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Ukraine's Naftogaz eyes upstream, trading expansion in new five-year strategy

Increase font size  Decrease font size Date:2021-02-20   Views:37
Ukraine's state-owned Naftogaz Ukrayiny on Feb. 18 launched a new three-pronged corporate strategy, which will see a major new push into upstream natural gas projects and an expansion of its gas trading capability.

The new strategy is part of plans to transform the company by 2025 and to double its value ahead of an initial public offering.
Since the start of 2020, Naftogaz has been mainly tasked with domestic gas production, supply and trading after its gas transportation business was spun off into a separate company.

Its new strategy will focus on three business areas: gas; business-to-consumer (B2C)/utility; and low carbon energies.

"We have developed a clear action plan until 2025, which should increase the group's value," Naftogaz said in a statement marking the launch of the new strategy.

CEO Andriy Kobolev said part of the plan was to pursue "intensive exploration and development" of new gas fields.

Naftogaz -- through its upstream subsidiary UGV -- produces around three quarters of Ukraine's total gas production of some 20 Bcm/year.

Equity model
Naftogaz received a number of promising upstream licenses last year -- including the major Dolphin Block in the Black Sea -- which has expanded the potential gas resources the company could target by five times to 600 Bcm, it said.

"To fully realize this potential, Naftogaz must invest $20-$25 billion," it said, of which it would invest $7 billion over the next five years.

To finance its most ambitious projects, Naftogaz plans to use an "equity model," it said. This would see Naftogaz taking on the first phase of exploration work by itself, and if successful then bringing in a partner to help finance the project's further development and mitigate risk.

"In a five-year timeframe, such efforts will allow Naftogaz to halt declining reserves and reach a replacement ratio of 100% by 2025," it said.

The group will also develop opportunities for trading gas, it said. "In particular, Naftogaz will enter the European trade market and start trading in forward physical and financial products," it said.

"Thus, Naftogaz will develop its trading opportunities to gain access to more profitable markets and increase its ability to hedge risks."

B2C, low-carbon
The second element of its strategy is working more directly with end users, by developing its B2C business, in order to become a full-fledged vertically integrated company.

In late 2020, the Ukrainian gas market was opened up for households to be able to choose their supplier and since then, Naftogaz said it has been chosen as a supplier by more than 800,000 Ukrainians.

"Our goal is to continue to offer customers high quality services at the best prices," it said, adding it hoped to become a partner for 4 million Ukrainian consumers by 2025, reaching a market share of 35%.

The third element of the new strategy is low-carbon business development, which is part of its target of becoming carbon-neutral by 2040.

"This will be achieved through active investment in emissions reductions and the development of new businesses, such as hydrogen and biofuel production, as well as carbon capture, use and storage," it said.

Naftogaz chief operating officer Otto Waterlander said the new strategy contained "ambitious" goals. He said the company would be able to achieve them "only in the absence of political interference" in the work of the group and the timely award of upstream licenses.

"If we succeed, the Naftogaz group will become a catalyst for economic growth and prosperity of the country," Waterlander said. "We are talking about significant budget revenues, greater partnership opportunities for financial institutions and businesses."
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