Exiled Russian politician to lead rush on Ukraine’s lucrative offshore gas

Ilya Ponomarev, the Russian businessman and exiled, former member of Russian parliament, says that next year could see the start of a rush on untapped natural gas reserves along the Black Sea’s Ukrainian shelf.

While Ukraine has about a trillion cubic meters of gas reserves onshore, more than enough to secure the country’s complete energy independence, its offshore deposits are estimated to be significantly larger and they’re 96 percent undeveloped, experts say.

Despite having some of the world’s largest proven and estimated reserves, gas production in Ukraine has stalled since 1991, stuck at around 20.5 billion cubic meters produced annually, compared to almost 70 billion cubic meters about fifty years ago under the Soviet Union.

Ponomarev, who is widely seen as having become a strong advocate for Ukraine since he permanently left Russia in 2014, says that offshore extraction could be the key to boosting Ukraine’s natural gas production.

He holds the starting pistol for this offshore gas rush and says he has already raised over $200 million in American and European capital for his company to make its first extraction venture into Ukrainian waters.

Energy war ally

With Russia’s controversial Nord Stream 2 gas pipeline into the heart of Europe going ahead – even though it’s widely regarded as a valuable weapon in the Kremlin’s hybrid aggression against the West – Ukraine and Europe both look to reinforce their energy independence.

Experts say that a substantial investment into Ukraine’s offshore, Black Sea gas could frustrate the Kremlin but also aid the whole European region in eventually pivoting away from Russian energy dependency, assuring joint energy security.

“That’s what we want,” said Roman Opimakh, executive director of the Association of Gas Producers of Ukraine, or AGPU. “We’re ready to not only use these large offshore gas reserves to become energy independent ourselves, but also become the backyard of Europe, and to help enhance the energy security of Europe and the entire region.

“This investment is about neutralizing a powerful economic weapon that Putin is using against Ukraine – energy,” said Ponomarev.

When Russian forces illegally took control of Crimea in 2014, they also seized Chernomorneftegaz,or CNG, then a Crimea-based subsidiary of state energy conglomerate Naftogaz. CNG had modest extraction ventures active in the Black and Azov seas, particularly on the Crimean shelf, and was looking to expand operations.

According to Yulia Borzhemska, a regulatory expert with DTEK Oil and Gas – the country’s largest combined energy holding with interests in hydrocarbon energy – CNG was extracting up to two billion cubic meters of natural gas each year from offshore reserves.

The Kremlin put an end to that, seizing the company and later handing it, and billions of dollars worth of equipment – including offshore equipment – to Russian state-owned energy giant, Gazprom, effectively decapitating Ukrainian offshore gas ventures.

But Ponomarev has a plan. In an interview with Kyiv Post he said his next step is to acquire a specific, targeted, U.S. energy company that already produces 20,000 barrels of oil per day and bring that company, with its equipment, engineers and experience, to the Black Sea so that large-scale extraction can quickly get underway.

He declined to name the target company but said negotiations are going well and in their advanced stages.

If this company can acquire the necessary licenses for offshore extraction, as Ponomarev expects it should – and Opimakh says it can – it could boost Ukraine’s current natural gas production by at least 5 billion cubic meters per year, or about 25 percent of the country’s current, total output.

With those talks in the final stages and expected to end with an acquisition in the first quarter of next year, according to Ponomarev, little appears to be standing in the way of his company’s plans.

“We’re doing this now,” he said, adding that almost 90 percent of his investors so far are hedge funds from the U.S. and the remaining 10 percent from Western Europe.

Offshore gold mine

According to experts from companies like DTEK, the country is indeed sitting astride an untapped, underwater mine of valuable energy resources that it hasn’t been able to extract: the investment, required expertise, and infrastructure are very specific.

“Offshore operations are more risky and more expensive than onshore – the weather influences the operations a lot and there is so little infrastructure (in Ukrainian coastal regions) to supply the gas onshore, to treat it and to store it,” said Yulia Borzhemska, a regulatory expert with DTEK.

But, according to Borzhemska, the reward could easily be worth the investment risk: one shallow-watered, 4,000-square-kilometer block, just off the coast of the south-eastern city of Odesa, is home to an estimated 300 billion cubic meters of gas.

Further along the coastline, in shallow waters closer to the Crimean peninsula in the south-east, the gas fields are estimated to be even more wealthy.

“Looking at the neighboring (coastal) countries, for example, Romania, Ukraine could make a great gas discovery in the Black and Azov Sea,” Borzhemska added. “The Ukrainian shelf is only three to four percent explored, which promises lots of opportunities… and the geology of Ukraine’s offshore is also attractive.”

And it’s not as if major, international energy companies have ignored Ukraine’s offshore resources. At one time or another, energy giants like Shell, ExxonMobil and Total, as well as others, have shown considerable interest in Ukrainian gas, with some going as far as signing agreements with the government.

