Editor's Choice Interview Ukrainian macroeconomics

Yaroslav Klymovych: “My incentive is in integration of  European living standards and economy in Ukraine”

Interview with Yaroslav Klymovych, Chairman of  Board of NJSC “Nadra Ukrainy” on the state of the geological sector in Ukraine.

Such people are called patriots. In case of him   responsibility for the country is in his mind, because he just does not work another way. For Yaroslav process alignment in country`s geology sector has become a matter of personal principle, he says:” I would like Ukraine to have well developed economy and the Ukrainians have European standard of living as soon as possible. Geology can become the key to open the flow of foreign investments to Ukraine”.

The conversation was stern , but fair, and must necessarily be continued by the results of the year.

: Yaroslav, tell us about the role of NJSC “Nadra Ukrainy” in filling the mineral resource base of the country. For what purpose a company,  that united sectoral state-owned enterprises, was created?

Y.Klymovych: Nadra Ukrainy is one of the largest enterprises in the country, which accomplishes the whole complex of geological exploration works on various types of minerals. Established by the state, National Joint Stock Company “Nadra Ukrainy” takes an active part  in  oil and gas investment  projects of the country, as well as in the  projects on the National Program implementation for of  Mineral Resources Development in  Ukraine till 2030.

In 2015-2017, activities of subsidiaries of the Company was gradually intensified. Currently, NJSC includes 6 active subsidiaries: Ukrnaukageocenter, ZakhidukrEolohiya, Tsentrukrgeologiya, Chernihivnaftogazgeologiya, Agrogeophysics and Zhytomyrburrozvidka LLC.

The National Joint Stock Company “Nadra Ukrainy” holds 21 special permits, 15 of which are active and 6 are in the stage of prolongation. The subsoil areas, for which we have special permits, are located mainly in the western region. One special permit is for   Sumy and Lughansk regions and four ones are for Zhytomyr region (metal ores).

It should also be noted that the Company’s affiliated person  holds special permits for hydrocarbons located in temporarily occupied territories: 1 special permit is on the territory of the Autonomous Republic of Crimea for geological study, including pilot-industrial development with subsequent extraction of gas and oil; 1 special permission we have within the limits of the northwestern Black Sea shelf for geological study, including pilot-industrial development with subsequent extraction of gas and oil.

In general, the enterprises that are part of NJSC “Nadra Ukrainy”, explored 1 864 deposits of mineral raw materials, of which 353 are oil and gas fields, drilled more than 10 000 deep oil and gas wells, reached the growth of conventional fuel – more than 2.9 billion tons, published more than 7,600 scientific and thematic works that became the basis for the discovery of hydrocarbon deposits.

During the period of existence of the National Joint Stock Company “Nadra Ukrainy”  15 hydrocarbon deposits were discovered. The most promising of them are the Rokytne gas condensate field (Kharkiv region), Vasyshchi gas condensate field (Kharkiv region), the Pryrichna oil and gas condensate field (Poltava region), the Retychyn gas field (Lviv region), the Pivdenno-Berestivske oil field (Sumy region) and Riznyky oil field (Sumy region).

The primary goal of the  NJSC Nadra Ukrainy founding  is to improve the quality of management of all geological enterprises, and the second one is to increase reserves for various types of minerals. In general, we would like to achieve energy independence and provide fuel self-sufficiency, and in the long term we are aimed to   export hydrocarbon materials.

: Is it possible to achieve that goal?

Y.Klymovych:  In 1975 Ukraine achieved maximum of hydrocarbon production, accounting for almost 69 billion cubic meters of gas, consuming 37 billion cubic meters. The country maintained such a level due to the fact that an efficient system of exploration and mining of mineral resources was built. Each year geological companies opened up to 10 large oil and gas fields and handed it to extractive industries, which enabled the state to meet its oil and gas needs.

The state geological enterprises of the NJSC “Nadra Ukrainy” before 1995 discovered and uncovered all the fields currently owned by mining companies, both state and private, including Ukrgazvydobuvannya and Ukrnafta.

To be honest, now the situation is very difficult. Moreover, what I am saying is open information that anyone can find by request.

Together with the head of our subsidiary Ukrnaukageocenter, we wrote an article and published it in the Uriadovy Kuryer newspaper, where we counted how much we have  of today’s oil and gas resources if we do not increase them. So at the current rate of exploitation of residual mining reserves will last only for 22 years.

