas production,” Oleksandr Romaniuk

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Oleksandr Romaniuk joined the team of NJSC Naftogaz with a background in business in 2015, when he was appointed Chief Operating Officer - First Deputy Chairman of the Board of JSC Ukrgasvydobuvannya (UGV). He then worked as the Head of the Exploration and Production Division of Naftogas Group, managing exploration and production of hydrocarbons at UGV fields, the Black Sea shelf, Chornomornaftogaz, and NJSC Nadra Yuzivska. From May 2022 to January 2023, he held the position of acting Director General of UGV. During the full-scale war, the company achieved one of the lowest production decline rates in the industry – 3%, having produced 12.5 bcm of Ukrainian gas in 2022.

Watch the full interview on YouTube:

Oleksandr Romaniuk revealed the most pressing issues facing the industry and its transformation. He explained how the war affected gas production and what challenges he and his team were able to overcome. He assessed the prospects and future of Ukrainian gas production in the context of global challenges and Ukrainian opportunities.

When did you start reforming the gas production industry, when were we on the right track, when did we make mistakes, and where are we now?

In 2015, when I joined Ukrgasvydobuvannya and the new management team of NJSC Naftogaz of Ukraine, the company looked as follows. The reserves portfolio of UGV was completely depleted with no material resources for exploration. For 10 years before 2015, the company had been losing special permits and receiving nothing in return, and was operating at old fields with an efficiency far below that of foreign companies operating at similar fields.

The company was closed to new technologies. Firstly, there were no funds. Secondly, the equipment used back then was mostly Soviet, obsolete and outdated. These were drilling rigs with an average lifespan of 33 years, several broken coiled tubing units that were kept behind a fence and not used, as was the case with the HF (hydraulic fracturing) fleet.

There was no industry-specific software, without which it is impossible to minimise risks and carry out exploration and development of fields in the modern world.

What do we have now? The situation with the resource portfolio has changed completely. Today, UGV has the potential to double its resources. This is the most important thing, because the value of a production company is determined by geology, resources, which can then be converted into reserves and subsequently extracted from the confirmed ones.

The technical base and technologies have been completely updated. We now have the modern fleet of onshore drilling rigs, the most powerful in Europe. The fleet includes 20 new powerful drilling rigs that can drill to a depth of 7 kilometres. We have fully modernised 15 old rigs, which drill to certain depths with the same efficiency as the new ones. In addition, 5 more old rigs have been updated and put into operation. The production is fully equipped with software complexes. More than 40 computer programmes have been purchased and implemented for use by specialists at all stages of the exploration and production value-added process. Each programme has a sufficient number of licences to work effectively with it.

Our commercial drilling speed per rig was 250 metres per month in 2015. Now we have reached over 1,000 metres per month. This is not the end, as there is still room for further development.

Today, UGV has a powerful fleet of new coiled tubing units. We also engage service companies to provide coiled tubing services. While in 2015 there were zero coiled tubing operations, now there are hundreds of operations, without which it is impossible to work with any well.

In terms of hydraulic fracturing, we have made a local breakthrough. Previously, five HF operations per year were standard practice. Now it is more than 100 per year, and in the future we have to increase such operations many times over to complete horizontal wells. After all, this is the only way to extract a large number of reserves that were previously considered unrecoverable.

And, of course, personnel. During this time, the company has opened up to specialists with foreign experience. Today, the company’s employees speak different languages and work with all available modern technologies. Though not all of them are yet widely used.

If we compare the work of UGV now and 7-8 years ago, we will see a very big difference. Today, we have a modern, up-to-date technology company with a fairly high level of digitalisation of production and service processes, which effectively operates the fields on its balance sheet. Yes, these are fields with more than 80% depletion, mostly discovered in Soviet times. But their management efficiency is no worse than that of similar companies abroad. It is measured by how much of the fields’ remaining reserves are extracted each year. This figure ranges from 3% to 10%, depending on the size of the field and the stage of its depletion.

In the interests of the Kremlin, Viktor Medvedchuk once developed a vigorous activity to block hydraulic fracturing and supply of coiled tubing machines for periods of 10 to 12 months.

