With the completion of Nord Stream 2 on the horizon and Europe making no real commitments to Ukraine’s energy independence, it’s high time for Ukraine to grow domestic gas production.
Around 33% of all Ukraine’s gas is imported and Ukraine now only produces around 20 billion cubic meters of gas per year, requiring 10 billion cubic meters to be imported.
Ukraine’s production is eclipsed by other nations. It produces nearly 35 times less than Russia and 48 times less than the United States.
This wasn’t always the case.
In 1975, Ukraine produced almost 68.1 billion cubic meters per year, representing over a quarter of all gas production within the USSR. Ukraine was a major gas exporter, providing gas to all 15 of the Soviet republics.
However, Ukraine quickly exploited its reserves of shale gas and oil. Gradually, over the 1980s, Ukraine shifted from being a major gas exporter to a major importer as a result of dwindling supply and a Soviet shift to Siberian gas supplies.
This does not mean, however, that Ukraine has nothing left to give.
According to an article published in The Harvard International Review, Ukraine has Europe’s second-largest known gas reserves in Europe. These reserves, estimated to amount to 1.09 trillion cubic meters of natural gas, are some of the least exploited in the world. Ukraine only uses 2% of this reserve annually.
Ukraine has previously embarked on a series of projects to identify new fields, supplement supply, and improve active wells. Different approaches, however, have met with varying degrees of success.
Synthetic gas failure
In 2012, Ukraine’s Naftogaz concluded an agreement with China on the funding and technology of new synthetic natural gas production.
China approved a $3.65 billion credit agreement to Ukraine for the construction of coal gasification plants across the country.
Over the course of several years, China and Ukraine proposed the construction of several coal gasification plants in the Donetsk and Luhansk Oblasts, and later in Odesa.
The outbreak of the war in Donbas made these locations untenable and former Economy Minister Stepan Kubiv failed to keep the loan alive on a last-ditch trip to China in 2017.
Andriy Suprun, managing director of Naftogaz subsidiary Vuglesyntesgas, said that diversifying Ukrainian gas production with synthetic gas was not a good move for Ukraine.
“Under current conditions, I doubt very much that coal gasification is feasible in Ukraine. It’s quite expensive and complicated. The investment that would be needed is in excess of $1 billion just for the Odesa plant. Plus, coal gasification has much waste and is really dirty, it’s a “dirty technology” as they call it,” Suprun said.
Suprun also noted that the Ukrainian government’s lack of political will had hampered efforts to diversify gas production, reducing domestic production, and making Ukraine less attractive for energy investments, especially from China.
“The Ukrainian government didn’t really want to use this money and I’m not really sure that there are now too many fields in the energy sector that could be interesting for the Chinese,” Suprun said.
Private sector success
The private sector has also made attempts to increase domestic gas production in Ukraine. DTEK, the energy giant owned by Ukraine’s richest man, oligarch Rinat Akhmetov, operates 26 gas wells in the Poltava and Kharkiv Oblasts.
In a written comment to the Kyiv Post, DTEK General Director Igor Shchurov claimed that private companies are proving to be more efficient than state enterprises due to their flexibility.
“State-owned enterprises have shown themselves to be more static and very dependent on political changes in the country,” Shchurov wrote.
State-run gas companies, on the other hand, possess over 60% of licenses issued by the government.
According to a 2019 report produced by DTEK, while state-run gas producers had reduced annual production by around 3.9%, private production had increased by 4.5%.
DTEK chalks up their success due to three factors: specialists, investment, and technological development.
According to Shchurov, DTEK has invested over $372 million in the Ukrainian gas and oil industry since 2013.
Much of DTEK’s success has come from major overhauls in its operating technologies, becoming the first in the market to adopt new extraction technologies, including rotary-driven systems, acid-proppant fracturing, and Schlumberger Vertical drilling systems.
In 2020, DTEK produced around 1.84 billion cubic meters of gas, more than doubling its extraction levels from 2013.
These increased volumes are a promising sign for Ukraine. Private sector initiative, both in technical and exploratory fields, have set market trends and spurred the public sector to adapt to an increasingly competitive energy market.
“Undoubtedly, ensuring the energy independence of Ukraine requires joint efforts to increase gas production from both the private and public sectors… The gas industry is like a large cruise liner — you cannot abruptly change its course with a single turn of the steering wheel,” Shchurov wrote.
While DTEK may be increasing its domestic gas production, Ukraine’s Security Service has accused the company in the past of violating electricity production laws and endangering energy stability in the country when shutting down power plants for alleged repairs.
Black Sea gas
Before 2014, Ukraine’s domestic gas production capacities were vastly superior.
A 2012 study showed that gas reservoirs in Ukraine’s territorial waters around Crimea amounted to nearly 2 trillion cubic meters of gas.
However, during Russia’s invasion of the Crimean Peninsula, the Russian military seized all of the equipment of Naftogaz’s subsidiary company — ChornomorNaftogaz, and its offices in Sevastopol.
Now, some of Ukraine’s most promising gas resources lie firmly under Russian control.
The illegal territorial claim and Exclusive Economic Zone (EEZ) in the northern Black Sea near Crimea, which Russia supports through an aggressive naval blockade, means that Ukraine has lost over two-thirds of maritime claims to the gas-rich Black Sea.
Naftogaz recently entered into an international partnership with Israeli company Naphtha Israel Petroleum to begin exploration on the Skifskaya field on the Black Sea shelf.
According to previous data from Exxon Mobil, the field has the potential to produce between three to four billion cubic meters of natural gas.
While the Ukrainian government’s issuing of exploration licenses has signaled that Ukraine intends to exploit this resource, legal and geo-political barriers may yet prove too costly.
In June 2020, Russian lawmaker Mikhail Sheremet publicly stated that Russia will stop any attempts to extract hydrocarbons on the Black Sea shelf off the coast of Crimea.
Dwindling demand
While natural gas will always remain an important fuel resource, data show that demand for natural gas is steadily declining globally.
Ukraine now consumes almost half the natural gas it did 30 years ago. Warmer winters and increased energy efficiency are reducing demand for natural gas in Ukraine and across Europe.
While Ukraine’s domestic gas is unlikely to radically alter the international energy market, increased production, paired with reduced demand, may help protect the country from Russia’s energy blackmail.
