Materials for the Round Table

1. KEY PRIORITIES OF EXTRACTION
INDUSTRY REFORMS:
FOCUS ON NATURAL GAS
MATERIALS FOR THE ROUND TABLE
June 18, 2018

2. Ukraine’s natural gas potential is really high, and ongoing market
liberalisation could benefit both society and business in the long run
 Ukraine’s economy has stabilised after the 2014-2015 crisis and its current trajectory provides reasons to be cautiously optimistic about the
future.
 The pro-European government supported by the global community is moving forward with an ambitious reforms agenda to put Ukraine’s weak
economy back on solid ground and create a welcoming business environment (+76 positions in Doing Business ranking during the last years).
 Ukraine is actively pursuing energy supply diversification policies and has already made a great step forward in the Gas sector.
 Gas market liberalisation: started from adoption of the Gas Law in 2015, has already produced some initial results, but a lot of work still lies
ahead.
Ukraine has enough natural gas reserves (№3 country in Europe) to materially substitute import and aims to increase domestic production
from 20 to 28 bcm by 2020. This ambitious target requires a set of regulatory and fiscal enablers to be in place at the national level.
During the last years Ukraine completely switched to natural gas imports from European direction; moreover, it has reduced imports by
50% between 2013-2017 – from 28 to 14 bcm. The segment has been opened for competition (67 importers at EU borders in 2017) and
leading European companies have already launched their operations in Ukraine.
Ukrainian gas transmission system is one of the most powerful in the world and being used for transit of the majority of Russian gas to
the EU. With the risk of construction of pipelines bypassing Ukraine and the expiration of transit contract with Gazprom, preserving gas
transit through Ukraine (which currently generates ~3% of Ukraine’s GDP) became a question of national security. Ukraine is looking for
international partner to manage its GTS, bring technical know-how and secure transit flows after 2019.
Capacity of Ukrainian underground gas storage facilities is the largest in Europe, equals to nearly a third of EU-28 capacity and is currently
being underutilised. Taking into account the available infrastructure, Ukraine could be a natural candidate for an Eastern European Gas Hub.
Total length of Ukrainian gas distribution system is 292 ths kilometers, connected to more than 12 million end consumers. There are 44
licensed DSOs in Ukraine - most of them are controlled by the private business group.
Ukraine’s natural gas consumption shows a steady decline during the last decades and amounted to 32 bcm in 2017 (only 65% of demand
was satisfied by local production). It consists of two nearly equally-sized segments – regulated and non-regulated. The regulated segment is
being supplied at regulated prices and operates under public service obligations (that mandate procurement of domestic natural gas from UGV
by Naftogaz and its subsequent sale to suppliers to households, religious organisations, and DHC). Pricing in non-regulated segment is
determined by the market.
 The Ukrainian gas market is at a stage of its transformation which creates opportunities for new market entrants. We believe that Ukraine is
attractive for investors in the long run, but a thoughtful entry strategy is required for success.
Source: PwC “Ukrainian gas market: Discovering investment potential and opportunities”, June 2018
Executive summary on Ukrainian natural gas sector
1

3. Ukraine is considered to be one of the key players on the
European gas market..
Ukrainian natural gas sector at a glance
Source: BP Statistical Review of World Energy 2017, Naftogaz
2
Ukraine is the third biggest holder of proven
natural gas reserves in Europe (~16% of total
Europe’s reserves)
Ukraine is the fourth biggest producer of
natural gas in Europe (~8% of total Europe’s
production)
Capacity of Ukrainian underground gas
storage facilities is the largest in Europe (is
equal to nearly a third of the EU-28 capacity)
Ukrainian GTS is the most powerful transit
route for Russian gas to European consumers
The 14th biggest gas importer in Europe
The 7th biggest consumer of natural gas in
Europe

4. .. with significant potential of natural gas reserves for future
development
Source: Geoinform
Distribution of natural gas resources by regions of Ukraine
West (116 fields, 111 bcm)
(Volyn and Podillia,
Precarpathian, Carpathian and
Transcarpathian oil and gas
provinces)
East (244
fields, 727 bcm)
(Dnipro and
Donetsk oil and
gas province)
South (42 fields, 68 bcm)
(Predobrudja, Black Sea and Crimean, Azov and Berezan,
Indolo-Kuban, and Black Sea Prospective provinces)
1) The latest available data
Ivano-Frankivsk
region
Other
regions
Dnipro
region
Sumy region
Poltava
region
Crimea
Luhansk
region
Shelf of the
black sea
4%
4%
35%
4%
Lviv region
9%
3%
37%
1%
1%
2%
Kharkiv region
906
bcm
Total balance
of gas reserves
in Ukraine
Share of total reserves, %X%
Natural gas reserves of Ukraine
(on January 1, 20171)
3

