Prospects For Achieving Energy Independence In Terms Of Gas Industry

24 January 2019

Nowadays energy security is one of the most important priorities of Ukraine, with natural gas market included. Current gas imports covered by the domestic gas production capacity will allow Ukraine to be independent from the export market conditions, significantly decrease the currency market pressure, and get rid of the Russian Federation’s black marketeering.

Understanding the urgent need in increase in gas volume produced by both state-owned and private companies, in December 2016 the Cabinet of Ministers of Ukraine by its Decree No. 1079-р approved the Concept for Development of Ukraine's Gas Production Industry. This document is aimed at the determination of conditions and measures which will contribute to increasing in the domestic natural gas production volume. Implementation of the abovementioned measures will allow decreasing dependency from energy resources imports, bringing in investments to the energy industry, and ensuring Ukraine’s energy independence. At the same time, all these will promote sustainable use of energy resources and industry management based on the principles of the rule of law, non-discriminatory participation of all parties concerned, transparency, as well as ensuring of social standards, further improvement of the oil and gas industry policy. Implementation of the abovementioned concept provides that in 2020 state-owned and private companies shall increase the natural gas production volume up to 27.6 bcm.         

Forecast natural gas production volume

(bcm)

However, to achieve the targets within the legal framework available on the gas market was not possible. That’s why, within the abovementioned Concept, the Action Plan on its Implementation was developed, being currently 90% fulfilled. The Plan’s tasks were aimed at laying solid legal foundation as the basis for gas production increase. The Plan’s fulfillment, follow-up revision and adoption of 4 laws, as well as update of 3 government acts took more than eighteen months. Among the important changes introduced, special mention should go to the following:     

• Decentralization of rent;
• Stimulative tax regime;
• Rent rate within Production Sharing Agreements;
• Amendments to the procedure for granting special permits;
• Regulations for oil and gas field development;
• Change in procedure for geo-information use, and cancellation of mine concession claims for oil industry.

Another important change was the adoption of Law on Simplification of Certain Aspects in Oil and Gas Industry  and Law on Transparency in Extractive Industries. Only the plan’s one point was unfulfilled proceeding to the updated version, namely the adoption of new Natural Resources Code.    

As the result, all changes approved gave an opportunity in 2018 to increase Ukraine’s domestic natural gas production by 2.5% up to 21 bln cubic meters, of which almost 15.5 bln account for UkrGasVydobuvannya’s production being the record-breaking output over the past 25 years.

On the sidelines of the Action plan’s fulfillment, the Natural Resource Governance Institute (NRGI)-backed “Roadmap” for Resource Governance Policy Reform aimed at bringing Ukraine’s extractive industry management standards to conformity with the best world practices was developed. The “Roadmap” is based on the output of RGI Index (resource governance index) offering ways to reform 11 aspects of the national policy clustered into 3 large groups, namely transparency and access to information, deregulation of business and related issues, and consulting local communities’ interests. Taking into account the majority of the Plan’s objectives being achieved and new challenges for Ukraine’s gas market, the decision was made to update the Action Plan in accordance with the Roadmap and tasks set by the Government for extractive companies.   

The Plan’s second version was being developed with the participation of experts, representatives of extractive companies, the Government, international financial organisations, associations. That’s why the updated Plan, as best as it can, takes into account all conditions needed for Ukraine’s domestic production increase. It was approved by the Decree of the Cabinet of Ministers of Ukraine as of 28 December 2016, No. 1079-р.

At the same time, it’s worth mentioning that delaying with the adoption of the new document led to certain points being expired at the time of approval. But the Association of Gas Producers of Ukraine has high hopes for fulfillment of the following tasks of the updated Plan:   

• holding of PSA auctions and competitive tenders for the sale of licenses for 50 oil and gas sites;   
• implementation of the electronic platform where geo-information and data on the subsurface sites put up for auction are to be placed;
• reform of the State Service of Geology and Mineral Resources of Ukraine (Derzhgeonadra of Ukraine) with the international expertise applied;
• advancement of issue of permits for drilling, that is introduction of a single permit with environmental, land rights, rights to security, and other rights included;
• updating of Law “On Oil and Gas” with the best world practices applied.

In 2019, the underlying legal and regulatory changes, as well as further fulfillment of the updated Action Plan on Implementation of the Concept for Development of Ukraine's Gas Production Industry are expected to give extractive companies an opportunity to set up a new record for the production volume bringing Ukraine further to achievement of energy independence in terms of gas industry.