A Unique Ukrainian Energy Day

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Ukraine’s gas market is changing fast. This transformation will impact the price and services offered to ordinary consumers, the development of domestic production and the country’s future energy landscape.

A joint project by the Kyiv Post and the Federation of Employers of the Oil and Gas Industry addresses these and other issues with the help of some of the best experts in the field – to determine what the future of Ukrainian energy will look like.

Few sectors play such an outsized role in Ukraine’s development as oil and, even more importantly, gas. Gas ensures tens of millions of households stay warm in the harsh winters, that industry keeps producing and is constantly mixed into local and international politics.

Organized as a special edition of Energy Talks, a forum hosted by the Federation of Employers of the Oil and Gas Industry, the Ukrainian Energy Day gathered experts to tackle some of the most important issues for both the Ukrainian and global energy industries.

Oil and gas remains a key sector for the Ukrainian economy, a key issue for Ukrainian security, and key to the future of Ukraine

Adam Barbolet

This point was underscored by Adam Barbolet, Senior Trade Commissioner and Commercial Counsellor at the Embassy of Canada in Ukraine, during last week’s Ukrainian Energy Day, an international event dedicated to the country’s energy sector. A summer breakthrough is coming to Ukraine’s retail gas market.

An industry-wide crisis

This year’s Energy Day took place amid exceptionally turbulent conditions – and not just because it took place online (the previous year’s session took place in Calgary, Canada).

“Today we are speaking according to COVID rules,” quipped Oleksandr Kharchenko, Managing Director of the Energy Industry Research Centre think tank.

Indeed, the coronavirus economic slowdown struck a painful blow to the industry. While headlines earlier this year emphasized how the oil price had fallen below zero (at least technically), gas has also suffered from a fall in demand in 2020 – by over 4% according to the Global Gas Report published by Snam, the International Gas Union, and BloombergNEF.

This has had a major impact on gas prices, which have dropped twofold, explained Oleksandr Romaniuk, Director of the Exploration and Production Division of the Naftogaz Group. “Naftogaz is no exception,” he added.

This is might be especially problematic heading into the current season, noted Andriy Kobolyev, Naftogaz CEO.

Years of work to cut down consumption and wean Ukraine off of gas imports, a warmer 2019-20 winter and reduced demand this summer mean that Ukraine is facing a virtually unprecedented situation of having more than enough supplies for the winter – the country currently has around 28 billion cubic meters (bcm) in storage, compared to an expected needed of 15 bcm for the winter.

Unfortunately, it was not just the format that was impacted, the oil and gas all over the world is living through a wide-scale crisis.

On the upside this is expected to result in lower gas prices for Ukrainian consumers this winter than for European users. However, it also carries risks for the market overall.

Vitaliy Shcherbenko

Traders created a huge downward pressure on the Ukrainian market, there is a very high likelihood of price collapse this winter.

Andriy Kobolyev

Big plans, continuous improvement

While the current set of challenges will be a headache for energy companies – experts warned that just like its international peers, Naftogaz of Ukraine has pulled the brakes on investments – oil and gas will continue to dominate in coming decades, especially given that natural gas is the best transition fuel on the way towards a greener, hydrogen-based economy.

Indeed, hydrogen is attracting a growing amount of attention as a potential solution for governments eager to move from fossil fuels and make their economies greener.

To take full advantage of hydrogen, however, additional investments are needed. But that does not mean that Ukraine has been waiting around – indeed, Ukraine’s gas sector has benefited from some tectonic changes over the past couple of years.

We are ready to be involved in the construction of the new green economy. We are ready to produce and even export hydrogen

In recent months, the long-regularly retail portion of the market has finally been liberalized, which means that consumers will pay market prices – but also benefit from better services and more competitive offers, likely bundling gas with electricity provision.

Vitaliy Shcherbenko

Created through the electrolysis of water, hydrogen can be mixed in with natural gas in the current networks of pipelines (current estimates are that 15-20% of hydrogen could be introduced into the gas mix in countries like Ukraine).

