ukrainian gas supply · model's outputs - ctm 22jan15-main slides_with enrique comments.pptx 8...
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Ukrainian gas supplyPJSC “Ukrgasvydobuvannya” Sep, 2016
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 2
Contents
• Overview
• UGV deep dive
• Strategy 20/20
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 3
Upstream,
gas processing
• 16 bcm gas produced
• 230+ oil, gas,
condensate fields
• 39 gas processing
plants
• 294 bcm 3P reserves
Gas transportation
& storage
Wholesale
gas trading
• 178 bcm exit capacity
• 150+ bcm transit
capacity to Europe
• 21 bcm entry from EU
• 67 bcm transit volume
• 34 bcm local
transmission
• 31 bcm storag
• 93 % market share in
imports
• 75 % market share in
production
• 100 % supplier to
households
Gas business
Naftogaz – a vertically integrated company
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 4
Diversification and
security of supply
• 2.4 times
reduction of
gas imports
from Russia
• Stable gas
supplies for
Ukraine and
the EU
Gas market
reform
Operating
efficiency
Transparency and
accountability
• 3EP-compliant
gas market law
• Deregulation of
commercial
market
• 7.5 times
growth in
private imports
• US$11m profit
for 9m15 vs.
US$4bn loss
for 9m14
• Improved debt
collection and
revenues
• Largest taxpayer
• First detailed
annual report
• Quarterly
audited stand-
alone accounts
• Corporate
governance
reform launched
Naftogaz key achievements in 2015
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 5
0,0 0,2 0,4 0,6 0,8 1,0
Uzbekistan
Ukraine
Trinidad & Tobago
Turkmenistan
Iran
Belarus
Russia
South Africa
Saudi Arabia
Vietnam
Primary energy consumption in Ukraine, by fuel type, mtoe
19 12 14 13 10
7471 69
5235
4239 37
38
33
1618 20
20
20
0
20
40
60
80
100
120
140
160
180
1995 2000 2005 2010 2014
Oil (m tonnes) Natural Gas CoalNuclear Energy Hydro electric Renewables
0 20 40 60 80
Poland
Belarus
Spain
Netherlands
France
Ukraine
Turkey
Italy
United Kingdom
Germany
Source: BP Statistical Review of World Energy 2015. * – excluding RussiaSource: BP Statistical Review of World Energy 2015, World Bank, own calculations
Source: BP Statistical Review of World Energy 2015, own estimates
45%
World’s most energy-intensive economies, 2014
Primary Energy
Consumption (koe/ $
of nominal GDP)
Ukrainian economyheavily dependent on natural gas
Major gas consumers in Europe*, bcm/y, 2014
one of the most
energy inefficient
countries
Ukraine
• High share of industry and residential sector
• 45% of primary energy consumption is oil & gas
• 4th in Europe by gas consumption
• 5th in Europe in gas consumption by
households
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 6
Exploration Drilling Extraction Processing Sales
72%exploration in
Ukraine
~70 wellsin drilling annually
14.5 bcmof natural gas
600 th tonnes/ per yearof nominal capacity
• Gas is sold to Naftogaz at regulated prices
140depositsexplored & operated
500th tonnesoil & condensate
• Production of diesel fuel, gasoline, LPG, fuel oil, etc.
• Liquefied petroleum gas, gasoline, diesel fuel – at auctions
Largest
technological
base
Approximately 285 bcm of 2P reserves
285 107 10275
42
UGV Petrom PGNiG Romgaz MOL
International 2P reserves
+166% +179%
+280% +575%
Oleg Prokhorenko, CEO
~73% of gas extraction volumes in Ukraine
14.51 (73%)
1,5 (8%)
3,8 (19%)
UGV
Ukrnafta
Other companies
In bcm, 2015
1 - incl. joint activity agreements
with companies of Naftogaz Group
Our ambitious goal is to produce 20 bcm of natural gas
by 2020. Under favorable conditions, it is possible to
meet Ukraine’s demand within five years, and within
10 years it is possible to start exporting
In bcm,
Ukrgazvydobuvannya - upstream and processing
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 7
Contents
• Overview
• UGV deep dive
• Strategy 20/20
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 8
270 bcm of reserves1
• 140 fields2
Production is 14.5 bcm - 74%
of total Ukrainian gas production• +512 thsd t of oil and condensate
(21% of market)
Vertically integrated company• Full operational cycle from exploration
to distribution
~4% of state budget receipts of
Ukraine• 20 bn UAH in taxes - #1 in Ukraine3
Overview of UkrGasVydobuvannyaKey facts
Notes:1.Calculated by Ryder Scott and production of 2015 2. In development and development and exploration 3. 2015
• 2-3 bn UAH – annual leaching of
money due to corruption schemes
• Non-transparent procurement –
prices х-times more than market‒ Contracted coil tubing
~2.3 mln USD/unit more expensive
than market price
‒ Contracted equipment for
Shebelynka for 51 mln UAH with
fair price 17 mln UAH
‒ Drill pipes
‒ Methanol
‒ other
• Distribution of petroleum to
affiliated companies
• Withdrawal of assets through JA –
210 wells in JA’s, approx. 40% of
all gas produced by UGV, pumped
through privately controlled
booster compressors
Strategically important state-owned enterprise…
…but was chronically riddled with
corruption
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 9
UGV is the pillar of Ukrainian energy security – its gas
provides heating and hot water to 42m of Ukrainians
4,849
1,5901,5901,5901,590
350350350
2014 1q152013 3q15 2q16F1q164q152q15
50
70707070
202020
Royalty rate, %
6
35
Import
13
Other ukr.
