Ukraine could export gas to EU once domestic needs met

LONDON (ICIS)–Ukraine could lift a ban on gas exports to Europe this year and ramp up its production in the longer term providing a number of conditions are met, the director of the Association of Gas Producers of Ukraine said.

Speaking to ICIS on 10 March, Artem Petrenko said there was now an oversupply of gas in the industrial sector and added that if enough volumes are delivered to domestic consumers, the country could start discussions on exports to Europe at the end of the heating season.

ICIS understands that around 1.2 billion cubic meters – or nearly a third – of the private gas production was not sold in 2022 and could be exported to Europe.

Ukraine introduced a ban on gas exports within days of Russia’s invasion, fearing it would seek to deprive it of electricity and gas resources.

However, with the situation being stable for the time being, many Ukrainian producers could be incentivised to sell abroad in addition to injecting gas in local storage.

Petrenko said the government would decide on lifting the ban, at least partially, depending on how Ukraine will conclude the current heating season and how much gas is left in storage to guarantee supplies to households.

Ukraine started off the heating season at the beginning of November with 14.6bcm in storage, and levels are currently estimated at 9.6bcm.

CHALLENGING YEAR

The surplus is linked to a sharp decrease in demand caused by war-related damages.

Russian airstrikes and drone attacks have targeted Ukraine’s energy and industrial infrastructure, leading to a 50% drop in consumption compared to the previous year.

Local production has also faced unprecedented challenges.

For nearly eight months after Russia’s invasion, some of Ukraine’s onshore fields located in the eastern Kharkiv and Poltava regions were occupied or damaged.

“The eastern region is crucial for the industry, as more than 90% of gas is produced there, containing almost 80% of explored hydrocarbon reserves,” Petrenko said.

As a result, Ukraine’s annual gas production fell 6.6% year on year in 2022.

Following the liberation of some areas by the Ukrainian military in summer 2022, the production of some companies increased by up to 40%, helping to lift supply above demand.

SUCCESS

Despite the damages and partial occupation, Petrenko said producers scored significant success last year not least because the government agreed to recalculate previously onerous royalties and bring them down to a more affordable level.

“During discussions on the draft of law with the government, we reached an agreement and included in the new amendments specific provisions that would guarantee that the parliament cannot increase royalties for the next ten years. It is a great thing for investors in the upstream sector of Ukraine,” he said.

Despite the war, Ukraine also held successful oil and gas e-auctions last year, which led to the sale of three blocs, with one of them registering the largest bid ever paid.

Producers also worked in 2022 on streamlining production-sharing agreements, a type of contract signed between a government and a resource extraction company and which determines how much of the resource each will receive.

Petrenko described it as a breakthrough as it was the first time ever that gas was produced under this mechanism in Ukraine, despite the war conditions.

Also, under the latest changes in the regulation on subsoil production, which will come in force on 28 March, subsoil licences can be sold among companies, bringing greater flexibility and incentivising investments in the upstream sector.

INCREASING PRODUCTION

Before Russia’s full-scale invasion of Ukraine, the private sector could increase output by up to 200 million cubic meters annually while state producers Ukrgasvydobuvannya (UGV) and Ukrnafta could see additional production of 300-400mcm annually, with the increases relating to existing fields.

However, Petrenko said that if more production were added from the Black Sea shelf and from blocs for which companies have now obtained licences, the increase could be even greater, effectively allowing the country to become self-sufficient in the longer term.

Just before the war, Ukraine consumed around 30bcm annually, of which around a third was imported.

In 2021, private output reached a record 5bcm of the total 19.8bcm produced that year but with the right investments it could expand further, a source said.

However, Petrenko conceded that much would depend on how soon Russia’s full-scale invasion of Ukraine ends and on the regulatory conditions that would incentivise further investments.