5. However, comparing to other European countries Ukraine’s
natural gas reserves base is underutilized
Natural gas reserves and production in Europe
(bcm, at the beginning of 20171)
Source: BP Statistical Review of World Energy 2017
1) The latest available data
2) Excludes gas flared or recycled. Includes natural gas produced for Gas-to-Liquids transformation
Country Proven reserves Annual production2 Extraction factor
Norway 7%
Netherlands 6%
Ukraine 3%
United Kingdom 20%
Romania 8%
Poland 4%
Germany 19%
Italy 15%35
35
91
110
207
591
697
1 763
5
7
4
9
41
18
40
117
Data is based on BP
Statistical Review of World
Energy 2017 and was used
for benchmarking
purposes. It could differ
from the data of the
Geoinform.
4

6. State owned company UkrGazVydobuvannya (UGV) is the
largest natural gas producer in Ukraine
Ukraine’s natural gas production by companies
Source: Naftogaz, Association of Gas Producers of Ukraine
5
15.3
4.1
0.01
1.1
UGV
Private producers
Chornomornaftogaz
Ukrnafta
20.5
bcm
Total gas production in 2017
(bcm)
Private gas producers and their share in private
production in 2017
(%)
Other
14%
UNBBurisma Geo-
Alliance
DTEK
18%
Total
private
production
PPCSmart-
Energy
40%
4%
9%
4%
Kub-
Gas
5%
6%
4.1 bcm
100%

7. Despite the fact that natural gas consumption shows a steady
decline, Ukraine still has to import gas to cover own needs
21.1 21.3 20.5 20.6 20.5 21.4 20.5 19.9 20.2 20.5
44.8
32.9 28.0
19.5
16.4
11.1
52.6
14.1
27.0
36.6
33.2
42.6
50.4
54.8
57.6 59.3
66.3
2016
-52%
20172015
33.8
31.9
2010 2011 20142012 20132008
51.9
2009
Consumption Import Production
Ukraine’s gas production, consumption and import volumes
(bcm / year, 2008-2017)
Source: Naftogaz, Association of Gas Producers of Ukraine
Ukraine’s annual gas consumption dropped by
52% over the last 10 years, however, domestic
production still lacks the ability to meet
country’s own needs
6

8. The Government aims to stimulate natural gas extraction in
order to ensure the country's energy independence
17
13
11
9 11
1415
642
2
5
4
2017F
28
20
1
2016F
19
25
0
2020F2018F 2019F
23
Baseline productionCurrent fieldsNew fields
14
11 10
6 8
1213
4
3
20
2020F
2
1715
2018F2017F
1 0 1
2019F2016F
15
2
18
0
3
223
2
2 3 42
2
1
2
1
6
2017F
4 5
0
2016F
7
1
2018F 2019F 2020F
7
Total production1
Concept of Ukrainian gas sector development 2020
Planned growth of domestic natural gas production according to
the Concept 2020
(bcm / year)
Private
produ-
cers
UGV
1) Excluding Ukrnafta’s production – 1.4 bcm in 2016 (according to the Concept 2020)
Source: Association of Gas Producers of Ukraine, Concept of Ukrainian gas sector development 2020
7
Totals may not add up due to rounding

9. Concept 2020 envisaged a number of measures aimed to
ensure development of natural gas production
Main provisions of the Concept of Ukrainian gas sector development 2020
8
Enablers
Prolongation of current licenses for bona fide holders
Resolving JV issues
New licenses granting by local authorities
Improvement of geological info sharing procedure
Deregulation of land issues
Incentive-based fiscal policy in upstream
New Rules of Development of Oil and Gas Fields
New Subsoil code
Abolishment of requirement for reserves re-estimation
every 5 years
International standards of classification and
categorization of reserves and resources
Availability and affordability of supporting services
Status
Source: Concept of Ukrainian gas sector development 2020
- At risk- In progress- Done - Partially / LT task
• Operating wells optimization
& intensification:
• Drilling new wells in existing
acreage
• Exploration and exploitation
drilling
• Geological & seismic
exploration
- Well workovers
- Hydrofracturing
- Modernization and
construction of boosting
compressor stations etc.
Key initiatives
Existing
fields
New
fields
Target:
28 bcm
in 2020

