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| FRIDAY, MARCH 23, 2012

ADVERTISING SUPPLEMENT

INTERNATIONAL HERALD TRIBUNE

Opportunities in Ukrainian energy

The Ukrainian government is encouraging domestic production of hydrocarbon resources, particularly natural gas, and foreign investment in the sector

Interest in potential reserves sparks a new era of exploration in Ukraine

ENERGY | Oil and gas

urope at the end of the 18th century duction of gas and oil, but also in its crucial was the scene of massive cultural and location between Russia the rest of Europe. political upheaval. It was also the periRussia supplies a quarter of gas consumed od when oil exploration in Ukraine was first in the European Union, and 80 percent of recorded. More than two centuries later, it that gas currently travels through Ukrainian could be said that culture and politics in pipes. Europe are once more in flux and that It is in this context that Ukraines fuel disUkraines energy industry is again set for a putes with Russia in the first decade of this new era of exploration. century must be seen. Bitter arguments regOil is no longer Ukraines major petroularly break out about how much Ukraine leum resource; gas makes up 87 percent of should pay Russia for gas imports and how the overall mix. Just as the predominant remuch they can charge in return for use of source has changed, so too has the geotheir pipes. Relations soured to such an exgraphical focus. tent that, in January 2009, supOver time, attention has plies to the European Union Ukraines shifted away from the Carpathiwere shut off. government ans, east to the vast DnieperUkraines position has been has pressed Donets basin, where more than weakened by the new Nord 120 fields and 3,000 wells acStream pipeline from Russia, ahead with count for 90 percent of the which started transporting gas energy reforms from Russia into northern countrys production. In its 2011 statistical review in recent years Europe through the Baltic Sea in of world energy, British Petrobe affected and encouraged 2011. It would alsopipeline that leum calculated that Ukraine by South Stream, a privatization has 33 trillion cubic feet (0.9 is expected to be completed by trillion cubic meters) of proven 2015 that will transport Russian natural gas reserves, 0.5 percent of the gas through the Black Sea to Europe. worlds total. Tapping the unproven reUkraines near monopoly on the transserves is what drives the energy firms. The port of Russias gas to the E.U., and the United States Geological Survey specuprice it can charge, is threatened. Pressure lates that Ukraine has some five trillion cuhas clearly been growing on the cashbic feet of undiscovered but recoverable strapped national oil and gas company, Nafnatural gas. togaz, to find new sources of income. They For the present, Ukraine, which is a net admit themselves the need to improve the importer of oil and gas, faces domestic eneffectiveness of their exploratory work, to ergy challenges. The research group Busiupgrade their equipment and to identify new ness Monitor International has estimated sources of oil and gas, not least in the Black that gas demand in Ukraine will rise from 46 Sea and Sea of Azov. billion to 52 billion cubic meters between To do all this on their own, however, is 2011 and 2016. Ukraines National clearly impossible, and other companies are Academy of Science claims gas consumpsure to play a significant role. Many of the tion could double by 2030. At the same major energy multinationals, however, have time, Naftogaz, Ukraines national oil and stayed away from Ukraine, deterred by the gas company, calculates that existing gas challenges presented. This has allowed fields are approximately 75 percent small and mid-sized overseas firms, such as depleted and oil fields are over 83 percent Cadogan Petroleum, to fill the gap, bringing depleted. rigorous practices, advanced technology The significance of Ukraines role in the and networks of expertise. petroleum industry lies not merely in its proMajor players are also starting to pay at-

CADOGAN PETROLEUM

Cadogan Petroleum, a company listed on the London Stock Exchange, with international ownership, is active only in the Ukraine, and 96 percent of its employees are Ukrainian. The company has invested about $500 million in the country since 2004.

tention, with Shell signing a contract in 2011 to explore for shale gas, in a deal worth up to $800 million (610 million). If the disputes with Russia inevitably set Ukrainian nerves jangling, more positive signs are clear to see. Ukraines govern-

ment has pressed ahead with energy reforms in recent years, encouraged greater privatization and improved cash collection rates from customers who are long used to non-payment. Outmoded exploratory and drilling practices and restrictive legislative

structures are being abandoned. New expertise and technology from overseas companies is set to squeeze more gas out of depleting wells. The waters of the Black Sea and the Azov, on Ukraines southern shores, are

tempting some analysts to make claims of long-term fuel security for the bordering countries. Looking ahead, the climate for doing business in Ukraines energy sector has never been better. 

