UGV: Hitting the Gas

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New strategy and business practices from the private sector help Ukraine’s top natural gas producer reverse the 20-year decline. The company increases production for three years in a row. The state-owned company hit all time high production level in 2018 thanks to experienced managers.

Practically any foreigner would find it difficult to spell the name of this Ukrainian company. UkrGazVydobuvannya is an acronym meaning namely “Ukrainian gas extraction”. But it would be even more difficult to realize how the company came to dire straits 5-6 years ago. Ukraine had the second biggest gas reserves in Europe second to Norway. But natural gas production was dwindling for more than 20 years. The wells were being depleted and low state-controlled gas price provided little or no resources to explore and drill new wells. The company culture stemmed from the Soviet institutions, which lacked transparency, proactivity and business approach.

The trend made a U-turn in 2016. Now UkrGazVydobuvannya is boosting production for three consecutive years. The company is the major natural gas producer in Ukraine with the share of 73% in 2017. The rest comes from smaller privately-owned companies. In 2018 UkrGazVydobuvannya extracted 15.5 billion cubic meters of natural gas. This makes almost a half of what Ukrainian households and businesses consume annually.

The improved production is a result of its new management. They developed ‘Strategy 20/20’, which aims to increase natural gas production to 20 billion cubic meters in 2020. The strategy focuses on modernization of existing wells for short-term gains and investing in green field exploration and drilling for a long-term perspective. The strategy envisages improvement of the economic efficiency of the company’s assets, optimization of internal functions, and fight against corruption. Should the strategy and energy-saving measures succeed, Ukraine will be able to stop all natural gas imports and rely solely on its domestic production.

There are suggestions that UkrGazVydobuvannya may not fully reach its goal by 2020 due to lack of permits for new field exploration. Some experts believe that the company’s moves face strong resistance from its previous beneficiaries. The obstruction allegedly comes from companies and persons, who profiteered from lack of transparency under the previous managements. For example, 63 UkrGazVydobuvannya’s requests for exploration permits from Poltava regional council were denied in 2016-2018. However, the company continues to grow despite the obstacles. Its new green field explorations and fracking are done in Kharkiv region.

There are people from the private sector behind the UkrGazVydobuvannya’s success. The current chairman of the board, Oleg Prokhorenko, has a solid experience in such companies as McKinsey & Company and Bridgewater Associates. Mr. Prokhorenko studied at Dartmouth College and John F. Kennedy School of Government at Harvard University. He was appointed in June 2015 following a transparent selection process by the Government of Ukraine.

The first deputy chairman of the board, Oleksandr Romanyuk, has an international background as well. He worked at PricewaterhouseCoopers, McKinsey & Company and EastOne Group.

The management of UkrGazVydobuvannya believes that the company strategy is working perfectly and its 2020 objectives are attainable if the local authorities are cooperative. This is a highly probable scenario as Ukrainian parliament, Verkhovna Rada, accepted the law directing 5% of the extraction rent to the respective local budgets.