GasMarketinUkraine:

Gas Market in Ukraine:

Myths,DriversAnd
Myths,DriversAndFuture
y , Future

DmitryGovorov,
DmitryGovorov,Manager
Manager,,GasBusiness
GasBusiness
Development,TNK
Development,TNK
p , BP

EuropeanBusinessAssociationinUkraine
p
 EBA
IN UKRAINE
 EuropeanBusiness
A
AssociationinUkraine
i i i Uk i
E
Established
t bli h d iin 1999
1999, th
the EBA provides
id a fforum iin which
hi h members
b can
discuss and find solutions to common problems affecting business in
Ukraine. This initiative was initially supported by the European Commission
and has grogrownn to become one of the largest and most influential
infl ential business
b siness
communities in the country.
Currently the EBA brings together more than 800 European, Ukrainian and
multinational
lti ti l companies
i tto enjoy
j ab broad
d scope off unique
i b
benefits
fit andd
activities.
These include:
Lobbying for Collective Interests
Networking Opportunities & Social Events
Promotion and Advertising Opportunities
Information, News and Publications
The European Business Association has 6 regional branches in Donetsk,
Dnipropetrovsk Kharkiv,
Dnipropetrovsk, Kharkiv Lviv,
Lviv Odesa,
Odesa Zhytomyr and a representative office
in Brussels operating as an independent body serving its members
interests
TNK BP
TNK-BP
 TNKBPAtAGlance
TNK BP At A Glance
WHO WE ARE:
50/50 Joint Venture ((AAR + BP))

RANKING:
Oil: #2 in Russia among independents
Gas: targeting #2 independent gas producer (now 14 bcma)
WHERE:
Production in Western Siberia
Refinery & retail throughout CIS
Fast international growth
UKRAINE:
Downstream presence (refinery and retail)
Memorandum of Understanding on UG development (2010)
 TNKBPKeyProducing
TNK
A
AssetsinRussia
i R i
Oil & Gas producing Assets
old 635,8 nln BOE
new i 2010
in
 WHY LOOK
INTERNATIONALLY
?
InternationalOpportunities:
KeySelectionCriteria

G i
Gettingnewexperience
i

U d
Understandinglocalbusiness
di l l b i

Accessingnewmarket(addedvalue)
k ( dd d l )

Businessmateriality
l
 GasConsumptioninEurope
AndSelectedCountries

Gas Consumption by Country bcma

GasConsumptionbyCountry,bcma

Europe

Russia

Ukraine

Poland

0 100 200 300 400 500 600 700

Sources: Energy Information Agency
 EuropeanGasDrivers
European Gas Drivers

1. European gas demand: steady although moderate

growth (1% p
p.a.)
a)
2. Global LNG: re-focus to Asia, diversification for
Europe
3. Russian exports: replace indigenous (decreased)
production, steady growth (geography), competition
with LNG
4. Other Alternatives: 20% by 2020, Unconventional
Gas (replicate US success?)
 MultipleSupplySources
Multiple Supply Sources

500
450
12%
14%
400
350 16%
33%
300 35%
17% 24%
250 Other
200 LNG
35%
RussianPipe
150
55% 59%
100 51%
49%
50
0
2010Actual GlobalRedesign Meta(2030) Vortex(2030)
Source: IHS CERA (2030)
 UnconventionalGasinEurope:
InvestorsPerspective

Short UG history / no commercial production in Europe

Resources
R spread
d unevenly,
l estimates
ti t vary d drastically,
ti ll
massive exploration required
Simply
Si l replicating
li ti US experiencei will
ill nott work
k
Confused public perception in Europe
No articulated common approach across Europe
Fiscal incentives yet to be introduced

Trial and error approach to each country

UKRAINE
 Ukraine
UkraineAtAGlance
At A Glance

BiggestinEurope
LowestenergyefficiencyinEurope
#152inEaseofDoingBusinessranking
Gashistoryreverses
Gazprom relations
Gazpromrelations
Gasconsumptionx4Poland
ResidentspaylessforgasthaninRussia
 Gasmarketoverview:
production
d i

Sources: Ukraines State Statistics Service, WoodMackenzie, Ministry of Fuel , Energy and Coal of Ukraine

30bcma expectedsupplygapinUkraineby2020
p pp y g p y
Consumptiontoremainsteadyat5060bcma
DomesticproductionMAYcoverneedsofhouseholdsandpublicsectoronlyuntil2020
Ukrainewillremainsignificantimporterofgaslongterm
Independentsproduce8.7%ofdomesticgas,restisbyNaftogaz &subsidiaries
 Gasmarketoverview:
consumption
i
S
Sources: Uk
Ukraines
i State
St t Statistics
St ti ti Service,
S i Ministry
Mi i t off Fuel
F l , Energy
E and
d Coal
C l off Ukraine
Uk i