But, for one reason or another, they all left, seemingly frustrated with a lack of progress in the country and nervous about Ukraine’s obnoxious and aggressive neighbor to the east.

“Recently, we’ve seen big changes,” said Borzhemska, who added that attractive royalties and taxation could bring natural gas investors back to Ukraine.

“European integration and the attraction of international investors are firmly on the agenda. Ukraine has made huge efforts to improve the regulatory policy, in order to attract more investors to the upstream (gas) sector.”

Ponomarev leads offshore rush

These days, Moscow has few favored sons here in Kyiv. But Ponomarev – now seen as both an exiled, Russian opposition leader and an important and potentially useful ally to the Ukrainian government – holds court daily at an up-market restaurant next door the country’s Supreme Court.

Flanked by agents from Ukraine’s State Security Service, or SBU – who he says are acting as his protective detail in response to Kremlin-linked death threats – Ponomarev spends most of his days in meetings with others who seem to have an interest in Ukraine’s prosperity.

But there’s also some poetic justice, for Ponomarev, who was essentially exiled from Russia five years ago when he was the only Russian lawmaker, out of 450, to vote against the Kremlin’s illegal annexation of the Crimean peninsula.

When his rigs arrive in the Black Sea, workers will be able to spot Russian flags fluttering on the Crimean coastline as they extract Black Sea gas from the Ukrainian shelf. Whether by careful design or blissful coincidence, Ponomarev now stands to benefit significantly if his new offshore venture in Ukraine’s Black Sea strikes liquid, natural gold.

“In 2014, after I voted against the annexation of Crimea, I was blocked from returning to (Russia) and I was thinking about what to do,” he said in an interview.

“Energy independence is crucial… so I decided to start an oil and gas company that would invest in Ukraine… in 2016 I created that company, Trident Acquisitions,” he said.

Ponomarev says his company was created as a blank cheque, capital-raising company in 2016 and through a May 2018 public listing on the New York Stock Exchange it has so far raised $200 million for oil and gas projects in Ukraine.

On Trident’s board of directors, alongside Ponomarev, is energy executive Edward Verona, formerly vice president of ExxonMobil Russia, banking executive Thomas J. Gallagher, Ukrainian engineer and entrepreneur Gennadiy Butkevich and Russian investment banker Vadim Komissarov serves as the company’s president and CFO.

On Dec. 19, Ponomarev told the Kyiv Post that his company had received word from the government that the authorities were ready to move ahead with open, electronic auctions for offshore extraction licenses as soon as possible, with 16 blocks believed to be full of hydrocarbons up for grabs initially, probably in early 2019.

Troubled waters

Experts say the Kremlin is throttling Ukraine’s energy independence and also wants to assert its control over the Azov Sea, Kerch Strait and the wider Black Sea territories.

It remains to be seen if Russian aggression in and around the Black Sea will derail plans to extract Ukraine’s offshore gas.

“Ukraine does have a significant volume of untapped gas reserves, (but) there is unlikely to be a major gas rush in the near future given the security tensions that have been on display in the Black Sea region in recent months,” said Eugene Chausovsky, senior Eurasia analyst at Stratfor, a U.S.-based geopolitical intelligence agency.

“It’s possible that Russia could seek to expand its control of gas reserves in the area… particularly in the event of a larger military confrontation between Russian and Ukrainian vessels in the Sea of Azov. Moscow will weigh its calculations carefully given that any such actions would likely spur greater sanctions against Russia, but the possibility of such an expansion cannot be ruled out,” he said.

“There’s no considerable security risk to our venture,” said Ponomarev, adding that his investors we’re aware of the situation and that his company had no plans to enter the hotly-contested Azov Sea or operate too close to the coast of Russian-occupied, Ukrainian Crimea, instead preferring to focus on gas-rich waters nearer to Romania.

As for questions related to Ponomarev’s background as a former Russian member of parliament and his convenient move into Ukrainian offshore gas, he says his record on Ukraine speaks for itself.

“Everybody understands my political position and support for Ukraine – other Russian nationals would, of course, be more of a significant concern,” he said, adding that he enjoyed the poetic justice of coming to the aid of Ukraine after his de-facto exile from Russia.

“There are many Russian citizens here: some are true Ukrainian patriots and others are definitely not. It has to be looked at on a case-by-case basis,” he said.

For what it’s worth, Ponomarev’s venture seems to have the tentative backing of the AGPU.

“It sounds pretty good,” said Opimakh, who added that as the investment would originate from American hedge funds it would be subject to robust checks and that New York-based Trident Acquisitions falls under the scrutiny of the U.S. Securities and Exchange Commission, or SEC.

“We support and welcome all kinds of investors into the Ukrainian natural gas sector,” Opimakh added. “As long as the investment isn’t coming from Russia.”