From its start in 2004, Geo Alliance has become one of Ukraine’s top private oil and gas exploration and production companies. Today, Geo Alliance holds 14 active licenses and is among the country’s top five companies in terms of condensate and gas production and the number one in terms of liquefied petroleum gas production. Formally a fully Ukrainian firm, in 2012 it became a joint venture with the international company Arawak Energy, and now stands to illustrate the win-win benefits of foreign partnerships in Ukraine. Here, its CEO Lyudmyla Kuchmenko describes how both the company and the nation’s energy landscape have evolved in recent years and highlights further opportunities for foreign partners to get involved in Ukraine’s burgeoning energy sector
You took the role of CEO in 2013. What were your biggest challenges and achievements since then?
The biggest challenge for the company was during the events of 2014, when there was no clarity about the future. We had war and political turbulence on one hand, and unstable government policy on the other. The industry experienced several upheavals such as doubling of royalty taxes, restrictions to sell produced gas. All of that had brought a lot of uncertainties to business decisions. It was not easy to stay calm and to continue doing things an oil and gas company should do. In the end, the strategy we chose had proved to be right. We didn’t stop our capital expenditure program, continued drilling wells and even acquiring seismic.
Over the past five years, the company has drilled and completed eight wells, seven of which are deeper that five kilometers. In addition to that, we are currently drilling a new very deep exploration well with a target depth of 6.2 kilometers. We covered most of our fields with new 2D and 3D seismic. Two years ago, we completed construction of our liquefied petroleum gas (LPG) plant, a project we are very proud of, which allowed us to become the largest private LPG producer in the country.
What have been the changes in the oil and gas sector of Ukraine since then?
I would say that the oil and gas sector of today versus five years ago are two different concepts. The sector has changed for the better tremendously. It has become much more transparent and liberalized. There have also been significant changes in the culture of doing business. Modern technology and services are used more and more commonly, oil and gas sector of Ukraine is catching up with global trends in oil and gas exploration and development of oil and gas fields. Although the state companies are the largest players in the industry, the role of private oil and gas companies should not be underestimated. Private oil and gas investments, in our view, are the key to growth and unlocking potential of the sector.
Over the last 14 years, Geo Alliance has become one of Ukraine’s largest independent producers of gas and gas condensate. Could you walk me through the company’s developments over the years?
The history of Geo Alliance starts back in 2004. We currently have 16 licenses. Unfortunately two of them are in the anti-terrorist operation zone, so in reality, 14 are in the territory which is controlled by Ukraine. The assets are at different stages of exploration and development. We are among the top five companies in gas and condensate production. Our annual production is over 200 million cubic meters of natural gas and 40,000 tons of condensate. At the same time, we are the biggest private producer of liquefied petroleum gas (LPG) in the country with 17,000 tons of LPG per year.
We started as a Ukrainian company, but in 2012 our shareholder structure was changed, and now Geo Alliance is a 50:50 joint venture with Arawak Energy, a daughter company of Vitol, the biggest private oil trader in the world. This is a very good example of the synergy between Ukrainian knowledge of the specifics of doing business in Ukraine and foreign experience, culture and technologies.
How has this international collaboration changed the way Geo Alliance does business?
I have been working in the company for 14 years, thus I have witnessed and contributed to the transformation of the culture and approaches in Geo Alliance. Arawak has brought international expertise and knowledge, has provided a new strategic vision. Ukrainian people are extremely hard-working and knowledgeable, but acceptance of approaches and technologies that were not used in Ukraine before was a time consuming educational journey. Geo Alliance now is often perceived as a pioneer in promoting and using new technologies, and it is a very clear example of how foreign investors can help develop the oil and gas resources of Ukraine.
One of the main directions that the company will be taking in the future is to increase the volume of your hydrocarbon production, and for that, you need investment and also the application of new technologies. To what extent are you open to foreign direct investment?
We have 14 active licenses, and there is definitely potential for cooperation with outside investors. We have identified several licenses where we are ready to consider partnerships. This business is about geological risk, and it is quite natural for the company to try to find a partner to share the risk. We are confident that there is a way to find a mutually beneficial partnership structure and are absolutely open to discussing various modes of collaboration.
Early next year, Ukraine is planning to hold an international bidding round for the rights to explore 30 license areas throughout the country. How important will this be for Ukraine’s domestic gas production?
This auction is a very important first step towards an open and transparent process of acquiring access to oil and gas licenses. From my perspective, the first lot of 10 assets, which is to be tendered in March, won’t be a game-changer for Ukraine. But again, this is only a first step and all stakeholders need to ensure the investors have full and open access to assets and what’s not less important, protection of holding rights.
According to the government, Ukraine expects to be energy independent by 2020. What does Ukraine’s energy independence mean for European energy security?
The targets set in the government strategy by 2020 are extremely aspirational and can hardly be achieved in the set timeframe. But, of course, if Ukraine is able to supply itself and even export gas it will provide Europe with another independent source of energy. Any diversification of supply means strengthening of the European energy security. Ukraine is geographically very close to Germany and other European countries and has a very developed gas infrastructure. One must not forget about gas storage available in Ukraine which should be opened up and become a part of the European gas infrastructure.
How will developing the energy sector impact the security of Ukraine?
Of course, energy security is one of the biggest components of national security as a whole. We have clearly experienced the blackmail used by Russia, when we were under threat of cut off of gas supplies. Besides, oil and gas sector is one of the major contributors to the economy of Ukraine, thus the development of the sector would definitely make our country stronger and more secure.
What would your message be to international investors looking at Ukraine?
I think that it would be fair to be open and frank with the investors. Yes, we have martial law. Yes, elections are coming. Yes, things could have been better in Ukraine. But, we have been through a number of elections in this country. We have been living with the Russian aggression for quite a number of years already. Our message would be: stay calm and consider possible opportunities in Ukraine. One of the ways to mitigate the risk is to enter into new projects with Ukrainian partners. We are here, we continue doing business and we know the specifics of the country. Of course, unpredictable things can happen, but that is a general risk now anywhere in the world.
Investors should look at the progress the sector has made in the difficult circumstances starting from 2013. This country wants to develop the energy sector. We make mistakes, and not everything is going smoothly, but in the circumstances, we don’t have an alternative but to move forward. Despite being a mature oil and gas province, this country has significant potential. And of course, from the business perspective, we have very good prices and investor-friendly taxation. All you need is a professional approach and a cool head to evaluate risks and consider the opportunities. In the long run, it is all about business decisions.