Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SOCIO-ECONOMIC POTENTIAL OF UNCONVENTIONAL GAS DEVELOPMENT IN THE KHARKIV REGION

DiXi Group think tank has produced this study in the framework of the project “Strengthening public support for the development of unconventional gas as a component of economic reforms” implemented in the framework of the Ukrainian Unconventional Gas Institute program.

The Ukrainian Unconventional Gas Institute is a project fulfilled by Shell Exploration and Production Ukraine Investments (IV) B.V., in cooperation with the British Council in Ukraine, under the Yuzivska PSA. The program includes studying of non-technical aspects related to exploration and production of unconventional hydrocarbons. The non-technical component is aimed at at promoting exploration and production of unconventional gas in Ukraine, raising awareness and research of industry’s economic, environmental and social influence on the state, regional and local development.

For detailed information see: http://www.shell.ua/innovation/ugi.html

© DiXi Group, 2015 Layout – Taras Mosienko Print – SiLa LLC

SUMMARY TABLE OF CONTENTS

Summary

4

Introduction and Methodology

8

1. Unconventional Gas Potential of the Eastern Region

10

2. Economy of Kharkiv Region

18

2.1. Structure of Industry

19

2.2. Production Capacities

22

2.3. Workforce

25

3. Oil and Gas Sector in the Economy of Kharkiv Region

28

3.1. Development of Oil and Gas Fields and Their Potential

29

3.2. Major Service Companies on the Regional Level

36

3.3. Infrastructure. Gas Transportation and Consumption

41

3.4. Labour Market in the Oil and Gas Industry and Related Sectors

47

4. Unconventional Gas Development in Kharkiv Region

52

4.1. Shell as a Pioneer in Large-Scale Exploration

53

4.2. Prospective Regional Projects to Continue Development

56

4.3. Potential Supply Chain of Exploration and Production

57

4.4. Regional Materials, Services and Labour for Unconventional Gas Production

62

4.5. Economic Trickle-Down Effect of the Regional Unconventional Gas Development

72

4.5.1. Impact of Wellpad Construction

73

4.5.2. Impact of Drilling

78

4.5.3. Impact of Construction and Drilling

82

5. Opportunities for the Companies to Contribute to the Social and Economic Development of Local Communities

90

5.1. Partnership with Local Companies

91

5.2. Cooperation with Educational Institutions in Staff Training for Operators and their Contractors

93

5.3. Social Responsibility and Development of Local Communities

95

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

3

List of tables Table 1: Share of Kharkiv Region in the Ukrainian Economy Table 2: Gross Value Added Structure in Kharkiv Region Table 3: Industrial Production Indices by Types of Activity Table 4: Population in Kharkiv Region and Ukraine Table 5: Kharkiv Region Population in Terms of Economic Activity Table 6: Material Production Data in Mining Industry and Quarrying Table 7: Material Production Data in Selected Categories Table 8: Use of Certain Types of Energy Resources and Refined Petroleum Products Table 9: Natural Gas Consumption Table 10: Employment by Types of Economic Activity Table 11: Average Payroll Number of Employees by Types of Industrial Activity Table 12: Average Nominal Monthly Wages of Full-Time Employees by Types of Industrial Activity Table 13: Production Forecasts for the Yuzivska field Table 14: Employment Impact of Wellpad Construction (1 Well) Table 15: Labour Market Impact of Wellpad Construction (1 Well) Table 16: Indirect Industry Impact of Wellpad Construction (1 Well) Table 17: Employment Impact of Drilling (1 Well) Table 18: Labour Market Impact of Drilling (1 Well) Table 19: Indirect Industry Impact of Drilling (1 Well) Table 20: Labour Market Impact of Construction and Drilling (Project) Table 21: Employment Impact of Construction and Drilling (Project) Table 22: Industry Impact of Construction and Drilling (Project) Table 23: Industries-Donors of Labour Income Table 24: Industries-Donors of Added Value Table 25: Induced Employment Impact of Wellpad Construction (1 Well) Table 26: Total Employment Impact of Wellpad Construction (1 Well) Table 27: Induced Output Impact of Wellpad Construction (1 Well) Table 28: Total Output Impact of Wellpad Construction (1 Well) Table 29: Summary of the Total Economic Impact of Wellpad Construction (1 Well) Table 30: Induced Employment Impact of Drilling (1 Well) Table 31: Total Employment Impact of Drilling (1 Well)

TABLE OF CONTENTS

Table 32: Induced Output Impact of Drilling (1 Well) Table 33: Total Output Impact of Drilling (1 Well) Table 34: Summary of the Total Economic Impact of Drilling (1 Well) Table 35: Induced Employment Impact of Construction and Drilling (Project)

4

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY TABLE OF CONTENTS

Table 36: Total Employment Impact of Construction and Drilling (Project) Table 37: Induced Output Impact of Construction and Drilling (Project) Table 38: Total Output Impact of Construction and Drilling (Project) Table 39: Summary of the Total Economic Impact from Construction and Drilling (Project) Table 40: Summary of the Relative Total Economic Impact from Construction and Drilling (Project) Table 41: Higher Educational Institutions by Type Table 42: Breakdown of Employees by Qualification and Types of Economic Activity

