Oil & Energy
Can Oil And Gas Save Europe’s Poorest Country?
Ukraine is now Europe’s poorest country (per capita), having overtaken the long-time leader Moldova in 2018. A country whose abundant coal reserves have spurred its transformation into the Soviet Union’s leading industrial and agricultural powerhouse has, over the course of the last 30 years, become Europe’s chronically under achieving appendage. The state of things in Ukraine’s energy sector reflects that of the economy at large outdated infrastructure, lack of long-term investment and an unwavering penchant for poor management have created a triple whammy that Kyiv has so far been unable to resolve. At the same time, its eastern neighbor Russia has tangibly contributed to the chaos and confusion and it is against the background of a still-raging conflict in Donbas that the Ukrainian authorities are trying to resuscitate their oil and gas production.
Struggling with gradually declining gas production from mature fields that were discovered back in the Soviet era of the 1960-1970s, Ukraine sees its national oil and gas company Naftogaz as the conduit towards higher domestic output and, consequently, increased energy security. Traditionally, Naftogaz would control almost four-fifths of Ukrainian gas production – this is certainly true for the average of the 2010s though it needs to be noted that in 2010 Naftogaz produced 89% of Ukraine’s aggregate compared to 76% in 2020. The main reason for this trend stems from the maturity of Naftogaz’s producing assets, the Shebelinskoye and Krestishenskoye fields’ depletion ratio had risen to 90% by the end of the decade, whilst there seem to be no new gas assets of equivalent quantity coming up in the pipeline.
Keeping all the above in mind, it seems somewhat counterintuitive that Ukraine’s Prime Minister Denys Shmyhal announced that by 2025 Ukraine should renounce imported gas. One would often hear from Ukrainian politicians that Ukraine has become more self-sufficient in terms of its gas needs, however, the only reason this happened is that overall consumption in Ukraine has plummeted since 2014. It is only in the past couple of years that demand bounced back into its growth phase. Total gas demand in Ukraine has increased 8% year-on-year to 32.29 BCm in 2020 while gas output has been decreasing – at first glance everything seems to indicate that such tight deadlines foreshadow a surefire failure.
Government intervention has been the main underlying cause of mismanagement in the modern history of Naftogaz the temptation of easy money flowing in from Gazprom’s transit fees or the lure of murky schemes in gas import contracts was never easy to shake off. CEO Andrey Kobolev has tried to ease the government’s grip on how Naftogaz revenues are allocated and now, with his mandate extended into 2024 and no more elections on the horizon, he can finally enjoy a couple of “silent” years, focusing on the Ukrainian NOC’s primary role, providing energy. Concurrently, it needs to be said that state intervention might also have a beneficial side, as was demonstrated by recent moves within Ukraine’s Energy Ministry. Committed to counteract the tepid international interest towards the country’s first-ever international licensing round, the government has allotted Naftogaz several promising licensing blocks.
These assets might provide the reserve base for future growth. The Dolphin block is Ukraine’s most promising offshore asset (the Ukrainian Black Sea is assumed to wield 150 BCm of gas), whilst the Yuzivska block is Ukraine’s most promising shale play, though located relatively close to the front line in Donbas. Naftogaz is confronted with a dual dilemma with regard to these blocks. Considering most of its currently producing onshore assets are of conventional nature, it lacks shale and offshore experience and know-how, however, perhaps even more importantly it lacks the finances to kickstart its ambitious drilling campaign. The COVID-induced market slump has stymied Naftogaz’s financial stature, dropping into negative territory following the profit-generating period of 2018-2019. At the same time, the Ukraine government maintains ambitious long-term goals for its largest national taxpayer:
Investing 21 billion USD into exploration in the 2021-2030 timeframe, of which 7.3 billion USD in 2021-2025
Tripling the company’s proven reserves base from the current level of 158 BCm to 500 BCm by 2025
Expanding into renewables, including the construction of wind farms in the Black Sea
Balancing these interests, especially in the tumultuous political climate of Ukraine, is no easy feat. For instance, the average price Ukraine pays for its imported gas has started to climb back again (see Graph 3) and although it useful for Kyiv that Gazprom has ceased to publish its prices since the summer months of 2020, the cost would still fall on Naftogaz’s shoulders. Simultaneously, Naftogaz can no longer count on transit revenues boosting its financial standing. One of the key tenets of the Ukrainian NOC’s transformation into a market-driven company was the spinning-off of all its transportation assets into a separate entity, Main Gas Pipelines of Ukraine (Magistralniye Gazoprovody Ukrainy, MGU).
By doing so, Naftogaz has rid itself of the gargantuan task of modernizing the entire country’s dilapidated gas transmission infrastructure, i.e. freeing up its balance sheet, as well as cleared one of the main geopolitical irritants of its operations – the seemingly endless Russo-Ukrainian gas dispute. On the other hand, transit revenues could have provided a temporary aid in financing Naftogaz’s upstream expansion. The Ukrainian government would still garner the transit income as MGU is a state-owned entity, however, Naftogaz would be excluded from that string of transactions.
This need not mean that Naftogaz’s ambitious plans are destined for failure. Ukraine still has ample hydrocarbon reserves and despite talks of achieving carbon neutrality by 2040, Kyiv would be fully supportive of more oil and gas production, regardless of whether it is conventional onshore, offshore, or shale. Thus, the EU/IMF-sponsored changes will at some point allow Naftogaz to become more profitable in the future, though the effect of those changes will most likely play out in a much more protracted timeframe than the Ukrainian authorities envisage. Yet if there is a time to launch a production ramp-up, it is now. Gas wars between Moscow and Kyiv are unlikely in the upcoming years thanks to the 5-year transportation contract signed in late 2019 yet the conflict potential is still there, especially as we get closer to 2024-2025.
Katona writes for oilprice.com
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.