Ukraine's En­ergy Chal­lenges


State-owned nat­u­ral gas ex­plorer Ukrgazvy­dobu­van­nya, known sim­ply as UGV, thinks it can make Ukraine in­de­pen­dent in this vi­tal source of en­ergy that pow­ers in­dus­try, busi­ness and homes.

“Ukraine is clearly miss­ing the op­por­tu­ni­ties,” said CEO Oleg Prokhorenko. “But we have a plan to make Ukraine gas in­de­pen­dent.”

The com­pany ex­pects to turn it­self around this year, achiev­ing in­creased growth of gas pro­duc­tion in 2017, for the first time since Ukraine achieved in­de­pen­dence in 1991.

The plan is for do­mes­tic pro­duc­tion and con­sump­tion to meet even­tu­ally, one of these years. How­ever, there’s still a big gap: Ukraine pro­duces 20 bil­lion cu­bic me­ters of gas and, only by 2020, con­sump­tion is hoped to de­cline to 26 bil­lion cu­bic me­ters from 33 bil­lion cu­bic me­ters.

The ad­di­tional 6 bil­lion cu­bic me­ters is ex­pected to come from pri­vate pro­duc­ers and UkrNafta, the oil-pro­duc­ing Naftogaz sub­sidiary.

The am­bi­tious plan re­lies on Ukraini­ans con­serv­ing more be­cause of higher, mar­ket-based heat­ing prices, but also on Prokhorenko suc­cess­fully re­fur­bish­ing the com­pany’s drilling fleet and re­ori­ent­ing it to hy­drofrack­ing — an in­no­va­tive tech­nol­ogy that is be­gin­ning to un­lock pre­vi­ously un­tapped gas re­serves across Ukraine, as it has around the world, boost­ing sup­plies of nat­u­ral gas world­wide.

The com­pany has been a ben­e­fi­ciary of the gov­ern­ment’s In­ter­na­tional Mone­tary Fund-backed pol­icy of in­creas­ing gas prices on house­hold cus­tomers, giv­ing the com­pany more money to in­vest.

“I spoke to my mother, and she said that when it’s about 22 de­grees Cel­sius, I start to feel hot. That’s what Europe lives through. Peo­ple have re­sponded to higher prices” by con­serv­ing en­ergy, Prokhorenko said. At sub­si­dized prices to con­sumers, “it was very dif­fi­cult to in­vest in new as­sets,” he said.

Ukrainian gas her­itage

Ukraine was the Soviet Union’s orig­i­nal gas hub. In the 1950s, as the Soviet econ­omy sought to ex­pand af­ter its post-war re­build­ing, Moscow seized upon vast gas re­serves in the east­ern re­gions of mod­ern Ukraine. Soviet engi­neers, trained in Kharkiv, de­vel­oped fields in Poltava and Kharkiv oblasts, with the She­be­linka field in Kharkiv Oblast, founded in 1956.

Ac­cord­ing to one re­port, more than 1 tril­lion cu­bic me­ters of gas were ex­tracted from the field be­tween 1956 and 2006, av­er­ag­ing 20 bil­lion cu­bic me­ters each year. Ukraine con­sumed 33 bil­lion cu­bic me­ters in 2016.

The Ukrainian boom stopped in the 1970s, when mas­sive gas re­serves were dis­cov­ered in Siberia. As the Sovi­ets pulled out of Ukraine, gas pro­duc­tion fell to around 20 bil­lion cu­bic me­ters each year, about where it re­mains to­day.

In­vest­ing for fu­ture

When Prokhorenko ar­rived at Ukrgazvy­dobu­van­nya, the com­pany was reel­ing from cor­rup­tion scan­dals.

One in­volved former Peo­ple’s Deputy Olek­sandr Onyshchenko, who fled the coun­try last year amid ac­cu­sa­tions that he stole $110 mil­lion from the com­pany. The same scan­dal later brought down former Fis­cal Ser­vice Chief Ro­man Nasirov, who al­legedly al­lowed par­tic­i­pants in the scheme to de­lay tax pay­ments in ex­change for a kick­back.

