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    Ukrainian Challenge: Opportunities and Barriers



There's a striking need for Ukraine to once again become a net energy exporter, according to Alastair McBain, Chief Executive Officer, Arawak Energy.

by: DL

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Natural Gas & LNG News, News By Country, Ukraine, Top Stories

Ukrainian Challenge: Opportunities and Barriers

What a difference a year makes.

In his address to delegates at the Ukrainian Energy Forum in Kiev, Ukraine, Alastair McBain, Chief Executive Officer, Arawak Energy, a unit of Vitol, noted that Ukraine's government had addressed many issues of concern for hydrocarbons explorers and producers in the country. Compared to the conference a year earlier, there appeared to be a glimmer of hope on the horizon.

Mr. McBain commented, "It's encouraging to see that other people have followed our example to make investments in this wonderful country."

Arawak Energy, he explained, was part of the big trading company, Vitol, an independent trading company, involved in gas, carbon emissions, and biofuels among others like the upstream oil and gas E&P business.

A public company, he said Arawak's focus had been in the former Soviet Union countries since 1995, with operations in Ukraine,  Azerbaijan and Kazakhstan, and that it had 29 concession blocks comprising 2,800 square kilometers, and employed 1,000 staff.

The company's total production, according to Mr. McBain, ran 6,500 boe/day net, 10,000 gross. Vitol, he added, was also active in West Africa, where they were partnered with ENI.

He went on to list the opportunities and barriers of the "Ukrainian Challenge."

"To us, one of the very major opportunities which attracted us to invest in Ukraine was the underinvestment and, candidly, neglect which started from the latter days of the Soviet Union, where the E&P focus moved elsewhere," he recalled.

"There's a striking need for Ukraine to once again become a net energy exporter, capitalizing on the global high price for energy, and we believe it's absolutely within the grasp of the sector in Ukraine. There's a strong applicability of modern upstream technologies, particularly for tight oil and gas, shales. There's also deep drilling and offshore technologies that were not generally available in the Soviet era," he said.

Moreover, he said there was a well developed gas market with excellent pipeline infrastructure readily available. The modernization of the E&P industry, he added, was supported by the government and there were a host of reforms in progress.

"There's a large availability of highly motivated technical staff, obviously with strong training need in the ways of the modern oil industry," said Mr. McBain.

He noted that there were well developed domestic industries available to supply oilfield equipment, including pipe and drilling rigs.

However, Mr. McBain pointed out some barriers or challenges like Ukraine's fragile situation with the independent industrial sector paying full, unsubsidized prices, "which is, in many ways, intuitively the reverse of what you would expect. We understand it is being addressed in the energy strategy through energy efficiency initiatives."

Gas politics, he said, was another potential barrier, as were underdeveloped gas market mechanisms: "There's no obvious national balance point - a lack of transparency, so the shift of power to the national regulator and away from vested interests should help to address that."

Ukraine's legislative framework remained a work in progress, according to him, and implementation remained to be done, but the implementation of the Energy Strategy should facilitate that, he opined.

Mr. McBain pointed out that some legacy issues remained to be addressed, like the right to move from the exploration phase to the production phase required a special permit. "The process is not particularly easy, it's not easy to do this without putting your exploration success out to tender, which is obviously something you don't want to do," he explained, adding that there were also some contradictions between the general legislation on the subsoil user environment and land laws.

"We very much welcome the new PSA laws, and obviously they have been successful in attracting some big ticket international investors and that's excellent, but at the same time it seems not quite right that the PSA world should be totally different than the normal world for subsoil users and without a clear mechanism for a current producer of the old framework to move to the PSA network," he commented.

Cutting edge technologies which were needed to move the industry to the next gear were not readily available, he said, and importing new equipment would be costly and time consuming, and there were regulatory barriers to that.

He spoke briefly about Arawak's activity: "We've acquired a minority position in an existing gas producer called Geoalliance in August 2012; there are 16 blocks, just over 1,000 square kilometers under license with the focus of operations in the Poltava region. We have current production of just over 800,000 cubic meters/day, with some condensate. This, I believe, puts us in the position of being the largest independent gas producer in Ukraine.

"Obviously, we're very pleased to have grown to this position and we have grown strongly in the last half of 2012," said Mr. McBain. "We're drilling 5 wells, have got a large seismic program and will be looking at a frack campaign this year or early 2014. We're assembling an in-house crew, modernizing our drilling rigs, upgrading services processing facilities, and in total we're expecting to spend a little over $100 million this year."

In terms of the lessons learnt, Mr. McBain said it was important to listen in Ukraine and behave with respect. He explained, "It's very tempting as an outsider to think you can correct everything overnight; there are a number of people out there with long history in the business."

But he called it "extremely important" to get the best possible legal advice in Ukraine.

In terms of "don't's" he said not to rely heavily on expatriates, nor cut corners with regulation no matter how irrational it might seem. It also wasn't prudent to assume one knew better. "Don't run before you can walk," he said.

"There are changes on the way and hopefully they'll be positive. A vibrant independent sector will facilitate those changes in its own right," said Arawak's Alistair McBain.