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Key Priorities of Extraction Industry Reforms: Focus on Natural Gas

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Key Priorities of Extraction Industry Reforms: Focus on Natural Gas

  1. 1. KEY PRIORITIES OF EXTRACTION INDUSTRY REFORMS: FOCUS ON NATURAL GAS MATERIALS FOR THE ROUND TABLE June 18, 2018
  2. 2. Ukraine’s natural gas potential is really high, and ongoing market liberalisation could benefit both society and business in the long run  Ukraine’s economy has stabilised after the 2014-2015 crisis and its current trajectory provides reasons to be cautiously optimistic about the future.  The pro-European government supported by the global community is moving forward with an ambitious reforms agenda to put Ukraine’s weak economy back on solid ground and create a welcoming business environment (+76 positions in Doing Business ranking during the last years).  Ukraine is actively pursuing energy supply diversification policies and has already made a great step forward in the Gas sector.  Gas market liberalisation: started from adoption of the Gas Law in 2015, has already produced some initial results, but a lot of work still lies ahead. Ukraine has enough natural gas reserves (№3 country in Europe) to materially substitute import and aims to increase domestic production from 20 to 28 bcm by 2020. This ambitious target requires a set of regulatory and fiscal enablers to be in place at the national level. During the last years Ukraine completely switched to natural gas imports from European direction; moreover, it has reduced imports by 50% between 2013-2017 – from 28 to 14 bcm. The segment has been opened for competition (67 importers at EU borders in 2017) and leading European companies have already launched their operations in Ukraine. Ukrainian gas transmission system is one of the most powerful in the world and being used for transit of the majority of Russian gas to the EU. With the risk of construction of pipelines bypassing Ukraine and the expiration of transit contract with Gazprom, preserving gas transit through Ukraine (which currently generates ~3% of Ukraine’s GDP) became a question of national security. Ukraine is looking for international partner to manage its GTS, bring technical know-how and secure transit flows after 2019. Capacity of Ukrainian underground gas storage facilities is the largest in Europe, equals to nearly a third of EU-28 capacity and is currently being underutilised. Taking into account the available infrastructure, Ukraine could be a natural candidate for an Eastern European Gas Hub. Total length of Ukrainian gas distribution system is 292 ths kilometers, connected to more than 12 million end consumers. There are 44 licensed DSOs in Ukraine - most of them are controlled by the private business group. Ukraine’s natural gas consumption shows a steady decline during the last decades and amounted to 32 bcm in 2017 (only 65% of demand was satisfied by local production). It consists of two nearly equally-sized segments – regulated and non-regulated. The regulated segment is being supplied at regulated prices and operates under public service obligations (that mandate procurement of domestic natural gas from UGV by Naftogaz and its subsequent sale to suppliers to households, religious organisations, and DHC). Pricing in non-regulated segment is determined by the market.  The Ukrainian gas market is at a stage of its transformation which creates opportunities for new market entrants. We believe that Ukraine is attractive for investors in the long run, but a thoughtful entry strategy is required for success. Source: PwC “Ukrainian gas market: Discovering investment potential and opportunities”, June 2018 Executive summary on Ukrainian natural gas sector 1
  3. 3. Ukraine is considered to be one of the key players on the European gas market.. Ukrainian natural gas sector at a glance Source: BP Statistical Review of World Energy 2017, Naftogaz 2 Ukraine is the third biggest holder of proven natural gas reserves in Europe (~16% of total Europe’s reserves) Ukraine is the fourth biggest producer of natural gas in Europe (~8% of total Europe’s production) Capacity of Ukrainian underground gas storage facilities is the largest in Europe (is equal to nearly a third of the EU-28 capacity) Ukrainian GTS is the most powerful transit route for Russian gas to European consumers The 14th biggest gas importer in Europe The 7th biggest consumer of natural gas in Europe