10. Ukraine has already shown good progress in reforming gas
extractive industry, but further steps should be taken (1/3)
Area Issue Done Should be done
Permitting
system
• The permitting system in the gas
production industry was too
prescriptive and overly regulated
• Mandatory collection of 44 approvals
at 16 institutions
• Field development launch took over
3 years
• The bill on deregulation of gas
extractive industry was adopted
• Changes include reduction of permitting
documents obtaining time
• Cancelled 14 approvals and 6
procedures held by different institutions,
the process is speed up by > 18 months
• Development and introduction of
“one window” approach for gas
production activities
Fiscal
regime
• The taxation system for hydrocarbons
was complicated, unstimulating
and inefficient
• It wasn’t attractive for investors
• Local communities lacked interest in
a constructive collaboration with the
industry
• Introduction of the new stimulating
taxation – 12% and 6% rates depending
on the depth of the new onshore wells
drilled
• Royalty decentralization – 5%
deductions to local communities'
development
• Production sharing agreements (PSA)
with the new stimulating royalties – 2%
and 1.25% for oil and gas respectively
• Simplification of the set of
different rent rates based on type
of hydrocarbon, depth, extraction
complexity, and type of
cooperation
Land
allocation
• Inability to use / develop wells after
exploration stage until obtaining of
the documents certifying right of land
use
• Need for change of the designated
purpose of land use
• Uninterrupted land use during the
transition from exploration to commercial
production under the exploration
agreement (until the obtaining of the
documents certifying right of land use)
• Land servitude is possible - no need to
change of the designated purpose of land
• Further amendments to related
legislation
3 !
First results of reforms and next steps
Source: Association of Gas Producers of Ukraine, National Investment Council of Ukraine, team analysis
9

11. Ukraine has already shown good progress in reforming gas
extractive industry, but further steps should be taken (2/3)
Area Issue Done Should be done
Access to
subsoil
• License auctions are held
unacceptably irregularly
• The offered lots are small and not
interesting to the investor
• Most of licenses are obtained without
auctions (app. 90% of all the blocks
were issued without auctions)
• There was no license auction held
from beginning of 2017
• The draft of amendments was developed to
ensure equal access to subsoil and
cancel the practice of issuing the license
without the auction
• Approval of the developed draft
amendments
• Elimination of the remaining
issues with auction procedures
• Elimination of double standards –
cutting of the possibilities to
obtain licenses without
competition
• Cancelling various government
bodies pre-approvals etc.
Geoscience
data
availability
• Lack of public access to the massive
geological data
• Lack of the transparent opportunity
to individually assess the vacant blocks
and nominate them for auctions by
most subsoil users
• The draft of the new Rules of the
geoscience data turnover was developed
• Approve the developed draft
amendments on liberalization of
geoscience data turnover
• Open the access to electronic
databases of the potential blocks
and information on the fields
currently under development
(limited disclosure)
3 !
First results of reforms and next steps
Source: Association of Gas Producers of Ukraine, National Investment Council of Ukraine, team analysis
10

12. Ukraine has already shown good progress in reforming gas
extractive industry, but further steps should be taken (3/3)
Area Issue Done Should be done
Mandatory
reserves
estimation
• A costly requirement for state re-
examination and reassessment the
reserves every 5 years
• Time-consuming procedure
• The requirement for mandatory state re-
examination and reassessment of reserves
of mineral resources was cancelled
Environmen-
tal impact
assessment
• The law on environmental impact
assessment has come into force, but
secondary legislation that would
have explained the mechanism for its
implementation has not been
properly developed
• Companies can not start drilling new
wells and continue special permits
because they do not have
environmental impact assessment
• Long term passing of the
environmental impact assessment –
min 5 months
• To finalize the mechanism of
environmental impact assessment
(make it transparent and clear)
• Develop necessary secondary
legislation
• Improve legislation and shorten
the term of environmental impact
assessment
3 !
First results of reforms and next steps
Source: Association of Gas Producers of Ukraine, National Investment Council of Ukraine, team analysis
11

13. Thank you!