players
Supply
17
UGV
3
15Ind. and other
costumers
Undergr.
storages2
Demand
17Households and
heating enterp.
35
Gas market balance, Ukraine, 2015, bcm
USD 1921
USD 72
Notes: 1. USD/UAH average rate for 2Q 2015 -22.046; as of 1.05.2016 UAH/USD 25.185 2. Incl. underground storages, ATO zone., etc. 3. Incl, underground storages
75%
UGV ensures
~75% of resi-
dential needs
UGV manages to ensure security of supply
for citizens …despite unstable fiscal regime
…and prices of gas on path to market levels
Gas price, UAH/mcm
SOURCE: UGV
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 10
There are high achievements in the past
20
08
14.8
20
07
20
06
20
11
20
10
20
12
15.0
20
14
20
13
14.8
20
09
9.7
+0.5%
9.7
14.7
26.0
68.7
19
90
19
75
8м
іс’1
6
4х
14.5
8м
іс’1
5
20
05
20
04
14.4
…
20
15
Production has been stagnating recent
years after 4x fall…
…which led to import energy
dependency
UGV gas production, bcm
5
34
15
Import
14
(41%)
Domestic
supply
20
Consumption
UGV Other producers
Gas market balance1, 2015, bcm
UGV has already
over achieved
results’15
Notes: Does not include gas for underground gas storage facilities, Gazprom balancing volume and take-up / filling of gas pipelines. 2. Under the condition of fulfilling of production
plans by UGV and private players.
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 11
Strategy 20/20 will allow Ukraine to cover 100% of
consumption by domestic gas in 2020
Government aims to cut imports by 2020 to ensure
energy security of Ukraine
5
34
15
Consumption Domestic
production
20
Import
Other producersUGV
26
20
Domestic
production
26-27
6-7
Consumption Import
2015
Notes: UGV/McKinsey estimates. Does not include gas for underground gas storage facilities, Gazprom balancing volume and take-up / filling of gas pipelines. 2. Under the condition
of fulfilling of production plans by UGV and private players. 3. Calculated based in Ryder Scott as of 01/01/2015 on 73 major fields and production 2015.
SOURCE: UGV
Gas market balance, bcm1Gas market balance, bcm1
14
(41%)
~0
(0%)
2020
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 12
New management has already demonstrated significant
success in reforms
~200
mln USD
~120
mln USD
Total effect from reforms,
incl.