  4. 4. .. with significant potential of natural gas reserves for future development Source: Geoinform Distribution of natural gas resources by regions of Ukraine West (116 fields, 111 bcm) (Volyn and Podillia, Precarpathian, Carpathian and Transcarpathian oil and gas provinces) East (244 fields, 727 bcm) (Dnipro and Donetsk oil and gas province) South (42 fields, 68 bcm) (Predobrudja, Black Sea and Crimean, Azov and Berezan, Indolo-Kuban, and Black Sea Prospective provinces) 1) The latest available data Ivano-Frankivsk region Other regions Dnipro region Sumy region Poltava region Crimea Luhansk region Shelf of the black sea 4% 4% 35% 4% Lviv region 9% 3% 37% 1% 1% 2% Kharkiv region 906 bcm Total balance of gas reserves in Ukraine Share of total reserves, %X% Natural gas reserves of Ukraine (on January 1, 20171) 3
  5. 5. However, comparing to other European countries Ukraine’s natural gas reserves base is underutilized Natural gas reserves and production in Europe (bcm, at the beginning of 20171) Source: BP Statistical Review of World Energy 2017 1) The latest available data 2) Excludes gas flared or recycled. Includes natural gas produced for Gas-to-Liquids transformation Country Proven reserves Annual production2 Extraction factor Norway 7% Netherlands 6% Ukraine 3% United Kingdom 20% Romania 8% Poland 4% Germany 19% Italy 15%35 35 91 110 207 591 697 1 763 5 7 4 9 41 18 40 117 Data is based on BP Statistical Review of World Energy 2017 and was used for benchmarking purposes. It could differ from the data of the Geoinform. 4
  6. 6. State owned company UkrGazVydobuvannya (UGV) is the largest natural gas producer in Ukraine Ukraine’s natural gas production by companies Source: Naftogaz, Association of Gas Producers of Ukraine 5 15.3 4.1 0.01 1.1 UGV Private producers Chornomornaftogaz Ukrnafta 20.5 bcm Total gas production in 2017 (bcm) Private gas producers and their share in private production in 2017 (%) Other 14% UNBBurisma Geo- Alliance DTEK 18% Total private production PPCSmart- Energy 40% 4% 9% 4% Kub- Gas 5% 6% 4.1 bcm 100%
  7. 7. Despite the fact that natural gas consumption shows a steady decline, Ukraine still has to import gas to cover own needs 21.1 21.3 20.5 20.6 20.5 21.4 20.5 19.9 20.2 20.5 44.8 32.9 28.0 19.5 16.4 11.1 52.6 14.1 27.0 36.6 33.2 42.6 50.4 54.8 57.6 59.3 66.3 2016 -52% 20172015 33.8 31.9 2010 2011 20142012 20132008 51.9 2009 Consumption Import Production Ukraine’s gas production, consumption and import volumes (bcm / year, 2008-2017) Source: Naftogaz, Association of Gas Producers of Ukraine Ukraine’s annual gas consumption dropped by 52% over the last 10 years, however, domestic production still lacks the ability to meet country’s own needs 6
  8. 8. The Government aims to stimulate natural gas extraction in order to ensure the country's energy independence 17 13 11 9 11 1415 642 2 5 4 2017F 28 20 1 2016F 19 25 0 2020F2018F 2019F 23 Baseline productionCurrent fieldsNew fields 14 11 10 6 8 1213 4 3 20 2020F 2 1715 2018F2017F 1 0 1 2019F2016F 15 2 18 0 3 223 2 2 3 42 2 1 2 1 6 2017F 4 5 0 2016F 7 1 2018F 2019F 2020F 7 Total production1 Concept of Ukrainian gas sector development 2020 Planned growth of domestic natural gas production according to the Concept 2020 (bcm / year) Private produ- cers UGV 1) Excluding Ukrnafta’s production – 1.4 bcm in 2016 (according to the Concept 2020) Source: Association of Gas Producers of Ukraine, Concept of Ukrainian gas sector development 2020 7 Totals may not add up due to rounding
  9. 9. Concept 2020 envisaged a number of measures aimed to ensure development of natural gas production Main provisions of the Concept of Ukrainian gas sector development 2020 8 Enablers Prolongation of current licenses for bona fide holders Resolving JV issues New licenses granting by local authorities Improvement of geological info sharing procedure Deregulation of land issues Incentive-based fiscal policy in upstream New Rules of Development of Oil and Gas Fields New Subsoil code Abolishment of requirement for reserves re-estimation every 5 years International standards of classification and categorization of reserves and resources Availability and affordability of supporting services Status Source: Concept of Ukrainian gas sector development 2020 - At risk- In progress- Done - Partially / LT task • Operating wells optimization & intensification: • Drilling new wells in existing acreage • Exploration and exploitation drilling • Geological & seismic exploration - Well workovers - Hydrofracturing - Modernization and construction of boosting compressor stations etc. Key initiatives Existing fields New fields Target: 28 bcm in 2020