Our enemies – the Russians – have been blocking gas incremental production in Ukraine throughout the entire period of our independence. They lobbied for the resignations of Ukrgasvydobuvannya’s Directors General, who were increasing Ukrainian gas production. For example, Illia Yosypovych Rybchych. They blocked our exploration attempts in the Kerch Bay area back in the 2010s. They blocked Shell’s work on the Yuzivska square. They also interfered with the work of UGV at the Sviatohirske field in 2018.

Gazprom financed all these “Ukrainian” environmental protest groups that marched with posters saying “Shale gas will kill Donbas”. And not only in Ukraine, by the way. Similar groups have blocked shale gas production even in the USA, Poland and many other European countries. Meanwhile, 10-13 thousand hydraulic fracturing operations were carried out in Russia every year.

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At the time of 2013-2014, we had reduced the extraction of residual reserves since 1989 to 0.5-1%. That is, we extracted only the gas that managed to come to the surface on its own. Here, the growth was a multifold. What about increasing production? This is the main issue that constantly bothers the management of NJSC Naftogaz of Ukraine. There was a lot of speculation about the 20/20 Programme. In my opinion, this programme resulted in new equipment, technologies, and thousands of engineers. But I want everyone to hear what was right and wrong with the 20/20 Programme.

Actually, I came to UGV because of the task of incremental production increase. Otherwise, there would be no point in wasting time and effort. The issue of systematic production increase was urgent in 2015, and it is still so today. But there were periods of production decline.

Because of the war started by russia against Ukraine in 2014 UGV temporarily lost 6 fiels in East of Ukraine producing about 200 mln m3 per year. In 2015 we developed the vital 20/20 Programme aimimg to produce 20 bcm of natural gas in 2020. In fact, we said that we could increase production at old fields. In addition, a number of new fields could be discovered during this time if UGV will be given by the state 20 new exploration areas every year. That is 100 areas in 5 years, where the company would discover up to 30 new deposits/fields, according to average discovery rate in the area. And we would put these new fields into production.

What happened in reality? Instead of 100 exploration areas, we received 7 in 2016 and another 10 in 2017-2018. That is, we received a total of 17 special permits, and at the same time, received up to 70 repudiation from the Poltava Regional Council. Back then, the procedure for obtaining special permits for exploration required voting by regional councils. In other words, the Poltava Regional Council actually refused to allow UGV to carry out activities aimed at large-scale development of the region’s economy. They called it a “barrier for UGV”.

However, it should be noted that since 2015, 17 new small deposits have been discovered. So UGV has done its job.

But the main problem is that the five-year production increase programme was suspended after the third year of implementation in early 2019. Therefore, it is impossible to consider its results in full. Nevertheless, in 2015-2020, the total production volumes at the existing/old fields were 93% of the planned ambitious targets.

I know we have a lot of critics. However, to increase production, one need to carry out a comprehensive professional analysis, create a systematic programme, think everything through for 5 years ahead, allocate funds, engage required specialists and work hard day and night. Therefore, the effects of the 20/20 Programme and its results were positive, even though it was basically stopped halfway through.

It should also be said that over the past 8 years, the attempts to increase production have been hampered by the lack of government support and the unsuccessful transformation of the operating model of the Naftogaz Group’s subsidiaries. Finally, very frequent changes in the top management of Naftogaz were also a hindrance. For example, three chairmen of the board of Naftogaz and five directors general of Ukrgasvydobuvannya have changed during this time. This is not the way the system can work, and it is unacceptable in normal private companies.

What’s wrong with the operating model of subsidiary management at NJSC Naftogaz of Ukraine?

The change in the operating model of management at Naftogaz Group was intended to improve efficiency. Unfortunately, this did not happen. It is not forbidden to make mistakes. It is forbidden not to correct them. What happened? This transformation was implemented but not subsequently cancelled. I have always been a critic of this system, because it was clear to many that this system had flaws that would lead to a deterioration of the situation. Because each daughter company of Naftogaz was divided into 10 parts – into 2-3 divisions, which had their own managers, and into 7 corporate functions. In other words, 10 people were responsible each for 1/10th of the company, and all the staff in this vertical were subordinated to them. Now the most important thing is that none of these 10 people reported to the director general of any subsidiary. They each reported to their own manager at Naftogaz. This meant that the director general in charge of the company could not dismiss these people – in fact, his deputies – or hire them, or invite them to a meeting. Their work was evaluated, they were rewarded or fired by managers at Naftogaz. In other words, the manager in charge of gas production could not make the decisions necessary to meet production targets. The decisions were made by people at Naftogaz whose motivation was not linked to increasing production. To this day, some people are responsible for production, while others make decisions instead of them.

