INTERNATIONAL HERALD TRIBUNE16 | FRIDAY, MARCH 23, 2012.

Opportunities in Ukrainian energy

ENERGY | Oil and gas

Interest in potential reserves sparksa new era of exploration in Ukraine

PROFILE | Cadogan Petroleum

A long-term commitment to UkraineVIEWPOINT | Bertrand des Pallières, CEO of Cadogan Petroleum

Challenges and opportunities for local and foreign firms

Vast untapped resources seen in Azov and Black Sea

Facts and figures

Assets: Eight licensesin UkraineProduction: around 450 barrelsof oil equivalent per dayPossible reserves (3P)*: 31BCF gas; 2.1 million BB liquidsContingent 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 forReconstruction andDevelopment (5.03%)

• Michel Meeus (3.68%)

Web site:www.cadoganpetroleum.com* Reserves and resources estimates byGCA, Dec. 2009BCF: billion cubic feetBB: billion barrels2C: ‘‘best estimate’’ of contingentresources3P: ‘‘proven, probable, possible’’

Opportunities in Ukrainian energywas produced by the IHT Creative Solutions departmentand did not involve the newspaper's reporting or editorial departments. It was sponsored byCadogan Petroleum. Text by JOE BOYLE. For information on the IHT Creative Solutionsprogram: www.nytimesglobal.com

E urope at the end of the 18th centurywas the scene of massive cultural andpolitical upheaval. It was also the peri-

od when oil exploration in Ukraine was firstrecorded. More than two centuries later, itcould be said that culture and politics inEurope are once more in flux and thatUkraine’s energy industry is again set for anew era of exploration.

Oil is no longer Ukraine’s major petro-leum resource; gas makes up 87 percent ofthe overall mix. Just as the predominant re-source has changed, so too has the geo-graphical focus.

Over time, attention hasshifted away from the Carpathi-ans, east to the vast Dnieper-Donets basin, where more than120 fields and 3,000 wells ac-count for 90 percent of thecountry’s production.

In its 2011 statistical reviewof world energy, British Petro-leum calculated that Ukrainehas 33 trillion cubic feet (0.9trillion cubic meters) of provennatural gas reserves, 0.5 percent of theworld’s total. Tapping the unproven re-serves is what drives the energy firms. TheUnited States Geological Survey specu-lates that Ukraine has some five trillion cu-bic feet of undiscovered but recoverablenatural gas.

For the present, Ukraine, which is a netimporter of oil and gas, faces domestic en-ergy challenges. The research group Busi-ness Monitor International has estimatedthat gas demand in Ukraine will rise from 46billion to 52 billion cubic meters between2011 and 2016. Ukraine’s NationalAcademy of Science claims gas consump-tion could double by 2030. At the sametime, Naftogaz, Ukraine’s national oil andgas company, calculates that existing gasfields are approximately 75 percentdepleted and oil fields are over 83 percentdepleted.

The significance of Ukraine’s role in thepetroleum industry lies not merely in its pro-

duction of gas and oil, but also in its cruciallocation between Russia the rest of Europe.Russia supplies a quarter of gas consumedin the European Union, and 80 percent ofthat gas currently travels through Ukrainianpipes.

It is in this context that Ukraine’s fuel dis-putes with Russia in the first decade of thiscentury must be seen. Bitter arguments reg-ularly break out about how much Ukraineshould pay Russia for gas imports and howmuch they can charge in return for use oftheir pipes. Relations soured to such an ex-

tent that, in January 2009, sup-plies to the European Unionwere shut off.

Ukraine’s position has beenweakened by the new NordStream pipeline from Russia,which started transporting gasfrom Russia into northernEurope through the Baltic Sea in2011. It would also be affectedby South Stream, a pipeline thatis expected to be completed by2015 that will transport Russian

gas through the Black Sea to Europe.Ukraine’s near monopoly on the trans-

port of Russia’s gas to the E.U., and theprice it can charge, is threatened. Pressurehas clearly been growing on the cash-strapped national oil and gas company, Naf-togaz, to find new sources of income. Theyadmit themselves the need to improve theeffectiveness of their exploratory work, toupgrade their equipment and to identify newsources of oil and gas, not least in the BlackSea and Sea of Azov.

To do all this on their own, however, isclearly impossible, and other companies aresure to play a significant role. Many of themajor energy multinationals, however, havestayed away from Ukraine, deterred by thechallenges presented. This has allowedsmall and mid-sized overseas firms, such asCadogan Petroleum, to fill the gap, bringingrigorous practices, advanced technologyand networks of expertise.

Major players are also starting to pay at-

tention, with Shell signing a contract in 2011to explore for shale gas, in a deal worth upto $800 million (¤610 million).

If the disputes with Russia inevitably setUkrainian nerves jangling, more positivesigns are clear to see. Ukraine’s govern-

I n October 2004, Cadogan Petroleum wasincorporated in the U.K. Its aims were tosearch for oil in the former states of the

Soviet Union. The following month, on the farside of Europe, up to a million protestorsgathered in Kiev’s Independence Square aspart of Ukraine’s Orange Revolution, a col-lective howl at years of political corruption.Eight years after those momentous events,both the country and the company find theirfutures inextricably linked. In July 2008,Cadogan Petroleum was listed on the Lon-don Stock Exchange.

