Martin Bartošovič serves as General Director of NAFTA a.s. Within the EP Infrastructure group, he is also Chairman of the Board of Directors in the company POZAGAS and Managing Director in the company SPP Storage. Prior to joining NAFTA company, Mr. Bartošovič was Chairman of the Board of Directors of SLOVGEOTERM, Member of the Board of Directors of SPP – distribúcia and Chairman of the Supervisory Board of the SPP Foundation. In the past he worked for A.T. Kearney on projects for international financial institutions and companies operating in the energy and transportation sectors.
Mr. Bartošovič holds a master’s degree from the Faculty of Economics and Management at the Slovak University of Agriculture in Nitra. During his university studies he was awarded scholarships at West Virginia University, and took part in the Cornell University program at the Institute of Economic Studies in Nitra, a program sponsored by the A. Mellon and G. Soros foundations.
Could you tell us what is NAFTA nowadays, and its production division in particular?
NAFTA is a strategic energy company in Central Europe, as it operates underground gas storage facilities with the capacity of ca 30 TWh. We have been developing this area for 45 years, working intensively to increase our storage capacity. By strengthening connections to other gas networks we also support tools such as reverse flows in transport networks. The underground gas storage of NAFTA play key role in the security of gas supplies in Slovakia and Central Europe and we have extensive experience in this area.
At the same time NAFTA is the Slovak leader in exploration and production of hydrocarbons with 105-years of experience in this area. Exploration and production has a central place in our history, as we were present at the birth of the oil and gas industry in Slovakia. Our organization has built a strong team of professionals, including experts on geophysics, geology, reservoir and petroleum engineering. NAFTA also provides workover and drilling services for internal and external clients and has expert experience in workover and drilling projects in Slovakia and abroad.
How is NAFTA structurally organized? Who are your company’s ultimate beneficiaries?
The Slovak republic owns via state energy company 28.6 % of NAFTA shares. 67.9 % of the company is owned by EPH, a Czech based company with operations in many European countries and important player in the European energy market.
What regions does NAFTA operate?
NAFTA´s activities are primarily located in Western Slovakia, where it operates a complex of underground storage facilities and performs exploration and production of hydrocarbons. However, our production centers are also based in Eastern Slovakia. In 2016 we started the first cooperation project in Ukraine, particularly in the Uzhgorod area, which is geological extension of highly explored Slovakian territories and is in trend of discovered fields in Eastern Slovakia. In 2016 we started cooperation in Danube Basin with Canadian company – Vermilion Energy.
We also search new possibilities of cooperation with foreign partners, which will bring us the opportunity to use our experience. Our attention focuses mainly on countries such as Ukraine, Germany and Turkey.
As of recent years the NAFTA’s representatives have been frequently visiting Ukraine, have participated in a number of conferences. What interest does Ukraine pose to your company?
NAFTA specializes on oil & gas exploration and production as well as on gas storage operations. We have been continuously analysing investment possibilities on Ukrainian market and evaluating possibilities to enter the projects connected with our business specialization. There were more reasons, why we have decided to focus on Ukrainian E&P sector. Ukraine has significant hydrocarbon potential and hydrocarbon system. Therefore it brings the possibility to utilize our experience and know-how we obtained within the Slovak projects over the past 15 years. In this market can be also found links and synergies between standards established in NAFTA by foreign shareholders (former E-oN Ruhrgas and Gas de France) and standards that have been used in the past also in our country and are still used in Ukraine.
There is also geographic and "geological" proximity of potential hydrocarbon fields compared with Slovakia. Nevertheless, cultural and linguistic proximity is an additional advantage, when considering Ukrainian market.
From other point of view, the growth potential of the Ukrainian economy in case of foreign capital entry and new investments, reforms within Ukrainian E&P market as well as other intended reforms in Ukraine are also appealing.
Nowadays NAFTA has been partnering Cub Energy Inc. for a gas exploration project in Uzhgorod field of Transcarpathia. What is NAFTA’s doing in this project?