This system needs to be changed. Thank God, Naftogaz has a new Supervisory Board with a majority of independent members, which should immediately cancel the regulations on divisions and corporate functions and give the daughter companies more autonomy. This is what tied up and reduced the efficiency of the Naftogaz Group 5 years ago. This mistake has not been corrected yet.

Moreover, when this transformation took place, the management boards of daughter companies were abolished, and they need to be restored. It is impossible to effectively manage such large companies without boards. It was also a good practice for the heads of daughter companies to combine their positions as members of the Naftogaz management board. This way they could speed up shareholder level decisions on their companies. Due to current management system in Naftogaz, UGV is losing production. Because of this, other subsidiaries also have performance below their potential.

Let me draw an analogy. Can you run a marathon with your shoelaces tied together? You can, but what for? If you can simply untie these shoelaces! Now, Naftogaz continues to run with its shoelaces tied.

Yurii Vitrenko, when he returned to Naftogaz, promised to change the system, and he did it partially. But it does not work by half or by a quarter. Divisions were cancelled, but the matrix structure with uncontrolled corporate functions remained. This system works at Shell, which is present in 50 countries on all continents of the world. They need this to exploit synergies and learn from mistakes. If a disaster occurs in the Gulf of Mexico, it is urgent to share information and experience so that the same thing does not happen at a field in another part of the world. We have synergies between Poltava and Kharkiv regions. What are we talking about?

Everyone has long understood that this is a mistake. But there is no will. I heard a saying: “If we close Naftogaz, production will increase”. I agree 100%.

There is also a big problem with personnel. This year alone, six qualified and experienced top managers left Ukrgasvydobuvannya. The outflow continues.

Under the matrix management system of NJSC Naftogaz of Ukraine’s subsidiaries, decisions are made in a very complicated and time-consuming manner. How much time does Ukrgasvydobuvannya’s management spend on paperwork and approvals?

Often half the time.

Is it simply because of an inefficient management system?

The fact is that under such a system, some people are responsible for results, while others make decisions instead of them. The latter often do not understand gas production issues. This is very irresponsible and inefficient.

It is understandable. We just need to let the experts work. Let’s get back to the resource portfolio. Does Ukraine have any gas reserves that these professionals can use to increase production?

The phrase about old fields that are already in the state of a squeezed lemon is 100% true. Old fields can only see production decline in the future. They can no longer even maintain a production plateau. This decline can only be compensated for by newly discovered fields and deposits. This is why it is now the most important issue for the state in the oil and gas industry.

What is the most important thing that has happened in terms of the resource portfolio? Firstly, the resources have been reassessed. When the full-scale invasion began, we focused on the centre and west of the country. The Carpathian region is not fully explored, with less than 10% of the territory having been seismically surveyed. This is in contrast to the Polish territory, where 90% is covered by 3D seismic. There is a potential to increase the resource portfolio by tens of billions of cubic metres, possibly up to 60 bcm.

Next, we have the Black Sea shelf, which we have finally received from the state for exploration. We have already done a lot there. We managed to carry out 3D seismic surveys on 5,000 square kilometres to 14 km in depth on the shallow shelf before the start of a full-scale war. There is a potential and prospect of increasing reserves from 70, possibly up to 100 bcm. We have already identified the first drilling targets. We need to return there immediately after the Victory.

Unfortunately, we did not have time to carry out seismic surveys on the deep water because of beginning of full scale war against Ukraine. However, experts believe that natural gas reserves there may amount to 300 bcm or more.

For comparison, UGV currently has only 240 bcm of residual gas reserves. But they cannot be recovered in 10 years, because these fields are up to 90% depleted. These reserves may only be extracted during  many decades by booster compressor stations.

