1. Gas Production in Ukraine. Key aspects
UKRAINIAN GAS INVESTMENT FORUM
PANEL DISCUSSION
March 23rd | 2016

2. Potential investor’s perspective
Section 1
Ukrainian gas market.
Potential investor’s perspective
Attractive or not?

3. Ukrainian Gas Market at a Glance Industry results in 2015
Production
19.2
billion cubic meters of natural gas
-3.1%
Consumption
33.7
billion cubic meters of natural gas
-21%
Import
16.4
billion cubic meters of natural gas
-16%
Transit
67.1
billion cubic meters of natural gas
+7.9%
Note: percentage represents change compared to 2014 annual data

4. Ukrainian Gas Market at a Glance Industry results in 2015
Production
19.2
billion cubic meters of natural gas
-3.1%
Consumption
33.7
billion cubic meters of natural gas
-21%
Import
16.4
billion cubic meters of natural gas
-16%
Transit
67.1
billion cubic meters of natural gas
+7.9%
Stagnating..
Note: percentage represents change compared to 2014 annual data

5. The bottom is yet to come
Market price dynamics
The bottom is yet to come
Transition from barter to market gas trade system. First “gas war” with Russia
Second “gas war” with Russia
Ukraine starts actively expand its Europeans reverse gas supply
Subsoil tax issues. Dramatic industrial decline
$160
Note: Prices net of VAT, import price net of transportation costs and Naftogaz fees
Source: NERC, World Bank

6. Thinner margins, lower returns..
Market price dynamics
The bottom is yet to come
Transition from barter to market gas trade system. First “gas war” with Russia
Second “gas war” with Russia
Ukraine starts actively expand its Europeans reverse gas supply
Subsoil tax issues. Dramatic industrial decline
Thinner margins, lower returns..
$160
Note: Prices net of VAT, import price net of transportation costs and Naftogaz fees
Source: NERC, World Bank

7. Historical Gas Production
A very rich experience Ukraine’s natural gas production at extremely high levels … 40 years ago
Historical Gas Production
billion cubic meters
60-65 bln m3 – highest level of production in early ’s comprised 2/3 of total Soviet Union volume
20 bln m3/year on average is being produced since mid ’s
Source: IHS

8. Poor operations, old technologies..
A very rich experience Ukraine’s natural gas production at extremely high levels … 40 years ago
Historical Gas Production
billion cubic meters
Poor operations, old technologies..
60-65 bln m3 – highest level of production in early ’s comprised 2/3 of total Soviet Union volume
20 bln m3/year on average is being produced since mid ’s
Source: IHS

9. ONGOING REFORM. New Gas Market Law adopted EU’s 3rd energy package compliance since October 1st 2015
Market Regulation and Supervision
Cabinet of Ministers of Ukraine; Ministry of Energy and Coal Industry of Ukraine; National Commission for State Energy and Public Utilities Regulation; Secretariat of Energy Community
Sources
Trading
Consumers
Wholesale Traders
Imports from the EU, Norway, Russia, etc.
Industry
Transmission System Operators
Operators of Gas Distribution Networks
District Heating Companies
Domestic Production (Natgas, Syngas, Biogas)
Public Sector
Liquefied Natural Gas
Operators of Gas Storages
Retail Suppliers
Households

10. How the NEW MARKET should work
LNG Operator
USF Operator
Import
Suppliers
GDS Operators
GTS Operator
Producers
Consumers
Export
Technical connection
Commercial relations

11. How the NEW MARKET should work
Main principles – after October 1st 2015
1. Naftogaz Reform – unbundling of businesses (transportation from production, supply)
2. Unbundling – Uktransgaz vs Naftogaz and Oblgazes (distribution vs supply), transparent rules, equal access of suppliers to the services.
3. Tariffs – regulated (transportation and distribution, partially – storage)
4. Consumers – are free to choose and to change the supplier.
5. “Last resort” supplier – supplies gas to consumers, which can not
receive gas from any other gas suppliers
6. Gas price – non-regulated (only if Public Service Obligations imposed!)
7. Public Service Obligations – CMU imposes such obligations on gas suppliers for the purpose of ensuring the general public interests (security of supply, national security, stability etc.)

12. How the NEW MARKET should work
Basic secondary legal acts – after October 1st 2015
1. Codes (developed by the Operators and approved by the Regulator):
GTS Code;
GDS Code;
USF Code.
2. Gas Supply Rules (to be approved by the Regulator)
3. Licensing Conditions (new Licensing Law. Contradicts to the Gas Market Law):
Transportation, distribution, storage under the Licensing Law
Supply, transportation, storage, distribution – under the Gas Market Law
4. Template (model) agreements (to be approved by the Regulator)
Supply,
Transportation
Storage
Distribution
Technical agreements, etc.

13. How the NEW MARKET should work
Basic secondary legal acts – after October 1st 2015
1. Codes (developed by the Operators and approved by the Regulator):
GTS Code;
GDS Code;
USF Code.
2. Gas Supply Rules (to be approved by the Regulator)
3. Licensing Conditions (new Licensing Law. Contradicts to the Gas Market Law):
Transportation, distribution, storage under the Licensing Law
Supply, transportation, storage, distribution – under the Gas Market Law
4. Template (model) agreements (to be approved by the Regulator)
Supply,
Transportation
Storage
Distribution
Technical agreements, etc.
Immature legislation and regulation being set up now..