List of figures Fig. 1: Prospective Areas of the Dnieper-Donets Basin for Unconventional Gas Development Fig. 2: Forecast of Gas Production from Different Sources Fig. 3: Shale Rocks Distribution in the Dnieper-Donets Basin Fig. 4: Map for Geological Exploration for Unconventional Gas in Shale Formations of the Eastern Oil and Gas Region Fig. 5: Map for Geological Exploration for Unconventional Gas in Consolidated Rocks of the Eastern Oil and Gas Region Fig. 6: Oil and Gas Production Dynamics in Kharkiv Regiont Fig. 7: Gas Production from New Commercial Wells to be Drilled by 2020 Fig. 8: Annual Gas Production at Kharkiv Region Fields: Forecast by 2020 Fig. 9: Map of Gas Transportation System in Kharkiv Region Fig. 10: Layout of the Yuzivska Field Fig. 11: Licensed Fields in the East of Ukraine Fig. 12: Upstream Value Chain

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

5

Summary Kharkiv region is a key industrial region of Ukraine accounting for more than 47% of national gas production (9.4 bcm in 2014). In 2013, the location quotient for gas production amounted to 7.3 – the number of times by which the region outstripped the standard gas output per population concentration. This industrial sector is of fundamental importance to the regional economy – it accounts for 7% of GRP1 and forms a basis for other sectors: oil and petrochemical industry, energy production sector, pharmaceutical industry and manufacture of construction materials.

Gas production industry has a long-term development potential. In Kharkiv region, there were issued 81 special permits for subsoil use, including 55 permits for commercial development of hydrocarbon fields and 11 permits for their geological exploration. The active well stock in Kharkiv region comprises 1,243 facilities, while the operating well stock comprises 1,184 facilities.

The Shebelynske and Zakhidno-Khrestyschenske unique gas condensate fields have the largest volume of recoverable reserves, but most original C1 proved gas reserves have been already recovered2. In addition to depletion of large fields and outdated material and technical resources, there is one more challenge related to the fact that proved hydrocarbon reserves lie dispersed in small fields.

Development of hydrocarbons in the Dnieper-Donets Basin may be continued in consolidated rock, e.g. in consolidated sandstones. According to different estimates, inferred gas reserves in consolidated sandstones may amount to 1.5 through 8.8 Tcm. Some estimates even suggest that there are 9.4 Tcm. According to the latest published geological data, at least 20% of these amounts are technically recoverable reserves. According to the results of modelling, 22 bcm of gas can be recovered within 5 years following the start of commercial field development. However, in order to start commercial development, it is necessary to implement a comprehensive exploration program which requires availability of modernised infrastructure, knowledge of innovative drilling techniques, qualified personnel, equipment and sufficient investments.

Kharkiv region has a developed infrastructure comprising 979 km of main pipelines and 472.7 km of pipeline branches, 6 compressor stations and 106 gas distribution stations as well as Kehychivske underground gas storage with the working gas volume of 700 mcm. In addition, in the region there is one of the largest facilities for production of light and dark petroleum products – Shebelynske Gas Condensate and Oil Refinery Department, processing nearly 90% of its raw materials.

SUMMARY

A quarter of almost 80 service companies operating in the oil and gas sector work in the east of Ukraine (including Kharkiv region). They include domestic companies (e.g. Ukrburgaz, DC Ukrburservis LLC, Turbogaz PJSC, Region LLC, Burova Technika Research and Technical Enterprise, Vikoil Ltd, Nadra Group, LLC Poltava Drilling Company, Orion Research and Production Enterprise, and others) as well as registered representative offices of Western companies (Schlumberger, Baker Hughes, Halliburton, Weatherford, Saipem) and companies with foreign capital (Service Oil Company).

6

1

According to the Fuel and Energy Department of Kharkiv Region State Administration.

2

Regional Programme for Kharkiv Region Fuel Sector Development for a period till 2020.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY

Until recently, a significant investment project was actively implemented for tight gas exploration in Kharkiv region. Shell and Ukrgazvydobuvannya PJSC jointly drilled two exploration wells: Bilyaivska-400 (Pervomaiskyi Raion) and Novo-Mechebylivska-100 (Blyzniuky Raion). Despite the fact that partner companies decided to stop exploration works under this project, Shell continues to perform works under the Production Sharing Agreement (PSA) for the Yuzivska field with predicted gas resources estimated at 4.054 Tcm. This field covers 7.8 thsd km2 and is located, in particular, in Izium Raion, Balaklia Raion, Barvinkove Raion and Blyzniuky Raion of Kharkiv region. One of the most prospective PSA fields in Kharkiv region is the Slobozhanska field covering around 6 000 km2. Recoverable basincentered gas reserves are estimated at 50 to 70 bcm. In addition, in the region 46 special permits for subsoil use were issued for the fields which may be used for unconventional gas production. In 2014, a list of 17 oil- and gas-bearing subsoil fields in Kharkiv region was announced to be put out to tender in 2015, including 7 fields with the right to perform geological exploration for tight gas.

