Michael Bakunenko: “Starting 2019 the UNB’s trading business will be a separate entity – UNB-Commodities”

Michael Bakunenko: “Starting 2019 the UNB’s trading business will be a separate entity – UNB-Commodities”

Michael Bakunenko, Chairman of the Board of PJSC «MC «Ukrnaftoburinnya», told EXPRO about his company's development strategy, the situation in the drilling and services market of Ukraine, UNB`s production potential, and the launching of UNB-Commodities as a trading company.

Over the past three years, Ukrnaftoburinnya has demonstrated an impressive growth in production, and today it is the third private gas producer in Ukraine. What has been achieved during this period? What is still pending?

Indeed, over the past 3 years, we have substantially improved all the Company's indicators. In particular, the daily production of natural gas has increased 3 times, liquid hydrocarbons – 4 times (from September 2015 to September 2018). This was achieved through the implementation of a large-scale capital investment program at the Sakhalin field. We have drilled and completed 7 wells, and 3 more wells are being drilled now. In addition, 17 CWOs have been carried out to stimulate production of our wells. In March 2018, we built and put into operation our own gas pipeline (37 km long), and connected it to the Ukrtransgaz countrywide gas pipeline transportation and distribution system, that made the process of gas delivery to customers more efficient and stable.

In addition to the growth of production indicators, we have created new additional jobs. In particular, the number of staff increased by 50% as compared to September 2015. I am sure that the Company's growing investment has also contributed to creation of additional jobs for contractors, suppliers and further on along the supply chain.

In general, UNB has grown more than 3 times during this time.

Today, the Company is developing only one Sakhalin field. What is the potential of this asset; is it feasible to increase production further on?

We estimate the production potential of the Sakhalin field at the level of 6-7 billion m3 of natural gas. Annually, we produce about 800 million m3 of gas at this field.

Next year we plan to commission 4 more new wells, spudding of which is planned for the end of the current year or the beginning of the next year. At the moment, we see the potential for further increase in production rates by stimulation, including hydraulic fracturing operations, additional perforations, development of other production reservoirs. Drilling of new wells depends on the results of the existing assets’ production and revision of geological information of the field.

Next year we plan to commission 4 more new wells, spudding of which is planned for the end of the current year or the beginning of the next year

In addition to production, Ukrnaftoburinnya is actively engaged in gas imports. It has announced plans for electricity trading. What has been achieved in these directions?

We import about 50-70 million m3 of natural gas per month, additionally we buy a resource of the domestic market from traders. We are selling from 150 to 170 million m3 of natural gas monthly (own and purchased gas). This September another record sale of natural gas has been achieved – 179.4 million m3.

In 2018 we plan to achieve sales of 1.6 billion m3 of natural gas, which is almost twice as much as the last year's figures.

In general, over the past three years, we have created a successful business line – natural gas trading. Therefore, we decided that starting from 2019 the UNB’s trading business will be legally singled out as a separate business entity – UNB-Commodities. The new company will be engaged in sales of natural gas (including gas produced by UNB), liquid hydrocarbons, and in the long term – electricity. All commercial department of UNB, as a whole division, will be moved to UNB-Commodities. Therefore, for our clients the change of supplier of natural gas will be effected almost unnoticed.

The separation of businesses – production and trading - will allow UNB strategically and operationally concentrate on its key competencies, namely hydrocarbon production, drilling and intensification. On the other hand, UNB-Commodities will be able to further concentrate on customer service and efficiency of sales.

Is Ukrnaftoburinnya ready to participate in the announced auctions of Derzhheonadra for special permits for new oil and gas fields?

Yes, we are always looking for opportunities to expand, regardless whether it is a green field project or a purchase of existing assets. Over the past three years, we have gathered a team of professionals and have gained valuable experience in drilling and production stimulation technologies that we are ready to replicate to other companies/licenses.

Obviously, the conditions for our participation in the Derzhheonadra’s tenders are their transparency, free access and completeness of information on the fields.

Currently, private companies are actively cooperating with the state companies, for example, leasing the abandoned wells at their sites. How relevant is that for the Company? Would you like to participate in the production enhancement contract of Ukrgasvydobuvannya?

