Posted 02 Feb 2008 13:37
Oil and Gas market in Ukraine (in-depth market study)
The volume of oil and gas consumption in Ukraine in recent years has risen many times, which caused substantial growth of oil and gas import in Ukraine by foreign companies.
General overview. Ukraine, being a net importer of energy, is well endowed with its own resources. Ukraine's oil and gas reserves are estimated at the level of 2,3 billion barrels of oil equivalent, with natural gas contributing 87% of the total. Ukraine's gas reserves account for 0,6% of total world proven gas reserves and 0,2% of oil reserves.
Ukraine`s hydrocarbon resources are estimated at 7-8 billion tons of fuel equivalent. Average annual oil and gas production amounts to 18 billion cubic meters of natural gas and 4 million tons of crude oil and covers 25 % of the demand for natural gas and 13 % of the demand for crude oil in Ukraine. Crude oil and natural gas are imported primarily from Russia, or through Russia from Turkmenistan (natural gas) and Kazakhstan (crude oil). Oil and gas make up to 60 % of the primary fuel consumption in Ukraine, including 40 % natural gas and 20 % oil.
There are three petroliferous regions in Ukraine: in the west (the Carpathian region), in the east (the Dnipro-Donetsk region) and in the south (the Black Sea - Azov Sea region).
The Dnipro-Donetsk basin is a major producing region of Ukraine accounting for 90% of Ukrainian production from over 120 oil and gas fields. The cumulative production from the basin is estimated at over 52 trillion cubic feet of gas and 1,3 billion barrels of oil. Over 3,000 wells have been drilled in the basin to date. The basin holds potential for deep gas exploration (deeper than 3.8km).
The Carpathian basin is relatively large - over 700 million barrels of oil and 8 trillion cubic feet of natural gas. The Carpathian foredeep has been explored to depths of 4.0km to 4.5km. Despite the extensive activities, deeper parts of the basin offer very good potential for further exploration.
The Black Sea - Azov Sea basin is predominantly gas-prone and includes natural gas fields. The Ukrainian part of the Black Sea shelf may have substantial oil and gas reserves, with mild weather and maximum water depth of 100 m. The hydrocarbon potential of the Ukrainian Black Sea shelf is substantial and it has been inefficiently explored, i.e. large structures in deeper waters have been bypassed due to the lack of offshore technology during Soviet times.
Key stakeholders. Naftogaz of Ukraine, a national holding company and its subsidiaries control the domestic natural gas and crude oil production industry and about 90% of the gas trading market. Ukrtransgaz and Ukrtransnafta, state subordinate companies of Naftogaz, own all oil and gas transportation and distribution systems and most of the oil and gas storage facilities in Ukraine. According to current Ukrainian legislation, these facilities are not available for privatization. In the future, however, the government intends to privatize portions of Naftogaz. Naftogaz`s subsidiary Ukrgazvydobuvannya and subordinate companies Ukrnafta and Chornomornaftogaz produce 97% of domestic natural gas and 96% of domestic crude oil and condensate. Chornomornaftogaz extracts oil and gas in Crimea on the Black and Azov Sea shelves, while Ukrgazvydobuvannia and Ukrnafta operate on land. Ukrnafta itself, a 50% state-owned company, is the largest oil producer in Ukraine (94% of domestic oil production.) Despite the high level of state control, there is a number of successfully operating international companies in oil and gas extraction. They are mostly working in joint ventures or under joint activity agreements with Ukrnafta or with Naftogaz`s subsidiaries. The Law on Production Sharing Agreements and the Oil & Gas Law were intended to simplify the procedure of obtaining licenses for oil & gas exploration and extraction and provide additional guaranties for the investors.
Oil & Gas Storage and Transportation. Ukraine has approximately 35,600 kilometers of gas pipelines, all operated by Naftogaz. The yearly transportation capacity of the system is 290 billion cubic meters. The transportation capacity toward South Russia, Belarus, Moldova, Romania, Hungary, Slovakia, and Poland is approximately 170 billion cubic meters annually. Naftogaz operates underground gas storage reservoirs with a total capacity of 32 billion cubic meters. Ukrtransnafta (includes Druzhba Pipeline company and Prydniprovsky Main Pipeline company) transports about 68 million tons of crude oil annually, operating at about 60% capacity. Druzhba Pipeline delivers crude oil to two refineries in Western Ukraine and transports Russian oil to Europe. The Prydniprovsky Main Pipeline delivers crude oil to the refineries in the central, eastern and southern Ukraine, as well as Russian oil exports to the terminals at Odessa, Ukraine and Novorossiysk (Russia.)