  10. 10. Ukraine has already shown good progress in reforming gas extractive industry, but further steps should be taken (1/3) Area Issue Done Should be done Permitting system • The permitting system in the gas production industry was too prescriptive and overly regulated • Mandatory collection of 44 approvals at 16 institutions • Field development launch took over 3 years • The bill on deregulation of gas extractive industry was adopted • Changes include reduction of permitting documents obtaining time • Cancelled 14 approvals and 6 procedures held by different institutions, the process is speed up by > 18 months • Development and introduction of “one window” approach for gas production activities Fiscal regime • The taxation system for hydrocarbons was complicated, unstimulating and inefficient • It wasn’t attractive for investors • Local communities lacked interest in a constructive collaboration with the industry • Introduction of the new stimulating taxation – 12% and 6% rates depending on the depth of the new onshore wells drilled • Royalty decentralization – 5% deductions to local communities' development • Production sharing agreements (PSA) with the new stimulating royalties – 2% and 1.25% for oil and gas respectively • Simplification of the set of different rent rates based on type of hydrocarbon, depth, extraction complexity, and type of cooperation Land allocation • Inability to use / develop wells after exploration stage until obtaining of the documents certifying right of land use • Need for change of the designated purpose of land use • Uninterrupted land use during the transition from exploration to commercial production under the exploration agreement (until the obtaining of the documents certifying right of land use) • Land servitude is possible - no need to change of the designated purpose of land • Further amendments to related legislation 3 ! First results of reforms and next steps Source: Association of Gas Producers of Ukraine, National Investment Council of Ukraine, team analysis 9
  11. 11. Ukraine has already shown good progress in reforming gas extractive industry, but further steps should be taken (2/3) Area Issue Done Should be done Access to subsoil • License auctions are held unacceptably irregularly • The offered lots are small and not interesting to the investor • Most of licenses are obtained without auctions (app. 90% of all the blocks were issued without auctions) • There was no license auction held from beginning of 2017 • The draft of amendments was developed to ensure equal access to subsoil and cancel the practice of issuing the license without the auction • Approval of the developed draft amendments • Elimination of the remaining issues with auction procedures • Elimination of double standards – cutting of the possibilities to obtain licenses without competition • Cancelling various government bodies pre-approvals etc. Geoscience data availability • Lack of public access to the massive geological data • Lack of the transparent opportunity to individually assess the vacant blocks and nominate them for auctions by most subsoil users • The draft of the new Rules of the geoscience data turnover was developed • Approve the developed draft amendments on liberalization of geoscience data turnover • Open the access to electronic databases of the potential blocks and information on the fields currently under development (limited disclosure) 3 ! First results of reforms and next steps Source: Association of Gas Producers of Ukraine, National Investment Council of Ukraine, team analysis 10
  12. 12. Ukraine has already shown good progress in reforming gas extractive industry, but further steps should be taken (3/3) Area Issue Done Should be done Mandatory reserves estimation • A costly requirement for state re- examination and reassessment the reserves every 5 years • Time-consuming procedure • The requirement for mandatory state re- examination and reassessment of reserves of mineral resources was cancelled Environmen- tal impact assessment • The law on environmental impact assessment has come into force, but secondary legislation that would have explained the mechanism for its implementation has not been properly developed • Companies can not start drilling new wells and continue special permits because they do not have environmental impact assessment • Long term passing of the environmental impact assessment – min 5 months • To finalize the mechanism of environmental impact assessment (make it transparent and clear) • Develop necessary secondary legislation • Improve legislation and shorten the term of environmental impact assessment 3 ! First results of reforms and next steps Source: Association of Gas Producers of Ukraine, National Investment Council of Ukraine, team analysis 11
  13. 13. Thank you!

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