Vast untapped resources seen in Azov and Black Sea

Energy companies in the Ukraine are focusing ever more intently on the Black Sea and Sea of Azov region. As yet, only a small percentage of Ukraines gas extraction is performed offshore. It is dwarfed by the DnieperDonets basin in the east of the country, which accounts for some 90 percent of Ukraines natural gas production. What is proving so alluring, however, is the potential to secure Ukraines long-term fuel security. If there is a sense of urgency, it is set against a backdrop of falling extraction rates in about 80 percent of Ukraines traditional gas sites. By contrast, the Black Sea and the Azov remain largely untapped. The United States Geological Survey calculates that in the AzovKuban basin the mean volumes of undiscovered petroleum are approximately 218 million barrels of crude oil, 4.1 trillion cubic feet of natural gas and 94 million barrels of natural gas liquids. The comparable estimates for Ukraines Dnieper-Donets oil and gas fields are 123 million barrels of crude oil, 4.8 trillion cubic feet of natural gas and 130 million barrels of natural gas liquids. (One trillion cubic feet is about 28 million cubic meters.) It is figures such as these that have led all the countries surrounding the seas to talk up the potential. Voices from Romania talk of the Black Sea potentially replacing gas supply from Russia. In 2009, the market research firm Aarkstore produced a report simply titled: Huge Potential Oil and Gas Reserves in the Black Sea Will Enable Turkey to Achieve Energy Self Sufficiency. The report was based on the assumption that there are 10 billion barrels of oil and 1.5 trillion cubic meters of gas beneath the Black Sea. For now, the Azov and the Black Sea continue to provide challenges. Drilling in the deeper waters of the seas is complex and expensive, even though the climate and weather conditions tend to be mild. Ukraine appeared slow off the mark, beginning exploration only in 2005, and unhelpful business regulations delayed potential partnerships with international firms. Now, as Ukraines government strips away legislative blocks, it is the more accessible shallow waters that appeal to the likes of the chief executive of Cadogan Petroleum, Bertrand des Pallires. The shallow Black Sea is our key offshore interest, he says. Production on this sort of project can reasonably be achieved as early as 2013-2014. A reasonably good infrastructure is already in place. The deep Black Sea projects might also be interesting exploration targets, but only as long-term objectives.

High potential in Azov and the Black Sea

Sea of Azov
388 25.3

UKRAINE
Northwestern section

RUSSIA Crimea
Prykerchenska block

495.7

50.4

321.2
Sevastopol Continental slope (deepwater trough)

126.8

Oil and condensate (millions of tons)

766.6

232.6

Black Sea

Natural gas (billions of cubic meters)

Source: Cadogan Petroleum

VIEWPOINT | Bertrand des Pallires, CEO of Cadogan Petroleum

Challenges and opportunities for local and foreign firms

exposure to modern field-optimization Bertrand des Pallires became CEO of techniques. Field rehabilitation and field opCadogan Petroleum in 2011 after a long timization is the low-hanging fruit that could career as a hedge-fund manager. Here he help ensure fast increases in production. talks about the challenges facing the Rehabilitating depleted fields offers signifiglobal energy industry and how Ukraine cant opportunities but its a complex issue. can play its part in meeting those chalInformation is poor about the number and lenges. condition of such wells and the field strucWhat are the major challenges facing tures around them. However, given adthe global energy industry? vanced technology and the right amount of Despite the current global economic investment, we expect to slowdown, we expect energy achieve not only a fast inprices to remain high over the The size crease in production but also a next five to 10 years as strucof potential material increase in recovertural supply struggles to meet growing structural demand. unconventional able reserves. We also believe that, despite Global energy producers will try gas reserves the need for speedy, high-risk to ensure sufficient supply by investing in technologically comis so large that exploration work and the uncertainties of future production plex energy sources, such as it cannot costs, the size of potential ungas shale, oil sands, deep offbe ignored conventional gas reserves is so shore and field optimization. large that it cannot be ignored. Gas will benefit most from What is the scope of your investment carbon-emission-reduction policies and the in Ukraine? shift away from nuclear energy in the wake The result of our current $130 million of the Fukushima Daiichi meltdown. Renew(99 million) work program for 2011-12 will ables will continue to play a marginal role in be critical in determining our next steps. the energy mix. Were confident well bring one or two fields Ukraine, with its significant existing and into development starting in late 2012 or yet-to-be discovered reserves in both conearly 2013. Each of these fields would repventional and unconventional gas as well as resent a development investment of $200 its significant infrastructure bordering Westmillion to $300 million. We will continue to inern Europe, has a tremendous opportunity vest in exploration and appraisal of our exto attract investment if it offers international isting assets, while starting investment in energy companies a viable business pronew areas, such as the Black Sea. We also position with reasonable fiscal terms and a hope to start exploration in unconventional stable political and regulatory environment. assets in 2012. In total, assuming the curIt has the potential to become the regions rent momentum shown by Ukraines governmost attractive investment destination. ment is maintained, we expect to invest Which areas of activity do you consider more than $1 billion in the coming years. most attractive in Ukraine? We already are the most active foreign Many existing fields have been undercompany in the Ukrainian upstream sector, exploited because of an insufficient and we expect to keep our position. We have the ambition and hope to become a contributor to the Ukrainian governments objective of expanding domestic production and make Ukraine energy independent through our own activities. Do you plan further cooperation with Ukrainian companies? The right development model for Ukraine is to link Ukrainian state companies with foreign energy firms. Ukraine may not have had enough cross-fertilization with the ideas and innovation from the rest of the world, but it certainly has the human talent to benefit from these exchanges. Partnerships are the best way to put talents and ideas together. Whats the future for the production of unconventional gas in Ukraine? Unconventional gas is a potentially significant contributor to future gas production in Ukraine. It is also an uncertain one. Unconventional gas production could contribute up to 20 billion cubic meters a year by the next decade. Thats equivalent to Ukraines current energy production. So, alone, it has the potential to double Ukraines production over time. If exploration starts this year, pilot production should start in three years, and commercial production in five years. Given the significant risks and costs in developing unconventional gas, the government must implement its promise to deliver better fiscal regimes. Otherwise, theres little chance of international energy firms investing in Ukraines shale-gas sector. 

