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Ukraine touted as next big shale play

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Above ground conditions could expedite shale development in Ukraine, although there are many risks to investment in the country, reports Jeremy Bowden

WHAT: Local operator JKX believes it could realise over US$3bn worth of gas sales by fracking its Rudenkovskoye field. 

WHY: The company has teamed up with oilfield services firm Schlumberger to carry out the work.

WHAT NEXT: Success on the project could spark a wider shale boom, as long as there is proper government support. 

Plenty of open space, established onshore gas fields, existing gas infrastructure and little local opposition: these are the key above ground characteristics that could make shale gas development work in Ukraine, unlike in the rest of Europe.

The country also has a pressing need for domestic gas supply to replace its reliance on Gazprom, following multiple disputes over payment, transit fees and delivery of Russian gas, in tandem with the on-going Moscow-backed insurgency in eastern Ukraine.

While it would initially mean selling into a cash-strapped domestic market, shale development costs have now fallen so far in the US that there is growing potential for low cost development elsewhere, provided the geology is right and licencing terms are not too severe.

The Ukrainian authorities have recently sweetened their terms, while for successful drillers, richer eastern European states could provide more lucrative markets further down the line. 

One company is now bringing in the experts. JKX, an independent operator listed on the UK and Dutch stock markets, already has a significant position in Ukraine, and is planning a series of hydraulically fractured wells in its Rudenkovskoye (Rudenkivske) gas field.

Rather than team up with a major, JKX has chosen oilfield services firm Schlumberger to carry out the work. “We have signed a contract with Schlumberger to stimulate 11 wells with multiple zones in the second and third quarter of this year,” JKX said in a statement, indicating the use of horizontal drilling, as well as fracking.

Schlumberger is expected to start the work this week before stimulating another 21 existing wells after the third quarter of the year. 

JKX went on to say that its newly reconstructed “Field Development Plan for Ukraine has revealed that using a modern, North American development approach for the Rudenkovskoye field could realise over US$3 billion worth of gas sales at today’s prices.”

The company added that “the size of this prize more than justifies taking on the many challenges facing our team on the surface”, a reference to lingering disputes with local authorities that have now been partially resolved.

Global expertise
Schlumberger, along with its leading competitor Halliburton, have built up considerable experience in developing shale gas and oil in the US onshore, normally alongside American independents rather than with oil and gas majors.

Costs have fallen sharply there since the oil price crash in 2014, allowing operators to make money at lower oil and gas prices. Some recently finished wells in the prolific Permian oil-prone shale region yielded 70% returns at first-quarter prices of just over US$50 per barrel, according to EOG’s CEO, Bill Thomas.

This is much more dramatic cost-cutting than was previously anticipated and is likely to lead to continued rapid growth in US shale output, which is already up sharply again this year after falling back in 2016.

OPEC itself has acknowledged that it expects non-OPEC output to rise 64% faster than anticipated this year, which will largely be driven by cheap US shale oil. 

Schlumberger has proved itself among the most successful purveyors of the US fracking revolution, which should raise the Ukrainian project’s chance of success.

It is not the first time Schlumberger’s shale expertise has been sought outside the US recently, with Argentina’s state-owned YPF teaming up with the services company for development work in the Vaca Muerta shale in April. Such alliances could displace the independents and NOCs’ traditional joint venture role with majors, which had been typical of major conventional projects.  

Critical access
In Ukraine, JKX’s wholly-owned subsidiary Poltava Petroleum Company (PPC) is one of the largest non-state producers of oil and gas.

Established in 1994, it initially focused its efforts on four fields located within the Novo-Nikolaevskoye Complex located in the Poltava region of Ukraine, where production of commercial quantities of oil and gas began in 1995. Critically, PPC continues to be the only non-state oil and gas company with a connection to the Souyez pipeline, which can transport gas directly into Ukrainian and European markets.

Beyond Ukraine, Poland and Bulgaria would be ready markets for the gas, with the governments of both highly critical of dominant supplier, Gazprom, and opposed to the Nord Stream 2 pipeline.

For those that are concerned about Gazprom’s market share and believe the EU should support the development of unconventional resources in member states, shale gas from the Ukraine could be the next best thing.
Late last year Kiev considered reducing its gas production tax from a maximum of 29% to 12% for new wells, in order to “make its gas sector an attractive destination for investors and stimulate gas production” – with the aim of realising its strategic goal of energy independence by 2020. 

It was only partly successful, however, managing a cut from a maximum take of 45% previously, to 29% for all wells now, which should still help encourage investment.

It is not the first time JKX has used fracking in Ukraine in partnership with Schlumberger. In 2013 the company confirmed the successful completion of a 10-stage fracking programme at its R-103 well. At the time, JKX CEO Paul Davies said that seven of the frack stages had achieved or exceeded design predictions.

Local difficulties
At the same time, JKX was involved in a dispute with the Ukrainian government. This hampered investment until a favourable court decision earlier this year improved the situation, along with the improved tax rates. JKX said the tribunal found that the Kiev government was in breach of agreements and had awarded the company damages of US$12 million.

JKX is seeking repayment of more than US$180 million in rental fees that it paid on production of oil and gas in Ukraine since 2011, after an increase of gas royalties from 28% to 55% and extension of the increase to 2015 (this has now been cut to 29%). 

The largest JKX shareholders include the Eclairs Group of Ihor Kolomoisky and Hennadiy Boholiubov with a 27.54% stake, and Glengary Overseas, owned by Oleksandr Zhukov, which has a 11.45% interest. In addition, Russia’s Proxima Capital Group owns 19.92%. The company currently produces just under 20 mmcf (566,000 cubic metres) per day of gas in Ukraine through its local subsidiary PPC, along with about 650 boepd of crude and condensates. 

Earlier this year the company noted that output from its main NN47 and NN16 wells in the Rudenkivske field, where fracking is taking place, had declined slightly, and that no production enhancements would be carried out in March because of preparation for the well stimulation programme this month.

The Rudenkivske field is estimated to contain 2.8 tcf (79 bcm) of gas in place (2C). JKX said that by using modern development and completion techniques this could result in the production of as much as 600 bcf (17 bcm) over the field’s lifetime. 

Should JKX be successful, the US has shown that investment can snowball once infrastructure becomes established and geological understanding improves. Provided the government remains committed, Ukraine could be the latest best bet for a new shale province outside of the Americas and China.

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