And this is a very big problem. If you do not conduct geological explorations to build up a resource base, future generations will remain without their own hydrocarbon materials. Therefore, it is necessary to increase the state funding on prospecting and exploration to ensure production  of oil and gas. And each year we hear that the state will increase funding for us, but promises are not fulfilled.

: What do you need to achieve the goal?

Y.Klymovych: If we talk about today`s conditions then we must talk about “overcoming the crisis”, which consists in the imbalance of the challenges faced by Ukrainian exploration enterprises and NJSC “Nadra Ukrainy”, in particular, the days and conditions in which our enterprise is compelled to fulfill its main statutory task: “… increase of the mineral material base and profit margin”.

The profit, despite the decline in orders and the economic crisis, still is managed effectively by our company and in 2017 we showed a double profit against to 2016. It several times exceeded the financial target. However, the first part of the task – the increase of the mineral raw material base is not so successful.  We literally struggled for the survival of the industry in extremely unfavorable economic, legislative and legal conditions.

Just think –  since 2009, when the industry still had at least pre-crisis levels of reserves of the country’s most urgent hydrocarbons (approximately 1,600 million tons of conventional fuel with more than 1.2 trillion square meters of gas reserves), financing only in terms of state participation in the order of the increase in mineral reserves declined from $ 128 million to scanty and decreased to $ 3-4 million per year in 2016-2017. This is not just inappropriate bearing to increase in hydrocarbon reserves. This is a direct threat to future hydrocarbon production in the coming years.

Why is it so? Because it does not fulfill the law “On approval of the National Program for the Development of the Ukrainian Mineral Resources Base for the period up to 2030” (SME 2030) specially developed and implemented in 2012, which explicitly provides funding for the searching and exploration of hydrocarbons (“Greenfield”) in the amount of at least UAH 500 million annually by the state, and much bigger, from 7 billion annually, by private investments.

: And what about private investments?

Y.Klymovych: We are very active: we participate in all workshops, look for alternative solutions to get out of the situation, try to develop more attractive economic model for the geological sector. We used to meet with international partners, in particular with representatives of the EBRD, proposing to attract low-cost loans for a complex of geological exploration.

: What is the result of these proposals?

Y.Klymovych: There is an official conciliatory decision of the environment Committee since Mr. Tomenko`s times.  The resolution was approved to support of the program, after which the program had to be sent to the Cabinet of  Ministers for approval. As a result, our program was not supported, because there is no money for it. But we did not stop and offered another mechanism – state guarantees.

: Was that proposal approved?

Y.Klymovych: No. This is a question of the complexity of our political realities that are taking place in Ukraine today. We do not have enough lobbies to solve this issue positively. But we don`t give up  and continue to work on it further.

: What are the chances that you will be heard?

Y.Klymovych: I base on the fact that common sense wins and eventually we mind-meld. I understand that the program is not perfect, but we agree to discuss it and listen to the suggestions. The problem is that today, for a foreign investor, there is no such a carrot, for which it would have to come here. So, the geological sector can become that reason if you prepare it in a proper way.

I also want to say that when I am abroad, I admire the developed countries and the level of life that exists there today. For me, as for a leader of a strategic company in Ukraine,

the incentive is to integrate the European standards of living and their economy in Ukraine so that our children and grandchildren have the same developed living conditions, especially as  there is everything in Ukraine for reaching  this aim.

:  What problems in the geological exploration industry today are most relevant and how to solve them?

Y.Klymovych: The question of the geological exploration sector development remains the most pressing issue. Modern mining of hydrocarbon raw materials does not meet the needs of the state. And it means that the current problem of exploration work effectiveness with oil and gas as well as  the rational usage of explored stocks has reached its critical level. And there is a number of reasons for this.

The first of the main reasons is natural: high exploration of oil and gas production regions and exhaustion of existing deposits.

The second reason is the low rate of opening new fields and deposits, as a result, low growth of hydrocarbon reserves, as evidenced of the fact that, with annual production of 20.75 billion m3 of gas per year, only 1.29 billion m3 were raised in open fields and deposits, which is 6.3% of extraction, and this is not twice as large (as traditionally accepted in the world to ensure stable production), and 15 times less, which is catastrophic for the prospect of extraction.

It is possible to increase stocks only by increasing the efficiency of geological exploration, and this, in it`s turn, may be achieved by restoring their financing to a level where NJSC’s companies opened up 5-10 fields of oil and gas per year and increased their reserves twice and more times, providing stable production, that means that the state will be completely provided with own hydrocarbons.