~4 mln USD for
Ukrainian budget
+40-50%
salary
+47
MMcm
~761
mln USD Procurement savingsPlan overfulfilment
of own gas production2
Minimum salary
increase across the
Company 1-Aug-16
vs 1-Aug-15
Purchases through
e-tender system
ProZorro
Notes: USD/UAH x-rate 1/25 1. Including ProZorro. Including 120 mln UAH effect on methanol purchases 2. Excluding JAAs and ATO zone
+393
MMcm
Y2015
8m’16
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 13
Long-term transformation
(Strategy 20/20)
Roadmap of UGV transformation by new management High-level
Quick wins
Jul
2015
Sep
2015
Development of long-
term transformation
plan (Strategy 20/20)
Dec
2015
Oct
2016Dec
2016
May
2016
Achievement of goals requires
sustainable and professional support of UGV
Source: UGV
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 14
New management has already implemented significant
changes (I/II)
Technical
• Stabilized production and exceeded plan of own production in 2015 by +0.4 bcm
‒ 8m16 vs 8m15 +47MMcm of gas
• Accelerated commissioning of new wells – 18 wells overall (+35% to plan in 2015)
• Accelerated acquisition of reserves – planned 36 licenses in 2016, scale of seismic x5 vs
2014 and obtained 4 new licenses in 2015 – UGV has already got 14 new licenses
• Discovered 2 new deposits– reserves of 2.4bcm, 290 thsd t of oil
• 3 new booster compressor units put into operation (Hrestyschynska, Letnya and Swidnica)
with 4.6 bcm capacity per year. 9 new compressor units planned for 2016
• Ran tender for 100 hydrofracking operations – got 2x lower price comparable to private
companies
• Developed rig fleet strategy - modernization of 7 rigs already in 2016
• Started modernization program , purchases, repairs
‒ Repaired own fracking fleet and coil tubing units
• Strengthened team by professionals with wide experience in industry (Shell, Chevron, BP,
McKinsey, BCG, Halliburton, Weatherford, etc.)
• Created UGV-service unit for WO and stimulation operations
• Capacity for third-party supply or processing in downstream increased to 10 thsd t/month
• Modernization of Shebelynka - started production of gasoline Euro-4 standard and
Eurodiesel (by August 2016)
SOURCE: UGV
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 15
New management has already implemented significant
changes (II/II)
Financial/
Anti-
Corruption
Process/
Capabilities
• Changed almost all procurement procedures - total effect >76 mln USD – UGV is one of
leaders on e-procurement ProZorro
• Avoided default for credit line
• Revised agreements - rates decreased for majority of loans
─ Negotiated ~30 mln USD discount on main sum, interest, penalties for credit
• Launched the process of returning wells from JV to UGV
• Lawsuits filed to terminate JAAs contracts in case of breach of investment commitments by
JAAs participants
• Started changes of mid-management team – if evidence of bribes/corruption schemes or
technical incompetence
• Strengthened security team and controls
• Revised and won court cases with SAP– full turnaround of situation: resolved court case,
channeled into constructive cooperation with SAP for ERP system
• Started gradual increase of salaries (+ 40-50% av across UGV) (also anticorruption
measure)
• Revised tolling strategy, prices on petroleum and channels of distribution ~+8 mln USD
effect
• Revised refinery modernization program – savings ~50 mln USD
• Started grading project to compensations and salary survey to identify and achieve fair
compensations (with help of one Big4 company )
• Created departments: IT, IFRS, PMO, Strategy, International projects, HR, PR, Controlling
• Reanimated implementation of SAP
SOURCE: UGV
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 16
Today UGV has new experienced management and
cooperation with international institutions
New management from international and
Ukrainian well-known companies…which is supported by
international partners
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 17
Contents
• Overview
• UGV deep dive
• Strategy 20/20
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 18
UGV’s new management has formulated ambitious vision to become
a production and technological leader in Ukraine’s O&G industry
MISSION:Ensure energy security and energy independence of Ukraine through
developing its gas resources potential, domestic technological competence
and robust industry ecosystem
VISION:Production and technological leader in Ukraine’s O&G industry with full fledged
capabilities and at par with market standards in operating and HSE practices
GOAL 1:Achieve
sustainable
increase of
production scale
and reach
20 bcm by 2020
SOURCE: UGV
GOAL 2:Increase
economic
efficiency and
keep cost of gas
below import
price
GOAL 3:Transform
company culture
and implement
world-class
management,
operational and
HSE practices
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 19
Current strategic vision of UGV is focused on sustainable
growth, while effectively resolving existing issues
Imp
rovem
en
t o
f o
pera
tio
nal
an
d
investm
en
t eff
ecti
ven
ess
Unlocking organization potential by removing historical legacy
Deregulation and legislation improvements
5
6
Production – 20 bcm by 2020
Strategy “20/20”
3
Develo
pm
en
t o
f cap
ab
ilit
ies a
nd
o
pti
miz
ati
on
of
op
era
tin
g m
od
el
2
Incre
ase o
f p
rod
ucti
on
an
d r
ese
rves
1
4 Reform of internal functions
SOURCE: UGV
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 20
Strategy 20/20 will allow Ukraine to cover 100% of
consumption by domestic gas in 2020
Government aims to cut imports by 2020 to ensure
energy security of Ukraine
5
34
15
Consumption Domestic
production
20
Import
Other producersUGV
26
20
Domestic
production
26-27
6-7
Consumption Import
2015
Notes: UGV/McKinsey estimates. Does not include gas for underground gas storage facilities, Gazprom balancing volume and take-up / filling of gas pipelines. 2. Under the condition
of fulfilling of production plans by UGV and private players. 3. Calculated based in Ryder Scott as of 01/01/2015 on 73 major fields and production 2015.