Our first project in Ukraine was cooperation with Cub Energy Inc. within Uzhgorod license. In 2016, NAFTA via it´s daughter company NAFTA INTERNATIONAL B.V. assigned agreement about shares purchases and shareholders agreement with the company Cub Energy Inc. In accordance with this agreement NAFTA INTERNATIONAL B.V. obtained 50% share in the new company CNG Holdings Netherlands B.V. which owns Ukrainian company CNG LLC. CNG LLC is 100% owner of the Uzhgorod mining plot in the western Ukraine. Surface area of the Uzhgorod license is 301.4 km2.
As I mentioned before, this license from geological point of view is in trend of discovered fields in Slovakia and presents continuation of matured Eastern Slovakia area. The license from eastern side neighbours with Rusko-Komarivske license, which 100% owner is Cub Energy Inc. This was the project by which we entered Ukrainian oil and gas market and now we would like to continuously extend our participation within country’s energy sector.
How far has the project’s implementation moved to? What has been accomplished and what is planned for the upcoming year?
NAFTA with its partner Cub Energy Inc. very promptly, already in October 2016 (only three months after the contract signature) started with the 3D seismic acquisition within the license. Till May 2017 118 km2 of the 3D seismic data were acquired. Subsequent processing and interpretation of the data was performed till December 2017. The interpretation has resulted in identification of the drilling prospects first of which are planned to be drilled in 3rd quarter 2018, just two years after the project start. Such efficient exploration approach we are ready to perform also within other projects in Ukraine.
Last year it became known that NAFTA intended to enter into PSA for Yuzivska field. It was reported that NAFTA was ready to become a shareholder in Yuzgaz, and committed to become a financial guarantor underwriting this project. Wasn’t it too risky to NAFTA?
The company Yuzgaz B.V. is in the advanced phase of negotiations with the companies EP Power Europe and NAFTA in the project of the Yuzivska field development.
EP Power Europe (EPPE), the company from EPH group, is ready to become the investor and the guarantor of the project. Taking into consideration the size and results of the EP Power Europe and its financial results, it represents strong financial back-up for such important project, as the development of the Yuzivska license is.
NAFTA would be the technical operator of the project, as it has a professional and long-term experience in exploration and production of hydrocarbons, as well as drilling services in international environment.
Cooperation of these partners on the development of Yuzivska gas field, combination of their financial stability and extensive experience can be a way to help the energy independence of Ukraine with effective and prompt start of the Yuzivska field development.
The project is currently in the stage of state authorities´ approval. Unfortunately, the approval process is not moving forward so promptly as we expected, although Ukraine urgently needs to increase its own gas production.
We know that the development of this project is closely monitored by other reputable international O&G companies and its success would attract other companies to invest in Ukraine.
How do you evaluate potential capacity of Yuzivska field? What appeals to you most in this project: potential reserves of the deposit, low taxes, legal protection for PSA?
As mentioned earlier, for us the most crucial point is geology. Yuzivska license is a part of Dniper-Donetsk basin and mostly northern and central parts of the license are within the trend of the most prolific hydrocarbon region in Ukraine. We had a chance to see some geological data, evaluated them and we are confident of Yuzivska potential, subject to standard exploration procedures. It is necessary to understand that Yuzivska is the greenfield project connected with high geological risk and requires extensive exploration phase. However, we believe that by implementing our know-how, experience and methods, we will be able to develop potential of the license.
For the investor, the PSA (Production Sharing Agreement) regime is very important, as the conditions for cooperation between investors and the government is established for 50 years. Thus we will concentrate the maximum capacity to prepare cooperation conditions (PSA) and after approval, we will concentrate on the work that will ensure gas for Ukraine.
PSA has been intensively negotiated several months with state representatives and the current wording is a compromise acceptable for both parties.
What do you think have changed after Shell and Chevron left Ukraine? Has it become better? Where do you see improvements?
