An interview with Aleksandr Katsuba, Ukrainian entrepreneur, owner of ALFA GAZ, energy expert, on the prospects of Ukrainian energy, the gas market and adaptation of Ukrainian business to the war.
Will Ukraine be able to live without gas imports?
The head of Naftohaz, Oleksiy Chernyshov, has said that Ukraine will be able to pass the winter period only on its own gas. Chernyshov says that this is due to the fact that, on the one hand, consumption has decreased, and on the other hand, we see record volumes of drilling and production growth. Is this true?
In general, we can say that both components are true. The market has indeed become much more transparent and easier to enter. On the other hand, consumption has fallen dramatically. That's why we can't declare the gas balance a Great Victory, because we lost a third of the economy. But despite the war, the industry has been successful. And as we regain control over the temporarily occupied territories, we can further increase production.
Are we talking primarily about Crimea and the Black Sea shelf?
Yes. But don't think that this will be a quick process. We do not know in what condition we will get the infrastructure of Crimean and Black Sea production after the Russians. It may take years to restore the production and transport infrastructure.
How realistic is it for Ukraine to get rid of its dependence on gas and oil in the long term? "Success" of the 2023/2024 heating season will not be a one-off?
It depends on the state policy, whether it will continue to become more loyal to investors. Besides, we need to radically simplify the access of technologies and specialists to our market. And, of course, on how the war will develop and how quickly it will be possible to secure at least the western part of the country.
Are there any examples of foreign investments in the Ukrainian oil and gas market at all? Not Russian, of course.
Yes, there are. Czechs are actively producing gas, Italian, British companies, players from the Middle East, Americans are interested. But you have to fight for investors, and our investment policy has been inconsistent all the years of independence.
What should be changed so that investors would not be afraid to invest in the Ukrainian oil and gas sector?
Actually, not much. If we talk about the key things, then, first of all, we need to ensure the stability of the rules of the game. After the end of the war, the market needs a balance between the state's interest to collect more taxes and the incentive to expand production. In 2018-2020, there was a programme to support the industry. It created incentives to drill new, deep and ultra-deep wells. I would also intensify the work on production sharing deals with potential investors. This would allow production to ramp up in the west of the country and then in the east and south. Another important emphasis is to work with local authorities. Local deputies and law enforcers should stop looking at investors as a source of personal enrichment rather than a partner of society and the country. Attracting investors also requires low risks of losing the investment. The government should ensure that any incentives are introduced for a clearly defined period of time and cannot be withdrawn or changed prematurely. For this purpose, regulatory documents should stipulate that Ukraine undertakes not to change incentive rates or other guarantees for a fixed period of 5-10 years.
What about specialists and technologies?
This challenge today is probably comparable to the security challenge. Although it has longer-term causes and consequences. In the USSR, professional oil and gas education was basically formed in Ukraine, and before the collapse of the USSR it was Ukraine that trained the lion's share of top specialists for the oil and gas industry throughout the former USSR. In the last 30 years Ukrainian education in principle has not shown much success....
Not just in the energy sector.
Yes, but in energy especially. In addition, until 2013-2014, most of the most promising graduates of specialised universities directly or indirectly worked for Russian companies, which could offer more money. With the outbreak of war, especially a full-scale war, some specialists returned home, but most of those who left Russia are looking for happiness in safer and clearer markets. That is why we already have great difficulties with specialists, especially in geological exploration and drilling.
What prevents us from attracting foreign specialists?
Safety. And we do not have so much money, especially now, to compete with Americans or Arabs.
So what should we do?
The problem can only be solved by the state and large state-owned companies, if they remain in place. We need more investment in core education, exchange programmes to train specialists, and more investment in professional core education. Private mining companies cannot afford such investments. Therefore, the step here is up to the state and specialised associations, which have to prove their capacity.
Is it the same with modern exploration and production technologies?
Modern exploration and production technologies can only come with large institutional investors. Or we must invest in applied scientific research in the field of geology and production technologies. But the state has no money for the second right now. Therefore, we should focus on investment.
Is the Russian influence on the Ukrainian energy market over?
No. I realise that this answer may come as a shock, but Russia continues to try to influence our market. Only now mainly through hybrid methods, because the Russian political lobby is practically nullified after 24 February (2022 - ed.). Russia informationally attacks resource extraction projects in Ukraine, conducts discrediting campaigns against the industry, and actively includes the "environmental theme". This, in principle, is not surprising. They are at war with us on all fronts.
Return to the gas market.
You worked in state-owned gas companies for 4 years in the early 10s. Then you went into the financial business. How did you decide to get back into the gas market? And why now?
It would be wrong to say that I left the gas market altogether. Contacts and interest have not gone anywhere, I still believe that the Ukrainian gas industry is promising and can develop quite dynamically.
Even during the war? Are you not afraid of missile attacks?
We are afraid, of course. But if the air defence system develops as it did last year, we are confident that the Defence Forces will be able to protect both civilian infrastructure and the Ukrainian energy industry. Therefore, now, when many people are ready to sell physical assets for cheaper, it is a good time to expand. Moreover, in general, it is easier to operate in the market now than it was 5 or 10 years ago.
Other market players complain about high taxes on the gas industry. Doesn't that stop you?