So, what has happened over the past year? UGV was limited on water and in the east, where there was the greatest potential for growth. However, an integrated team of Ukrainian and foreign geologists compared in detail the rocks, rock and geological conditions in the Ukrainian and major fields in the US Texas. They confirmed that the UGV fields have promising gas resources that are identical in their characteristics to the gases that are being produced in the USA at a huge rate. These are the so-called “unconventional gas reserves” or, as we used to call them, “hard-to-recover gases”. This is because it is impossible to extract these reserves using old vertical drilling technologies.

As a result, we have estimated the potential for reserves growth of over 200 bcm in the UGV licenced areas where we are already operating. These reserves are no less than the existing ones, but they are not currently on our balance sheet. This is the same gas. The difference for production is only in three main parameters: porosity, permeability and rock brittleness. Conventional gas is located in a cavity underground, from where it is lifted through a vertical well. Unconventional gas is produced using another more expensive technology of directional drilling and hydraulic fracturing. These are fields that have special permits, licences, 3D seismic, many vertical wells and surface facilities. Last year, we prepared six wells for pilot drilling, and this year we were to drill three of them.

In my opinion, there is nothing more important for the state and Naftogaz in the gas industry than testing and drilling pilot wells in these unconventional deposits. After all, this could double UGV reserves. If we look at the entire Dnieper-Donets basin, where these resources are located, the potential for reserve growth is more than 1 tcm.

A similar story happened in the USA, where gas was also produced from conventional fields. Over 60 years, large companies depleted them and sold the fields to smaller market players. The latter have developed the technology of hydraulic fracturing and directional drilling and proved that it is possible to effectively extract reserves that were previously considered unrecoverable. Over the past 15-20 years of the shale revolution, America has transformed from a gas and oil importer to an exporter. Over these years, unconventional technologies have produced many times more gas than 60 years before using conventional methods.

Therefore, I am confident that Ukraine’s gas potential is the largest in Europe. We can talk not only about Ukraine’s energy independence, but also about ensuring the stability of energy supplies to Europe.

Let us return to our unconventional reserves of 200 bcm. Very simplified high level illustration. In order to extract them, we need to drill up to 500 wells over the next 10 plus years. Each well will produce up to 400 mcm over its life cycle. To drill this number of wells, approximately $10 billion is required. In order for the project to become self-financing, it is necessary to make a pilot, prove the concept and invest up to $1 billion. At the market price of natural gas of $350 per 1,000 cubic metres, our 200 bcm of gas will cost $70 billion. This is the biggest engine of Ukraine’s economic development even in wartime. This is the growth path of Ukraine’s GDP.

This requires technologies that are not widely used in our country today. But they are widely used in the world, for example, by Halliburton. By the way, the company is one of the few that exited the Russian market by selling its business there for 1 ruble. It generated annual revenues of up to $1 billion. They also left $500 million worth of equipment in the swamps. This is what is called a principled position and support for Ukraine.

So, Halliburton engineers helped us design the pilot wells, because the design is very different from our vertical wells.

In order to launch a project, you need to start somewhere. Therefore, we have budgeted for drilling three horizontal wells this year. Unfortunately, due to the inefficiency of Naftogaz’s operating model, which we have already discussed, these wells are unlikely to be drilled this year. This is the biggest problem that the Company’s Chairman of the Board, Supervisory Board and members must urgently address. The financial plan needs to be revised immediately and funds need to be allocated for the pilot.

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Since Halliburton has left $500 million worth of equipment, maybe they can give us money for the pilot?

This is not a question for them. They are a service company, not a production company. Last year, we held negotiations with the largest US gas production companies to invest with us on a partnership basis, as this is their speciality. But the negotiations are still ongoing. Foreign companies are not ready to work under martial law. It is easier for them to increase production at home, pay large sums of money to transport LNG across the Atlantic Ocean and then liquefy the gas. It is many times cheaper to transport Ukrainian gas to Europe via our GTS.

It was also said that the US government was ready to consider financing this pilot directional drilling project in the amount of up to $250 million because they understood its importance. In fact, this is a regional revolution and a change in the energy balance in Europe. In return, the Americans demand clear things – full accountability, transparency, and compliance with international corporate governance standards.

