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.