PROFILE | Cadogan Petroleum

is the need for Ukraine to continue its legal, n October 2004, Cadogan Petroleum was fiscal and business reforms. Part of his incorporated in the U.K. Its aims were to remit as CEO is the management of key search for oil in the former states of the government relationships. He has particuSoviet Union. The following month, on the far lar praise for Ukraines minister for energy, side of Europe, up to a million protestors Yuri Boyko, whose energetic globe-trotting gathered in Kievs Independence Square as has focused on encouraging cooperation part of Ukraines Orange Revolution, a colbetween Ukraine and foreign energy lective howl at years of political corruption. companies. Eight years after those momentous events, Current developments in Ukraine, says both the country and the company find their des Pallires, led by the government, and futures inextricably linked. In July 2008, especially Yuri Boyko, make the countrys Cadogan Petroleum was listed on the Lonenergy sector extremely attractive. Our comdon Stock Exchange. mitment to Ukraine is long-term. Evidence Cadogans importance to Ukraine is such of that commitment is that Ukraine is the that it is now the countrys largest foreign inonly country in which Cadogan is active, and vestor in the upstream oil and gas sector. As 96 percent of the companys an exploration and production employees are Ukrainians. company, its major licenses lie Cadogan is now Cadogan may be focused on in the vast Dnieper-Donets oil the countrys Ukraine, but the venture is takfields in the east of the country. These major fields are supplelargest foreign ing on an increasingly diverse and international shape. A remented by a number of minor investor in the structuring of the board of direcfields in the Carpathians to the west. The company is also beupstream oil tors in 2011 has seen the arrival formerly of ginning to dip its toes in the offand gas sector of Gilbert Lehmann,energy comthe French nuclear shore reserves of the Black pany Areva, and Chicco Testa, Sea and the Sea of Azov. former chairman of the Italian electricity By the end of the 2011-12 financial pericompany Enel. The chairman, Zev Furst, is a od, Cadogan will have invested over $500 political consultant respected by statesmen million (381 million) since its operations and executives the world over. first began. Bertrand des Pallires, The company now produces some 0.03 Cadogans chief executive, says the spendbillion cubic meters (1 billion cubic feet) of oil ing is set to continue: $61 million was invesa year. Its projections suggest that within ted to 2011, $68 million is budgeted for three years it will be producing 0.61 billion 2012 and the figures rise thereafter. cubic meters a year, a twentyfold increase. If there is a caveat, says des Pallires, it Transforming Ukraine into a significant energy-producing nation will not always be a smooth process. Like all companies in the Opportunities in Ukrainian energy was produced by the IHT Creative Solutions department sector, Cadogan has suffered setbacks, and did not involve the newspaper's reporting or editorial departments. It was sponsored by forced to confront technical problems and Cadogan Petroleum. Text by JOE BOYLE. For information on the IHT Creative Solutions program: www.nytimesglobal.com the outmoded nature of much of Ukraines

A long-term commitment to Ukraine

technology and infrastructure. But Cadogans years of investment in Ukraine, with its understanding of the skills of the workforce and its increasing confidence in striking deals with major international firms looks set to pay dividends. 

Facts and figures

Assets: Eight licenses in Ukraine Production: around 450 barrels of oil equivalent per day Possible reserves (3P)*: 31 BCF gas; 2.1 million BB liquids Contingent resources (2C)*: 2,500 BCF gas; 110 million BB liquids Major shareholders SPQR Capital Holdings (29.12%) Lloyds TSB Banking Group (12.09%) Cynderella Foundation (8.12%) Pierre Salik (5.58%) European Bank for Reconstruction and Development (5.03%) Michel Meeus (3.68%)

Web site: www.cadoganpetroleum.com

* Reserves and resources estimates by GCA, Dec. 2009 BCF: billion cubic feet BB: billion barrels 2C: best estimate of contingent resources 3P: proven, probable, possible