Cub Energy to Boost Ukraine Gas Output Despite Crisis in East

Cub Energy Inc. Chief Executive Officer Mikhail Afendikov said the conflict roiling Ukraine’s east won’t change its plans to boost extraction by shifting emphasis to the western part of the former Soviet republic.

Toronto-based Cub plans to raise its Ukrainian output 30 percent to 480,000 cubic meters a day next year, after adding 11 new wells in 2014, Afendikov said in an interview at the Adam Smith Energy Forum in Kiev on June 25. Cub extracted about 320,000 cubic meters a day at the end of 2013.

“We know and we understand Ukraine, and we realize the effect of what we do here,” Afendikov said. “Increasing extraction here is the right way to go.”

Ukraine has struggled to reduce its dependency on gas imports from Russia, accusing the world’s largest energy exporter of using its fuel reserves as a political weapon. Russia, which supplies about half of Ukraine’s annual gas needs, stopped deliveries to the neighboring country on June 16 over mounting debt, as Ukraine disputes an 81 percent price increase in April.

Ukraine’s two eastern regions of Donetsk and Luhansk, the country’s industrial heartland, have been battered by unrest that was sparked by pro-Russian separatists. More than 400 people have died in the conflict in battles that ensued after rebels attacked government buildings, airports and coal mines.

Cutting Consumption

There are enough fields in Ukraine and the nation may be able to “dramatically” cut its annual gas consumption by about 10 billion cubic meters after reforms needed to stimulate efficiency are in place, Afendikov said.

The country needs more geological research to boost its own extraction, he added. Ukraine consumes about 50 billion cubic meters of natural gas a year and is one of the least energy-efficient consumers in Europe, according to the European Bank for Reconstruction and Development.

Cub Energy holds four licenses for gas exploration in four fields in the western Zakarpattya region and eight fields in Luhansk region to the east. The company is adding six and five wells, respectively, in both regions this year, even as the armed conflict continues, according to Afendikov.

Plans to start drilling two wells in Luhansk region this year have been delayed to 2015 because of the difficulties in delivering equipment for deep wells because of fighting and road blocks, he said.

Cub’s fields in eastern Ukraine have more potential than in the west, though the company will concentrate on fields in Zakarpattya because of the situation and plans to raise extraction levels in that area, he said.

Security Concerns

At the same time, the company is expending “a lot of effort” in beefing up security at eastern facilities and had to relocate some staff and equipment. The company also had to delay a plan to sell a $50 million bond in Norway, he said.

“If there had been no separatist unrest there, we would have extracted more, we would have drilled more,” Afendikov said. “If the political situation stabilizes, I hope we will be able to place bonds soon in Norway and spend the funds to develop fields in Ukraine.”

The company expects to post “some profit” this year, Afendikov said without giving details. Dividends from 2014 operations will not be paid to investors and will be spent to increase output in Ukraine. Cub Energy is interested in possible acquisitions.

Cub is planning to file applications for new fields in Turkey this month, Afendikov said. He is meeting Turkish officials responsible for granting new licenses in two weeks.

“We see Turkey as a strategic direction,” Afendikov said, adding that the company doesn’t expect raising extraction levels in Turkey before next year.

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