There are three major oil terminals in Ukraine: Odessa, Yuzhny and Feodosia. The Odessa oil terminal, which has an annual capacity of 20 million tons of crude oil, accounts for most of the crude oil and petroleum products transshipped in Ukraine. The nine million-ton capacity Yuzhny oil terminal launched in December 2001, and the Odessa-Brody pipeline are intended to be an essential part of the Caspian crude transit route through Ukraine to Poland and further to Europe. Before 2004, the southern part of the Odessa-Brody pipeline and Yuzhny terminal were shipping Russian crude oil.
Oil Refining and Gas Processing. Oil & gas production and transportation is mostly state-owned. Oil refining and petroleum retail trade is mostly private. Six Ukrainian large-capacity oil refineries are currently controlled by private shareholders, including: Lysychansk LINOS in eastern Ukraine (owned by TNK-BP), Kremenchuk NefteOrgSintez in central Ukraine (owned by the Ukrainian Government and by Ukrtatnafta, a Ukraine-Tatarstan JV), Kherson Refinery in southern Ukraine (owned by Alliance Group, Russia in partnership with Kazmunaigaz/Kazakhoil, Kazakhstan), Odessa Refinery in southern Ukraine (owned by Lukoil, Russia), Halychyna (controlled by Halychyna Economic Union, Ukraine) and Naftokhimik Prykarpattia (controlled by Privatbank) in western Ukraine. Petroleum trading both wholesale and retail is a free self-regulating market. Lukoil, TNK-BP, WOG, Sentoza, Ukrtatnafta are the major retail traders and have their own gasoline service stations, petroleum storage and distribution capacities throughout Ukraine.
Even though Ukraine has the second largest refinery capacity in the CIS, with six crude oil refineries of about 53 million tons capacity potential per year, the utilization is still about 50%. Private shareholders of Ukrainian refineries are currently investing in upgrading the capacities to increase utilization. Development of industrial transportation and logistics as well as soaring of car sales were main reasons for increase in oil consumption. Experts estimated the market volume up to $6 billion in 2005, and about $8 billion in 2007. The market growth caused also new trends in the field - consumers tend to buy high-quality antiknock [high-duty] fuel instead of low-quality cheaper fuel. In addition, because Ukraine is a net importer of oil products, the market is strongly dependant on world market tendencies and price.
Although the market of oil products is constantly growing, from year to year Ukrainian petroleum refineries are decreasing their production. When in 2005 the Government imposed zero rate import duty, these actions led to influx of foreign oil products in Ukraine. Importers offered petrol at the same price, although comparing to their Ukrainian rivals the quality of imported products was much higher. Due to this reason the share of foreign oil products (from Belarus, Romania, Lithuania and Russia) increased dramatically. In 2005 the share of foreign companies was only 10%, in 2006 it accounted to almost 25% and at the end of 2007 the foreign share is estimated to be up to 45% of all oil products sold in Ukraine.
Another drawback of Ukrainian refineries is low production efficiency comparing to European competitors.
Main trend of oil retail market was acquisition of small companies by key players in the field. According to experts only in 2007 the number of retail companies, which sell oil products decreased three times – up to 1500. Large quantity of filling stations (more than 6.000 all over Ukraine) and strict competition also had a positive influence on quality of service, which now equal to European. In order to support reputation and staid company image, retailers invest millions in advertising campaigns and offer their consumers premium-quality petrol (euro-3, 4, 5 standards).