At the moment, we have already provided the necessary information to participate in the PEC with UGV. But the terms of cooperation are not yet fully understood, namely: what objects (wells, licenses) will be considered, and what rights and obligations of the investor and the UGV will be under contract, and what mechanism of sharing the results of production enhancement will be.

One of the greatest risks we see is the UGV’s bureaucracy in decision-making, which can significantly reduce the attractiveness of such contract for an investor. For us, the normal practice is a prompt approval of any production decision, and a close interaction of technical and geological teams.

We will make the final decision on our participation in the contract, provided all the conditions are clear.

In the recent months, the Company has significantly increased its production of liquid hydrocarbons. What are the prospects for further development of oil and condensate production?

Indeed, in July, we completed well №20, which resulted in increase of liquid hydrocarbons’ production rate by 20%.

As I’ve mentioned, in future we plan to focus on stimulation of production of both condensate and oil at the existing wells. In addition, we plan to invest in technologies that will help to increase condensate recovery at our oil and gas treatment plant.

The business of liquid hydrocarbons is very important for us and we will work on increasing their production rates.

In future we plan to focus on stimulation of production of both condensate and oil at the existing wells

Over the last two years, several private gas companies have started manufacturing LPG (Smart Energy, Geo Alliance), or announced such plans - DTEK Naftogaz and Burisma. Don’t you plan to start LPG production? What do you need to do this?

We are just preparing a business plan for the next year, and deepening of processing of raw hydrocarbons is one of the most discussed and priority issues. According to the feasibility study in this regard, we see a good potential for extracting additional products from our natural gas. Now we are assessing the technical issues and options for the construction of production facilities. The project is large enough and costly, so we want to make sure that the profitability and return on investment are acceptable.

During the last two years in Ukraine there have been incentive royalty rates for newly built gas production wells. How do you assess this initiative; has it met expectations of producers?

The reduced royalty rates for new wells are, of course, a very positive incentive to increase drilling volumes. At the same time, the positive effect of reducing the gas royalty was partially downplayed by the same high rates for condensate (0.45 for wells shallower than 5000 m and 0.21 for wells exceeding 5000 m). This does matter for our Company as we mostly drill wells of 4500-5600 meter depth. It is not clear why the state, to some extent, discriminates companies, which produce condensate, including UGV: the rates for oil are 0.29/0.14. (from January 1, 2019 the rates for gas condensate will be 0.29/0.14 - EXPRO).

How do you assess the drilling and service market of Ukraine? What problems exist and how do the companies resolve them?

The market has noticeably revived. It happened due to the increase in UGV's and private companies’ activities. In other words, the demand for services is growing. However, years will pass before the service reaches the level of quality alike the one in the developed countries, such as, North America or the UAE.

There is an acute shortage of good quality services. Most contractors are heavily loaded with UGV orders, and sometimes it is difficult even to find a CWO rig with required capacity for urgent works or to contract team for geophysical works.

There is an acute shortage of good quality services. Most contractors are heavily loaded with UGV orders

The Company has increased its drilling scopes. What has changed in the work with the drilling contractors and the suppliers of materials and services? Which companies do you work with?

First of all, we have analyzed our contracts with drilling contractors and have identified strong and weak points. We came to the conclusion that it is more efficient to purchase materials by ourselves: casing strings, tubing, valves, accessories and other components on the basis of the transparent tenders. This greatly influenced the quality of our facilities. We plan to get only the best materials and the best equipment, I mean drilling rigs. We see that it pays off and our team managed to significantly reduce time of drilling new wells. We work with many companies; so far, everyone is happy.

Taking into account your scope of drilling, have you considered purchasing of drilling rigs and other equipment for your own needs?

The question is definitely interesting. However, it requires significant investment. It is necessary to consider all pros and cons. It is often more efficient to contract the equipment, thus investing in the modernization of the drilling rigs. Another question is that not all contractors want to upgrade their fleet, and operate with "scrap metal" equipment, moving it from one well to another.

As an option, we are considering to buy a rig (drilling or CWO) and to pass it over to a specialized service company working in the interests of UNB.