The tax burden is now at the top, it is true. But the circumstances are extraordinary now. The army is financed from the Ukrainian budget, from our taxes. The survival of Ukraine, Ukrainians, Ukrainian business depends on how many weapons we are given and how much we can provide the AFU. Therefore, we have to pay. But - on the other hand - now there is much less red tape, the market has become much more transparent. And the profitability of the oil and gas market still allows for a long-term return on investment.
For example?
For example, access to promising areas for exploration and production is now awarded through an electronic auction. The process of obtaining a licence is also digitalised. You win the auction, you pay the state, and then you get on with your work. Therefore, in general, working with the state has become simpler and cleaner. If earlier, conditionally, the advantage in bidding for deposits was given to old players who know how the bureaucracy works, now the entry of new market players depends on the desire and ability to invest, as well as on technical and managerial readiness.
Managerial and technical readiness. Is this about the fact that there are a lot of inexperienced players on the market who want to make quick money?
Inexperienced in the energy sector, in the gas industry. Because we have long been observing a stream of businessmen who, after success in some spheres, go to the gas market, find partners of varying degrees of reliability, or fall for the hype about giant fields where investments will pay off in the first month. There are former officials who "solved" promising areas for themselves, but then realised that you cannot "just" make money in this industry. You have to understand processes, technology, and the market.
And what happened as a result?
We end up with a situation where more than 200 potential fields are actually frozen. Either there was no exploration at all, or it was insufficient, or the investor simply abandoned the site. The investor did not pull the production, was disappointed with the result, or did not find the necessary management. As a result, the country is missing quite a lot of gas and oil, which could not only meet our needs. But it could also provide exports.
What should we do about it?
I think that the best solution is to set a time limit of 3-5 years, within which the investor must carry out exploration and development of the field. If he fails to do so, give it back to the state, take the money back minus the penalty for downtime and let others work.
How much does your company produce now? Or is it a trade secret?
No, it's not a secret. About 1.5 million cubic metres (cubic metres of gas - ed.) per month.
Are you a big player for our market?
Much closer to the average. We have several companies on the market that produce more than a million cubic metres a day.
The future of the Ukrainian energy sector. "Europe's energy hub."
Let's move away from the gas market and talk about Ukraine's energy strategy in general. In the summer, the deputy head of the Office of the President Rostislav Shurma presented the idea of making Ukraine the energy hub of Europe. To increase electricity generation 7 times by 2050, gas production 4 times, oil production 7 times and so on. How realistic is this in your opinion?
This is a very ambitious declaration, but it cannot yet be called a plan. Because it requires systematic detailing. By itself, such a project will require the development of the entire Ukrainian economy, its increase by several times. Plus - several hundred billions of investments. Billions of dollars, of course.
Where should we start?
For starters - to revise the current energy strategy, which the Ministry of Energy adopted before the war started. And it looked strange even at that time. It was more a set of declarations than a realistic view of the problem. Besides, it is hard to believe that big investors will come to the industry without systemic reforms in the basic areas of state management.
So we are back to investment attractiveness and systemic reforms?
Yes, but not only. We are again returning to the topic of specialists. In order to produce equipment, build new enterprises, develop and produce reactors and turbines - and this is stated in Shurma's plan - there must be specialists. From scientists and engineers to those who will do all this in the factories. In addition, in order for all this energy to be needed at all, Ukraine must think not only about exports, but also about consumption. Metallurgy, machine building, chemical industry, energy-saving technologies. All this requires state industrial policy and attraction of investments into this very sector.
What do you think of the idea to close all coal-fired power plants, which is also contained in the energy hub concept?
It is difficult for me to comment on this, I am not an expert in coal and coal-fired power plant technology. It is probably an important component for EU integration and for reducing the carbon footprint. That is why there is a special emphasis on it.
To what extent can anything be done for energy development in times of war? Missile attacks, drones last winter left millions of Ukrainians without light. Does it make sense for an investor to invest anything at all in such conditions?
Of course, investing in such conditions is a big risk. But there are things that can and should be done now. Energy companies are modernising networks, distribution, and systems to protect against fluctuations. The state and local government could focus on energy saving. Energy-saving technologies pay off quickly in principle, and they can reduce budget and business costs already now. Besides, I think you have seen how our partners presented the list of reforms they expect from Ukraine. All these reforms help to attract investors - foreign and domestic - under almost any conditions. Yes, if military risks are levelled, there will be more investments. But the internal basis for attracting money is important. In the end, South Korea, Taiwan, Israel always have military threats. And they were able to build super-successful economies.
We are always talking about practical steps for the development of energy and economy in general. In your opinion, should Ukrainians change something about themselves?
First of all, they should stop living in dreams. This is relevant for business, for politicians, for everyone. We have a lot of work to do to reform institutions, to attract investors, to bring back people who are hiding from the war abroad. Therefore, the sooner we realise the complexity of the task and break it down into small steps that we all need to take, the sooner we will move from dreaming to implementing the plan. The war now besides challenges gives us an advantage, we are ready to be helped to become better. We need to take advantage of this window of opportunity.
Aleksandr Katsuba is a Ukrainian entrepreneur, energy expert, owner of theALFA GAZ company.
