Interview Ukrainian macroeconomics

“Our main goal is to make Ukraine an energy independent country after 2020”

The talk with Roman Opimakh, the executive director of Gas Producing Companies Association in Ukraine, who describes the current situation in the gas industry.   

The association of gas producing companies of Ukraine was founded two years ago and unites seven state-owned and private-owned enterprises. Consolidated extraction of these enterprises makes up almost 90% of Ukraine’s total natural gas production.

Despite the young age, the Association has significant achievements and reaches. Its leadership succeeded in establishing fruitful cooperation with the authorities, business and international experts on the reform of the gas-extracting sector of the country. Implementation of important initiatives is a prerequisite for the formation of Ukraine as an energy of self-sufficient state, to increase the investment attractiveness of the industry, provide international investment and modern technologies, and establish partnerships with gas-extracting regions. These are the goals of the Association’s team.

Executive Director of the Association Roman Opimakh is a person, who knows all the subtleties of the industry not only in Ukraine but also abroad. “We find a common language with the authorities, society, industry representatives in order to develop the industry and strengthen the energy security of the country. We are being heard, we are advised”, – this way Roman Opimakh describes the activities of the organization. And how these processes can be realized, he told in the exclusive interview.

: The association is young enough, but at the same time it is ambitious. Are there difficulties in work because of lack of experience?

OpimakhDespite the fact that the Association was founded not so long ago, our team is well-informed about gas production. Personally I have been working in the sector for more than 10 years and I am actively studying the features of its regulation. In our work we as an Association explore world practices, take on the experience of progressive countries, cooperate with international experts.

Today, Ukraine faces a vital task – to attract foreign investments, for which they struggle all over the world. An important part of this process is understanding: what do your competitors do, how it is happening in neighboring or economically more advanced countries? We analyze in detail the international practices and local features, and demonstrate how the Ukrainian gas industry must evolve.

All our achievements, recommendations and forecasts are an open source for anyone, we are happy to tell you what we do and why. We carry out the promotion of the industry not only in Ukraine but also abroad, and at the same time we dispel myths that exist.

: What do you mean exactly?

R. OpimakhThere is a number of legends in the society associated with the gas extraction sector. For example, some people believe that gas companies are polluting the water in the territories where they work or do not pay taxes. But this is not true. In particular, in 2017, the oil and gas industry paid about 75 billion USD of taxes, accounting for almost 10% of revenues to the state budget. In addition, according to our estimates, the Association’s companies paid over UAH 150 million last year to finance various social programs in the regions where extraction takes place.

Since the beginning of 2018 an important initiative actively supported by gas producers has been implemented. The idea of this project is to deduct 5% of the rent for the development of local communities in the areas where the companies operate. We expect that this will motivate the local population to cooperate with the sector for the common benefit. After all, the more gas the company produces, the more money will remain “on the ground” for important social programs. We consider this as a positive trend.

: What positive changes have been made in the gas industry due to the Association activity?

OpimakhDuring two years we have achieved a lot.

The government recognized the development of the industry as a priority and strategic direction. Ukraine has a huge resource base, we are among the three countries in Europe in terms of gas reserves. However, unfortunately, these resources are being developed very slowly, unlike in other countries. We can extract more and faster, we can supply our gas to cover domestic consumption and become an energy independent country, and in the future even export it. We are convinced that when a gas surplus is created on the market, then the price for the consumer will decrease.

The gas industry requires large investments and modern technologies. And they will not come unless more attractive conditions are created in the Ukraine than in the neighboring countries. We need to implement important reforms for the development of the industry, on which the Association constantly emphasizes.

The first significant step has already been taken – a new fiscal regime has been introduced. Since the beginning of the year, there is a stimulating taxation for new gas wells, and the state has provided guarantees that it must not be changed for 5 years. The new tax policy has greatly improved the investment attractiveness of the industry. According to international experts, today Ukraine has the most attractive position among the mining countries in Europe.

: Does it mean that simplification of the taxation system for gas companies can be a key reform that will open the flow of foreign investment in Ukraine?

OpimakhOf course. The new fiscal regime, introduced by the government and parliament, is positively evaluated not only in the domestic market, but also in the world. We expect that the arrival of international investors will contribute to the development of the industry and increase  the gas production.

: What other reforms are necessary to develop the industry?

Opimakh: The second important initiative is the deregulation of gas extracting. In March, the Verkhovna Rada adopted a revolutionary bill No. 3096-d, which abolishes many of the permissive rudiments of the Soviet era, which restricted the development of industry for years.

Previously for the introduction of the deposit into industrial development, companies had to get 44 approvals in 16 institutions, and collecting of those documents  collection had been taking more than three years. The procedure for the establishment of the well took more than a year, which was three times longer than the drilling itself. Thanks to the law, the Ukrainian regulatory system has come close to the best international standards. The procedure for obtaining permits is accelerated for 18 months, 6 stages of duplicate approvals are eliminated.

The third important step to increase own gas production is the holding of open auctions and the offer of new plots. This question is quite problematic and we can not initiate it. When the company has all the permissions and means for drilling wells, it needs places where it will actually work. Accordingly, the state must propose a list of new areas for the use of subsoil and enterprises must receive them via transparent auctions.

In the world there is a competitive struggle for the investor: every year countries aggressively offer tens of  thousands  square meters in bidding.

For the past year and a half no auction has been conducted in Ukraine and there are no plans for the current year. Unfortunately, we see that there is a practice of double standards when the plots are rendered out of bidding or it is difficult for companies to get a work permit from the regional councils. Of course, the investor pays attention to all of these facts: he wants to work transparently and that’s how his problems are repulsed. We constantly focus on these items and propose changes to eliminate all gaps in the legislation.

: These factors relate precisely to legislative initiatives. And if we talk about technological capacity, then how far Ukraine and industry are lagging behind, for example, from Europe?

OpimakhFrom the technological point of view, we are less developed. This is reflected in a simple indicator: how much gas reserves we have and how intensively these resources are being developed. Annually Ukraine produces only 2% of its reserves, while in the world it is about 6% or more. That means that in more developed countries this happens faster and more efficiently by attracting new technologies and modern methods of extracting.

From the other side, Ukraine has a huge potential to increase its gas production by eliminating technological lag. We are already witnessing the first positive results from the introduction of stimulating taxation. The new tax system has significantly revived the service market, orders for drilling new wells this year are unprecedented. We expect the arrival of new players and companies that will make the services cheaper and, accordingly, more affordable.

If by the results of 2017 the increase in gas production had been 2.4%, then in this year we expect at least 7% growth.

: How do you think, how much time it may really take to make Ukraine an energy independent country?

OpimakhThere is an ambitious government plan to realize this idea by 2020. However, there is a certain delay in the implementation of the Concept for the development of the gas industry. Not all important changes were made on time. However, reforms in the sector are taking place, and this  fact should be noted.

It is worth to understand that for the full self-sufficiency of the country in its own gas needs we must take into account two factors – how much we extract and how much we consume. Accordingly, the more we obtain, the better the implementation of programs aimed at energy efficiency will be provided and the sooner we reach the goal.

The events of this winter and Gazprom company’s unscrupulous actions reaffirm the axiom that we must boldly develop our own production and go to zero import. I am convinced that after 2020, the country has all the prerequisites for becoming energy independent.

Please read: To be successful in Ukraine, you need to forget everything you’ve ever known before entering its market

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