Such projects would have an important impact on the economy and social sector of Kharkiv region. First of all, construction of necessary facilities and well pads requires much workforce.

Before the start of drilling, performance of construction works worth around 10 mln USD per site will require direct participation of 45 workers (full- and part-time equivalent). The number of indirect employees (engaged in production of heavy equipment, freight transportation, vehicle fleet maintenance etc.), due to additional investment in construction works in the amount of 10 mln USD, will reach 30 persons (full- and part-time equivalent); the induced employment will be another 30 persons. In general, 3 jobs created in the construction sector, in fact, generate 7 jobs in the regional economy. Given 10 mln USD investment in pad construction, additional output in related sectors will amount to 6.25 mln USD. At the stage of drilling which requires substantial short-term mobilisation of financial and labour resources, 1 well will create 72 additional jobs (36 direct jobs, 12 indirect jobs and 24 jobs in related sectors) and will generate 5.3 mln USD of additional output.

Given that an average project involves construction of 7 well pads, each worth 10 mln USD, and drilling 3 to 4 wells per pad (total 21 to 28 wells), total costs will exceed 210 mln USD, taking account of a 30% reduction in the drilling cost during the first year of work.

The effect produced by unconventional hydrocarbon exploration, including pad construction and well drilling, will create 757 indirect jobs in the sectors directly related to construction and drilling. Construction and drilling need a supply chain which will create additional 264 jobs in contracting companies. In general, such project may create more than 1,000Â jobs (fulland part-time equivalent), 75% of which will be created directly in construction and drilling companies and another 26% will be created in supporting companies. The outlined standard project will create employment opportunities in the areas of oil and gas operations support (84 jobs), law services (around 30 jobs), building maintenance (11 jobs), wholesale (10 jobs) and other sectors.

The induced impact of the project will create another 511 related jobs due to increased demand for consumer goods caused by growing wages and payments in drilling, construction and related sectors. About 16% of these jobs will be created in restaurants and other catering facilities (shops, markets, cafes), 12.3% – in insurance, financial and legal services and real Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

7

estate sectors, 11.7% – in non-food retail, and 6.5% – in education, employment and other service sectors.

Therefore, an upstream project of such a size will create 1,532 jobs and 66.764 mln USD of additional output. Every 100 USD invested in construction and well drilling will generate 156.1 USD in the regional economy: 100 USD directly for the oil and gas sector (construction and drilling), 24.3 USD for suppliers to construction and drilling companies, and 31.8 USD for companies receiving co-benefits.

In more than 35 sectors, the largest output will be obtained by drilling and construction companies and their suppliers (72.4%), B2B service companies (6.7%), companies providing services to both business and public (3.5%) as well as companies providing individual services (7.5%).

The predicted effect has been modelled only for construction of 7 well pads, each worth 10 mln USD, and drilling 3 to 4 wells per pad (total 21 to 28 wells involving investment in the amount of 250 mln USD). Specified amounts do not include the cost of construction of additional infrastructure: pipelines, processing facilities and other relevant assets. Nevertheless, even predicted results can be achieved, provided that the regional labour market fills the potential vacancies.

It is important to note that most investments by production companies in the regional economy are made at the level of raions and communities situated around the extraction site. As a rule, corporate social responsibility policy provides for the partnership with local companies. For example, Shell undertook to choose Ukrainian goods, works and services, provided that equal or better terms and conditions concerning price, time schedules, quality, supply terms and other criteria as well as conformity to international standards are ensured. At the existing facilities, most main works (pad construction, service water well drilling, supply of slabs and fuel, equipment delivery, security services, construction camp arrangement and maintenance, and associated works) were performed by Ukrainian contractors.

SUMMARY

To perform more complicated works which require higher qualification, professionals from foreign companies are mainly engaged. At the same time, companies implement their own training programs and offer internship for graduate students. Kharkiv region is a powerful scientific and educational centre comprising 56% of core scientific and technological capacities, 15% of all Ukrainian research institutes, 20% of design companies, and more than 16% of research scientists. Within the framework of cooperation with V. N. Karazin Kharkiv National University (KhNU), Shell spent 300 000 USD (including 200 000 USD on the purchase of equipment) on development and launching of the Master’s degree program in occupational safety engineering. This integrated program is designed on the basis of three KNU departments: Geology and Geography Department, Ecology Department and Chemistry Department. Shell also supports research activities, including academic research as well as research by companies, think tanks and civic society organisations.

Direct social investments for the benefit of citizens are relatively new for Ukraine. State-owned companies mostly care about their employees’ welfare, while most private companies point out to their payment of taxes and levies, including local taxes, as a form of obtaining a “social 8

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY

license”. Western standards applied by Shell in Kharkiv region are based on a dialog with the representatives of local communities situated near hydrocarbon exploration site.

