In Odesa, at the end of September, the second international Black Sea Oil and Gas Conference was held. This is about the Odesa Offshore Conference 2018 that gathered more than 150 participants this year; they are key public and private oil and gas companies, international organizations, service and consulting companies.
For experts, the conference was very important because the beginning of work on the shelf requires strong preparatory work, the availability of appropriate investments and competencies, which in turn pushes Ukrainian companies to find foreign partners with relevant experience and/or a willingness to share risks and to join a pool of operators of the relevant maritime areas within the territory of Ukraine. As a result of two days discussion, we can say that Ukraine with the participation of foreign contractors is ready to launch a campaign for the development of marine oil and gas deposits, which are the key resources of Ukrainian energy security, politically, economically and technically.
Before the annexation of Crimea by Russia, Ukraine annually extracted 2 billion cubic meters of natural gas from the Black Sea shelf. Now, after losing this territory, the state had lost both gas volumes that our industry needs so much, and material resources namely the property of the state enterprise Chernomornaftohaz, which was “nationalized” by the aggressor state.
Nevertheless, Ukraine has come close to the start of preparatory work on the development of marine oil and gas fields on the Black Sea shelf. It happens due to a large number of specialists for the restoration of offshore production and ambitious plan for self-provision with hydrocarbons, which determines political support and readiness to invest.
For Ukraine, this is fundamental, since with the implementation of this ambitious project, national security can be strengthened and the risks of energy blackmail from the northern neighbour can be reduced. The state-owned company Naftohaz of Ukraine will become the main player in this arena, alongside its part, the largest mining company Ukrhazvydobuvannia JSC.
In particular, the director of Ukrhazvydobuvannia’s geology department Myron Firman estimates the natural gas resources that lie inside the Black Sea shelf, taking into account the water area around the annexed Crimea, in the amount of 2 trillion cubic meters. According to him, Ukrhazvydobuvannia plans to carry out exploration and extraction at 5 areas located in the Black Sea area controlled by Ukraine. These areas can contain about 300 billion cubic meters of gas resources. In order to implement a plan for the development of these deposits, it is planned to create a separate subdivision for better organization of work on the shelf in Odesa. However, according to Firman, this can only be done after obtaining licenses for exploratory study and further industrial development of these fields.
From the side of the state, the Chairman of the State Service of Geology and Mineral Resources of Ukraine Oleh Kyryliuk, who also spoke at the conference, said that in October-November 2018 it is planned to auction two areas on the Black Sea shelf that have natural gas resources. According to the head of the State Service, there are 16 areas in total. Two of them have been approved for the auction by the Ministry of Ecology and Natural Resources of Ukraine. As for the other 14 sites, the government must make a decision whether to distribute these areas according to the mechanism of agreements on product distribution or to agree to auction them. He also added that the two upper mentioned areas are located in the Black Sea waters, which are not annexed and are controlled by Ukraine.
According to the State Service of Geology and Mineral Resources of Ukraine, the following areas will be auctioned: “Pradniprovska” (area 556.21 sq. km, C1 gas reserves of 1051.11 million cubic meters, initial sale price 69.999 million UAH, geological information value 421.921 million UAH); “Alibeyska” (area 530, 58 sq. km, С1 gas reserves 1002, 68 million cubic meters, the initial sale price 66,774 million UAH, the cost of geological information 476,697 million UAH).
Ultimately, it is yet unknown whether Ukrhazvydobuvannia will take part in this auction, because first of all the company planned extraction on 5 shelf areas, namely: “Meduza”, “Krabova”, “Zmiina”, “Sozanovskoho” and “Krylovska”. All of them are located east of the Tatarbunary district in the Odesa region and north-east of the island Zmiinyi.
Recall that the last time when applications for these areas were sent by the State Service of Geology and Mineral Resources of Ukraine for approval to the Odesa Regional Council, the latter refused in the relevant act. In the past year, this norm was removed, namely, the State Service of Geology and Mineral Resources of Ukraine initiated it. So, the Cabinet of Ministers supported and amended the Government Resolution No. 615 “On Approval of the Procedure for Granting Special Permits for the Use of Subsoil”, according to which the clause on the necessity of the subsoil user to obtain approval of regional councils for extraction of natural gas on the sea shelf was excluded. Therefore, now, there is no need in approval of marine hydrocarbon extraction at the local level, which definitely accelerates the start of the operations.
Ukrhazvydobuvannya, although it is the only Ukrainian company that is ready for gas production at sea, it’s not the only one in the regional dimension. In particular, the conference was attended by a large delegation of mining company Black Sea Oil & Gas SRL (BSOG – ed.). It is developing the offshore fields on the shelf of Romania. Taking into account size of the delegation and its activity, this was not just a courtesy visit, but quite possibly an attempt to get acquainted more accurately with the proposals of the state auctions on the development of Ukrainian marine areas.
It is well known that Romania is currently facing a very difficult process of adopting new legislation on the regulation of hydrocarbon production at sea, which leads to conflicts between investors and the Romanian Parliament. Therefore, there are quite high chances that some of the international investors, including OMV, Exxon Mobil, BSOG, are looking at Ukrainian proposals.
