This Is How Ukraine's Gas Production Reform Works
18 April, 2017

Ambitious goals lay ahead for Ukraine’s largest gas-production company, 'UkrGazVydobuvannya'. These plans are set to be completed by 2020, and they aim to attract investment to the industry, obtain permission from local authorities for gas exploration and drilling, and to produce gas independently, without any involvement from oligarchs.

In the summer of 2015, the 38-year-old Harvard graduate, Oleh Prokhorenko was appointed CEO of 'UkrGazVydobuvannya' in order to materialise these goals, bring down the corrupt schemes and make the company profitable once again. "Plan 2020’s" main task is to stop importing gas completely, and to potentially become an exporter. To illustrate - in 2015 'UkrGazVydobuvannya' produced 14.6 million cubic metres of gas, but imported 16.4 million. But, it hasn’t always been like this. In the mid-70s, the Ukrainian Soviet Socialist Republic (which was then part of the USSR) was the leading exporter of gas to Europe; selling to Poland, Czechoslovakia and Bulgaria.Up until Ukraine declared independence in 1991, gas production figures dropped by more than thrice.

Prokhorenko’s salary is more than 15 times higher than that of his predecessors.

Oleh Prokhorenko was appointed CEO of 'UkrGazVydobuvannya' in 2015

“Despite the fact that people were earning $550-750, they were withdrawing money from the company. They were giving that money to the person standing behind them. These companies could feed entire political forces,” he said.

The easiest way to increase gas production is by modernisation and complete overhaul of the existing wells. As of the year 2000, gas companies attracted investors through a system of agreements and general operation. The idea was that private investors put money into these wells, and in return they receive a part of the proceeds on the sale of gas. The new leadership has set a course to stop these agreements and general operations entirely.

“These schemes were created simply for money laundering within the company”, affirms the head of 'UkrGazVydobuvannya'. “It wasn’t about development, they simply needed to invest in the wells, pump the gas, sell it and receive a profit, that was all. Now, when we have a market price for gas, we don’t need those corrupt schemes”.

This is how the scandalous Ukrainian MP and former member of the Party of Regions (the ruling party in Ukraine during the Viktor Yanukovych presidency, 2010-2014), Aleksandr Onyschenko, earned his money. On the 15th June, the National Anti-corruption Prosecutor of Ukraine announced the discovery of an organised crime ring which had cost the government 3 billion hryvnias ($111, 300). This loss was the result general operations based on agreements with 'UkrGazVydobuvannya'. According to the evidence, Onyschenko was behind this scheme.

Even today, Ukraine is fourth in Europe in terms of gas production - after Norway, the Netherlands, and Great Britain. Ukraine is also third in explored gas reserves, but the reserves of the existing wells are constantly being depleted. This is a natural process. To increase gas production, they need to be searching for new wells, and drilling new reserves, all the time. The existing wells are in need of an upgrade. These steps have to be agreed upon with the landowners, who even prevent exploration equipment from entering their land.

However, on the other hand, the Poltava region (central Ukraine) for example, together with the Kharkiv region, has given the the state 4/5 of all its gas production - regional government has become their main obstacle. The regional government of Poltava did not grant permission for the drilling of any new wells in 2016. MPs demanded that a part of the profit from the gas went straight to the regional budget. In the end, they succeeded. In 2017 the President ratified a law (Verkhovna Rada introduced the draft bill in 2016) which decreed that 5% of the profits remain within the region in rent payment . 2% goes to the regional budget, 2% goes to the district or community budget, and 1% goes to the town or village in which the gas is being drilled. In this way, the region where the gas production is taking place benefits financially.

However, regional councils are still dissatisfied with the law on the decentralisation of rent payments because it will not come into force until 2018. What is more, the money will still be directed straight to a protected budget, and not into a special fund that can be used freely by the

For local residents however, this opens up fantastic possibilities.