But Prokhorenko ig­nores the past, and has fo­cused his ef­forts on re­fur­bish­ing the com­pany’s rust­ing Soviet equip­ment. He said that the cost to re­pair a sin­gle drilling rig was “rel­a­tively low,” rang­ing from $200,000 to $1.5 mil­lion, de­pend­ing on the “com­plex­ity of the re­pair.”

The plan is to in­vest in hy­draulic frac­tur­ing on a large scale.

Hy­draulic frac­tur­ing, also known as hy­drofrack­ing, is a way of ex­tract­ing nat­u­ral gas by us­ing flu­ids to break apart rock for­ma­tions in which the gas is trapped.

“This com­pany had its own hy­drofrack­ing fleet, but it was out­dated,” he said, and in dis­use. “For us, this was a strate­gic pri­or­ity. We ba­si­cally said, look. If we want to in­crease pro­duc­tion quickly, we should start hy­drofrack­ing.”

UGV sta­tis­tics sug­gest that the com­pany is on tar­get to im­prove pro­duc­tion in 2017, in part be­cause of 100 hy­drofrack­ing op­er­a­tions in use now.

Prokhorenko said that he has ne­go­ti­ated fixed-price con­tracts with for­eign com­pa­nies to help with hy­drofrack­ing and coil tub­ing op­er­a­tions.

Not all rosy

The global pop­u­lar­ity of frack­ing tech­nol­ogy — and its abil­ity to tap new gas re­serves at at­trac­tive prices — is viewed as a threat by the Krem­lin to Rus­sian state-con­trolled Gazprom’s dom­i­nant po­si­tion in nat­u­ral gas pro­duc­tion. Prokhorenko said Rus­sian in­ter­ests are be­hind lo­cal op­po­si­tion to frack­ing.

More­over, sus­pi­cions and spec­u­la­tion are ram­pant about UGV’s ties to bil­lion­aire oli­garch Vic­tor Pinchuk.

UGV chief op­er­at­ing of­fi­cer Alexan­der Ro­manyuk worked at Pinchuk’s EastOne un­til he joined UGV, while Alexan­der Klimov worked as head of in­vest­ments for UGV af­ter spend­ing five years at EastOne and another five at GeoAl­liance, a Pinchuk oil ven­ture.

Be­tween Au­gust 2016 and June 2017, at least Hr 2.15 bil­lion ($80 mil­lion) in steel pipe pur­chase ten­ders for UGV went to In­ter­pipe.

Volodymyr Gaidash, UGV’s com­mu­ni­ca­tions chief, ar­gued that there was noth­ing un­to­ward in the re­la­tion­ship and af­firmed that no­body in UGV would stand to gain from In­ter­pipe’s pur­chases.

“These are fre­quent al­le­ga­tions, spread by our com­peti­tors,” he said. “We are try­ing to widen our scope of sup­pli­ers.”

“Oleg is grad­u­ate of the Har­vard Kennedy School of Gov­ern­ment,” he said, de­fend­ing Prokhorenko’s qual­i­fi­ca­tions. “Ro­manyuk is easy tar­get,” Gaidash said, be­cause he is re­spon­si­ble for mak­ing pro­duc­tion de­ci­sions, cre­at­ing spurned com­peti­tors.

The firm has been prof­itable for the Ukrainian gov­ern­ment un­der Prokhorenko’s man­age­ment. Last year, it sup­plied half of the Hr 12 bil­lion (now $446 mil­lion) div­i­dend that Naftogaz de­liv­ered to the state bud­get.

(Oleg Pe­tra­siuk)

UkrGazVy­dobu­vyanna CEO Oleg Prokhorenko ges­tures in his com­pany’s Kyiv of­fice on Sept. 28. Prokhorenko is fo­cus­ing on hy­drofrack­ing as a way to in­crease gas pro­duc­tion.

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