14. However, required potential
Section 2
However, required potential
is still in place

15. 2,88 Western Ukraine Eastern Ukraine 2P reserves base Southern Ukraine
Ukraine holds significant oil and gas reserves Most are located on rebels free territory
Western Ukraine
79 fields
12% reserves
81% reserves
Eastern Ukraine
191 fields
2P reserves base
2,88
trillion
cubic meters
Southern Ukraine
35 fields
7% reserves
Note: 2Р reserves according to IHS estimates
Source: IHS

16. 6 67 17 10,3 0,1 9,7 0,5 Ukraine diversifies natural gas supply
… using it’s unique infrastructure heritage
Natural gas flows within Ukraine in 2015, Bcm 6
Russia
0,1
Poland 67
Transit
9,7
Slovakia 17
Storage
Total imports:
16,4 Bcm
0,5
Hungary
В 2012 году Украина начала реверсные поставки газа из Европы, по условиям контракта с компанией «RWE»
Незначительный импорт в 2012 году, и более существенный, 2,1 млрд. м³ в 2013 году
Реверс газа был на $5-10/тыс. м³ дешевле российского в году, но все же достаточно дорогим (~$400/тыс. м³)
Общий объем поставок реверсного газа из Польши, Венгрии и, на данный момент, Словакии мог бы составлять 18 млрд. м³ в год
Но доступность газа находится в прямой зависимости от объема российского газа, проданного в Европу
«Газпром» сократил продажи газа в Словакию, Польшу и Румынию в середине сентября, тем самым принудив Польшу и Венгрию временно приостановить реверс газа в Украину
10,3
Europe
Source: NJSC Naftogaz Ukrainy

17. Private gas producers acting as key contributors to the energy security and security of supply among domestic producers !
Total gas
market in Ukraine: 36
bln m3
Gas supply, bln m3
Growth, % YoY

18. The basis for independent sector production growth was a $0
The basis for independent sector production growth was a $0.73 billion  increase in investment from
Core six independents combined managed to increase gas production by 1/3 (0.5 Bcm) in This is the effect of investments that were made in : $0.73 billion (total by core six companies)
Investments made by six independent producers in 2014 exceeded $250 million – highest ever volume of investment made in one year by independent sector. However growth rate of investment has significantly slowed down to just 10% (compared to ) – taxes were raised twice just in 2014 year alone
Investment made in 2014 will most likely still result in production growth by the end of If taxation regime is still unfavorable in , lack of investment in will result in production decline as soon as in 2016
Historical annual investment by independent gas producers vs. gas production growth

19. Oil and gas industry investment cycle “Optimistic scenario”1 2
Leg. & fin. estimation
License obtaining 3 4
Engineering research
Seismic surveys 5 6
Exploration drilling
Appraisal drilling 7 8
Commercial production
Development
month #0
month #6
month
#18
year
# 7-15 9
1,5 years
Well abandonment
Добыча

20. How the industry should never be “treated” again
Changes to the Tax Code were adopted, which "temporarily" raised subsoil tax rates from previous 15% / 28% to
28% / 55%
New Law “On natural gas market” was adopted
Introduced a correction factor of 0.55 to subsoil tax rates for production from new wells
The Parliament adjusted the Tax Code in accordance to the Law “On natural gas market”
July
2014
Nov
2014
Dec
2014
The court overturned the CMU Resolution #647
Feb
2015
March
2015
Apr
2015
Oct
2015
Nov
2015
Dec
2015
Restrictions on purchasing natural gas from non-state-owned companies by large industrial consumers were adopted by the CMU Resolution #647
Subsoil tax rate decrease was passed by the Parliament in the first reading
Parliament adopted amendments to the Tax Code to decrease subsoil tax rates
Higher subsoil tax rates were extended
Parliament failed to decrease subsoil tax rates in the second reading.

21. 1,5 years How the industry should never be “treated” again
Changes to the Tax Code were adopted, which "temporarily" raised subsoil tax rates from previous 15% / 28% to
28% / 55%
New Law “On natural gas market” was adopted
Introduced a correction factor of 0.55 to subsoil tax rates for production from new wells
The Parliament adjusted the Tax Code in accordance to the Law “On natural gas market”
July
2014
Nov
2014
Dec
2014
The court overturned the CMU Resolution #647
Feb
2015
March
2015
Apr
2015
Oct
2015
Nov
2015
Dec
2015
1,5 years
Restrictions on purchasing natural gas from non-state-owned companies by large industrial consumers were adopted by the CMU Resolution #647
Subsoil tax rate decrease was passed by the Parliament in the first reading
Parliament adopted amendments to the Tax Code to decrease subsoil tax rates
Higher subsoil tax rates were extended
Parliament failed to decrease subsoil tax rates in the second reading.

22. The industry is very sensitive to unpredictable legislation “updates”
Price and production volume dynamics
$ / ths m3
Subsoil tax decreased
Subsoil tax increased
Источник: НКРЭКУ, Burisma Holdings, НАК Нефтегаз Украины

23. Main issue of today’s agenda
Target gas production in 2020
billion cubic meters
27 Bcm to be produced again in Ukraine by 2020
7 Bcm by private companies and 20 Bcm – by State owned
Total natural gas production
State-owned production
Independent companies production
Source: IHS

24. Key challenges facing Ukraine's energy independence
TAX
Clean and Transparent Functioning of new Gas Market Law
Stability of Taxation for Oil & Gas sector $
Improvement of Regulatory issues
General Investment Climate Improvement and Macro Stability

25. Section 3
Case study

26. COMPOUND ANNUAL GROWTH RATE
Burisma's robust growth pace Is backed by aggressive investment program
Production
Total natural gas in mln m3
50%
COMPOUND ANNUAL GROWTH RATE
CAPEX
USD mln
* Management estimations including production volume from affiliated entities

27. Section 4
Discussion

28. thank you
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