Ukraine’s new government outlines hydrocarbon license examination plans

Ukraine's new government looks to changes at the Fuel and Energy ministryIn one of the earliest ministerial-level strategies to be unveiled, Ukraine’s newly-formed coalition between the Bloc of Yulia Tymoshenko (BYuT) and the Our Ukraine – People’s Self-Defense (NU-NS) parties outlined its plans for the country’s oil and gas sphere.

Besides preparing to take oil transport monopoly Ukrtransnafta public, the government hopes to sign a long-term contract for gas purchase from Central Asia. Currently, Ukraine’s national energy firm Naftogaz no longer buys gas directly from Central Asian countries, instead relying on the gas intermediary RosUkrEnergo. This maligned trader coordinates the purchase of the gas and its transport through Russia, as well as its resale to Ukraine. Breaking back into direct negotiations with Central Asia (despite relying on the region for about 3/4 of its gas imports, Ukraine lost this position a few years ago) may help Naftogaz in its own talks with Gazprom on Russian gas supplies.

Also discussed in the strategy (which I’m attempting to obtain a complete copy of) are plans to re-examine the results of oil and gas producers to determine if they are adhering to their license agreements, specifically in regards to their upstream investment plans. Those firms that are not pumping in an adequate amount of investment or producing the necessary volumes will be stripped of their license, which will be then be given to other companies who promise closer adherence with the government regulations.

BYuT deputy Mikhail Volynets, who previously suggested a re-examination of Regal’s licenses, is quoted as suggesting that these moves are expected to boost production 5-7% by 2009. From Korrespondent (my translation):

“We can’t increase the volume of production of oil and gas in the country when companies holding the production licenses don’t invest enough in deposits [fields]. The majority of them received licenses for further resale. We plan to return to the government the licenses and transfer them to companies which will fulfill the investment conditions and conduct the extraction of oil and gas.”

One analyst suggests that this will bring about a similar situation to Russia in 2004, when a crackdown via stricter government enforcement resulted in a consolidation (and contraction) of operating oil and gas producers in Russia from about 300 to around 40. Large firms were able to scoop up the licenses for the fields operated by under-resourced smaller companies unable to follow the clauses of the licenses — or unable to pay the necessary bribes.

Ukrainian license holders, however, have apparently threatened to protest any such action with law suits, with one directer of a smaller producer warning that this plan will result in the survival of companies only with “political influence and financial resources.” While ideally, the producers would be financially successful enough to have the necessary financial means, the director may also be referring to money for extra-legal protection from a loss of license. There are also questions of the legality of this plan, which is based on how explicit the investment conditions were stipulated and how confidently their fulfillment can be estimated.

The outgoing government has already made it difficult for many oil and gas producers, forcing them to sell their output to a pre-ordained buyer for a capped price. While these are attempts to keep domestic energy prices low, it has also resulted in decreased capital available for investment, leading to this current attempt at essentially government-mandated investment. However, the plan doesn’t seem nearly as viable as commercially regulated investment, i.e. firms injecting money into their projects because they expect it to earn them more in the future. A combination of tightened finances and an unclear political / economic horizon has instead led many firms to concentrate on the short term.

BYuT representative Volynets (second from bottom) has an extensive background in the coal industry and is an accomplished labor rights organizer — a feat, considering some of the conditions present in Eastern Ukraine. Given his high level on the party list and these recent comments, it would seem that he may be a favorite to succeed Yuri Boyko as Minister of Fuel and Energy when the new Cabinet of Ministers is sworn in. However, he may also be a candidate for the Ministry of Labor and Social Policy, leaving the door open for someone else from the ruling coalition — so long, of course, as the two parties can cooperate enough to actually form a functioning government…

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