It all depends on the abundance of electricity, however, making it particularly interesting for countries, like Ukraine, which have a surplus, Lana Zerkal, Advisor to Naftogaz CEO argues.

One of the main is the long-awaited unbundling of the transmission system operator (TSO), which has brought Ukraine in line with European regulations on market liberalization. Together with a new transit contract with Gazprom, this puts Ukraine in favourable situation to continue to be the main route for Russian (and Central Asian) gas to transit to European consumers.

In recent years Gazprom has attempted to push Ukraine out of its position as the central transit role – in addition to the existing Nord Stream 1, which carried over 58 bcm in 2018 under the Baltic Sea, Gazprom is planning a second line that would be able to carry 31.5 bcm. Together with the TurkStream, planned under the Black Sea, this would make it possible to entirely circumvent Ukraine.

For now, however, it has been blocked by partners for reasons that range from ecological concerns to a recognition that it is a geopolitical project rather than an economic one.

Yet transit is not the only front on which Ukraine has made substantial progress. In particular, the modernization and professionalization of the sector overall is already playing a big role.

The operational side has also improved, particularly in terms of digital solutions for sub-soil users – for instance via the use of e-auction to sell licenses. These have increased from just 10 a few years ago to 36 in 2019 and 35 already in 2020. This has not just substantially increased revenues for the state, but also made the process more transparent and convenient.

New partners for success

To continue moving forward, however, Ukraine will need the technological and financial support of Western partners. This is particularly true when it comes to increasing own production, which is still not sufficient to cover Ukraine’s domestic needs and forces the country to buy gas from European hubs.

According to Kobolyev, the crisis underscores the importance of cooperation with international partners and creates new opportunities. Among the various partners Canada, with its impressive industry centered around the Alberta deposits, is the most interesting.

Naftogaz is particularly interested in Canada’s experience of non- conventional gas (i.e., so called tight gas, which is extracted using a novel and sophisticated process), explained Romaniuk. Applying this technology could unlock vast new amounts of gas, including from what are currently considered depleted deposits.

Education is another area of interest for Naftogaz of Ukraine. To implement all the new technologies, explained Margarita Korotkova, Director for Personnel Management and Social Policy of Naftogaz of Ukraine, you need skilled staff that are in short supply in Ukraine.

Our main strategic goal is exploration, our country has huge potential in terms of yet unlocked deposits of gas – both in the Dnipro basin and Black Sea regions. We are open as we never were before.

Oleksandr Romaniuk

We hope that with the help of our Canadian counterparts we will become stronger, more efficient. We will be able to compete even under the current difficult price environment and become more resilient.

Andriy Kobolyev

Thanks to partnerships with over 60 industry partners, as well as the Southern Alberta Institute for Technology (and Ukrainian universities), Ukraine has been able to launch labs and practical education programs that will provide the basis for a modern gas industry, Korotkova noted.

Ukraine already has successful experiences of cooperation with Canadian players, most notably between Vermilion and Ukrgasvydobuvannya, a part of Naftogaz Group. Vermillion was particularly important for the geological exploration phase, for which its expertise proved especially valuable.

The big opportunity going forward would be to apply this collaboration to Ukraine’s Black Sea shelf – which has potential gas deposits that could reach the trillions of cubic meters.

The main challenge to unlocking this opportunity? According to Kobolyev, the main stumbling block is rule of law, which continues to plague the country, while the second is Russian infringement of Ukraine’s territorial integrity – particularly in the Black Sea shelf. To overcome this international partners need to be pro-active and vocal about securing Ukraine’s interests.

Whatever the stumbling blocks, the direction that Ukrainian energy experts wants to take is quite clear. “I hope next year we will be able to meet offline in Calgary, as part of the Global Petroleum Show,” Shcherbenko announced emphatically.

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