That is, during the war, negotiations were underway with the US government to finance a pilot project for gas production from unconventional deposits. But everything came to a halt due to the lack of transparency and the American partners’ lack of understanding of how their funds would be spent. Am I understanding this correctly?

Yes, you are correct. But, in my opinion, the main issue is compliance with international corporate governance standards, which require the Supervisory Board to hold competitive selections for the positions of Chairman and members of the Board of Naftogaz and heads of subsidiaries. In general, I fully agree with you that it is unacceptable not to use this opportunity. This is a strategic direction and priority No. 1 in the gas industry of Ukraine.

It turns out that Ukraine has huge explored volumes of gas, and there are experts in production. We even received money for this. But...

I hope that the problems will be solved and the money will be there. It’s just that we all have a certain intolerance to failure. Everyone expects gas to come out of the first well. The Americans lost billions of dollars while testing this technology. We, of course, will not incur such costs, because the technology is known, but our geological conditions are somewhat different. In Ukraine, these deposits are 1.5-2 km deeper, so we will need to find the right recipe and apply this technology correctly. For these reasons, we need up to 10 pilot wells. We have to be tolerant to allow this to happen. Only with a sample of wells, six in our case, will the prospects be clear.

Why is it so important? The starting flow rate of each well that is being drilled should be 1 mcm per day. Imagine if we have 20 wells with a starting flow rate of even 0.5 mcm per day, the total is 10 mcm. This is a plus of 25-27% to the current daily production of Ukrgasvydobuvannya. This is an increase in production not by a few percent at the old fields, but by tens of percent. If we go further with those 500 wells I mentioned, we will have a multiple increase in gas production.

We are facing a large European gas market that is only 30% self-sufficient, meaning that Ukraine has a place to sell its gas. This issue should be at the top of the list in the Ukrainian economic development strategy. At least I don’t know of any other industry that can increase the country’s GDP to such an extent. We have everything we need for this. We just can’t put it together.

By the way, for every employee in the upstream oil and gas industry, there are more than 10 workers in related industries – oilfield services, construction, petrochemicals, etc. Without them, it is also impossible to produce and process gas. This is a very powerful industry that has a major impact on Ukraine’s GDP.

This year, the Supervisory Board of NJSC Naftogaz of Ukraine was finally elected. You have already told us what it should have done during this time. Why hasn’t anything been done yet?

Every new Supervisory Board needs a certain period of time to get to grips with things. So I think enough time has passed for them to start acting on these issues (change of Nagtogaz operating model and allocation of funds and attention to horizontal drilling on unconventional resources). It is clear that the Supervisory Board is always busy with a lot of issues, but they need to understand the Priorities by now.

What does the winter hold for the industry? What is the current situation with production?

The summer is over, and in terms of production, all efforts should be focused on the next year. After all, the results for 2023-2024 were set out in the plan back in 2022. This plan envisaged a significant increase in production growth. Let me remind you that last year UGV managed to maintain production despite the prolonged occupation of a large number of fields, destruction of production infrastructure and, unfortunately, loss of employees. But at the same time, the strategic foundations for the future were laid. First and foremost, we are talking about directional drilling.

In 2023, we planned to increase production by 6% to 13.2 bcm of commercial gas. We also plan to drill 370 thousand metres, which means drilling about 100 wells. In 2024, it was planned to maintain the same production growth rate (6%) to 14 bcm and drill about 400 thousand metres. All this was to take place mainly in traditional deposits. Starting from 2025, after testing directional drilling, we could talk about production growth of up to 10%. This was the logic after successful testing of directional drilling in unconventional deposits.

This year, we have excellent results in production and reserve growth that exceed our expectations. This is because the integrated geological team, which was quite difficult to put together over several years, laid down qualitatively new drilling sites in 2022 and, thanks to the good work of Ukrburgaz (a division of UGV), wells with starting flow rates of 500 thousand to 1 mcm per day were built. These were not isolated cases that led to the discovery of new gas deposits.