Cadogan’s importance to Ukraine is suchthat it is now the country’s largest foreign in-vestor in the upstream oil and gas sector. Asan exploration and productioncompany, its major licenses liein the vast Dnieper-Donets oilfields in the east of the country.These major fields are supple-mented by a number of minorfields in the Carpathians to thewest. The company is also be-ginning to dip its toes in the off-shore reserves of the BlackSea and the Sea of Azov.

By the end of the 2011-12 financial peri-od, Cadogan will have invested over $500million (¤381 million) since its operationsfirst began. Bertrand des Pallières,Cadogan’s chief executive, says the spend-ing is set to continue: $61 million was inves-ted to 2011, $68 million is budgeted for2012 and the figures rise thereafter.

If there is a caveat, says des Pallières, it

is the need for Ukraine to continue its legal,fiscal and business reforms. Part of hisremit as CEO is the management of keygovernment relationships. He has particu-lar praise for Ukraine’s minister for energy,Yuri Boyko, whose energetic globe-trottinghas focused on encouraging cooperationbetween Ukraine and foreign energycompanies.

‘‘Current developments in Ukraine,’’ saysdes Pallières, ‘‘led by the government, andespecially Yuri Boyko, make the country’senergy sector extremely attractive. Our com-mitment to Ukraine is long-term.’’ Evidenceof that commitment is that Ukraine is theonly country in which Cadogan is active, and

96 percent of the company’semployees are Ukrainians.

Cadogan may be focused onUkraine, but the venture is tak-ing on an increasingly diverseand international shape. A re-structuring of the board of direc-tors in 2011 has seen the arrivalof Gilbert Lehmann, formerly ofthe French nuclear energy com-pany Areva, and Chicco Testa,

former chairman of the Italian electricitycompany Enel. The chairman, Zev Furst, is apolitical consultant respected by statesmenand executives the world over.

The company now produces some 0.03billion cubic meters (1 billion cubic feet) of oila year. Its projections suggest that withinthree years it will be producing 0.61 billioncubic meters a year, a twentyfold increase.

Transforming Ukraine into a significantenergy-producing nation will not always be asmooth process. Like all companies in thesector, Cadogan has suffered setbacks,forced to confront technical problems andthe outmoded nature of much of Ukraine’s

Bertrand des Pallières became CEO ofCadogan Petroleum in 2011 after a longcareer as a hedge-fund manager. Here hetalks about the challenges facing theglobal energy industry and how Ukrainecan play its part in meeting those chal-lenges.

What are the major challenges facingthe global energy industry?

Despite the current global economicslowdown, we expect energyprices to remain high over thenext five to 10 years as struc-tural supply struggles to meetgrowing structural demand.Global energy producers will tryto ensure sufficient supply byinvesting in technologically com-plex energy sources, such asgas shale, oil sands, deep off-shore and field optimization.Gas will benefit most fromcarbon-emission-reduction policies and theshift away from nuclear energy in the wakeof the Fukushima Daiichi meltdown. Renew-ables will continue to play a marginal role inthe energy mix.

Ukraine, with its significant existing andyet-to-be discovered reserves in both con-ventional and unconventional gas as well asits significant infrastructure bordering West-ern Europe, has a tremendous opportunityto attract investment if it offers internationalenergy companies a viable business pro-position with reasonable fiscal terms and astable political and regulatory environment.It has the potential to become the region’smost attractive investment destination.

Which areas of activity do you considermost attractive in Ukraine?

Many existing fields have been under-exploited because of an insufficient

exposure to modern field-optimizationtechniques. Field rehabilitation and field op-timization is the low-hanging fruit that couldhelp ensure fast increases in production.Rehabilitating depleted fields offers signifi-cant opportunities but it’s a complex issue.Information is poor about the number andcondition of such wells and the field struc-tures around them. However, given ad-vanced technology and the right amount of

investment, we expect toachieve not only a fast in-crease in production but also amaterial increase in recover-able reserves.

We also believe that, despitethe need for speedy, high-riskexploration work and the uncer-tainties of future productioncosts, the size of potential un-conventional gas reserves is solarge that it cannot be ignored.

What is the scope of your investmentin Ukraine?

The result of our current $130 million(¤99 million) work program for 2011-12 willbe critical in determining our next steps.We’re confident we’ll bring one or two fieldsinto development starting in late 2012 orearly 2013. Each of these fields would rep-resent a development investment of $200million to $300 million. We will continue to in-vest in exploration and appraisal of our ex-isting assets, while starting investment innew areas, such as the Black Sea. We alsohope to start exploration in unconventionalassets in 2012. In total, assuming the cur-rent momentum shown by Ukraine’s govern-ment is maintained, we expect to investmore than $1 billion in the coming years.

