The Cabinet of Ministers has approved a resolution that will let state oil and gas company Naftogaz explore and produce hydrocarbons on the Black Sea shelf without competing in an auction.
Naftogaz will be able to get special permits to explore subsoil oil and gas, including pilot field development for a period of 30 years. The special permits come with a government fee — from 10% from the reserve price at depths of less than 100 meters to 1% at depths greater than that.
According to the resolution, Naftogaz “is the only company in Ukraine that has many years of experience developing offshore gas fields” and has the resources to do so.
“This decision will allow Ukraine to increase its production of natural gas, create jobs and fill local and state budgets,” Roman Abramovsky, environmental protection minister, stated during a government meeting on Nov. 25, news agency Interfax-Ukraine reported.
Sergey Kuyun, head of energy consultancy A-95, said that the decision has pros and cons. On the one hand, it’s usually preferable to conduct a proper auction. On the other hand, auctions take up to two years — time that can be better spent exploring the Black Sea shelf and getting production started as soon as possible.
Given the current economic climate, said Kuyun, it’s unlikely that big foreign players will come in to bid on a contest in Ukraine, a country burdened by Russia’s war in the Donbass and the coronavirus crisis.
However, when a large foreign player did win the $200 million exploration and production tender in the Black Sea in August 2019, the Ukrainian government canceled it less than a month later, raising questions.
U.S. company Trident, backed by western hedge funds and headed by former Russian lawmaker and current Ukrainian businessman Ilya Ponomarev, said it had been ready to invest as much as $1 billion into gas extraction.
The energy ministry at the time said the contest had been too short and not competitive enough, even though three foreign companies competed in the tender.
The urgency is growing for Ukraine to explore new gas fields, as its existing production sites are more than 80% depleted. The country is lagging behind other Black Sea nations in extracting the potentially bountiful offshore gas deposits.
Naftogaz told Ukrainian magazine Novoye Vremya that its investments in the Black Sea shelf could amount to $40 million in the first year.
Naftogaz recorded losses of Hr 17 billion ($596 million) in the first nine months of 2020, compared to a profit of Hr 12.9 billion ($452 million) in the same period in 2019.
While the company has been hit by the global economic crisis, former manager Yuriy Vitrenko had written on Facebook that the losses have more to do with governance issues and technological deficiencies.
