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Alexander Khurshudov:The Gas Princess aims at the Ukraines Naftogaz

Alexander Khurshudov, expert Oil and Gas Information Agency
October 10/ 08:02

Yulia Timoshenko promised to eliminate Naftogaz company if she is elected the Ukraine’s President. She thinks that the gas monopoly is an unnecessary agent and is not really involved in production. With her usual valor Timoshenko intends to do the elimination in just half a year, before the contract with Gazprom expires. Then she plans (notice!) to divide the gas stream in two parts – the Ukrainian gas (cheap) should to the impoverished country dwellers, while the imported gas (super-pricey) should go to their capitalist robber-barons, so they would choke on it…Voila!

From the economics stand point this is a complete nonsense. They have changed places more than once in the Ukrainian gas industry, they have even changed the players, but all in vain. The business decayed having lost the possibility to sell Russian gas to Europe, which they had been extensively doing throughout the 90s…However, this spring dried out a long time ago. The last source of income, Russian transit, threatens to disappear. I’ll quote a few figures from Naftogaz’s report of 2016, available to public.

The company’s revenue for that year amounted to 192.7 bln Hrn, 75.1 bln of which came from Russian transit and 99.8 bln Hrn from the sales of gas to domestic and foreign consumers. The sales of gas caused losses of 3.5 bln Hrn, while Russian transit brought 26.2 bln Hrn profit, which is $1.03 bln if counted at the average exchange rate (25.4 Hrn for a Dollar). The total profit of Naftogaz for the same year amounted to 21 bln Hrn, which is 20% less that their transit revenue.    

I haven’t found their last year’s report in open sources. According to mass media their profit grew 1.5 times and reached 39.3 bln Hrn, with the revenue from Russian transit up to 36.5 bln Hrn. Naftogaz added to the report the results of the Stockholm arbitrary, which are currently under appellate litigation. I’d like to note that gas sales inferred losses again, though half of the revenue (51.1 bln Hrn) is government aid. The very aid that the IMF requires to replace by raising the price for gas.

With this said it becomes clear that loosing Russian transit Naftogaz becomes a zombies, a living dead. The Ukraine applied an unbelievable effort to increase gas production last year to the level of 20.8 bln m3, though the increase was due to the wells of Poltavsk region, which are 5 to 6.5 thousand meters deep. Such wells have an abnormally high pressure and start producing with wonderful production rates, but deplete very soon. Besides, there is no demand for such gas and it won’t sell without an aid.  

The state of Ukrainian gas industry is bad enough, but Timoshenko’s innovations will only make things worse. They may sustain the low recovery cost at small fields for 2-3 years, then the production rate will decline, the recovery cost will go up, the wells will be shut-in. But all this will happen “later”, and the politician doesn’t think about that.    

Besides, Timoshenko also calls for stopping the sales of the Ukrainian Gas Transit System (GTS). She believes that the GTS costs $300 bln (note that this is more than cost of BP and Gazprom combined). Naftagaz estimates the GTS 25 times lower ($12.5 bln), which is also too much. At first approximation the cost of a company equals five times its year profit, which makes the current cost $5-7.5 bln. But only if Russian transit stays. If it doesn’t the GTS revenue will decrease five times and its cost will become a negative value.  

From politics stand point the Gas Princess' maneuver is not bad at all. She reasonably believes that people won't go into such details and they will eagerly welcome her intention to take something away from the rich. By doing this the lady hopes to win additional 3-4% of votes at the presidential elections. Then Naftogaz may fly high or fall through the ground. It will be curious to watch things unfold.

Other news briefly

The Ukrainian government has postponed the increase in the price for gas for individual consumers and the Teplokommunenergo (TKE) till 18 October 2018. As reported earlier the price for gas for individual consumers will increase by 23%, while for industrial companies it will reach $480-520 for 1,000 m3 . The IMF won't give the Ukraine another loan unless these measures are taken. However, there is another side of this problem – the consumers fail to pay for the gas they've used and no one has the nerve to disturb heating during the winter. In the summer the consumers' debt amounted to 49 bln Hrn ($1.75 bln).