Households naturalgas
28%
39% Households and public sector heating
Householdsandpublicsector

Powergeneration

State organizations and technical needs

Stateorganizationsandtechnicalneeds
15%
Industrialconsumers
12% 6%

Over 60% (37,1bcma) of gas consumption is subsidized, while 40% (23,8bcma)

consumed by industry is relatively marketpriced.
Industrial consumers most costsensitive. Need for energy efficiency/saving
programs & switching to alternative fuels (by 2020 industry is forecasted to consume
by 22% (5,23bcma) less.
Heating sector: losses of delivering heat to customers reach up to 50% due to
outdated infrastructure new energy efficiency projects are crucial.
 UnconventionalGasinUkraine:
KeyDrivers

Demand (local + export potential)

Materiality
Transportation & Marketing
Economics
Local market knowledge
New technologies / expertise
 Ukraine: WhatssDone
Ukraine:What Done
1. ImprovedPSAlaw(stabilisation clause,internationalarbitration,etc.)
2. NewTaxCodeadopted(incometaxreduced,explorationtaxdisappears)
3. LawonGasMarketFunctioningadopted(liberalisation,thirdpartyaccess)
4.. U
Unconventionalgasisrecognised
co e t o a gas s ecog sed legally(taxincentivestobeintroduced)
ega y (ta ce t es to be t oduced)
5. Abolishedannualrevisionpracticeforlicensingandauctionrules
6 DeclaredOneWindow
6. Declared OneWindow principleforlicenseissue
principle for license issue
7. Newbreathtooldagreements(Vanco PSA,ShellNaftogaz JAA)
8 RevisedEnergyStrategytill2030(draft)nowincludesunconventionalgas
8. Revised Energy Strategy till 2030 (draft) now includes unconventional gas
9. InterGovernmentalAgreementsonUnconventionalGas(USA,Russia,Poland)
10.MoUs
withinternationalmajors(Exxon,Shell,Chevron,TNKBP,ENI,Statoil)
h l ( h ll h l)
 Ukraine:Unconventional
WisdomAndConventionalMyths

1. Technologies: Theres nothing new!

2. Competition:
C Investors or Countries?
C ?
3. Land: Biggest Area Or Biggest Troubles?
4. Regulation: Or Demotivation?
5. Timeline: Think Industry, Not Elections
 Let
LetssCompare:(1)Resources
Compare: (1) Resources

Ukraine

Sources: Energy Information Agency

 Let
LetssCompare:(2)Industry
Compare: (2) Industry

NorthAmerica Poland Ukraine

Industry Age
IndustryAge 25 years
25years 4 years
4years 0 years
$1015mln
$15mln
$
W ll C t
WellCosts d
downto
t $16 l
$16mln
(?)
$24mln
2000
2000
Drillingrigs# <50 0
+/ 10%
Wells# >100,000 <50 0

Commercial
Commercial
300+Bcma 0 0
Production Sources: Energy Information Agency, WoodMackenzie
 Lets
Let sCompare:(3)Licensing
Compare: (3) Licensing

Poland Ukraine
Agencies&polices
A i & li
ProcessTransparency 1Agency
changeeveryyear
h
Min12months
Timetoissuelicense 3months
MaxUndefined
Explorationlicensecost Conv.methodology:
$70/sq.km
(auction startingprice) hugenumbers!!

Maxlicenseareasize 1200sq.km 500sq.km

Numberlicensesissued ~70in4years 0
 Lets
Let sCompare:(4)Taxes
Compare: (4) Taxes

100%
90%
80%
70%
60% Contractor take
Contractortake
50%
40%
30%
Governmenttake
20%
10%
0%
Ukraine Austria USA Germany Sweden Poland
WoodMackenzie, TNK-BP
 Recommendations

Ukraine Huge Opportunities But Still

Difficulties For Investors

1.
1 Learn from international experience
2. Study own UG resource base
3
3. Launch pilot projects ASAP
4. Adapt legislation to UG specifics
5
5. Implement One Window policy for license issuance
6. Improve general investment climate
7
7. P id governmentt supportt att allll llevels
Provide l
THE PRIZE
MAY BE
 Unconventionalgas
potentialinUkraine
i l i Uk i
2500 60
Gasproduction

2000 50
Exploredwells
p
ar

bcmaa
wells per yea

40
1500 Productionwells
30
w

1000
20
500
10

0 0
2012 2014 2016 2018 2020 2022 2024

P
PotentialforabrandnewindustryinUkraineandtriggeringthe
i lf b d i d i Uk i d i i h
developmentofmanyserviceindustries
Thousandsofjobs
j andtensofbillionsofinvestment inUkraine
EnergysecurityforUkraine
WoodMackenzie, TNK-BP, Ministry of Fuel, Energy and Coal of Ukraine