We already are the most active foreigncompany in the Ukrainian upstream sector,

and we expect to keep our position. Wehave the ambition and hope to become acontributor to the Ukrainian government’sobjective of expanding domestic productionand make Ukraine energy independentthrough our own activities.

Do you plan further cooperation withUkrainian companies?

The right development model for Ukraineis to link Ukrainian state companies with for-eign energy firms. Ukraine may not have hadenough cross-fertilization with the ideas andinnovation from the rest of the world, but itcertainly has the human talent to benefitfrom these exchanges. Partnerships are thebest way to put talents and ideas together.

What’s the future for the production ofunconventional gas in Ukraine?

Unconventional gas is a potentially sig-nificant contributor to future gas productionin Ukraine. It is also an uncertain one. Un-conventional gas production could contrib-ute up to 20 billion cubic meters a year bythe next decade. That’s equivalent toUkraine’s current energy production. So,alone, it has the potential to doubleUkraine’s production over time.

If exploration starts this year, pilot pro-duction should start in three years, and com-mercial production in five years. Given thesignificant risks and costs in developing un-conventional gas, the government must im-plement its promise to deliver better fiscalregimes. Otherwise, there’s little chance ofinternational energy firms investing inUkraine’s shale-gas sector.[

ment has pressed ahead with energyreforms in recent years, encouraged greaterprivatization and improved cash collectionrates from customers who are long used tonon-payment. Outmoded exploratory anddrilling practices and restrictive legislative

structures are being abandoned. New ex-pertise and technology from overseascompanies is set to squeeze more gas outof depleting wells.

The waters of the Black Sea and theAzov, on Ukraine’s southern shores, are

tempting some analysts to make claims oflong-term fuel security for the borderingcountries.

Looking ahead, the climate for doingbusiness in Ukraine’s energy sector hasnever been better.[

Ukraine’sgovernmenthas pressedahead with

energy reformsin recent yearsand encouraged

privatization

The sizeof potential

unconventionalgas reserves

is so large thatit cannot

be ignored

Energy companies in the Ukraine arefocusing ever more intently on theBlack Sea and Sea of Azov region. Asyet, only a small percentage ofUkraine’s gas extraction is performedoffshore. It is dwarfed by the Dnieper-Donets basin in the east of the country,which accounts for some 90 percent ofUkraine’s natural gas production. Whatis proving so alluring, however, is thepotential to secure Ukraine’s long-termfuel security.

If there is a sense of urgency, it is setagainst a backdrop of falling extractionrates in about 80 percent of Ukraine’straditional gas sites. By contrast, theBlack Sea and the Azov remain largelyuntapped. The United States GeologicalSurvey calculates that in the Azov-Kuban basin the ‘‘mean volumes ofundiscovered petroleum areapproximately 218 million barrels ofcrude oil, 4.1 trillion cubic feet of

natural gas and 94 million barrels ofnatural gas liquids.’’ The comparableestimates for Ukraine’s Dnieper-Donetsoil and gas fields are 123 million barrelsof crude oil, 4.8 trillion cubic feet ofnatural gas and 130 million barrels ofnatural gas liquids. (One trillion cubicfeet is about 28 million cubic meters.)

It is figures such as these that haveled all the countries surrounding theseas to talk up the potential. Voicesfrom Romania talk of the Black Seapotentially replacing gas supply fromRussia. In 2009, the market researchfirm Aarkstore produced a report simplytitled: ‘‘Huge Potential Oil and GasReserves in the Black Sea Will EnableTurkey to Achieve Energy SelfSufficiency.’’ The report was based onthe assumption that there are 10 billionbarrels of oil and 1.5 trillion cubicmeters of gas beneath the Black Sea.

For now, the Azov and the Black Sea

continue to provide challenges. Drillingin the deeper waters of the seas iscomplex and expensive, even thoughthe climate and weather conditionstend to be mild. Ukraine appeared slowoff the mark, beginning exploration onlyin 2005, and unhelpful businessregulations delayed potentialpartnerships with international firms.

Now, as Ukraine’s government stripsaway legislative blocks, it is the moreaccessible shallow waters that appealto the likes of the chief executive ofCadogan Petroleum, Bertrand desPallières. ‘‘The shallow Black Sea is ourkey offshore interest,’’ he says.‘‘Production on this sort of project canreasonably be achieved as early as2013-2014. A reasonably goodinfrastructure is already in place. Thedeep Black Sea projects might also beinteresting exploration targets, but onlyas long-term objectives.’’

Black Sea

Sea of Azov

Prykerchenska block

Oil and condensate (millions of tons)

Natural gas (billions of cubic meters)

321.2 126.8

388 25.3

Sevastopol

RUSSIAUKRAINE

Crimea495.7 50.4

Northwestern section

766.6 232.6

Continental slope(deepwater trough)

High potential in Azov and the Black Sea

Source: 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.

Cadogan is nowthe country’s

largest foreigninvestor in theupstream oil

and gas sector

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

technology and infrastructure. ButCadogan’s years of investment in Ukraine,with its understanding of the skills of theworkforce and its increasing confidence instriking deals with major international firmslooks set to pay dividends.[

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