Investing in Ukraine’s energy independence
Otto Waterlander, Naftogaz Group Chief Executive Officer - Chief Transformation Officer
Energy independence is one of Ukraine’s most important strategic goals. Events over the past decade have illustrated how energy, especially natural gas, can and will be used to exert economic and geopolitical pressure.
Naftogaz occupies a privileged position within Ukraine’s quest for achieve energy independence. In recent years, Naftogaz has demonstrated its ability to perform and lead significant reforms: it succeeded in ending the Russian monopoly over Ukraine’s gas imports; separated transmission activities from production and commercial activities in order to bring the market structure into line with EU norms; maintained stable production from ever older fields; and plays a pro-active, market-oriented role in helping open the retail market for competition to allow customers to choose.
The company also wants to become a key driver in the development of Ukraine’s domestic gas production. Naftogaz can serve as a catalyst for growth: identifying new gas fields, bringing investors on board, and increasing production volumes.
As well as reducing Ukraine’s dependence on gas imports, the material growth of local gas production would provide new impetus to the Ukrainian economy. It would create direct local employment in several regions, while indirectly improving services including hospitals, schools, and infrastructure development. Depending on the level of investment, the oil and gas industry could realistically add 3% to Ukrainian GDP annually.
As the sole shareholder, the Ukrainian government has set two goals for Naftogaz. Both are linked directly to energy independence. The government wants to see decreasing demand for gas imports through higher gas production and increasing 2P oil and gas reserves.
The amount of investment required to achieve these goals is estimated at USD 20-30 billion, which exceeds Naftogaz’s existing financial resources. It will therefore be necessary for private companies to join Naftogaz in this endeavour.
For this to happen, Ukraine must first create and maintain favorable conditions for investments. This means competitive taxation, a stable legal framework, and predictable political perspectives. This is vital in order to attract international investors in the oil and gas sector and throughout the Ukrainian economy.
We suggest considering the positive results of incentive royalty rates for the oil and gas industry and extending them from 5 to 10 years. Thanks to incentive taxation, almost 200 new wells have already been drilled, with private producers accounting for one third of them, providing more than 1.4 bcm of gas, or 5% of the country’s needs. This should also apply to oil and gas condensate production through the introduction of incentive royalty rates of 6/12%.
According to Geoinform of Ukraine, there are more than 3000 wells in Ukraine that have not been producing hydrocarbons for more than two years. Data from the Association of Gas Producers of Ukraine shows that some members were able to increase their production by 50% or more over the past two years with the right focus and incentives.
Ukraine enjoys significant “non-conventional” hydrocarbon resources. Ukraine’s gas reservoirs have an estimated potential of 1.2 trillion cubic meters. A reduced 1.25% incentive royalty would support the accelerated development of these resources.
The oil and gas market is cyclic, with intrinsic falls and surges in prices. However, this time the recovery promises to be more difficult, while energy companies are thoroughly controlling their return on investments. Many countries realize this and governments across the globe are rushing to stimulate their domestic production activities. Any such steps in Ukraine will stimulate developments and investments in new projects. These investments will open up new gas fields and lead to gas production growth within three to five years. And this brings us closer to energy independence.