Based on local proposals agreed with the raion authorities, Shell spent minimum 2.7 mln UAH on implementation of such projects as replacement of heating systems and roofs in schools, overhaul of kindergartens, street lighting installation, road repair, purchase of drugs for raion hospitals, and construction of artesian well for drinking water supply. As for the Yuzivska project, Shell obligations related to social investments provide for spending at least 2 mln USD per year in such fields as education, health care, environmental protection, ensuring access to quality drinking water, development of entrepreneurship, road traffic safety, and public culture. Thus, under this project central raion hospitals and rural first aid stations in the Izium Raion and Barvinkove Raion of Kharkiv region received medical equipment worth around 200 000 USD.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

9

Introduction and Methodology DiXi Group think tank prepared this study under the Project “Strengthening public support for the development of unconventional gas as a component of economic reforms” implemented in the framework of the Ukrainian Unconventional Gas Institute program jointly with Shell Exploration and Production Ukraine Investments (IV) B.V. and the British Council.

The aim of the project is strengthening public awareness of potential social and economic benefits of unconventional gas development in one of the Ukrainian regions, namely in Kharkiv region.

Key project objectives include:

• Introducing in Ukraine best experience and practices of other countries related to assess-

ment and measurement of potential social and economic impact of unconventional gas development; establishing sustainable partnership between scientists and experts from the U.S. and Ukraine; obtaining knowledge and skills required for data collection and analysis.

• Using available data and experience obtained to create new knowledge of social and economic benefits of unconventional hydrocarbon development in Kharkiv region.

• Strengthening public awareness; extending social base of beneficiaries to cover local public

officials and active community members in the fields which are used or planned to be used for unconventional gas development.

INTRODUCTION AND METHODOLOGY

In order to complete the study, an international group of scientists and experts from the U.S. and Ukraine was created, which provided a substantial support in obtaining knowledge and skills required for data collection and analysis as well as for appropriate completion of the study. In particular, the group included Dr. Iryna Lendel, the Assistant Director of the Centre for Economic Development at the College of Urban Affairs at Cleveland State University, and Vitaliy Filenko, the Chairman of the Board at Nova Energia NGO (Kharkiv).

The Project team has explored available databases of public authorities and their territorial offices in Kharkiv region, also by means of filing requests for public information access. We have also studied the results of existing surveys involving social and economic component analysis as well as data collection practices under similar projects implemented abroad. In addition, we have analysed media reports in respect of calculation of social and economic indices related to unconventional gas development or associated activities. Finally, we applied best practices of economic analysis used at the level of U.S. states (input-output models, such as IMPLAN or RIMS) adapted to Ukrainian reality3.

This study covers most parameters of social and economic development at the regional level.

First of all, our analysis focuses on the potential of Kharkiv region subsoil for unconventional gas development. Next large section discusses characteristics of the regional economy and the place of gas production sector within its structure. Then, we dwell on current and planned unconventional hydrocarbon exploration projects.

3

10

I n particular, instead of regional purchase coefficients (RPCs), the analysis focuses on assessment of potential outflows of funds to other regions or countries, i.e. it determines the value of products which may be supplied outside the region, thus leading to outflows. For more details, see Section 4.4.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY INTRODUCTION AND METHODOLOGY

Discussing social and economic impact of such activities, we consider potential participation of local companies in the capacity of contractors, engagement of local workers, goods and services, and a general economic effect. Finally, to underpin our reasoning, we site specific examples of Shell activities as a pioneer company in the field of large-scale unconventional gas development in Kharkiv region.

Given the level of data aggregation, availability and comparability with equivalent American parameters4, the analysis focuses on two levels – the region (Kharkiv region) and the standard upstream project. More detailed characteristics and modelling do not seem feasible at this stage as there is no possibility to obtain reliable data not only at the level of local communities, but also at the level of raions. For this purpose, it is possible to use the achievements of the Project “Geo-information system for monitoring the impact of hydrocarbon exploration and production projects on the development of local communities in Kharkiv region” implemented by the Association of Local Self-Government Bodies in Kharkiv region, Research Park “Radio Electronics and Informatics” and the Research Centre for Industrial Development Problems of the National Academy of Sciences of Ukraine5.

There is one more restriction: we use 2013 as a base period. It is related to the availability of comprehensive data for this period as 2013 is the last full period in the feedback from local administrations and public authorities. However, if available, we use more recent data (for 9 or 11 months of 2014 or as of a specific date in 2015). At the same time, given sharp changes in the economy and social life in 2014, we use 2013 as a base period when comparing certain parameters.

4

F or example, the use of the National Classifier of Ukraine DK 009:2010 “Classification of Types of Economic Activity” does not provide for sufficient disaggregation of types of activity, especially in the oil and gas sector.

5

http://gasmonitoring.org.ua/

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

11

Section 1

UNCONVENTIONAL GAS POTENTIAL OF THE EASTERN REGION

12

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS POTENTIAL OF THE EASTERN REGION

Fig. 1: Prospective Areas of the Dnieper-Donets Basin for Unconventional Gas Development Source: Viable Opposition, Ukraine’s Oil and Natural Gas Reserves – A Pawn in Geopolitical Chess Game?, March 16, 2014, http:// viableopposition.blogspot.com/2014/03/ukraines-oil-and-natural-gas-reserves.html

The updated Energy Strategy of Ukraine for the Period till 2030 (2013 version) specifies potential conventional gas resources which currently amount to 5.4 Tcm (including recoverable resources in the amount of 1.1 Tcm). As for unconventional gas6 and offshore gas in the Black Sea outer continental shelf, estimates differ due to the lack of comprehensive geological data. They were made on the basis of primary data, tentative forecasts and comparison with global practices.

