Alan Apter: Ukraine is in danger of losing investment attractiveness for gas exploration and production due to proposed permanent high rents

13 October 2014

Ukraine and Russia have reached an agreement on gas “for winter period” in fact. Accordingly, has the need for a special position in the gas industry disappeared?

– Of course, we welcome the signing of the framework agreement between the EU, Ukraine and Russia. However, it is important that Ukraine did not stop in the implementation of the Energy Strategy, aimed to increase domestic production as much as possible and reduce dependence on foreign suppliers of natural gas. I believe that this point of view is now prevalent across the political spectrum. However, the Ministry of Finance proposes to use charge for use of mineral resources increased in July by twice (to 55%) on a constant basis. However, I understand the need for the government to look for ways to increase incomes, but the proposed initiative creates huge risks for the implementation of the strategy of energy independence and significantly reduces attractiveness of new field exploration, which is capital-based.

But the Ministry of Finance considers the “July” tax changes for high gas producers not to be high and even intends to defend their increase.

– Proposed rate of rent is high for any country of Central and Eastern Europe, especially those countries that seek to implement the import substitution policy and reduce dependence on foreign energy sources. The proposed rate of rent undoubtedly lead to reduction of investment amount in the gas sector, it would dent not only energy policy, but also will make it impossible to provide budget revenues at the levels, planned by the Ministry of Finance.

After meeting with U.S. Secretary of Commerce Penny Pritzker Prime Minister Arseniy Yatsenyuk has agreed on joint actions in the priority areas for both sides. In particular, this is about attracting US investment in energy projects. How real is the interest of American investors to Ukraine?

– We have also heard that Ms. Pritzker said that Ukraine should implement tax reform and deregulation. This will help create the necessary conditions for the arrival of US investors. The interest of the United States and other Western investors in Ukraine is actually real. But the timing of their arrival here will depend on political stability, the resolution of the military conflict in the eastern regions of Ukraine and the implementation of reforms, which should lay a solid foundation for economic growth. As an investment banker, who worked in places such as Morgan Stanley and Renaissance Capital, I can say that Ukraine should take into account a number of factors: before making a decision, investors analyze regions around the world to identify the most promising ones. And only after that they stop at specific countries and the most attractive sectors. If we look at Ukraine in the context of investments in the gas sector, the increase in rents in combination with other problems of the country, makes it attractive even among neighboring states. Increase of local internal gas exploration and production is out of expectation without foreign investment.

You are in the Board of Directors of the largest independent gas producers in Ukraine Burisma Holdings. Are you considering the possibility of reducing investments in natural gas till the end of the year?

– No. In 2014, we will complete all the projects on exploration and drilling, which have been provided in our strategic plan accepted at the beginning of the year. In particular, we plan to put into operation 21 new wells by the end of the year, and expect to produce about 675 million cubic meters of gas. As for the plans for the next year, we will consider them when will be a better understanding of the conditions in which we have to work. We could to introduce 15 to 20 new wells in 2015 with appropriate investment and reach the production volume of over 1 billion cubic meters of produced gas. But the plan requires a considerable amount of investments from Burisma Holdings, as the deployment of modern technologies of exploration and production is very expensive in the Ukrainian geological conditions. In the case of a stable situation in Ukraine and the favorable investment climate, Burisma plans to accelerate the exploration and production at its fields, thus contributing to energy independence of Ukraine, the social well-being of our employees and the regions in which we operate, through attracting Western investment, including the ones from the United States. Due to the instability in the country, investors have suspended their programs at the moment. The increase of rental fees only complicates our ability in dialogue with investors who currently estimate investment in gas production as a high-risk.