«A lot of positive changes in the fiscal sphere have occurred thanks to cooperation between the state and gas producing companies» - Yaroslav Kachurin, General Director of KUB-GAS, gas producing company with foreign investments, told EXPRO in their conversation about the current situation in business and plans for the nearest future.
Two and a half years ago, KUB-GAS changed owners. How did it affect the situation in the Company?
There have been some changes in the structure of the Company, aimed at bringing the Company to the general principles of Burisma Group corporate policy. In particular, the strategy for further development was revised taking into account the decline in production, expenditures were optimised and the most cost-consuming subdivisions were downsized.
When the owners changed, the taxes were high, and the price of gas was falling. Today the situation is different.
Yes, the initial background was different. Then the taxes were reduced, the royalty rates were decreased. A lot of positive changes in the fiscal sphere have occurred thanks to cooperation between the state and gas producing companies. But we must understand that business that has funds always analyses alternative investment options - where to invest and where there is best income/risk ratio.
KUB-GAS has always had its operational divisions, its own drilling rig and snubbing unit...
We don’t have our own drilling rig any more. This was the unit that we decided to reduce because there was no possibility to keep it busy with work all the time. Taking into account that Burisma Group has its own advanced drilling subdivision, this unit needed to be optimized.
If you start drilling, will you hire a drilling company?
There is always an open competition to which we invite all the drilling companies in Ukraine. As a result of it, we cooperate with the contractor who offers the best terms.
And you decided to keep the snubbing unit within the structure?
The fact is that snubbing unit is the peculiar feature of KUB-GAS. We have highly qualified staff who was trained abroad and had working practice in Canada – these are high-quality specialists who carry out a wide range of works with the snubbing unit. At the moment, we are actively exploring the possibility of cooperating with other companies in terms of rendering services for snubbing unit.
Does reduced royalty rate for new wells stimulate drilling?
Definitely. But the point is that before spudding the well, a very long process of geological exploration, designing, preparatory work, etc., takes place. Accordingly, if the area is not prepared for drilling, the companies will not start to drill tomorrow just because the royalty rent was reduced. Gas extraction is one of the most knowledge-intensive, time- and fund-consuming industries.
So, it is not the case that as soon as royalty rate and taxes are reduced, everyone rushed to drill?
Of course not! It is misleading to think that as soon as new rates are introduced, all the 40 rigs start to drill immediately! It's a very expensive pleasure to drill a well. You need to have at least minimal confidence in an expected result. Perhaps when the company has dozens of licenses, it is possible to prepare dozens of wells for drilling, but believe me, it is also not done at once.
What measures do you take to intensify the production and to reduce the drop in production?
We do workovers. Recently, we have made a recompletion to the upper horizon, after which the flow rate increased several times; as of today we carry out preparatory works in order to perform a complicated workover in one of the oldest wells of the Company. Regarding some special methods, such as hydraulic fracturing, this technology does not work in all wells. In any case, it is drilling the main asset for any producing company.
Recently KUB-GAS has conducted gas intensification of gas production, hasn’t it?
Yes, we conducted the internsification quite successfully, but currently do not have the wells which could be candidates for such stimulation.
Today, the majority of gas-extracting companies witness some decline of production dynamics.
Given the specifics of the industry, it should be taken into account that each well has a certain resource. For example, our wells are already at the stage of production, when artificial lift is used. In connection with the declining formation and, correspondingly, wellhead pressure, in order to ensure processing and transportation of natural gas, high capacity booster compressors were installed at the Olhivske and Makiivske gas and condensate fields. With regard to the future prospects, we currently invest a lot of funds into geological exploration.
Does this apply to above mentioned fields?
It applies to all fields of the Company, in particular, Makiyivske and Olhivske. Starting from last year, KUB-GAS has been actively investing in geophysical exploration. The main resources in these fields have already been explored; production is at a stage where more than 70% of the C1 reserves have already been extracted. We need new information and new gas fields.
Which methods do you use?
We have acquired 3D seismic survey on the Olhivske and Makiivske fields, so we are looking for additional methods. In particular, we are considering reinterpretation of seismic data and have already ordered hydrodynamic modelling. It will enable us to predict the remaining reserves - where they are located depend on field depletion rate.
We also have North-Makiyivske area. In next year we plan to drill an prospecting well there. We have already started drilling at Zakhidno-Olhivska license area. We are currently conducting the geophysical study.
- How expensive are these studies?
It all depends both on the type and on the scope of study. If we talk about 2D seismic survey, it is dozens of millions of Hryvnias. If we talk about 3D seismic, it can cost more than 100 million Hryvnias. The budget planned for this year, including drilling, 3D seismic exploration and other studies, makes about $ 12 million.
Are you using your own or loan funds?
Our own funds are sufficient.
Two Company’s fields remained on the temporarily occupied territory. Is this a significant loss for the Company, given their potential?
If we analyse the volumes of production, these are not our main fields. But for the Company, everything matters since it is a loss of up to 10% of production. These fields were fully equipped, and all technological processes were well-established.