SOURCE: UGV
Gas market balance, bn m31Gas market balance, bn m31
14
(41%)
~0
(0%)
2020
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 21
There is potential to achieve strategic goal of
20bcm in 2020; required CAPEX ~4bn USD
Capex
by 2020,
USD bn Comments
Baseline1 0.52
• Organic CAPEX needed for
maintenance of existing
infrastructure58.0
Well
availability0.1
• More than 1,000 WOs by 2020
(incl. 200 WOs to be outsourced)5.1
Pressure
optimization0.1
• 60 mini compressors to be
installed
• 8 new booster stations to be built
and 7 - modernized
2.6
Stimulation 0.2
• 250 fracks (wells) to be done until
2020 (significant level of
outsourcing required)5.9
Brownfield
drilling 1.4
• Up to 270 wells to be drilled by ‘20
(up to 30% of wells are completed
with frack)
• 25% drilled by external contractors
7.0
Greenfields 1.6• 55 exploration, 138 appraisal and
200 production wells are drilled
• First production well in 2017
6.0
Total 3.9 84.5
Effect
’16-‘20,
Bcm
18
14
4
12
22
0
8
2
16
10
6
2020.1
1.5
0.9
2020
9.7
2.3
ProductionBcm
0.40.3
2.8
0.5
1.4
0.71.0
1.20.60.4
1.70.3
10.7
2.0
11.6
1.1
1.7
1.0
2017 2019
12.5
3.0
0.6
15.2
0.7
16.5
2018
18.3
2016
13.5
14.5
0.1
14.5
2015
BaselineWell availabilityPressure optimizationBrownfield drillingGreenfield Stimulation
SOURCE: UGV, team calculations
Requires outsourcing
Notes: brownfield drilling first year adjustment factors of 0,25, 0,25, 0,3, 0,3 and 0,5 for 2016-2020 respectively
1. Baseline level is within +/-5% of Ryder Scott numbers
2 UGV financial plan
PRELIMINARY
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 22
Execution of the target program requires significant UGV
operations scale-up; several factors are crucial for growth
1. # of existing
wells with
fracking
2.1. # of
Brownfield
wells
2.2. # of
Greenfield
E&A wells
• UGV needs to
significantly scale-up
operations to achieve
strategic targets
• Several key factors are
crucial for UGV to enable
required scale-up
– Strengthening-up UGV
capabilities, incl.
project management
team (see the next
section)
– Smooth and effective
procurement system to
allow quick and optimal
decisions on outsourcing
procurement (incl. high-
quality experienced
contractors)
– Fair fiscal regime and
predictable cash
position
– Quick and efficient
license acquisition
process3. # of WOs
(incl.
outsourcing) 280275 202802
18
340
80
2020
300
19
60
355290
250
172016
23340
233
0
2.3. # of
Greenfield
prod. wells100603010-
4343434816
5863583055
80804525201
1 Current UGV’s plan of 45 wells is under risk due to execution issues (procurement delays, regulatory issues etc)
2 Number may decrease after implementations of preventive measures (inhibitors, tubing metallurgy etc.)
SOURCE: UGV, team analysis
2. Total wells
drilled, incl.
2011661318871
WOs outsourcing plan
250
657
264
193
200
1,518
Total number
of wells
1 year of delayed implementation
of the program costs up to UAH
10bn in NPV
PRELIMINARY
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 23
UGV’s Strategy will have significant effect for market
overall
Ramp up outsourcing
market of main
services
Entry of international
players and bringing
new technologies
Increase efficiency of
gas sector
• UGV plans outsource significant volumes of services/ difficult work:
• Workovers
• Hydrofracking
• Drilling
• UGV’s scale of need in services(commitment in demand) should
be a significant anchor for international companies to entry the
market
• Growth of the market and entry of international companies should
create competitive environment, which will ensure effective pricing
and optimization and development of effective legislation for O&G
sector
Source: UGV
Model's outputs - CTM 22jan15-Main slides_with Enrique comments.pptx 24
THANK YOU
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