Ukraine's gas industry: Introduction

by Heiko Pleines

For a long time, Ukraine was one of the Soviet Union's main gas producers, responsible for about a third of total Soviet output between 1960 and 1975. But as natural gas reserves shrunk and production costs rose, Ukraine's gas output began to decline in the late 1970s.
The Soviet government began to concentrate on the development of west Siberian resources at that time, and Ukraine's gas industry was neglected. As a result, Ukraine's natural gas output has been in decline ever since, falling from 60 bn cm in 1970 to 30 bn cm in 1990 and further to 18 bn cm in 1999.
At present, domestic gas production satisfies about 25 % of the country's demand. Accordingly, the country will be dependent on imports for the foreseeable future. But in order to reduce this dependence in the long run, Ukraine has initiated an ambitious program meant to increase annual production of gas to 35 bn cm by 2010.
Even though hydrocarbon exploration has been going on for a long time and the country's main producing regions are currently in a mature stage of exploration, there is potential for secondary recovery since many gas fields have been poorly exploited by the Ukrainians, who lack advanced technology. In addition, there are reasonable prospects for new discoveries in the Crimea-Black Sea region.
However, due to economic problems, Ukraine has been unable to develop its domestic resources in the desired way. First, the government has failed to provide the funds necessary for geological research. Second, Ukrainian companies lack the necessary equipment for development of deep-lying deposits.
The remaining oil deposits in the Donets-Dniepr Basin and in the Carpathian region especially are often found at a depth of more than 6,000 metres. The development of the Black Sea deposits, on the other hand, will require considerable funds for exploration activities and for construction of the necessary infrastructure.

In 1999, the Ukrainian oil and gas industry underwent substantial restructuring. All major state enterprises of the industry were reorganised and combined into the national joint-stock company Naftogaz Ukrayiny. In June of 1999, the assets of the former state gas company Ukrgazprom, namely the country's gas pipeline network and a number of production units, were turned over to Naftogaz Ukrayiny, which also took over the gas trading company Intergaz.
The state company Chornomornaftogaz remains outside Naftogaz Ukrayiny. The Simferopol-based company is responsible for oil and gas exploration and exploitation in the Black Sea and onshore on the Crimean peninsula. At present, it accounts for a mere 5 % of Ukraine's gas production, but it is hoped that production will increase considerably in the longer term, as new fields are developed.
Chornomornaftogaz also runs the gas pipeline network in Crimea and accounts for 40 % of the peninsula's gas consumption. A number of foreign companies has shown interest in investing in the Ukrainian gas industry, but the conditions for foreign investment in the sector are not very promising. However, a sensible law on production-sharing agreements, or PSAs, was finally adopted in September of 1999. As a result, state-run companies still dominate the industry.

Foreign companies with an interest in Ukraine include Shell, British Petroleum, JKX Oil & Gas (UK) and Carpatsky Petroleum (US). Shell won the first Ukrainian offshore tendering held in late 1996 and had the declared intention to form a joint venture with Chornomornaftogaz. Moreover, Shell has since 1997 shown interest in the acquisition of a stake in Ukraine's gas pipeline network.
However, on both fronts no real progress has been made so far. BP-Amoco has been carrying out appraisals of old gas fields in the Dniepr-Donets Basin. But in January of 2000, BP-Amoco announced that it would not continue its Ukrainian project.
As a result, only smaller foreign companies are really active in the Ukrainian gas industry. JKX has formed a joint venture with Chornomornaftogaz for activities in Crimea and another one with three Ukrainian companies for gas production in the Poltava region (Donets-Dniepr Basin).
In a joint venture with Poltavanaftogaz, a subsidiary of Naftogaz Ukrayiny, Carpatsky Petroleum is re-developing the Rudovsko-Chervonozavodskoye field in central Ukraine, the largest gas deposit ever discovered in Ukraine. Carpatsky is also producing gas at the Bitkov field.