Therefore, inferred tight gas resources are estimated at 2 to 8 Tcm, shale gas resources are estimated at 5 to 8 Tcm (technically recoverable resources amount to 1 through 1.5 Tcm), coal bed methane resources are estimated at 12 to 25 Tcm. Gas production forecasts for 2030 provide for 7 to 9 bcm, 6 to 11 bcm and 2 to 4 bcm accordingly7.

According to the U.S. Energy Information Administration, inferred free reserves of tight gas amount to 48 Tcf (1.36 Tcm), including 12 Tcf (340 bcm)8 of technically recoverable reserves.

Such modest estimates can be attributed to the need to take account of risks associated with development of faults in cut-off parts of the Dnieper-Donets Basin, its depth and not fully understandable level of reservoir saturation.

As for coal bed methane, its potential, according to the IEA estimates, is up to 3 Tcm9. According to the Institute of Geological Sciences of the National Academy of Sciences of Ukraine, coal mine methane resources amount to 13 Tcm, while the geologists of Nadra Ukrayny National Joint Stock Company estimate shale gas reserves at 4 bcm10.

The appraisal of shale gas reserves of the Eastern oil- and gas-bearing region of Ukraine carried out by Ukrnaukageotsentr SE at the request of the State Service for Geology and From a geologic perspective, unconventional gas is classified into different types: shale gas, tight gas, coal bed methane etc., depending on reservoir characteristics (permeability, depth, thickness etc.).

6

7

Ministry of Energy and Coal Industry of Ukraine. The Updated Energy Strategy of Ukraine for the Period till 2030. Public Discussion Draft, 2012.

8

Idem.

9

International Energy Agency. Golden Rules for a Golden Age of Gas, 2012

10

http://dt.ua/ECONOMICS/terra_incognita_dlya_energoinvestoriv-77201.html

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

13

80 70 Unconventional gas (base scenario)

Annual production (bcm)

60 50

Low-permeability gas reservoirs

40 30

Development of new resources

20 10 0

Existing fields (decline)

2 0 0 5

2010

2015

2020

2025

2030

2035

Fig. 2: Forecast of Gas Production from Different Sources (basic scenario) Source: Press Service of the Ministry of Energy and Coal Industry of Ukraine

Mineral Resources of Ukraine (Derzhgeonadra) shows the figure of 9.4 Tcm11. Detailed modelling of unconventional gas production can be found in the survey carried out by international company ІНS CERA at the request of the Ministry of Energy and Coal Industry of Ukraine. The experts came to the conclusion that by 2035 Ukraine will be able to extract 60 to 70 bcm of gas per year or even more, provided that there is sufficient investment12. In addition to capital investments in the amount of 10 bln USD per year, necessary conditions for implementation of this scenario include the gas market reform, legal framework amendment, improvement of business environment, in particular, taxation, and especially predictable government policy13. Unconventional gas resources will be developed at a slow rate as annual investments required to start their exploration amount to 2 through 3.5 bln USD14.

According to the conservative scenario, IHS CERA predicts that the production of shale gas and coal bed methane will start in 2015. It will allow to achieve, by 2025, a sustainable target of 25 bcm, according to the base scenario, or even over 30 bcm, according to the optimistic scenario15. According to the company’s analysts, tight gas development (in particular, in low-permeability sand reservoirs) will start in 2013, allowing to extract 9 bcm in 2025 and 16 bcm in 2035. According to IHS CERA, total conventional gas resources are estimated at 2.88 Tcm and unconventional gas resources (shale gas and coal bed methane) are estimated at more than 11.5 Tcm16. Ultimate recoverable reserves of tight gas are estimated at 1.5 to 8.5 Tcm, 20% of which (at least 300 bcm) are technically recoverable reserves17.

SECTION 1

Interesting forecasts and relevant modelling for the next 20 years were made by the group of experts at the request of the U.S. Agency for International Development (USAID). Thus, according to the reference scenario, unconventional gas production will start in 2015 and the

14

11

http://shalegas.crdfglobal.org/Documents/Panchenko_Ukrnaukageotsentr%20(ukr).pdf

12

http://mpe.kmu.gov.ua/fuel/control/uk/publish/article?art_id=221425&cat_id=35109

13

IHS CERA. Special Survey “Natural Gas and Energy Future of Ukraine”, 2012.

14

Idem.

15

Idem.

16

Idem.