So today, geological exploration must be focused on:

–  the reclaiming of the territories where the actual reserves of 904 billion cubic meters of gas are located;

– conducting exploratory work in the territories where resources are allocated in the amount of 5.6 trillion m3 of gas (due to the development of large depths, the search of low-amplitude stubborn traps, stock  zones, carbonate deposits);

–  carrying out scientific-analytical, exploratory work in perspective territories, where the resources of non-traditional deposits (gas of shale strata, densified reservoirs and central-basin type) in the amount of 32-50 trillion. m3 of gas.

Proceedings the tasks “Nadra Ukrainy” plans:

– to develop strategic plans and directions of search and exploration of minerals;

– to implement State programs for increasing the production of hydrocarbons in the part of exploration works;

– increase the production of oil and gas at the expense of remediation works on liquidated wells, which are based on additional research and analysis of geological and geophysical materials;

– to prepare geological and geophysical materials in the form of business projects and investment programs in order to attract potential investors;

– to substantiate new perspective  areas for oil and gas;

– to carry out exploration drilling at the licensed sites of the company at the expense of own and investment funds.

: How much is Ukrainian subsoil rich in hydrocarbon?

Y.Klymovych: The territory of the country takes about 0.5% of land surface, and in its depths, according to domestic expert geologists, there is about 5% of the world’s reserves of minerals. To date, over 400 oil and gas fields have been opened in Ukraine, 95% of which have been opened by NJSC companies. In the industrial development there are 269 deposits, the balance (residual) reserves of which are 904 billion m3 of gas and 187 million tons of oil and gas condensate. Prospective and projected resources are estimated at 5.7 trillion m3of gas equivalent.

In addition, there are still scientifically grounded resources from unconventional deposits: shale gas, compressed gas reservoirs and coal deposits, which, according to various estimates, consist of 30-52 trillion m3.

In Ukraine, it has been produced 2.5 billion tons of conventional fuel, accounting for 69% of the initial reserves of hydrocarbons. Annual gas production in 2017 was:

– gas – 20.8 billion m3;

– oil – 2.1 million tons.

: Now they are actively talking about the energy dependence of Ukraine. What do you think must be done  to provide the state with its own gas?

Y.Klymovych:  After tax rents and other legal shocks of 2014-2015, that stopped the search and exploration of hydrocarbon, good conditions for investors, must be prepared by the state itself. But the state, by its unpredictability and constant change of rules of the game does not work  in the interests of investors,  turn them away from investitions, not only in terms of new deposits exploration,  but also in the development of the existing ones. All investments now are aimed only at obtaining temporary surplus and instantaneous increase in production at existing sites. This will inevitably lead to a sharp decrease in production already in the medium term due to the accelerated decrease in mining stocks under the influence of aggressive hydrocarbon sequestration.

Exploitation was aggressive, and earlier, in Soviet times, but at the time people understood the threat that could lead to excessive rates of extraction of the hydrocarbon growth rates of, and one cubic meter of gas extracted it was organized tangible investments, which opened and raised two or three new cubic meters. So, thanks to that policy, we have been collecting resources for 30 years from our enterprises created in the status of Soviet state geological enterprises. Without a state order, without support, we do absolutely everything that is possible and even more from our own limited resource, but this will not be enough to preserve the stock of energy strength of the Ukrainian subsoil.

It is good that we have introduced a stimulating low rent for the extraction of new wells and the recently simplified conditions for exploration at least at the technical level. As for tomorrow, preparing Greenfield for future generations and investors, as in previous years, our company is fully prepared as soon as the state allocates proper financial support to the industry, at least through the reinvestment of its annual revenue from the state budget.

For example, in 2017, these funds were at least 2 billion USD, which the “Derzhgeonadra Ukrainy” put into the country’s treasury. Revenues from hydrocarbons in the country’s budget, which is at least 10% of total budget revenues, exceeds 70 billion UAH of taxes and fees at all levels.

Against this background, once again I remind that last year’s budget of all state geology is  100 million USD for the entire industry (0.1% of hydrocarbon revenues) and estimate the “hopelessness” of the expectations of an increase in reserves for the country with such investments of the state in the industry.

