Rising volumes of cheap European gas imports have put independent gas producers in Ukraine under pressure, leading to calls for a change in the country’s tax regime.
Gas import prices in Ukraine have dropped dramatically in the past few years, which have made the country’s domestic production uncompetitive, independent gas producers told delegates at the European Gas Summit in Dsseldorf on Tuesday.
Getting the government to embrace private investment has been a challenge, Philip Vorobyov, senior commercial manager at JKX Oil & Gas, an independent gas producer operating in Ukraine, told participants at the conference.
Ukraine paid an average of $200.70 per thousand cubic metres (Mcm) for the 3.41 billion cubic metres of gas it imported between January and July this year. This is much less than the import gas price from Russia, which averaged $430/Mcm for 2012 as a whole. Kiev’s dispute with Moscow over the terms and pricing of its 2009 supply contract meant Ukraine’s direct imports from Russia fell by 80% between 2012 and 2015, from 33 bcm to 6 bcm. Meanwhile, European imports rose from zero to 10 bcm, according to the Institute for Economic Research and Policy Consulting.
Vorobyov said international lenders, such as the International Monetary Fund, have been mostly focused on reforming Ukraine’s gas prices and restructuring state-owned Naftogaz.
Meanwhile, reform of the country’s upstream sector – to encourage domestic production with more attractive tax rates – has been lacking.
"If the government wants to reach energy independence by 2020, which is now an official target, it has to give the private sector a chance or [it] will fail," Vorobyov said.
Alan Apter, chairman of fellow Ukrainian independent gas producer Burisma, said domestic producers cannot compete with the increasing imports from Europe.
"We have to accept the new pricing reality, but [there needs to be] a taxation system for producers in place that enables them to live with the new reality and still make a reasonable return," Apter told Interfax Natural Gas Dailyon the sidelines of the conference.
Tight profits
Apter said profits for domestic producers under the current tax regime are "very squeezed, and returns [are] difficult to achieve" – a situation that is also discouraging international investors.
"There is a burden on the producers themselves to plough every bit of cash back in – which, given the political riskiness of Ukraine, is a brave decision," Apter added.
"It would be better to share [the risk of investments] with the international investment communities – but then you have to give them the appropriate return," he added.
Vorobyov agreed that the most significant challenge to increasing production is the tax regime, "which is not competitive".
Producers in Ukraine have to pay a royalty rate of around 29%, according to JKX. "Under the current pricing environment, this is pretty high," Vorobyov told the conference.
The Ukrainian Association of Gas Producers has proposed a 12% royalty rate. "This is [the] average around the world, and would put Ukraine on the map," Vorobyov added.
Increasing production
"Ukraine has already reduced its [dependence on imports from Russia and the EU] tremendously, but it [still] needs [to increase] its own domestic gas production – which is currently around 20 bcm/y – by a good 50% in order to get to 30 bcm/y," Vorobyov added, saying he expects Ukraine’s gas demand to reach that level.
There is much room for improvement in Ukraine’s domestic gas production, which suffers from a lack of investment and new equipment. The reserve-to-production ratio of Ukraine’s fields is around 50 years, according to JKX.
"This is a lot compared with 11 years for a field in the United States, for example. So there is tremendous scope for accelerating existing production," Vorobyov added.
Vorobyov said there was little drilling because investment and modern technology are lacking. "If we could have a tiny share of the technology from the US come to Ukraine, we could see an increase in production," he said.
Vorobyov said the combination of falling domestic gas prices and high production taxes made greenfield Ukrainian projects especially uneconomic.
"The netback on a greenfield project in Ukraine doesn’t cover the costs – applying a lower tax rate [such as] 12% would change that and could increase the interest from the private sector," he said.
With even conventional gas production facing a challenging time in the low price environment, unconventional development seems to be a pipe dream for now.
Apter said his company was interested in developing unconventional gas in Ukraine, but the oil price crash has upset its plans.
"[Unconventional production] is just off at the moment – we were looking at that [...] with the [former President Viktor] Yanukovych government – which also wanted to reduce reliance on Russian gas," he added.
https://interfaxenergy.com/gasdaily/article/22148/ukraine-independents-call-for-new-tax-regime