17

Idem.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

Sumy

SUMMARY UNCONVENTIONAL GAS POTENTIAL OF THE EASTERN REGION

Sumy region

Luhansk region Kharkiv

Luhansk Kharkiv region Poltava Poltava region Dnipropetrovsk region

Donetsk region

Fig. 3: Shale Rock Areas in the Dnieper-Donets Basin Source: presentation materials by P. Holub, Director General of Ukrnaukageotsentr SE

production will amount to 22 bcm within 5 years and 97 bcm within 20 years. To achieve these targets, it is necessary to drill 44 and 729 well clusters accordingly, which requires investment in the amount of 2 to 9 bln USD per year18. According to the forecasts, domestic gas production may increase twice within 5 years and will exceed consumption within 15 years, making it possible to export gas.

However, such large-scale production requires from Ukraine to have improved infrastructure and drilling technologies, better qualified personnel, and more equipment to carry out hydraulic fracturing. Otherwise, according to the pessimistic scenario, commercial production will start only in 2027.

Calculations made by the Institute for Economics and Forecasting of the National Academy of Sciences of Ukraine show similar results: in case of correct and balanced policy, Ukraine has the chance to drop gas imports to zero in 2024. However, even in case when the dependence upon external supplies is preserved, shale gas production will amount to 7.5 bcm in 203019. By the way, according to all scenarios, unconventional gas is considered to be competitive fuel and its development is deemed to be cost-effective.

According to the latest estimates by Nadra Ukrayny NJSC, scientifically proved predicted resources of unconventional hydrocarbons amount to 39.4 Tcm, including:

• s hale gas – 14.3 Tcm; • b asin-centered gas – 8.5 Tcm; • t ight gas – 5 Tcm; • c oal bed methane – 11.6 Tcm

.

20

As a result of geological and geophysical data processing, direct measurement of core tail gas and organic matter content, and comprehensive analysis of research findings, including by means of the American ΔLogR method, Ukrnaukageotsentr SE of Nadra Ukrayny NJSC defined 5 key shale rock areas21 for geological exploration and production: 18

Environmental and Regulatory Assessment for Shale Gas Development in Ukraine. Executive Summary, 2012.

19

Idem.

20

http://irbis-nbuv.gov.ua/cgi-bin/irbis_nbuv/cgiirbis_64.exe?C21COM=2&I21DBN=UJRN&P21DBN=UJRN&IMAGE_FILE_DOWNLOAD=1&Image_ file_name=PDF/Mru_2014_4_8.pdf

21

http://gcenter.net.ua/news/%D0%94%D0%BE%D0%BF%D0%BE%D0%B2%D1%96%D0%B4%D1%8C%20%D0%93%D0%B5%D0%BD%D0%B5 %D1%80%D0%B0%D0%BB%D1%8C%D0%BD%D0%BE%D0%B3%D0%BE%20%D0%B4%D0%B8%D1%80%D0%B5%D0%BA%D1%82%D0%BE %D1%80%D0%B0%20%D0%93%D0%BE%D0%BB%D1%83%D0%B1%D0%B0%20%D0%9F%D0%B5%D1%82%D1%80%D0%B0%20%D0%A1 %D0%B5%D1%80%D0%B3%D1%96%D0%B9%D0%BE%D0%B2%D0%B8%D1%87%D0%B0.pdf

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

15

Fig. 4: Map for Geological Exploration for Unconventional Gas in Shale Formations of the Eastern Oil and Gas Region (S. Vakarchuk and others, 2014)

Legend priority areas for geological exploration prospective areas for gas in shale formations based on the Tectonic Map of the Dnieper-Donets Depression (Ye. Dvorianyn and others, 1996)

• I - the Kybyntsivsko-Blyzniukivska area (Dnipropetrovsk region, Kharkiv region and Poltava region) with resources in the amount of 2.7 Tcm;

• I I - the Valiukhivsko-Vedmezhanska area (Sumy region, Poltava region and Kharkiv region) SECTION 1

with resources in the amount of 2.4 Tcm;

16

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS POTENTIAL OF THE EASTERN REGION

• I II - the Petrivsko-Berestianska area (Kharkiv region and Donetsk region) with resources in the amount of 1.9 Tcm;

• I V - the Makiivsko-Kruzhylivska area (Luhansk region) with resources in the amount of 1.1 Tcm;

• V - the Folded Donets Basin with reserves in the amount of 1.3 Tcm. Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

17

Fig. 5: Map for Geological Exploration for Unconventional Gas in Consolidated Rocks of the Eastern Oil and Gas Region (S. Vakarchuk and others, 2014)

Legend priority areas for geological exploration prospective areas for gas in shale formations based on the Tectonic Map of the Dnieper-Donets Depression (Ye. Dvorianyn and others, 1996)

An interesting estimate was made by the Institute of Geology of Taras Shevchenko University and Naftogaz of Ukraine NJSC. It suggests that in the Eastern oil- and gas-bearing region of Ukraine there are the following predicted resources: tight gas – 3 to 4 Tcm; shale gas – 10 to 12 Tcm; shale oil –300 to 350 mln tons22.

