Political instability and a shaky economy do not seem to have deterred either the government’s plan to increase domestic natural gas production or the willingness of private companies to help fulfill that plan. Toronto-listed Cub Energy recently announced that it would go ahead with its 2014 capital expenditure plan of $23-$27million for in-country projects.
The news comes after the Houston-headquartered company increased hydrocarbons output by 29 percent in 2013. A leading oil and gas exploration and production company, Cub Energy last quarter brought its first 100 percent working interest well online – RK-22 – in the Transcarpathian Basin.
The government’s policy of increasing domestic gas production by 8-9 percent, or to 22 billion cubic meters, this year has not led to a stampede of companies entering Ukraine, except for oil majors with their shale gas plans. Of the six biggest private gas extraction companies making holes in Ukraine, only third-ranked Cub Energy can claim to be fully foreign owned. The steadiness of government policy in this sphere and the enormous potential profits are more than enough to keep them going.
Despite the company’s slow but steady success, Cub Energy has not garnered much attention. Unlike its rivals, like London-listed JKX’s Ukrainian subsidiary, the Poltava Petroleum Company, or billionaire Rinat Akhmetov’s Naftogazvydobuvannia, it is not afflicted by shareholder conflict. The debt load is low and the company has not suffered from stoppages.
Through Luhansk-based KUB-Gas, Cub Energy has a 30 percent interest in five drilling licenses in the Donbas and fully owns three more in the region. In addition, the company, via its purchase of Tysagas in 2012, has a 100 percent working interest in four licenses in the Transcarpathian Basin in western Ukraine. Last year Cub Energy bought the Ukrainian PrivateCo and the Turkish Anatolia Energy Corporation to increase its extraction territory to 766,000 acres. While the company states that it is based in Texas, it placed 20 percent of its shares on the Toronto Stock Exchange in 2009. In its 2013 third quarter financials the company reported a 5.6 percent year-on-year decrease in net profit to $2.3 million.
It is also one of the oldest gas extraction companies in Ukraine. In one form or another Cub Energy has been working on the Ukrainian market for at least a decade. It was formerly called 3P International Energy Corporation and registered in Canada, which in 2012 bought out in a reverse-takeover all the assets of Gastek LLC. In turn, Gastek, a U.S.-registered oil and gas company founded in 2004, bought the Luhansk-based KUB-Gas. KUB-Gas, meanwhile, can trace its history back to 2000, when it was co-founded by Luhansk businessman and politician Oleg Titamir.
Titamir currently deals in heavy machinery and construction materials, but in the 1990s and early 2000s he was into fuels, having worked for the notorious United Energy Systems of Ukraine and Donbastransgas developing gas wells in Luhansk Oblast. By his own admission, Titamir did not have the resources to develop KUB-Gas properly, and so as the company’s output declined and gas prices shot up in 2009 he agreed that 70 percent of it be sold for $45 million to Jan Kulczyk, the richest man in Poland. Titamir was appointed deputy head of Luhansk Oblast State Administration under then-President Viktor Yushchenko, but he changed colors during the financial crash in favor of opposition leader Arseniy Yatseniuk’s Front for Changes, now part of imprisoned ex-Prime Minister Yulia Tymoshenko’s Batkivshchyna Party.
The common denominator in all these companies is Donetsk-native, U.S. and Ukrainian dual citizen 49-year old Mikhail Afendikov, the current executive chairman and chief executive of Cub Energy and co-founder of both Gastek and KUB-Gas. According to investor relations director Lionel McBee, Afendikov left Ukraine for the U.S. in the early 1990s and returned to Luhansk to enter the gas extraction business. Seeing how local technology limited effective drilling, McBee explained, Afendikov began importing state-of-the-art Canadian equipment, a practice that his companies have extended to other sites.
Afendikov has praised conditions for foreign investors in Ukraine and his company has had no problems with the authorities. Others have not been so fortunate. Cub Energy senior consultant and shareholder Robert Bensch was obliged to sell his Cardinal Resources oil and gas production company in 2008 after the government issued decree #31, which lowered gas prices from $200 to $50, accouding to Bensch.
However, the gas production business in Ukraine is a risky activity with uncertain long-term prospects as the country’s gas reserves have been vastly exhausted by the Soviet economy due to high inefficiencies. Moreover, such projects usually intersect with the interests of local oligarchs, whose businesses are highly dependent on energy resources. Therefore, it’s difficult to succeed in such a market without strength and the ability to resist external pressure.
Kyiv Post staff writer Evan Ostryzniuk can be reached at [email protected].
