Ukrainian Government approves PSA terms for two offshore gas fields
The government has approved the terms of product sharing agreements (PSA) for two offshore gas fields in the Black Sea. Exploration and development licenses for the Skifskaya and Forosskaya fields, which measure 16,700 km2 and 13,600 km2 respectively, will be issued for 50 years. The draft PSAs provide for a 70:30 product split between the investor and the state until initial investments are repaid.
Dragon Capital Comments on the news: The most unusual condition of both tenders is an upfront fee of at least UAH 2.4bn ($300m) payable to the state budget. Previous similar tenders for the Prykerchenska offshore field (won by Vanko Prykerchenska) and Yuzivska and Olesska onshore shale gas fields (won by Royal Dutch Shell and Chevron) required no upfront payments. With no history of successful large-scale offshore development and a risky business environment in Ukraine, we think the government may fail to generate strong interest for these tenders based on the existing terms.
According to government estimates, annual production from Skifskaya and Forosskaya may peak at 3-4 bcm and 2-3 bcm respectively. With water depths in these areas reaching 1,500 meters, we think commercial development of these fields can realistically start in 7 to 8 years