SECTION 1

22

18

. A. Mykhaylov, S. A. Vyzhva, P. M. Chepil. Shale gas and other unconventional sources of hydrocarbons in Ukraine: state of the problem and V production prospects// Use of mineral resources in Ukraine. Investment prospects. Materials of the First Research and Practice Seminar (10–14 October 2014, Truskavets). State Commission of Ukraine on Mineral Reserves (DKZ), Kyiv, DKZ, 2014.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS POTENTIAL OF THE EASTERN REGION

One of the most important research activities in the last years involved preparation of the lithostratigraphic diagram of main strata of Paleozoic shale and consolidated rocks prospective for gas exploration in the Dnieper-Donets Depression as developed since 2012 by the group of scientists at the Institute of Geological Sciences of the National Academy of Sciences of Ukraine under the supervision of S. Vakarchuk23.

23

http://irbis-nbuv.gov.ua/cgi-bin/irbis_nbuv/cgiirbis_64.exe?C21COM=2&I21DBN=UJRN&P21DBN=UJRN&IMAGE_FILE_DOWNLOAD=1&Image_ file_name=PDF/znpign_2012_5_25.pdf

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

19

Section 2

ECONOMY OF KHARKIV REGION

20

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

ECONOMY OF KHARKIV REGION РЕЗЮМЕ

2.1. Structure of Industry Kharkiv region is an important industrial and agricultural centre of Ukraine. In JanuaryNovember 2014, Kharkiv region ranked 6th in Ukraine by the volume of industrial products sold. During 11 months of 2014, the industrial enterprises in the region sold industrial products and performed industrial works and services for the amount of 64.7 bln UAH accounting for 6.1% of the national volume of industrial products sold24. According to the Fuel and Energy Department of Kharkiv region State Administration, the gas production sector accounted for 7% of the gross regional product (GRP) in 2014.

The regional industry comprises all major types of activities, including the following priority fields: manufacture of food products, beverages and tobacco products, manufacture of machinery, electricity, gas, steam and conditioned air supply, and mining industry. These sectors account for 71% of the volume of industrial products sold.

Despite the fact that in January-November 2014 the industrial production index dropped down to 95.2% (as compared to the national index of 89.9%), it was by 14.1% (8 bln UAH) higher than during the same period in 201325. Kharkiv region is affected by the complicated political and economic situation in Ukraine, financial crises and exchange rate fluctuations which result in termination of long-standing contractual relationship, loss of traditional sales markets and decrease in domestic demand.

Table 1: Share of Kharkiv region in the Ukrainian Economy (in 2013)26

Manufacture of specific types of industrial products, agriculture, research and development, education

Share of Kharkiv region in the Ukrainian economy in 2013, %

Location Quotient (by share of population)

66

11.00

Natural gas in liquefied or gaseous state

43.8

7.30

Natural gas condensate recovered from natural gas reserves

19.9

3.32

Groats

19.3

3.22

18.3

3.05

17.7

2.95

16.2

2.70

16

2.67

Number of Doctors of Sciences (Ukrainian scientific title)1

13.7

2.28

Number of Candidates of Sciences (Ukrainian scientific title)1

13.7

2.28

Margarine and similar edible fats

13.1

2.18

Cement

12.5

2.08

Centrifugal pumps for liquids; other pumps

Volume of own scientific works and research and development works performed by organisations Financing of internal expenses for scientific works and research and development works Number of contractors engaged in scientific works and research and development works Number of organisations engaged in scientific works and research and development works

24

According to the Programme for Economic and Social Development of Kharkiv Region for 2015.

25

http://www.investment.kharkov.ua/uk/novini/1192-pro-obsyagi-realizovanoji-promislovoji-produktsiji-kharkivskoji-oblasti.

26

F rom now on, statistical tables or data for statistical calculations have been taken from: Statistical Yearbook “Kharkiv Region in 2013”, Main Statistical Office in Kharkiv Region, 2014.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

21

Manufacture of specific types of industrial products, agriculture, research and development, education

Share of Kharkiv region in the Ukrainian economy in 2013, %

Location Quotient (by share of population)

Number of higher educational institutions of the ІІІ-IV accreditation levels

11.4

1.90

Number of students in higher educational institutions of the ІІІ-IV accreditation levels

10.9

1.82

Flour

10.7

1.78

Number of students, persons

10.2

1.70

Yogurt and other fermented or cultured milk and cream

10.1

1.68

Sunflower

10.1

1.68

Universal motors of an output exceeding 37.5 W; other AC motors; AC generators

9.6

1.60

Building blocks and bricks of cement, of concrete or of artificial stone

9.3

1.55

Number of institutions

8.7

1.45

Pneumatic elevators and conveyors and other continuous-action elevators and conveyors, for goods or materials

7.8

1.30

Crude sunflower-seed oil and fractions thereof

7.2

1.20

Vegetables

7.2

1.20

Number of higher educational institutions of the I-ІІ accreditation levels

6.9

1.15

Cereals

6.7

1.12

Associated petroleum gas recovered from oil deposits

6.6

1.10

Number of students in higher educational institutions of the I-ІІ accreditation levels

6.6

1.10

Vegetable products

6.3

1.05

Eggs

6.2

1.03

Gross agricultural output

5.8

0.97

Number of students

5.2

0.87

Milk

4.7

0.78

Crude oil, including oil obtained from bituminous minerals

4.6

0.77

Animal products

4.6

0.77

Potato

4.5

0.75

Number of institutions

4.4

0.73

4

0.67

Meat (live weight)

