Crimea Oil & Gas Grab To Prolong Russian Dependency

BMI View: The Crimean authorities' claim of ownership over oil and gas assets in the region could have a short-term impact on fuel supplies to Ukraine. However, more significantly it is creating an increasingly uncertain situation with regards to Black Sea assets and the future of exploration licences. The Crimean offshore was a key part of Ukraine's strategy to develop domestic resources and reduce the impact of gas Russian imports. Its potential loss to Russia will therefore only work to prolong gas import dependency with very limited options for Ukraine to diversify.

Pro-Russian militia took control of the Feodosia crude and petroleum products terminal in Crimea on March 17, according to a report by Platts. The terminal is able to handle around 240,000 barrels of crude and petroleum products a day at maximum capacity, or as much as 70% of Ukraine's daily petroleum product consumption. The site is home to a 280,000 cubic metre oil storage facility and is linked by railroads to Ukraine's refining centres. The Feodosia facility was taken over following the move by the Crimean Parliament to declare oil and gas producing and handling assets as state owned. Operations at the Feodosia port are reportedly suspended.

The loss of the Feodosia port from Ukrainian government control could impact the country's fuel supplies over the short-term, particularly gasoline, while the facility remains offline. As a result the Ukrainian Minister for Energy and Coal, Yuriy Prodan, is due to request a cancellation of currency restrictions on oil traders in order to enable increased gasoline imports. The government had previously restricted hard-currency purchases due to the country's struggle with balance of payments. De-restricting oil traders could place further pressure on the country's near-term finances, putting greater pressure on securing a monetary deal with the IMF and EU. While Ukraine has sufficient refining capacity to meet local demand, ageing facilities and inefficiency are driving underutilisation meaning it remains reliant on imports of gasoline.

Dependent On Gasoline Imports
Ukraine Gasoline Production & Consumption

BMI View: The Crimean authorities' claim of ownership over oil and gas assets in the region could have a short-term impact on fuel supplies to Ukraine. However, more significantly it is creating an increasingly uncertain situation with regards to Black Sea assets and the future of exploration licences. The Crimean offshore was a key part of Ukraine's strategy to develop domestic resources and reduce the impact of gas Russian imports. Its potential loss to Russia will therefore only work to prolong gas import dependency with very limited options for Ukraine to diversify.

Pro-Russian militia took control of the Feodosia crude and petroleum products terminal in Crimea on March 17, according to a report by Platts. The terminal is able to handle around 240,000 barrels of crude and petroleum products a day at maximum capacity, or as much as 70% of Ukraine's daily petroleum product consumption. The site is home to a 280,000 cubic metre oil storage facility and is linked by railroads to Ukraine's refining centres. The Feodosia facility was taken over following the move by the Crimean Parliament to declare oil and gas producing and handling assets as state owned. Operations at the Feodosia port are reportedly suspended.

The loss of the Feodosia port from Ukrainian government control could impact the country's fuel supplies over the short-term, particularly gasoline, while the facility remains offline. As a result the Ukrainian Minister for Energy and Coal, Yuriy Prodan, is due to request a cancellation of currency restrictions on oil traders in order to enable increased gasoline imports. The government had previously restricted hard-currency purchases due to the country's struggle with balance of payments. De-restricting oil traders could place further pressure on the country's near-term finances, putting greater pressure on securing a monetary deal with the IMF and EU. While Ukraine has sufficient refining capacity to meet local demand, ageing facilities and inefficiency are driving underutilisation meaning it remains reliant on imports of gasoline.

Dependent On Gasoline Imports
Ukraine Gasoline Production & Consumption

Ukraine has the capacity to accept imports by sea to the port at Odessa, which is twice the size of Feodosia, is home to a refinery and is served by a railroad system able to move crude and products further afield. Ukraine should therefore be able to survive any disruptions caused at the Feodosia terminal, though it will increase the vulnerability of importing through Odessa. Any interruption to imports at Odessa, the country's only other established oil importing terminal, could lead to the threat of more serious shortages.

Crimea Claiming Oil & Gas Assets

The move by the Crimean Parliament to take ownership of oil and gas assets may have a limited impact on fuels imports, though it could have more long-term implications with regards to domestic exploration and production. Assets owned by Chernomorneftegaz and Ukrtransgaz, the main upstream and midstream entities in the Crimean region, are also to be transferred to the local authorities giving it greater control of production from the region.

The move adds further uncertainty to the future of offshore developments, with much of the most prospective unexplored waters in the Ukraine surrounding the Crimean peninsula. With Ukraine increasingly heading towards closer ties with the EU last year, Shell, Eni and ExxonMobil, moved into the highly prospective Black Sea region, buoyed by exploration success further south in Romania.

However, as Russia is seemingly moving ahead with the annexation of Crimea and European powers appear unlikely to intervene barring an escalation of military action ( see, 'Sanctions Insufficient To Prevent Crimea Annexation', March 17), the legal status of the licences negotiated with the Ukrainian government in the Black Sea remains unclear. The Ukrainian government is likely to lose jurisdiction over this area, particularly with the increasingly aggressive move by the local authority to take ownership of oil and gas industries. Furthermore, Gazprom has now signalled its intent to develop Crimea's oil and gas sector, after reportedly proposing the purchase of Chernomorneftegaz from the Crimean authorities. Such a move would likely see Gazprom assert greater pressure to control both the current production facilities in Crimea's offshore as well as the deepwater exploration areas. With significant shallow water oil and gas production assets, a takeover of Chernomorneftegaz by Gazprom would give Russia further leverage over Ukraine's immediate energy supply. The company reported natural gas reserves of 66.2bn cubic metres and 159mn barrels of oil in 2011, which equates to around 6% of the country's gas and possibly as much as 40% of the country's oil reserves.

Key Diversification Potential Could Be Lost

The possible loss of the deeper water Black Sea acreage will put considerable downside risk on Ukraine's future production potential. The country has increasingly been looking to diversify from Russian gas, on which it remains around 58% dependent.

Diversification Efforts Scuppered
Ukrainian Natural Gas Domestic Production & Russian Imports 2013 (bcm)

Part of the diversification strategy had been to increase exploration and production of domestic resources with a focus on shale gas and offshore Black Sea developments. However, with the increasing uncertainty over the fate of the Crimean offshore acreage, any potential exploration work in the area is likely to be delayed over the short-term and possibly stopped altogether unless taken up by a Russian company.

This leaves Ukraine to focus on its shale gas efforts, an industry which we believe will be boosted because of the crisis ( see, ' Shale Gas Trailblazers Will Benefit From Russo-Ukrainian Rift', March 11). However, the Black Sea could have played a more significant role in increasing gas output, with ExxonMobil estimating the addition of offshore gas to onshore production could have boosted output to as much as 45bcm a year by 2020. This would almost be sufficient to cover domestic demand, which we anticipate to be around 50.76bcm by this point. Ukraine is therefore likely to remain highly dependent on Russian gas for the longer term, with limited options to diversify supply, as it is surrounded by net importers to the west and Russia to the east. With Turkey continuing to refuse the transit of liquefied natural gas (LNG) carriers through the Bosporus, it appears unlikely Ukraine will be able to diversify sufficiently to dilute the influence of Russian gas on the country. Ukraine will therefore continue to build up debt with Russia from gas imports, while Russia's political energy tool will likely strengthen if it successfully completes the annexation of Crimea.

Read the full article

This article is tagged to:
Related sectors of this article: Oil & Gas, Upstream, Exploration, Unconventional, Energy Policy, Marine and Subsea
Geography: Ukraine, Russia
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.