Ukraine has taken major steps in the process of opening up, reforming and strengthening its natural gas sector. And as Ukraine prepares for its first public auction of the country’s gas reserve sites in March, it would do well to study the successful example of Norway, which has managed to profit from its natural resources while keeping the industry under strict government control.
On Dec. 6, Ukraine began the long-awaited process of opening up the country’s natural gas production sector, listing 42 onshore reserve sites for an online auction set to take place in 2019. Today, state-owned oil and gas giant Naftogaz has a firm grip on Ukraine’s energy sector, extracting over 80 percent of both petroleum and natural gas.
By publicly leasing off land rich in deposits of natural resources, Ukraine plans to entice foreign investors, boosting the country’s gas extraction and creating a de-monopolized market.
Ukraine consumes around 35 billion cubic meters of gas annually, while producing only slightly more than 20 billion cubic meters in 2017. Of this amount, 75 percent was extracted by the state-owned UkrGasVidobyvannya, a subsidiary of Naftogaz. But with Ukraine’s proven reserves estimated at over 1 trillion cubic meters, many Ukrainians feel that the state monopoly is doing a bad job in securing the country’s energy independence.
The path of de-regulation and de-monopolization is seen in Ukraine as the best possible solution. However, Norway chose a different route, where the field is strictly regulated and monopolized by the state, but is nonetheless highly efficient, experts say.
Norwegian model
Norway extracts around 120 billion cubic meters of natural gas a year, according to Norskpetroleum, a state-run information website. That is six times the amount of what Ukraine currently extracts, even though Norway’s proven reserves are only twice the size of Ukraine’s. Additionally, Norway’s oil and gas lies offshore, with its extraction being too technologically advanced for a country like Ukraine.
Nonetheless, similarly to Ukraine, the sector is highly monopolized, with state-owned energy giant Equinor, extracting over 65 percent of Norway’s oil and over 75 percent of its gas in 2018. However, Erik Haaland, communication manager at Equinor, says that Norway’s energy sector is highly competitive, and that Equinor operates as an independent company under its own management.
Even though Equinor (formerly called Statoil, but renamed in 2018) is a limited liability company with its shares traded in New York and Oslo, the government remains the largest shareholder, owning a 67-percent stake. The company remains the dominant player shaping Norwegian energy market. Yet, of the 11-person supervisory board, only three are non-independent, according to Equinor’s website.
Furthermore, the true power over the market is in the hands of Petoro, a company fully owned by the government and responsible for issuing leases for the extraction of natural resources. The company has under 60 employees, yet owns 33 percent of the oil and gas produced by Equinor.
Oystein Noreng, professor emeritus at BI Norwegian Business School and one of Norway’s top energy experts, explains that Norwegian law forbids the sale of oil and gas fields — they can only be rented. “Companies extract oil on behalf of the government under specified conditions,” Noreng told the Kyiv Post.
So Norway has never sold offshore oil and gas exploration blocks, according to Noreng. Instead, he says, there is an administrative licensing procedure under which the government, the owner of the land, selects through state-run firm Petoro the companies that will eventually exploit the field.
Instead of paying a fee for the rights to a block, companies pay high taxes — over 50 percent — on production and earnings, as well as giving some of the oil and gas to the state. Overall there are 13 companies that extract oil, of which seven extract over 1 billion cubic meters of hydrocarbons.
The system ensures that the deposits remain under the government’s control, yet are efficiently exploited by private companies, according to experts.
Lessons for Ukraine
Ukraine is to begin to liberalize its energy sector on March 6, when the first 10 of 42 planned auctions are to take place. The top management of Naftogaz has also been promising to de-bundle the state-owned monopoly since 2014 however has yet to make any major steps in the process.
Up for sale are the rights to lease onshore exploration blocks for a 20-year period. The most likely outcome is that Naftogaz, through its subsidiaries, in the same way as Equinor in Norway, will remain Ukraine’s largest oil and gas producer. But in order to ensure these blocks are exploited efficiently, Ukraine will have to set further rules.
According to Roman Opimakh, the head of the Association of Gas Producers of Ukraine — members of which are responsible for 92 percent of Ukraine’s gas extraction — Ukraine is moving in the right direction.
“In the past 2 years Ukraine has done more than in the past 20 (years),” Opimakh says.
UkrGasVydobyvannya used to receive the rights to manage the country’s resources without any auction. Today, issuing licenses without an auction is impossible. But the low household gas prices obstruct the creation of a fair and competitive market, according to Opimakh.
Volodymyr Gaidash, head of communications at UkrGasVidobyvannya, emphasized in his comment to the Kyiv Post that for a company to operate effectively, the price of natural gas should take into consideration the vast expenses that gas extractors face.
Norway’s response to a similar issue it had back in the day was avoiding gas price regulation, forcing Equinor to work in a competitive environment together with households and other industry players.
