JKX suspends drilling in Ukraine, warns of risk of falling gas sales

JKX Oil & Gas (JKX LN) decided to suspend its 2015 capital investment program in Ukraine, the company reported on Jan. 7. It drilling rig “is being stacked” after the completion of its IG-140 well, the company elaborated. JKX attributed its decision to “the punitive rate of the gas production tax” (which is being kept at the level of 55% of the local price  for 2015, after being 28% before August 2014), as well as government’s restrictions of gas sales by private producers to the nation’s 168 biggest industrial consumers (valid for winter 2014/2015).

JKX was able to find customers for 80% of its gas production capacity in December, while 20% of its capacities were idle due to the government’s market restriction, according to the same release. Recall, the company threatened to halve its production in December. This time, it warns again that it “may reduce gas sales to less than 50% of its production capacity in Ukraine”. JKX highlights that the market available to private gas producers (who can sell their gas to anyone except the 168 biggest consumers) continues to contract, and competition is becoming intense.

In its other release, dated Jan. 9, JKX reported on the successful testing of its third well at the Elizavetovskoye field. It tested a flow of 5.2 MMcfd of gas and 18 bpd of condensate from the G7-12 sandstone reservoir. It stressed that production from deeper reservoirs is also possible but “is not economic in the prevailing economic conditions in Ukraine”.

Alexander Paraschiy: The suspension of JKX’s drilling program is certainly negative news. We expected the program would be revised downward (as the higher production tax rate has been extended by Ukraine’s parliament for one more year) but not suspended. Most likely, the company will renew its program this spring, if the government does not prolong its market restrictions for private gas producers.

Despite prevailing pessimism in JKX’s statements, there are some encouraging moments as well. Firstly, the company decreased its gas sales much more moderately (-20%) compared to its expectations (-50%) for December. This allows us to expect that its output in Ukraine in January and February (before the market restrictions terminate) will also remain better than “half of its capacity”.

Secondly, JKX’s encouraging result of testing at its third consecutive well at the Elizavetovskoye field (although it’s slightly worse than for the first two wells that were tested at 6.0–6.2 MMcfd flow) hints at its high quality and promising growth potential when the drilling campaign is restarted.