There are five gas-processing plants (GPPs) in Ukraine. Unlike oil refineries, Ukrainian GPPs are not independent entities. GPPs are part of larger oil/gas producers (or their regional branches). Three of them (Hnydytsevsky, Kachanivsky, and Dolynsky) are incorporated into Ukrnafta; and two of them (Shebelinsky and Seleschensky) are in the Ukrgazvydobuvannia/Naftogaz structure. Together, Ukrainian GPPs and privately owned small gas processing units produce only about 1.2 million tons per year. GPPs are involved in the purification of light crude oil, processing petroleum gas, production ofpropane-butane and motor fuel.
Oil and Gas Field Machinery. Ukraine does not have local manufacturing of pumping equipment capable of producing below 6,000 feet, even though many of the fields on-shore are at depths of 10,000 to 15,000 feet. Local production of drilling machinery is limited. Stimulation technologies such as hydraulic fracturing and acid stimulation are not available. On-shore and drilling equipment is antiquated and has difficulty drilling below 15,000 feet. Ukraine has substantial offshore natural gas and crude oil reserves, but does not have technology to drill underwater deeper than 70-80 meters (200 feet).
Best sales prospects foreign companies include: technologies for gas production and storage, for gas-transport infrastructure, in particular pipeline construction equipment, compressors and pumps for pipeline applications; gas transmission systems; gas pipeline leak control systems; gas pipe fittings and applications; welding machines, cranes, pipe-cleaning equipment, and line trend machines; monitoring and control systems for gas and oil pipelines; advanced and highly efficient oil and gas exploration and drilling equipment and technologies, particularly pontoons supported on columns, hoisting cranes, drilling rigs, bits, electric motors, winch rollers, rotary tables, sheds, hoisting blocks, monkey boards, crown blocks, gin holes, shackles, cutting, roller and diamond bits, casing sleeves, chemicals, stimulation technologies, modern 3-D seismic, drilling pumps (below 6,000 feet), drilling technology for offshore projects deeper than 200 feet; equipment for atmospheric-vacuum oil refining; modernization and increasing of hydro-cracking and catalytic cracking capacities; units for catalytic transformation of distillates; industrial automation, control and monitoring systems for refineries, gas processing and petrochemical plants; desulfurization and quality control facilities; safety systems; fuel dispensers, fuel storage tanks, fuel level monitoring and accounting systems.
The largest projects in the oil & gas sector include the following:
1) Refineries rehabilitation & upgrade.
Ukrtatnafta/Kremenchuk, TNK-BP/LINOS, Lukoil/Odesa and Alliance Group/Kherson refineries are undergoing capacity rehabilitation and upgrade projects on different stages. The major Ukraine oil production company Ukrnafta is looking for partners to reconstruct and upgrade Kachanivsk Gas Refinery. The major gas production company Ukrgazdobycha plans to upgrade its three gas processing plants.
2) Crude oil transit by pipeline.
UkrTransNafta, Ukraine`s oil transportation monopolist, is looking for participants for the international consortium to operate the Odessa-Brody pipeline and Yuzhny oil terminal, to build the pipeline extension to Plock in Poland and to pump Caspian crude to Central and Southern European markets.
3) Gas transit and distribution by pipeline.
The major Ukrainian gas transit company UkrTransGaz is attracting foreign investors and equipment suppliers to rehabilitate and modernize the Ukrainian gas transport system, including building co-generation units on gas compressor stations and increasing the efficiency of compressor stations. Russia, Germany and Ukraine are negotiating a gas transit consortium to rehabilitate and operate the main gas pipeline that passes through Ukraine and delivers nearly 40% of Europe`s natural gas.
4) Coal bed methane development.
The major Ukrainian private industrial corporation, Industrial Union of Donbas, is looking for large suppliers with project financing capabilities for a coal bed methane development project in the Donbas region.
Conclusion. Despite the low share in world reserves, Ukraine could boost production by utilizing up-to-date technology. As the implementation of oil & gas exploration and production needs considerable investment in new technologies currently not available in Ukraine, the sector opens great opportunities for foreign investors and suppliers of equipment. While modern drilling technology is needed for deep exploration, most of the opportunities in the basin are believed to lie with work-overs, in-fill drilling, or step-out drilling. The only way Ukrainian companies can save their positions in oil and gas sector is by substantial investment in modern technologies and cooperation with foreign partners.
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Author: Julia Berezovska, Kseniya Belinskaya, Oleksandr Tereshchenko
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