Although, given the Romanian experience, during the speech by Mark Beakom, Vice President and Executive Director of Black Sea Oil & Gas, it became clear that if Ukraine wants to develop offshore gas extraction, our country must set clear goals and respect foreign investment (given the Romanian scandal – ed.) and simplify legal procedures for obtaining permits and concluding contracts for the production of hydrocarbons.
Recall that neighbouring Romania, at one time focusing on the active development of exploration and production of natural gas on the Black Sea shelf, was able to significantly increase gas production and become its exporter. Moreover, the state-owned company Ukrtranshaz has now requested Transhaz, a Romanian GTS operator, to increase the capacity of export gas pipelines. It’s made in order to receive gas from Romanian marine deposits in the interests of Ukrainian consumers.
Will there be support?
As it was already mentioned, extraction of oil and gas in the Black Sea is a complicated and pricey process. Moreover, it requires strong technical and financial support with the involvement of international partners.
A very important positive signal was made at the conference. Therefore, Ulmas Musaliyev, a chief banker of the EBRD (European Bank for Reconstruction and Development – Ed.) in “mining, oil & gas investments” segment, said that the bank is ready to invest in projects for the development of Ukrainian shelf, but only if we find worthy partners. The EBRD representative noted that the bank supported a number of similar projects in Azerbaijan, Romania and other countries. In particular, the company contributed to the equity of the already mentioned Black Sea Oil and Gas.
The importance of potential EBRD participation can’t be overestimated because the bank is a guarantor of transparency in operations, which makes potential scandals impossible.
On the other hand, understanding Ukraine’s readiness for investment a tangible revival of foreign contractors with the appropriate technical competence has happened. In particular, the Azerbaijani company SOCAR AQS considers Ukraine as a promising region for conducting its drilling operations for oil and gas production, including the Black Sea shelf. According to Deputy Director General of SOCAR AQS Orhan Vagabov, today SOCAR AQS has 6 drilling platforms in Azerbaijan, which are operating on the Caspian Sea shelf, as well as another drilling rig that’s operating in Bangladesh. By 2020, the company plans to increase the number of its drilling platforms up to 12, and it doesn’t exclude that some of them can work in Ukraine.
Among the other companies that expressed readiness to assist in the implementation of the plan for the production of hydrocarbons at sea were the international engineering company CNGS Group, consulting company DNV GL, with experience in implementing projects in the Black Sea, American company Solar Turbines that has both equipment and experience for work at offshore oil and gas facilities, etc.
What about Crimea?
Taking into account the presence of Russian occupation troops on the territory of the Autonomous Republic of Crimea, we can’t talk about the restoration of work on deposits that are located on the shelf of the peninsula. Moreover, the aggressor state continues illegal actions on the annexed territory.
Thus, the Russian Federation has built a gas pipeline through the Kerch Strait from the Krasnodar Territory to maintain the need for the annexed Crimea in natural gas (consumption of about 2 billion cubic meters of gas). Russia also continues to exploit the Odesa gas field (about 1 billion cubic meters of gas), which is located in the Ukrainian economic zone According to the head of JSC Chornomornaftohaz Svitlana Nyezhnova, during the annexation of Crimea, Russia violated the norms of international law and drilled 7 new wells in the Odesa field.
It should be noted that in the first quarter of 2019, JSC Chornomornaftohaz expects to obtain a decision of the International Tribunal at the Permanent Court of the Arbitration Court in the Hague (the Netherlands) to recognize Russia as responsible for the annexation of Crimea and the party who is to pay damages to the Ukrainian state-owned enterprise. Moreover, losses continue to grow, because Russia continues to extract hydrocarbons from Ukrainian deposits.
According to Svitlana Nyezhnova, the amount in dispute is 5 billion USD, and also 2 billion USD worth fines should be taken into account. By the way, their size is constantly increasing.
At least until the elections, Ukraine has a political will to develop oil and gas shelf areas. Ukraine also has an understanding of the economic and technical challenges of this project’s complexity. On the other hand, there are contractors with relevant competence and support from international financial institutions, in particular, the EBRD.
Will Ukraine be able to implement this project soon? No, of course, it will take five years before Ukraine will receive stable supplies of gas, and of course, this is not an easy process. There will also arise technical, logistical, regulatory difficulties that will need to be addressed promptly, but nobody said it would be easy.
As it was suggested by the chief geologist of Ukrhazvydobuvannia Myron Firman, let’s have a dream, that the first licenses will be obtained, and the first seismic studies of oil and gas reserves in Ukrainian deposits will be commissioned in one year, and then according to the plan: drilling, more drilling, construction of gas pipelines and distribution to consumers.
A dream can become reality since the first licenses are received, but the question of their issuance’s time is also important. The longer the state bodies will delay their issuance, the more money in next 5-10 year, Ukraine will spend on the import of gas, which is at least irrational, given the already small budget of our country.
Text and photo by Volodymyr Dolnyk