We see quite significant changes and reforms within E&P sector during recent years. As positive development examples, we can mention royalty change to 12%/6%, which is standard international royalty rate, changes in land allocation, approval of the well drilling plan and its arrangement, state expertise of the mineral resources, connection to the gas transmission system or gas metering.
From general regulations, we are very much welcoming electronic system of VAT claims. By implementation of these and other changes, after active discussions with industry representatives, Ukrainian E&P market is standardizing and coming closer to standards, which foreign investors are looking for. It is very important to continue in that approach and try to standardize all procedures as much as possible.
However, we still see a big potential for further reforms to create better conditions for investors. Potential improvements lie for example in implementing rules allowing free movement of financial resources, thus opening the possibility of foreign loans. Another step could be enhancement of the conditions for business partnerships, such as implementing standard taxes or introducing new partnership forms. Legislation allowing the dividend pay out in full amounts could attract new investors too. Specifically for oil & gas business, legislation on free licence transfer could be considered as a step forward. We also think, that all legislation and regulations which are copied from European Union, have to be adjusted to the Ukrainian specific. Also, before adopting any new rules, it is necessary to create conditions, that these rules will be enforceable within practical life.
What is very important for the investors is stability. It means, once conditions are standardized, it is necessary to keep them. During the last years, Ukraine has undergone significant political, financial and legislative changes with positive trends, however it is still very difficult to predict future development of business conditions. Therefore introducing e.g. PSA regimes with stabilization clauses provides efficient tool for attracting and supporting business investments in Ukraine. PSA regime also serves as a perfect tool to bridge over the period, until all reforms are adopted and fully implemented.
It is fair to also mention there are some important negative factors (e.g. decrease of gas prices, unstable situation close to the licence boarders, end of shale gas “frenzy” in Europe) that pragmatic investor needs to take into account which decrease the investment amount the investors are willing to commit to.
Suppose the Ukrainian Cabinet of Minister agrees the PSA with Yuzgaz, what will you do first?
We believe, that EPPE in cooperation with NAFTA would be able to fully develop Yuzivska potential. Pursuant to the request from Ukrainian officials besides Comprehensive exploration of the whole license, in parallel with these steps, we will be focusing from the very beginning to the most promising geological structures in order to ensure the first gas production as soon as technically possible.
Based on the ongoing data analysis and investment program, the license development would have two basic stages. Within early production stage, existing data would be analysed, evaluated and utilized for fast track drilling. In this stage could be also managed workover of respective existing wells.
The second phase, comprehensive exploration, would start with 3D seismic acquisition or processing and interpretation, which would result in identification of drilling prospects. Expected volumes of production could be then determined and prefeasibility study processed, including number of wells and planned infrastructure. As the final steps of this phase, economical evaluation, risk analysis and preparation of prospect portfolio and its ranking would took place before drilling.
Investor priority is ensuring that first gas is received in 2019, when it is planned to receive the first dozen millions of cubic meters of gas. The preliminary goal for 2020 is to achieve production of 100 million cubic meters of gas. Comprehensive exploration will further secure about 1 bcm of gas production in 2022, and in the middle of the next decade production of 6-7 bcm of gas based on baseline scenario, therefore ensuring long-term and stable production with an effective project economics. In positive scenario, this level of production could be kept for 20 years. In order to meet such volumes of production, it will be necessary to invest significant amount of funds into exploration and development of discovered structures. It is expected that hundreds wells have to be drilled in order to fulfil this aim. The investment commitment for first five years currently represents USD 200 mil. Further and longer development of Yuzivska field could bring even higher investments, reaching hundreds of mil. USD.
Expected volumes of production within this project would significantly increase utilization of own gas produced in Ukraine. Therefore we believe that early start of production is an important step for Ukrainian energy security.
Is NAFTA interested to participate in other projects in Ukraine?
Definitely yes, but the final decisions will also depend on the approval of Yuzivska project. Within this project, we are bringing our capacities to Ukraine, in order to fully develop this project and ensure gas for Ukraine and also return investments to investors. In case Yuzivska project will not be approved, we will need to consider the future strategy in Ukraine.Author: ExPro