No money, no sea shelf
No money, no sea shelf

No money, no sea shelf

20:23, 25 September 2006
4 min. 1461

In the big picture, lack of financing is one of the major obstacles to the  implementation of the oil and gas development projects in Ukraine.

Recently the Minister for Fuel and Energy of Ukraine Yuriy Boyko shared his vision of the oil and natural gas production process within the aquatorium of the Black Sea and the Sea of Azov.

The minister has expressed an opinion that the state-owned companies should have a priority in the production of carbonates on the Ukrainian sea shelf.

According to Mr. Boyko, within the nearest two years the financing of USD 500 million up to USD 800 million should be raised for the purposes of naval carbonates exploration.

The minister empathized that Ukraine has enough natural resources and technical opportunities to apply for financing from the major foreign banks in order to implement Ukrainian oil and gas production projects.

Mr. Boyko expressed an opinion that while granting licenses to oil and gas production our country should be primarily oriented to the companies which "are providing sources of energy to the people of Ukraine".

Nobody disputes the fact that our country gravely needs domestically produced natural gas and that State authorities must take urgent measures to increase the amounts of domestic  production and storage facilities.

Nevertheless, the hope that Ukrainian oil and gas production companies would cope with the difficult task of exploring Ukrainian sea shelf is too vague.

The peculiarities of Ukrainian oil and gas production industry shall be taken into account. These peculiarities can be boiled down to several key issues.

                            REGULATORY AUTHORITIES

Licensing of natural resources exploration and exploitation is within the scope of authority of the Ministry for Environmental Protection and Cabinet of the Ministers. Carbonates do fall under the category of the natural resources.

Therefore, despite the fact that the Ministry for Fuel and Energy is responsible for providing energy to Ukrainian companies and individuals, it has no authority to influence the state policy of carbonates exploration and exploitation.


The only Ukrainian company capable of exploring sea shelf is Chernomornaftohaz State Stock Holding Company. The company is led by Ihor Franchuk, the notorious ex-MP and former son-in-law of the President Kuchma.

Despite having obvious advantages (primarily well-qualified personnel that has impressive working record on Crimean Peninsula) Chernomornaftohaz lacks finances and equipment.

In the big picture, lack of financing is one of the major obstacles to the implementation of the oil and gas development projects in Ukraine.

According to the statistics only one out of three wells yields the outcome that is sufficient for starting the production; the price for each of the sea based wells can vary from USD 60 million up to USD 100 million and that is the triple amount of what should be usually spent on drilling a well on the `conventional` soil.

Therefore, one actually working well will require from USD 180 million up to USD 300 million of financing and the production cost for such natural gas will be several times higher comparing to the conventionally produced gas.

Therefore, the sale of the naval-extracted gas to the consumers at the artificially reduced prices will not allow the expenses to be paid back.

Yuriy Boyko failed to explain where Chernomornaftohaz is planning to get the financing; he only announced that at the recent moment the company is actively seeking foreign investors who have enough experience in the high-depth maritime production of oil and natural gas.

Won`t it be more reasonable to spend this money on improving the production areas where Chernomornaftohaz is already active?

The drill rigs which Chernomornaftohaz currently owns allow drilling at the depth of 80 meters while the major deposits of carbonates in the Black Sea lie at the depth of 100 up to 1000 meters. This range of the depth includes so-called `Scythian` Area which the government of Yuriy Yekhanurov planned to sell earlier this year.


On February 20, 2006 the government of Yuriy Yekhanurov introduced amendments to the licensing procedure as established by the Regulation of the Cabinet of the Ministers No. 168.

Needless to say, these amendments were `inspired` by the management of Naftohaz. Amendments entitled companies that sell the natural gas under the official State tariffs (read: Naftohaz and its subsidiaries) to apply for licenses to the prospective areas and deposits without any tender being conducted.

According to the State Geological Service of Ukraine, 59% of the exploration and industrial exploitation licenses in Ukraine are granted to the two major state-owned companies: Ukrhazvydobuvannya (46%) which is a subsidiary of Naftohaz Ukrayiny and Nadra Ukrayiny (13%).

"State-owned companies are the major producers of the natural gas in Ukraine and that is a problem", Hennadiy Rudenko, the former Chairman of the Parliamentary Committee in Charge of the Natural Resources says.

"If Ukraine will continue the discouraging practice when the majority of licenses are granted to the state-owned enterprises, we are at a certain risk of freezing the development of the oil and gas industry in Ukraine delaying the market entry of the large foreign companies. In this case the private investors would not be able to work at our market directly and will be forced to enter the market via Ukrainian state-owned enterprises".

Mr. Rudenko expressed an opinion that such a situation may decrease the attractiveness of the industry for the foreign investors. Moreover, such situation may create a fertile ground for corruption that is already quite frequent for the oil and gas industry.

Unfortunately, the motto "Let the subsoil belong to the state-owned companies" does not meet the modern realities.               

The news was monitored by The Action Ukraine Report (AUR) Monitoring Service, Morgan Williams, Editor.

Analysis & commentary: By Oleksandra Ivanova

Ukrayinska Pravda On-line, original article in Ukrainian

Kyiv, Ukraine, Thursday, September 21, 2006


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