BMI View: A v olatile security situation and continuing geopolitical tensions hamper exploration and production activities in Ukraine. Regulatory challenges, ill ustrated by recent tax hikes on oil, gas and mineral extractio n , are expected to act as a further deterrent to investment in Ukraine's oil and gas sector . Despite Ukraine's significant gas supply diversification efforts, we expect the country will continue to depend to some extent on Russian gas supplies over the coming winters.
|f = BMI forecast. Source: EIA, BMI|
|Crude, NGPL & other liquids prod, 000b/d||60.0||58.8||56.5||54.2||52.1||50.0||48.1|
|Dry natural gas production, bcm||20.0||19.7||19.5||19.3||19.1||18.9||18.5|
|Dry natural gas consumption, bcm||42.6||37.5||35.8||34.9||34.2||33.8||33.5|
|Refined products production, 000b/d||116.6||115.5||114.3||113.2||112.0||110.9||109.8|
|Refined products consumption & ethanol, 000b/d||239.3||215.2||218.2||225.2||233.5||242.4||252.3|
Key forecasts and developments :
We maintain our forecasts for oil and gas reserves this quarter. However, we note that Chevron and Shell's exits from their respective shale gas exploration projects create increasing downside risk to our gas reserves forecasts.
Downside risk to oil production exists over the coming year from a tax dispute between Ukrnafta and the Ukrainian state. In March 2016 the company received a formal notification from the State Service of Geology & Mineral Resources of Ukraine that 16 of its licenses could be suspended, in addition to three recent suspensions. According to the company, the suspension of these licenses would stop production of about 6,500b/d of crude oil, a significant proportion of the company's production and of the country's total 38,000b/d crude and condensates production in 2016.
Most of Ukraine's refineries remain closed as of 2016, leading to a severe underutilisation of its refining capacity. We maintain this situation will endure until an amelioration in the political, economic and security situation comes through.
Given the country's disastrous refining sector, crude net imports have fallen substantially over the past decade and are expected to remain low over the coming decade. Nevertheless, this has also translated into increasing refined products import requirements, as domestic production is insufficient to meet demand. Net imports of refined products will pick up speed as consumption recovers. This is unlikely to change unless the refining sector undergoes a significant revamp.
Despite large reserves and an active exploration scene, gas production in Ukraine is forecast to shrink across our forecast period to 2025. Upstream activities will suffer from an unpredictable regulatory and fiscal environment, the legal uncertainties regarding offshore Crimean licenses and the ongoing security situation in the east of the country.
While the government has enacted legislation early 2016 to reduce subsoil taxes to the same levels that were in effect prior to the increase in 2014, the unpredictable environment is clearly not incentivising for companies wanting to explore and develop hydrocarbon projects in Ukraine.
2015 gas consumption is expected to have contracted further taking overall consumption down to 37.5bcm in 2015, down from a peal of 87.2bcm in 2005. This quarter, we maintain our forecast for continued, albeit weaker contraction over the coming years on the back of increased gas prices and the government's gas efficiency plans. However, gas consumption contraction could have been more extreme then provisional estimates, and we could revise this to the downside over the coming quarter.
In May 2016, Ukraine's new government overhauled household heating prices to help restart a USD17.5bn loan from the International Monetary Fund as the U.S. The new gas tariff eliminates separate winter and summer prices for households, and unifies what they pay with the cost for industrial customers. It will be set at UAH6,879 (USD273) per 1,000 cubic meters starting May 1. As with the other price increases, we believe the introduction of the higher prices will weigh heavily on gas demand, as household incomes continue to be under severe stress.
Ukraine has successfully diversified its gas import sources and substantially reduced dependence on Russian gas over the past two years. In 2015, Naftogaz data highlighted that imports over 2015 from Russia decreased from 14.5bcm in 2014 to 6.1bcm in 2014, with Russian supplies in Ukraine's gas consumption decreasing from 34% in 2014 to 18% in 2015. In 2015, imports of gas from the European market more than doubled from 5.0bcm to 10.3bcm.
Naftogaz did not purchase any Russian gas in Q1 2016 because the price offered by the Russian side for this period was higher compared to gas prices at which Naftogaz purchased gas in the European market. Over this period, European consumers received nearly 27bcm of natural gas transported from Russia via Ukraine.Rapidly falling domestic gas consumption will push Ukraine's gas imports lower until 2019. As the consumption stabilises and domestic production continues to shrink, we expect a slight recovery in the country's gas import levels in the second half of our forecast period. Despite strong reductions in Russian gas imports, Ukraine will remain dependent on Russian gas during the winter months over the short to medium term.
The Ukraine Oil & Gas Report has been researched at source and features BMI Research's independent forecasts for Ukraine including major indicators for oil, gas and LNG, covering all major indicators including reserves, production, consumption, refining capacity, prices, export volumes and values. The report includes full analysis of industry trends and prospects, national and multinational companies and changes in the regulatory environment.
BMI's Ukraine Oil & Gas Report provides professionals, consultancies, government departments, regulatory bodies and researchers with independent forecasts and competitive intelligence on the Ukrainian oil and gas industry.
- Benchmark BMI's independent oil and gas industry forecasts for Ukraine to test consensus views - a key input for successful budgeting and strategic business planning in the Ukrainian oil and gas market.
- Target business opportunities and risks in the Ukrainian oil and gas sector through reviews of latest industry trends, regulatory changes and major deals, projects and investments in Ukraine.
- Assess the activities, strategy and market position of your competitors, partners and clients via our Company Profiles (inc. SWOTs, KPIs and latest activity) and Competitive Landscape Tables.
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