Ukraine’s state energy company Naftogaz is finally reaping the rewards of his overseas prospecting ventures, as the company announced that it can now start extraction of oil and natural gas in Egypt.
In
September-October alone, Naftogaz reported that it had extracted 19 million
cubic meters of natural gas, or about 300,000 cubic meters per day. The
pipelines have been laid and the infrastructure will be completed in 2015.
Once the infrastructure is fully
operational, the company projects daily natural gas extraction of 700,000 cubic
meters per day, which would come to over 255 million per year. Taking into
consideration the first quarter 2015 price for gas agreed with Russia’s Gazprom
on Oct. 30 of $365 per thousand cubic meters, the relative value for Ukraine of
one year’s worth of Egyptian gas comes to around $93 million.
In addition,
Naftogaz expects to produce 260,000 tons of oil this year in Egypt, or 11-12 percent of the annual oil production in Ukraine. Once all the gear is in place, the expectations is that
extraction will rise form 740 tonnes of oil per day to 950, according to
Naftogaz.
The project, located in the El
Alam Shawish East field in the Western Desert of Egypt, was initiated in 2006
with a concession agreement between Naftogaz and the Egyptian government and
the Egyptian General Petroleum Corporation. After drilling 16 prospecting, 12
exploratory and 12 production wells, the first output of the 80 tonnes of oil
per day, or 588 barrels, began to flow in 2009. Until this past September,
total production has been 680,000 tonnes of oil.
However, all of the oil and
gas produced by Naftogaz in the Western Desert is sold in Egypt, not in Ukraine.
Naftogaz has expressed a desire to bring
Egyptian gas in a liquefied form to Ukraine. However, while Egypt has two
export-oriented liquefied natural gas terminals capable of liquefying as much
as 10 billion cubic meters of natural gas, according to the Oxford Business
Group, Ukraine does not have a regasification facility needed to turn the liquefied
gas into the state that’s used in the industry.
However, political tension in Egypt that
started yet in 2011 during the Arab Spring has had a negative impact on the
economy, which is why the energy exports have been down. Last year, Egypt
exported just 3.7 billion cubic meters of LNG in 2013, while in 2010 the figure
was 6.9 billion cubic meters. It has signed contracts with Algeria and France
to import LNG.
Energy specialist Andriy Chubik of the
think tank XXI Strategy sees this latest stage of the Egyptian project as a
“positive example for going forward with renewed interest in Naftogaz’s overseas
investments.” He noted that it would be very difficult to bring the gas to
Ukraine, as described above, but more importantly the project creates an
invaluable revenue stream for the company, which is heavily in debt and short
of cash. Naftogaz reported $4.2 billion of net losses for nine months of this
year, which is more than six time last year losses for the same period in
dollar terms.
The fact that the Egyptian gas is coming
out the ground in large volume now is no coincidence. Naftogaz CEO Andriy
Kobolev has made such projects a company priority, says Chubik. Before, the
company had been dragging its feet in the Middle East, starving projects there
of investment.
So far, the Western Desert field is the
only overseas project of Naftogaz that is producing. The company created a
subsidiary called Naftogaz Middle East to develop hydrocarbons in the United
Arab Emirates in 2004, but to date nothing has come of it. The company also developed
a plan for a Euro-Asian Oil Transportation Corridor to get oil from the Caspian
Sea to European markets in order to avoid transport bottlenecks in the
Dardanelles and diversify supply. However, this project too is moribund.
Now, however, with the renewed enthusiasm
for energy diversification, similar projects could be soon in the works.
Ukraine has long-standing relationships with the countries of North Africa from
Soviet times to provide technical assistance, explains Chubik of XXI Strategy.
The hydrocarbons there are plentiful and easily accessible as well.
Ukraine consumed 48 billion cubic meters
of gas last year and imports most of it from Russia’s Gazprom and this year is
going to be likely 42-43 billion, according to the Cabinet of Ministers. Public
companies accounted for 90 percent of natural gas output in 2013 in Ukraine, or
18.7 billion cubic meters, while private companies extracted 2.3 billion cubic
meters. With the Russian annexation of Crimea in March, Ukraine lost control of
the state company Chornomornaftogaz, which produced 1.65 billion cubic meters
in 2013. The country’s proven conventional gas resources were estimated at
1,092 billion cubic meters by the U.S. Energy Information Agency.
The latest Gazprom deal notwithstanding, Naftogaz
will need all the gas it can feed its pipelines, since as of Nov. 11 until Feb.
28, 2015 the company became the monopoly supplier of natural gas to all industries
and energy-producing companies. This was done by Cabinet decree on Nov. 7,
although originally the plan was for the monopoly status to be assumed on Dec.
1.
Kyiv
Post business journalist Evan Ostryzniuk can be reached at [email protected].