The production target of 13.2 bcm will be reached this year. But due to new discoveries, it could have been 200-300 mcm higher. However, this will not happen due to poor quality and slow decisions at the group level. Due to the untimely provision of materials, services and fuel for production. Due to repeated and massive idle time of drilling rigs. For these reasons, up to 50 thousand metres will be drilled less than planned. Similarly, there will be no gas from horizontal wells that should have already been put into production in the second half of 2024. Therefore, out of the planned 14 bcm of commercial gas for 2024, we will not receive 200-300 mcm. We will need to look for options to compensate for this.

The 50,000 metres that were not drilled cannot be compensated for. The lost drilling time cannot be compensated for even in 10 years.

You are absolutely right. However, it is important to understand that drilling over 320 thousand metres in 2023 will be a record for all the years of our country’s independence. Last year, UGV also set a record, as in March 2022, we resumed drilling the first well in Poltava region, although the situation was still very dangerous. That is why last year’s production was maintained and more wells were drilled than in 2021. These guys are great, because they can and know how to do more and better. But they are hampered by an inefficient management system.

When the war ends and Ukrainians liberate all their territories, where will Ukrgasvydobuvannya go first?

After the Victory, UGV and our industry will face a new round of development. Unconventional deposits have the greatest potential in the onshore gas industry. This is what can make Ukraine energy independent within five years. I believe that the industry will recover and gas consumption will return to pre-war levels. We will be able to supply gas not only to ourselves but also to our EU neighbours. There is also potential in the Carpathians and in the East – the Yuzivska square of more than 9,000 square kilometres and the areas provided for exploration under the production sharing agreement, where work has been temporarily suspended due to the hostilities.

The Black Sea shelf holds great prospects for increasing conventional gas deposits. But the offshore exploration is long and expensive. Research, exploration, development, and construction of wells and gas pipelines take 7 to 10 years. One exploration well on the deep water, which cannot be used as a production well, costs up to $100 million.

But it needs to be developed together with partners. By the way, we held negotiations and had several potential investors from Asia, the Middle East and Azerbaijan who were ready to join the development of the shallow shelf.

We also need to attract partners to develop the deepwater shelf. Our Turkish colleagues have recently discovered more than 500 bcm of natural gas on their shelf. Time will tell how much of this will become confirmed reserves, but the potential is very high.

Therefore, the most logical partner for us in deep water would be Turkey, as they have already created a fairly strong offshore oilfield services industry. In fact, our offshore gas fields are adjacent to each other. Together with our partners, we can reduce the cost of exploration and development of all fields.

On the border with the Romanian shelf, where Exxon Mobile made a discovery, a partnership with Romania is possible. It would be economically feasible to build a joint gas pipeline there that would go to Ukraine. Unlike the Romanians, we have an extensive GTS and could supply this gas to Europe.

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If the state cannot bring order to the gas production industry, would it not be better to put Ukrgasvydobuvannya up for privatisation and get rid of this headache?

Before UGV, I worked in the private sector, advising various companies, mostly foreign ones. From my own experience, I can say that in 90% of cases, a private owner is more efficient than a state-owned one. There were examples in Ukraine when a private owner ran large companies extremely inefficiently. But this is an exception. All over the world, private owners have better corporate governance, they usually have no corruption, they have no political agenda, and they work for maximum economic results.

Speaking about UGV, I believe that the fastest way to increase reserves and production drastically is to attract a strategic investor and partner. In my opinion, it is advisable to involve a North American company that has extensive experience in developing unconventional deposits.

A foreign investor will bring significant funds to the country’s budget for buying its stake in a state-owned company. Before the full-scale war, I estimated the cost of UGV at the existing old reserves to be up to $10 billion. At the same time, the company has a great potential for value growth if we add those 200 bcm of new reserves. This should be interesting for strategic investors. Plus, we have a buyer on our European border who has refused bloody Russian gas and is waiting for Ukrainian gas.

Therefore, to maximise the development of Ukraine’s industry and economy, we need to attract private foreign partners. Of course, this issue should be resolved by the parliament and the government. But I, as a former consultant for a large consulting company, would advise doing just that. It makes no sense to keep in state ownership something that is managed inefficiently, which hinders the development of the entire country’s economy.

Watch the full interview on YouTube:

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