Ukraine gas production decreases for JKX, Regal, and Serinus in November

Ukraine produced 1.65 bcm of natural gas in November, which is 1.2% higher yoy (excluding Crimean assets) and 1.5% higher m/m (on daily average basis), based on preliminary information disclosed by Energobiznes news site. Yet the subsidiaries of foreign-listed companies showed declining gas output in November, on a month-over-month basis. In particular, a subsidiary of JKX Oil & Gas (JKX LN) produced 0.60 mcm of gas per day (21.1 MMcf/d) in November, which was a 4% m/m decline and the fourth consecutive month of falling output.

On a year-over-year basis however, natural gas output at the subsidiary increased 11% in November. Kub-Gaz, a subsidiary of Serinus Energy (SEN PW), produced 0.92 mcm/d of gas in November (22.6 MMcf/d, net to Serinus’s working interest). While output rose 7% on a year-over-year basis, it fell 7% month-over-month, with November being the third consecutive month of decline. Regal Petroleum (RPT LN) produced 0.14 mcm/d of gas, which was a 3% m/m decline and 18% yoy fall.

Alexander Paraschiy: The decline in gas production at the Ukrainian assets of all the listed companies was of little surprise, given that they all reduced their well drilling and workover programs this year, for company-specific as well as industry-specific reasons.

Recall, the Ukrainian government doubled the production tax rate for gas producers since August, which prompted all producers to downgrade their CapEx and postpone some projects. This postponement has been already reflected in production declines at JKX Oil & Gas and Serinus. One source of encouragement is that the excess production tax, adopted till the end of 2014, has some chance of not being prolonged. The Energy Ministry appealed to the Finance Ministry with the request to return to standard production tax rates (28% for shallow wells, 15% for deep wells) as of January 2015, as reported by the Interfax news agency on Dec. 18.

However, even if the Finance Ministry does not prolong its regime of high gas production taxes for 2015, private gas companies are unlikely to restore their production soon. Recall, the Ukrainian government banned 168 of the biggest gas consumers from buying gas from any private company till the end of the winter, which limited private producers’ customer base.

JKX Oil & Gas has even threatened to halve gas production in December due to this regulation at a time when the Ukrainian economy especially needs domestic gas. In their attempt to overturn the restriction, private companies gained a successful court ruling recently, though the regulation remains in place. For this reason, we expect gas production by the listed companies will decline further in December and January.