Private gas producers in Ukraine increased production by 18% in 2014, production by state-owned companies fell due to the occupation of Crimea and price distortions

Ukraine produced 20.5 billion cubic meters (bcm) of gas in 2014, down 1.0 bcm compared to 2013. Private companies increased gas production by 18%, to 3.3 bcm. The volume of gas produced by state-owned Ukrgazvydobuvannya remained at the same level as 2013 (15.1 bcm). Ukrnafta gas production in 2014 fell by 10%, to 1.7 bcm. Due to the occupation of Crimea in March, Ukraine recorded only 0.3 bcm of gas production from Chernomorneftegaz, compared to 1.7 bcm in 2013.

The main reason for the divergence of performance by private and public companies was the selling price of gas produced.

Private producers in Ukraine sell their gas at a price of UAH 5,900 (about $350) per thousand cubic meters including royalties, which is about the same price as imported gas in the 4th quarter of 2014. Ukrgazvydobuvannya is forced to sell at UAH 349 UAH (about $20) per thousand cubic meters excluding royalties. According to Naftogaz estimates, Ukrgazvydobuvannya needs a price of $220 per thousand cubic meters excluding royalties to enable investment for the development of new deposits and increase gas production. All gas produced by Ukrgazvydobuvannya is used to cover the needs of Ukrainian households. This provides about 70% of the population’s gas and home heating needs. Naftogaz must import the remaining gas for the population and other privileged categories of consumers at market prices.

Ukrnafta’s ultimate sale price for natural gas it produces is set at UAH 530 (about $30) per thousand cubic meters including royalties. Ukrnafta has repeatedly challenged prices set by the state regulator in court from 2006-2011, claiming that the price does not cover the cost of producing gas. Naftogaz has not received gas produced by Ukrnafta to cover the needs of Ukrainian households since 2012. Naftogaz owns 51% of Ukrnafta but does not exercise operational control over the enterprise.