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27 April 2021

Gas market of Ukraine: production

Natural gas is widely used both in industry (power generation, chemical, metallurgical, processing industries) and for the needs of the households (heating, cooking, etc.).

The main source of natural gas production is its industrial extraction.

The largest reserves of natural gas in Ukraine are concentrated in the Dnipro-Donetsk hollow, in Kharkiv and Poltava regions.

How much gas does Ukraine produce?

By the end of 2020, Ukraine produced 20.2 bcm of natural gas, which is 2 per cent (or 415 million m3) less than in the previous year. Compared to 2018, the gas production in 2020 decreased by 3.3 per cent(or by 0.7 bcm).

The state-owned companies produced 15.3 bcm in 2020 and the rest of the gas – 4.9 bcm was produced by private companies.

According to the gas market monitoring data for the 4th quarter of 2020 provided by the NEURC, commercial natural gas production in Q4 2020 decreased by 83 million m3 (or 1.7 per cent) compared to the Q3 2020 and by 118 million m3 (or 2.4 per cent) compared to the same period of 2019.

The NEURC’s monitoring results for the natural gas market for the Q4 2019 also confirm a decline in gas production in Ukraine. As such, the volume of natural gas production in Q4 2019 decreased by 18 million m3 (or 0.38 per cent) compared to the same period of 2018.

Naftogaz Group produced 13.45 bcm of commercial gas in 2020, which is 1 per cent less than in 2019.

Experts attribute the reduction in gas production to the natural deterioration of the main Naftogaz fields, which were discovered in the middle of the 20th century. Their depletion rate is approaching 90 per cent. The peak of the natural gas production in such fields was observed in 1960-1970, at the beginning of their development.

An increase in Ukrainian gas production is a guarantee of non-volatility on one hand, and attracting investment in the Ukrainian economy, on the other. At the same time, price trends of the first half of 2020 for energy resources, particularly, gas, are the basis for a deeper analysis of its production cost.

Natural gas production process can conditionally include the services of the LNG installation, which is a licensed business activity and consists of converting natural gas from a gaseous state to a liquid (liquefaction) or converting liquefied natural gas from liquid state to a gaseous (regasification) using LNG installations.

This technology allows use of the gas produced on another continent, without the need for pipelines for its transportation.

What are the possible ways for managing gas production in Ukraine?

Ability to carry out business activities for the natural gas extraction arises from the application of several legal structures: based on a special permit for the use of subsoil or under a production sharing agreement (hereinafter – “PSA”).

Special permit

A special permit for the use of oil and gas subsoil (hereinafter referred to as a “special permit”) is a document issued by the StateGeoSubsoil, which certifies the right to use oil and gas subsoil for a period of time, within a subsoil plot, under the conditions provided for in this document.

Types of special permits:

  • for geological study of oil and gas subsoil, including pilot industrial development of deposits
  • for the geological study of oil and gas subsoil, including pilot industrial development of fields with further oil and gas production (industrial development of deposits)
  • for oil and gas production (industrial development of deposits)
  • for the construction and operation of underground facilities not related to the extraction of minerals, including underground oil or gas storages and facilities for the disposal of waste products from the oil and gas industry and related waters

Issues of granting special permits within the territory of Ukraine, its continental shelf and the exclusive (marine) economic zone, as well as procedures for extending the validity period, renewal, suspension or cancellation of a special permit and amending it are regulated by the Procedure for granting special permits for subsoil use approved by the CMU Resolution dated May 30, 2011 No. 615 (hereinafter – the “Procedure for granting special permits”).

Permits are granted by the StateGeoSubsoil to the winners of auctions  or without an auction in cases provided for by the Procedure for granting special permits.

The procedure for holding auctions for the sale of special permits for the subsoil use is approved by the CMU Resolution dated 23 September 2020 No. 993 approved on the basis of the positive results of a pilot project for holding auctions by electronic bidding, effective from 24 October 2018 to 1 October 2020. State Service of Geology and Subsoil of Ukraine reported that eight auctions were held in 2020 and 58 lots (special permits) out of 70 offered were sold for UAH 826 million.

Auctions are conducted using an electronic trading system for the sale of permits, which simplifies the auction procedure, increases its transparency and reduces the level of corruption risks.

State Service of Geology and Subsoil of Ukraine prepares proposals for determining the list of subsoil plots, permits for the use of which are put up for auction, taking into account statements and materials submitted by individuals – entrepreneurs and legal entities, which means that entrepreneurs received the right to independently initiate determination of subsoil plots for which they will compete at the auction.

Foreign legal entity that does not have a representative office in Ukraine may also participate in an auction. In case of winning the auction, such foreign entity is obliged to register a representative office in Ukraine within four months from the date of signing the permit sale and purchase agreement.

Production sharing agreement

Natural gas production under a production sharing agreement has certain features, given that the PSA mechanism provides more opportunities for the free settlement of relations between the state and the investor.

Relations arising in the process of concluding, executing and terminating production sharing agreements, the main legal requirements for such agreements, as well as features of legal relations for the use of subsoil under production sharing conditions are regulated by the Law of Ukraine “On Production Sharing Agreements” (hereinafter – the “PSA Law”).

Thus, a production sharing agreement is an agreement between Ukraine and an investor on the search, exploration and mining of mineral resources at a certain subsoil plot(s) at the expense of investor, for which the investor receives the right to a part of profitable products.

According to the report of State Service of Geology and Subsoil of Ukraine in 2020, seven agreements on sharing of hydrocarbon products have been signed: commitments exceed $350 million at the stage of geological exploration of an area > 6400 km2 . The winners of competition are Ukrgazvydobuvannya (Buzivska, Balakliyska, Berestyanska and Ivanivska areas), DTEK Naftogaz (Zinkivska area), Geo Alliance Group (Sofiyivska area), Zakhidnadraservis (Ugnivska area).

The PSA Law establishes the requirements and essential terms of the PSA.

Information contained in this article is for the general informational purposes only, does not constitute legal or other professional advice and should not be relied upon as a substitute for specific professional advice adapted to the specific circumstances.

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