A carpet of red poppies covers the landscape around a drilling rig near Krasnaya Poliana village in western Crimea, where the fresh sea breeze tells us we are less than a hundred miles from the Black Sea resort of Yevpatoria. As the hard realities of rising oil and gas prices bite in Ukraine, Crimea could well in the near future become not only Ukraine's primary tourist destination but one of the country's major oil and gas productions centres.
The drilling rig among the poppies is operated by Canadian independent producer Transeuro Energy, which commenced drilling here in the first quarter of 2007. This developmental well, which reaches a depth of 1,085 metres in the Karlavskoye gas condensate field, is expected to lead to commercial production in 2008. "What is very encouraging," says the company's deputy manager Geoff Papero, "is that towards the close of 2006 and the first quarter of 2007 dialogue improved with our Joint Activity Agreement (JAA) partners. Mutual efforts translated into getting down to the business of drilling for gas."
Transeuro Energy, through its wholly-owned subsidiaries Indusmin Energy and Pivdenspetsbud has been active in Crimea since 2000. Today the company has four JAAs with the state energy company: SSE, NJSC, Nadra Ukrainy, Krymgeoligia.
As an experienced international player with oil and gas projects in Argentina and Cuba behind him, Papero knows only too well the pros and cons of developing upstream projects in emerging economies. Key to success in new markets, he says, is maintaining close and carefully-tuned relationships with the central and regional authorities as well as local communities. "The only constant in business and life is change and our experience here in Ukraine is no exception. It is critical to any operation to develop an open, fair, informative working relationship with the village, local, regional and central governing bodies," he says.
Transeuro Energy’s four licences are all for operations in The Autonomous Republic (AR) of Crimea, which is a proven hydrocarbon zone with substantial potential both on and offshore. Previous exploration during the Soviet era discovered and appraised over 39 structures, of which 10 were oil fields, seven gas condensate fields and 22 gas fields. Of the 39 fields, 10 are located offshore and the remaining 29 onshore. To date, three oil fields and five gas deposits have been developed.
The cold shower of high energy prices
One of the most significant changes faced by Ukraine and other former Soviet republics since the end of 2004 has been the arrival of sharply increased energy prices. Since crude oil prices hit USD 70 per barrel and natural gas from Russia began selling in Ukraine at USD 130 per 1000 cubic metres compared to a mere USD 50 several years earlier, there has been an understandable desire in Ukraine and neighbouring Belarus for a return to the times when abundant cheap energy supplies flowed from Russia - which means more domestic production.
For Ukraine, which according to recent BP data is the tenth largest natural gas consumer in the world, these increases have been a major shock to a system which had grown used to huge metal and chemical works in the industrialised East having to care little for energy consumption or efficiency. In 2006, Ukraine consumed 66.4 billion cubic metres of natural gas - some 50% more than Austria, the Czech Republic, Hungary, Lithuania, Poland, Sweden and Switzerland combined.
The ability to deliver
This new price reality has generated remarkably positive changes in local authorities' attitudes towards independent and vertically-integrated companies from the West capable of boosting production in Ukraine's brown and unexplored fields. In the second half of 2006 and the first half 2007, the likes of the Anglo-Dutch Shell and the US Marathon companies came to the country, having signed favourable deals with Ukraine's leading natural gas producer UkrGazVydobuvannia. Meanwhile, the US-based firm Vanco International is close to signing the country's first agreement on hydrocarbon exploration and production in the Ukrainian zone of the Black Sea continental shelf.
Transeuro Energy, which is listed on the Toronto stock exchange, is being particularly welcomed in Ukraine today because of its ability to bring the necessary funding and modern technologies to exploring and developing a number of small but attractive sites. Maxim Shyshlov, director of the finance and investment department of state-owned oil and gas licence holder Nadra Ukrainy says Transeuro Energy is one of the very few foreign energy companies in Ukraine genuinely committed to real exploration and development work. "Unlike some other foreign investors, who in reality are interested only in snapping up licences then selling shares to investors in the West, Transeuro Energy is making a consistent effort and we can measure their progress by closely working with them. We meet on a weekly basis and believe that their work is mutually beneficial. It is extremely important for us today to boost domestic production, providing stable natural gas and oil supplies for the industry and population and supporting Ukraine's energy stability."
Ukraine’s return to prominence
During the 1950s, Ukraine pioneered the development of large scale natural gas fields in the former Soviet Union. With the launch in 1956 of the giant trillion cubic-metres Shebelinka natural gas and gas condensate field in the Kharkiv region, Ukraine supplied natural gas to both Moscow and Leningrad. This ended however in the 1970s when major oil and gas fields in western Siberia took the lead and thousands of experienced geologists, drillers and other exploration and production specialists left Ukraine for the new upstream projects in Russia. The final death knell came in the 1990s when Russia and Ukraine parted ways and an economic crisis combined with USD 15 per barrel prices saw the closure of thousands of exploration and production wells in the country.
The arrival of companies like Transeuro Energy is therefore an exciting prospect for Roman Maydenburo, chief geologist at Nadra Ukrainy’s regional subsidiary Krymgeologia. "Transeuro Energy is doing some very important things for us today. They invest stage by stage in geological exploration projects, bring the right technical solutions and have a real spirit of co-operation. They have also deployed high level specialists here."
Also impressive to the Ukrainian side is Transeuro’s willingness to field its best experts in Crimea. Neil Stewart, the company's managing director in Ukraine, is a highly experienced geologist, having worked in the North Sea and Western Africa. He is confident that the quality of gas condensate in the fields the company is developing will mean highly marketable production, which will benefit all the parties involved, from the investors and the government to the local community.
Stewart says that besides the company’s confidence in its Crimean fields, its assistance to the local people has been particularly satisfying. "We have a programme of helping the local community with water supplies organisation," he says.
Stewart's expectations are echoed by Larissa Tuysuzova, head of the regional state administration in Chornomorske, which neighbours the Transeuro Energy gas condensate fields at Karlavskaya and Povorotnoye. "These people have proven that their words and deeds never part," she says, adding that the company has already changed plastic pipes in the village and subsidised the incomes of the elderly in addition to other contributions to the community. "This is why," she continues, "I very much wish that their projects here result in sustained profitability."
