Ukraine Oil & Gas Report Q3 2007

The latest Ukraine Oil & Gas Report from BMI forecasts that the country will account for 6.07% of Central and Eastern European (CEE) regional oil demand by 2011, while providing just 0.50% of supply.

CEE regional oil demand rose to 5.30mn barrels per day (b/d) last year and should average 5.45mn b/d in 2007, before reaching 6.06mn b/d by 2011. Production of 12.41mn b/d last year is forecast to reach 15.06mn b/d by 2011. CEE gas consumption in 2006 was 594bn cubic metres (bcm), with demand of 720bcm targeted for 2011. Production last year of 685bcm should reach 758bcm by the end of the period.

Ukraine's share of gas consumption in 2006 was 11.18%, while its share of production was 2.79%. By 2010, its share of demand is forecast to be 11.22%, with the country accounting for 2.90% of supply.

Global oil demand growth is expected to be around 2.0% this year, with Asia Pacific and the CEE regions dominating. This is an encouraging rate of market expansion, given a relatively uncertain economic picture and high commodity prices. Our oil price projections for 2007 as a whole are revised upwards from the last quarterly report. We are now assuming an OPEC basket price average of US$59 per barrel, compared with the US$55 estimate provided by our last two quarterly reports. Based on recent price differentials, this implies Brent at US$62.83, WTI averaging US$61.25/bbl, and Urals at US$59.42/bbl.

Ukraine's real GDP growth is forecast by BMI at 6.0% for 2007, down from 7.1% in 2006. We are assuming 5.5% growth in 2008, 5.1% in 2009, followed by 5.0% in 2010 and 4.9% in 2011. Reasonable and consistent growth in oil consumption seems likely, averaging approximately 3.0% per annum. This suggests that the country will be consuming around 367,000b/d of oil by 2011. With oil production likely to slip back to just 75,000b/d, Ukraine will require imports of at least 292,000b/d by 2011. BMI forecasts that gas demand will rise from 66.4bcm in 2006, through 69.1bcm in 2007 to 80.8bcm by 2011. Domestic production, largely in the hands of state-owned Naftogaz Ukrainy but with some international oil company (IOC) involvement, should also increase, from 19.1bcm last year to at least 22bcm in 2010/11.

In the BMI Business Environment Ranking matrix, Ukraine now receives a higher composite score of 27, which now ranks the country equal 10th out of 12 states included in the CEE region, alongside Russia.

The overall business environment can be considered unattractive, due largely to a high level of perceived political risk, only moderate progress in deregulation and competition, plus limited growth potential in oil and gas production. The country's reserves-to-production ratio (RPR) is about average for the region, but the prospects, licensing framework and regulatory regime do little to attract investment from leading IOCs.