Ukraine's Naftogaz eyes integrated fertilizer, natural gas, renewable cluster amid energy transition commitments

Author: Aura Sabadus

2021/04/19

LONDON (ICIS)--The Ukrainian gas incumbent Naftogaz aims to expand its activities in the fertilizer and renewables sectors in addition to ramping up gas explorations in the Black Sea later this year, the advisor to the CEO told ICIS in an interview.

Lana Zerkal said the company will be taking an integrated long-term approach, focusing on setting up cluster projects that would combine renewable power plants such as onshore wind farms with gas production to be used as feedstock for green ammonia.

As part of its long-term strategy unveiled earlier in March, Naftogaz intends to increase its share in renewable electricity generation from less than 1% currently to 25% of its entire portfolio by 2030. The vision reflects Ukraine’s own commitments to decarbonise its economy in the upcoming years.

The company launched a small solar pilot project in the northeastern Kharkiv region, another larger plant in the northern Zhytomyr region and has recently conducted pre-feasibility onshore wind studies in the southern part of the country.

However, Zerkal said Naftogaz had encountered obstacles related to the electricity grid connections as these involve bureaucratic procedures to obtain permits. Additionally, solar tariffs had also been reduced last year following an overhaul of renewable incentives, making investments in solar generation much less attractive.

Even so, she said preliminary results from pre-feasibility studies for onshore wind production in the southern Odessa region were encouraging, which meant that in the longer-term wind generation could be used to produce electrolysed hydrogen or green ammonia.

FERTILIZER SECTOR

The Odessa region is now a priority for Naftogaz, where the company intends to buy out urea and ammonia manufacturer Odessa Port Plant (OPZ) later this year, following an expected share issuance by the state.

The gas incumbent was one of seven companies shortlisted to take part in an electronic auction for a new gas tolling partner for OPZ.

The tender was expected to be held on Friday, 16 April, but was delayed to Monday. The results should be published in the upcoming days as OPZ’s current exclusive tolling contract with Ukraine’s Agro Gas Trading (AGT) expires on 30 April.

OPZ, a leading producer and one of the world’s biggest trans-shipment hubs, is owned by the State Property Fund.

Although ammonia exports had been subdued in recent years, they soared in 2020 when Ukraine sold 166,792 tonnes compared to just 23,290 tonnes in 2019, according to the ICIS demand and supply database.

The increase was largely due to record low gas prices last year but Zerkal said Naftogaz was encouraged by the long-term prospect of producing green ammonia or hydrogen using either renewable onshore wind generation or pioneering gas pyrolysis.

Gas pyrolysis is currently tested in some European countries and Russia and could be deployed for the conversion of natural gas into cleaner fuels.

BLACK SEA REGION

As the largest domestic producer with an average annual output of 14 billion cubic metres, Naftogaz intends to expand its exploration and production activities particularly in the offshore blocks of the Black Sea.

“According to all forecasts, gas will remain an important fuel [in the medium to long-term],” she said. We hope we will manage to step up production in Black Sea in the next five to six years and are aiming to conduct 3D seismic surveys in deep water.”

Naftogaz holds 37 licences for exploration in the Dolphin and Skivska offshore blocks which lie close to the Romanian Neptun and Turkish Tuna-1 blocks, where recent exploration studies have shown high reserve potential in excess of 500 billion cubic metres.

Ukraine has proven gas reserves close to one trillion cubic metres and intends to ramp up production from an annual 20bcm to 35bcm by 2030 of which 5bcm/year could be exported to Europe.

However, exploration activity has stalled largely because of low demand and falling gas prices.

Zerkal said Naftogaz had already signed an agreement with an as-yet unnamed company to carry out 3D surveys between July and November 2021.

She said some of the wells which have already been depleted could be converted into carbon capture and storage facilities (CCS) as Ukraine will be looking to ramp up its hydrogen production from natural gas. However, more studies are yet to be carried out to gauge the CCS potential as well as the costs involved.

HEATING SECTOR

The role of natural gas in electricity generation may also increase in the upcoming decade as Ukraine is expected to phase out most of its 18GW of coal and lignite-fired capacity.

Although the longer-term emphasis will be on renewable production, the country will still require baseload capacity to balance the system.

It is not clear how much of the thermal capacity that is due to be phased out will be replaced with natural gas-fire plants but Zerkal said that in the short-term Naftogaz will be taking over six old heating power plants, which are in immediate need of restructuring and upgrading.

“We’ve been asked [by the government] to manage six old heating power plants. The discussion [about the restructuring of the heating sector] started last year and now it’s appeared with new elements including the necessity to adopt a law which will envisage the transfer of these six power plants to Naftogaz.”