Ukraine's woes

Patrick Crow
Washington, D.C.
[email protected]

Foreign oil firms interested in the Ukraine complain of a gamut of legal, political, and commercial problems.

The basic conflict is between the Ukrainian approach of handling each deal on a case-by-case basis and the desire of western companies for transparency and consistency.

Ukraine wants to increase its energy output, particularly gas and condensate, to meet at least half of domestic demand by 2010 (OGJ, Dec. 29, 1997, p. 26).

But foreign companies complain about a lack of transparency on who can make decisions; a burdensome and confusing tax system; local partners' resistance to western technology; a lack of understanding of international financial procedures; legal system problems; frequent state audits; partiality by regulatory agencies; employment constraints; and limits on the sale of production.

Westerners say they need a road map showing the ministries, committees, and agencies that must be consulted before investments can be made.

A possible solution is the establishment of a government-business forum, such as the one in Russia, to move Ukraine toward a legal system favorable for energy development.

Needs seen

Bohdan Babiy, chief of Ukraine's state committee for oil, gas, and refining, said the top priorities are developing new reserves and expanding output from existing fields.

He said exploration is complicated by the need to find production either in the Black Sea or in deep (more than 5,000 m) reservoirs. Other problems are the small size and complex geology of the fields and the high viscosity and high sulfur content of the oil.

Babiy said Ukraine must import all but 10% of its oil and 18-20% of its gas.

By 1995, production had fallen to 4.2 million metric tons of oil and 18.8 billion cu m/year of gas, down from peaks of 14 million tons/year and 69 billion cu m/year in the mid-1970s.

He said Ukraine needs to repair and expand existing pipeline systems, which have gas and oil throughput capacities, respectively, of 120 billion cu m/year and 130 million tons/year.

Babiy noted that Ukrainian refinery throughput declined to 16.9 million tons in 1995, despite 51.1 million tons of capacity, and improvements are needed in secondary processing.

More leasing

The state committee on geology is trying to bring Ukraine's licensing procedures closer to world practices.

The government is considering legislation and decrees on use of geological data, the order of fields to be licensed, and rules about international tenders.

Last year, Shell won a license to explore on Ukraine's Black Sea shelf and is expected to sign a deal soon. A second round of Black Sea licenses will be offered this year.

Aanatoliy Zozulya, head of Ukraine's energy investment department, said the nation's principal energy problems have financial roots.

He said Ukraine must expand the Odessa oil terminal, repair the gas transmission system and expand it by 20-30 billion cu m/year, and enlarge gas storage capacity from 32 billion cu m to 41 billion cu m.

As many other government officials have said, Zozulya contends that Ukraine could resolve foreign investors' problems on a case-by-case basis. If enough operators complain, he said the government would consider correcting a problem through legislation.