[NGW Magazine] JKX future in ukraine in doubt
This article is featured in NGW Magazine Volume 2, Issue 13.
The board of east Europe-focused oil and gas producer JKX faced its curtain call at the end of the month. Shareholders representing 47% of the shares used the annual general meeting to vote in a new set of directors and remove the CEO and CFO: Tom Reed and Russell Hoare. At time of press there were just four non-executive directors running the company, chaired as before by Paul Ostling.
The timing is curious: JKX has just embarked on a major drilling operation in Poltava that could transform the company’s fortunes and boost Ukraine’s gas supplies. The Rudenkovskoe field contains 2.8 trillion ft³ – possibly $3bn worth of recoverable gas. It is not clear how this will be developed under a new team.
Reed and Hoare were installed in late January 2016 by two Ukrainian entrepreneurs who wanted a better return on their investment than they felt they were likely to have with the old board. The new board addressed declining production and the reduction of $40mn of tax liabilities in Ukraine which might otherwise have put the company out of business later that year.
Since then the decline in production has been halted and some of the tax liability has been settled through the courts; but last month one of them, representing Eclairs (27.47%), called for the wholesale dismissal of the executive and non-executive directors of the board. The proposal was to install just one director, Michael Bakunenko; but when he learned that was not acceptable in UK law he changed his mind. Proxima (19.92% shareholder) also wanted the board dismissed.
At a board meeting after the AGM it was decided that Reed and Hoare would stay on for a three-month transition period, Reed as advisor to the acting CEO Victor Gladun, the present general director of Poltava Petroleum Company. Hoare is to stay as acting CFO, with no successor yet identified. Proxima’s non-executive director Vladimir Rusinov was also voted off the board.
Despite Reed’s repeated questioning in May and June, no reason was given for Eclairs’ and Proxima’s change of heart; nor any indication of what the plans were for the company’s future, Reed told NGW in an interview June 13.
This is all the stranger as the company’s tax debts have been reduced by legal argument – a tactic one shareholder, Proxima’s Igor Kolomoisky, who had been frustrated with the previous board for three years, had not expected to succeed; and the company has just begun a new system of hydraulic fracturing at the Rudenkovskoe field, in the Poltava region, repeating successful north American tactics to increase gas output at lower cost. The previous board had fracked the field, Reed said; but not in the way were doing it. “We have done eight fracks in ten days at a cost of $1.5-2mn,” he said. Before, it would have taken 100 days and cost $12mn to do ten fracks.
The company has done all the preparation it needed to and is now in execution mode, aided by US oil field services giant Schlumberger, which is responsible for providing the equipment used to blend the proppant and drilling fluid and to pump it into the well.
JKX has an economic advantage as it was able to lease the licences from NAK Nadra, the state subsoil agency, for nothing. The Rudenkovskoe field has 32 Soviet-era wells, all plugged and abandoned. This means lifting off the concrete cap and drilling through the tangle of old strings of pipes that have been cemented in place and so become a part of the plug. When a drill-bit designed for concrete encounters steel it can become damaged and need replacement.
Where the new system Reed introduced saves time and money is by delegating budgetary responsibility to the supervisors rather than following the central command and control approach that stifles individual initiative and characterises the slow performance of former Soviet enterprises.
It was the nimble small operators in north America that brought about the massive increase in shale oil and gas output, Reed said, not the majors, whose output actually fell in the US.
“We showed the Ukrainian crews what was possible,” he said. “We did not increase output by percentages but by 20 or 30 times. And this was not new discoveries but a completely new approach.” This was not just improvements on the engineering side but also on the management side. If a drill-bit encountered metal, or a motor broke, the crews could buy or insert a replacement before fixing what was broken, saving on down-time.
JKX gave the supervisor the right to change things ‘on the fly’ without seeking approval, if something unexpected came up when drilling. Drilling to a depth of 4,000 metres could take upwards of 3 months, whereas in the US it takes just a week or two. This approach will have to be copied and learned by the new operators if output is to reach and exceed the levels that the country wants. “If it’s not us running the company, it will need to be someone like us,” he said.