In April 2019 the platforms at Kashagan oilfield offshore Kazakhstan will be stopped for maintenance. It may take up to 45 days, then the North Caspian Operating Company (NCOC) plans to reach the same production level of 370 thousand barrels per day.

It is curious to watch the estimated reserves of this large field shrink. Initially the range was astonishing: from 1.5 to 10 bln tons of oil. Then the optimism decreased to 5-6 bln tons and now the recoverable reserves are estimated at just 803 mln tons of oil and gas condensate. This is not bad, but it won't seriously affect the global price for oil. Besides, a lot of gas is produced with oil, there is no demand for it, so it has to be reinjected into the formation. The hydrogen sulfide present in the gas causes pipeline damage and failure.

Meanwhile the largest Brazilian field Lula in July set a production record of 879 thousand bpd. Petrobras company intends to reach target capacity of 1 mln bpd. Note that last year oil production for the company grew by just 0.4%; this means that the increase in recovery at green fields almost totally compensated for the recovery at brown ones.  

Besides, the US and Brazilian authorities fined Petrobras for $853.2 mln under the corruption investigation carried out in the two countries.  This was announced by the US Justice Ministry. The Americans made hay here on the pretext of Petrobras trading at New York Exchange. Funny enough is that top-managers stole $3.8 bln in under the table payment and the blind Themis not only failed to return the money to the companies, but also fined them. This practice is worth spreading – let’s make everyone who has been robbed pay a fine, so they’d be more careful next time. By the way, our companies listed at Western stock exchanges should get ready for such treatment.

D. Medvedev ordered the government to make amendments to the tax maneuver before 10 October 2018. They are supposed to promote exploration and provide additional benefits for developing small fields and the use of enhanced recovery techniques (shall we really see it come true?). The key objective of the amendments is increasing aid to refineries, which lack crude that is sold abroad. The long struggle with the tax maneuver only makes me smile – it had been developed for 4 years, worked for 9 months and it already needs changing. Note, I wrote 4 years ago: “It is the first time I see a law which is killing a whole industry – the petroleum chemistry”. One can’t help but cry over such “efforts” of our Cabinet of Ministers and the Parliament!

Novatek will construct an LPG terminal in Murmansk region. Liquefied natural gas will be reloaded from medium-size ice-breaker tankers onto large ones, which would carry it to Europe. A similar terminal is planned to be built in Kamchatka for shipments to the South-East Asia.

The oil market hardly reacts on Trump's tweets. His delirious claims to the OPEC last week were followed by the increase in the Brent price to $86.74 (see picture). The price is close to the upper limit of the long-term uptrend later corrected to $84.11.

Picture

The main drive for the increase is the threat of embargo for oil supplies from Iran. One has to be too naïve to expect shortage of supply at the market for this reason. Note that Iran has been exporting oil under sanctions for 4 years, nothing will stop it from doing the same now. Though it seems the traders will realize it only by the end of November, till then the oil price may continue to grow up to $89 for a barrel of Brent. 

Among other reasons for the increase I’d name weak production growth in the US. It has increased by 0,9% over the recent weeks, but this is far from extreme rates. Besides, the commercial stocks grew but slightly in September, by 2.5 mln barrels, while  the oil rig count decrease by 1. It has been fluctuating within 860-867 for the last 4 months. Meanwhile the price for WTI has grown by 15.4%, why don’t they drill more? There doesn’t seem to be enough sweet spots, the drilled wells are suspended more and more often.  In August the number of uncompleted wells reached 8269, having grown by 3%.

However, there is a saying at the stock exchange that says there is no good rise without a good fall. After the attempt to reach $89 I expect a stronger correction to the level of $80-82, and whether the growing trend will continue or not will be clear by the end of the year

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