How many wells does the Company have today?
Currently, we are constantly operating 15 wells, and two are in periodic operation. Also, we have some abandoned and suspended wells.
How many wells does the Company plan to drill this year?
2-3 wells depending on the situation. If our optimistic forecast comes true, there will be three wells this year.
Gas price is the main factor here?
No, it will depend on the results of the first well. On how accurate the model and forecasts are and so on. The first well has been chosen as the most optimal candidate, and the next wells will depend on the results of the first one.
And what about the depth?
The wells are not deep. Up to 3 kilometres.
Does this mean that they are relatively inexpensive?
Our wells are relatively inexpensive – up to $ 3 million. There are much more expensive wells.
Yes. At the same time, we carry out a full range of geological study: coring, qualitative geophysical exploration, multiple interpretations. At this stage, we try to avoid cost saving, because the geological structure of the fields is quite complex. There are many relatively small deposits, so it's hard to explore and produce.
In your areas, all the wells are shallow. Is there a probability of deeper deposits?
Based on the information available, there is nothing deeper.
Nearby in the Kharkiv region, they drill deep wells.
Yes, there are wells with a depth exceeding 5,000 meters.
In Soviet times everything at a shallow depth was depleted, but there is Shebelynske field.
Everything depends on the field and its specifics. As far as it concerns gas production and field operation, everything is very individual, and there are no common recipes for success.
Is the area where you are drilling now new?
Zakhidno-Olhivska licensed area is relatively new. Right in its centre, there is Druzhelyubivske OGCF, which has been operating since the 1980s. And Zakhidno-Olhivska are, where we currently carry out our works, surrounds it.
What are the plans for the next year?
A large project of 3D seismic survey is planned on the Zakhidno-Olhivska licensed area.
You haven’t announces the tender yet, have you?
Everything is almost at the final stage. It should be mentioned that the approaches to the field exploration are currently changing in terms of reinterpretation of the old seismic data.
So, can the old survey results be reconsidered, reinterpreted, and provide for another result?
Yes. In particular, it is because to some extent interpretation is a subjective view of the interpreter. As a rule, experts rely on modern technologies and knowledge that change in the course of time.
And what about gas quality? Should it be additionally treated?
There are requirements of Ukrtransgaz JSC – the operator of the gas transportation system, which are outlined in the Code. As in every other enterprise, we treat the natural gas before feeding it to the main gas pipeline.
Are there any surprises on behalf of Ukrtransgaz? Is there any issue with the access to the pipeline network?
The new requirements (The GTS Code - EXPRO) have not yet been fully implemented. In a situation where the country does not provide itself with gas, the aim of preventing the gas of lower quality from coming into network looks strange. They should decide on whether the Company pays the difference for non-compliant gas, or they will have to suspend the Company’s activity and there will be no production. But suspension of production is not beneficial for anyone: neither to the owners who develop the fields, nor for the state which has a deficit of gas. We need to find a compromise.
What is your attitude towards the plans of the Derzhheonadra to sell licenses for new areas more actively? Is KUB-GAS interested in it and what is the position of the Company’s investors?
In any case, the decision is taken based on how interesting the project is for us. So far, we have not been considering purchasing new licenses, but things can change. As for the policy of Derzhheonadra, this is normal, good initiative. The only point is that it must still be properly implemented in full.
What do you think of the prospects for the industry?
The changes taking place now, are definitely positive. Including the achievements made with the help of the Association of Gas Producing Companies, in which KUB-GAS has membership. Several laws on deregulation have been adopted, land issues are being solved, which is very positive step, but there is a room for further development. The issues related to the new Subsoil Code of Ukraine are discussed since the current one contains fairly archaic norms which need to be changed. Some regulations must also be updated. This is especially true for the safety rules in the oil and gas industry. But in general, it is impossible not to mention positive changes, in particular in the fiscal field...
How do you assess the situation with competition in the natural gas market? Do you feel the competition of the foreign traders?
Ukraine is an import-dependent country, so if there is no self-sufficiency, there is no competition in the market. Now we reference import as a key price-forming factor. As soon as we satisfy the internal needs of the country, the price will be determined by the market differently.
And then the price may reduce?
Yes. The price will decrease significantly. But this will be achieved only when we reach the parity between supply and demand, and excess of gas will occur. We will have to produce more in order to compensate for the fall in prices, to fight for a market share, to export gas.
Why it turns out that proper conditions have been created, but there is no growth.
These conditions require 3-5 years to work. The system is inert. However, I hope that in the next five years, if the rules do not change, we shall reach a steady growth in production. If there is stability, the situation will be predictable, and, accordingly, companies will be able to spend more money on exploration, drilling, and there will be a prospect of the new players emerging in the market. As a result, gas production will increase.
The market has changed a lot over the past few years, which market trends can you spot?
There are more new players on the market - it's very good. Any company, especially Western, comes to the market with its technologies and it is always a fresh breeze in the development of the industry.Author: ExPro