If the investments in government procurement will be 2 billion USD, at least at the time when the industry effectively worked, the stocks will be aligned and will go up. If not, then remember that for 10 years they have fallen by 40%. In 20 years they can fall to zero. Therefore, it is necessary to invest now in order to extract and export tomorrow. This will be the energy independence of Ukraine. Energy independence is unattainable  any other way.

: How do you think, is it real to involve money of business to invest in exploration by shifting the focus from budget to extrabudgetary funding?

Y.Klymovych:   We have lost the moment, by introducing tax breaks for product-sharing agreements and special fiscal and other conditions, by which we became interesting for large oil and gas players in 2013-2014 period. I’m talking about Shell, Chevron, ExxonMobil, etc., which, in terms of the world’s  falling market  for hydrocarbon in 2014-2015, reoriented from Ukraine to other regions. This impetus was being formed for several years and should have been an incentive for decades when investments in exploration, and subsequently in mining, had to take inertia in anticipation of future profit. These are so-called positive business expectations that are cultivated in the United States and Europe so carefully and cautiously, as they are the driving force for private investment. This is a construction project that is difficult to start, but not much more important to stop, because stopped construction is almost death for an unfinished project. The same thing happened with the project “energy independence”. We gave impetus and then they stopped construction. This is very dangerous. In such a situation, the state again should create critical conditions for a new impetus.

Now we will not now return the prices to $ 110 a barrel of oil, but at least we can create a less favorable regulatory, legal and fiscal field, in which even at current prices, which have already crossed the psychological limit of US $ 60 per barrel (the limit of the attractiveness of hard and non-traditional hydrocarbons) can be fully hoped for the return of domestic and foreign investors to the search and prospecting projects for new hydrocarbon in Ukraine.

First of all, it would be necessary to invest in this, for example, through the state order in the volumes that I mentioned earlier, to search for several new fields, as this, incidentally, was envisaged by the Law Raw Material Base 2030 (two years of state investment for the launch of the investment process) It will be a signal for private business, which in no way can be spoiled by legislative complications for geologists and mining companies. Rents are  to be the same or  reduced. After that it will be absolutely realistic to shift the center of gravity from budget to extrabudgetary funding, which will exceed the budget at a time. That’s when the process of energy independence will not stop.

: How much geological industry in Ukraine lags behind the European one?

Y.Klymovych: I can make such a comparison only in terms of technical support. But today the world is talking about the level of our specialists. Our geologists are involved in many international conferences and forums. For example, in 2017 we were in China, which has a special interest in Ukraine, to work principles and approaches of our geological industry. Of course, we are lagging behind in our technical tools that require  immediate upgrade. I pay particular attention to the fact that it is  upgrade rather than repair. In Ukraine, for 25 years, there was no modernization of the geological industry. And this is the biggest problem for today.

: In February 2018 Ukrainian geology celebrated its 100th anniversary. Tell us about the prospects of the geological industry. What is the place of NJSK “Nadra Ukrainy” in these perspectives?

Y.Klymovych: Ukraine has been and remains a powerful mining country. About half of the industrial and export potential of the country and up to 20% of its labour resources are connected with the extraction and use of minerals. The immediate task now is to continue the reform of the geological industry to ensure the effective functioning of institutions in the field of subsoil use and environmental protection; improvement of legislation in order to improve the investment climate in the field of subsoil use; improvement of financing of exploration works for the restoration of the mineral-raw material base of Ukraine.

But the problem of the geological industry is in the fact that all the extraction, which today is in our country, is functioning due to the active work of the geological industry in the 70-90s of the twentieth century. It does not actually work right now. However, the past year gives good hopes for positive developments, primarily due to the adoption of a number of regulatory documents that are intended to stimulate the development of the extractive industry. And the prospects for Ukrainian geology directly depend on the quality of the investment climate in the country in general.

According to a recent history, geological explorers conduct searches and exploration much more efficiently, having the age-old practice of exploration of deposits, material resources, equipment and developed geological and geophysical material, and, what is the most important, they are experienced personnel who, due to various circumstances, are not currently involved in the exploration process.

In the difficult financial and economic conditions, NJSC “Nadra Ukrainy” carries out a full range of geological exploration works, conducts restructuring and modernization of subsidiaries, and works for the definition of promising areas of exploration for non-state-owned enterprises.

And I can assure you that, under the conditions of proper state financing of the industry, the exploration enterprises of the NJSC “Nadra Ukrainy”, will be carrying out exploration works through the implementation of scientific, analytical and production potential, can 100% meet the country’s needs for filling the mineral-raw material base.

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

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