3.8

0.63

Factory beet

3.6

0.60

Processed liquid milk

3.2

0.53

3

0.50

Fat cheeses

2.9

0.48

Wool

1.8

0.30

Non-alcoholic drinks

1.6

0.27

Fruit and berries

White beet sugar crystals

Regional economy of the Kharkiv region has a diverse structure. Though it is known for a high share of agriculture, it also supplies natural gas and gas condensate to other regions of Ukraine. Table 1 shows a share of basic products manufactured in the region in Ukraine’s overall production. The list is arranged by location quotient27 which indicates the products

SECTION 2

27

22

L ocation quotient (LQ) is a valuable way of quantifying how concentrated a particular industry is in a region as compared to the nation. It can reveal what makes a particular region “unique” in comparison to the national average. In more exact terms, location quotient is a ratio that compares a region to a larger reference region according to some characteristic or asset. Suppose X is the amount of some asset in a region (e.g., manufacturing jobs), and Y is the total amount of assets of comparable types in the region (e.g., all jobs). X/Y is then the regional “concentration”

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OF KHARKIV REGION ECONOMY

manufactured in the sectors forming the economic base of the region, i.e. the industrial sectors that manufacture products intended not only for regional use, but also for other regions of Ukraine and, possibly, for export abroad.

In the Kharkiv region, the concentration of hydraulic pump production is 11 times higher than the population concentration. Though only a part of these products is used in the oil and gas sector, it shows the potential in terms of equipment, knowledge and qualified workforce to enhance the base to cover supplies for oil and gas production and related industrial sectors, if necessary.

In 2013, the natural gas production in the region was 7.3 times higher than the population concentration. It means that the gas production industry is a part of the regional economic base and the region is a major “exporter” of natural gas to other regions of Ukraine. Same as for natural gas, the location quotient for condensate is 3.3, which indicates its potential for export to other regions.

Another resource, associated petroleum gas recovered from oil deposits, has the concentration index of 1.1, which means that its regional production is sufficient for own use. At the same time, the oil production is insufficient to meet the needs of the region (0.77), i.e. about 23% of oil is imported to the Kharkiv region from other regions of Ukraine (or from abroad).

The research and development sector is one of the most important related sectors which support oil and gas development in the Kharkiv region. This fact is confirmed by a high value of the location quotient for own scientific works and research and development works performed by organisations (3.05); expenses for scientific works and research and development works (2.95); number of contractors engaged in scientific works and research and development works (2.7); number of organisations engaged in scientific works and research and development works (2.67); number of Doctors of Sciences (2.28), and number of Candidates of Sciences (2.28). These scientific resources may be used when developing technologies throughout the whole value added creation chain in the oil and gas sector: during drilling and production, construction of efficient infrastructure (pipeline systems, oil and gas processing facilities), and especially during development of technologies for the use of oil and gas as energy sources and raw materials for petrochemical and chemical industries, being energyintensive sectors of the Ukrainian economy. Together with the neighbouring Poltava Region, this region has abundant natural resources, human assets and experience in oil and gas production which may help it become a centre for energy development of the country.

In support of this statement, the following goods which may be used for contracting works in the oil and gas sector have higher than the average in Ukraine concentration index values: cement (2.08), electric motors (1.60), blocks and bricks of cement (1.55), elevators and conveyors (1.3).

At the same time, the volume of regional sales depends significantly on the activities of the limited scope of enterprises. The following enterprises account for around 40% of the volume of industrial products sold in region: Philip Morris Ukraine PrJSC, Kharkivoblenergo JSC, of that asset in the region. If X’ and Y’ are similar data points for some larger reference region (like a state or nation), then the LQ or relative concentration of that asset in the region compared to the nation is (X/Y) / (X’/Y’). The location quotient above 1.0 (in practice above 1.2 to avoid economic noise impact) means that this industry or product is produced for consumption not only inside the region but also sold in other regions of the country. The location quotient below 1 is usually means that this product is imported to the region from other regions of the country or from other countries. In our case, we compare the concentration of each product in Kharkiv region to a concentration of population.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

23

Zmiivska Thermal Power Plant of Centrenergo PJSC, Shebelynske Gas Condensate and Oil Refinery Department, Shebelinkagazvydobuvannya Gas Production Division, Kharkiv Branch of SUN InBev Ukraine PJSC, Eurocement-Ukraine PJSC, Turboatom PJSC, Kharkiv Combined Heat and Power Plant No. 5 PJSC, and Plant Electrotyazhmash SE. Situation at these enterprises has a direct impact on the performance indicators of Kharkiv region industry.

2.2. Production Capacities Changes in the industrial production dynamics allow to control Kharkiv region capacity and availability of hydrocarbon reserves for potential development. According to the regional economic analysis, during 11 months of 2014, the machinery production was by 12.4% lower as compared to the same period in 2013 (January-November). It can be attributed to several factors. In particular, they include lack of determination of industrial development priorities at the governmental level, absence of decisions concerning “a wide range of pressing issues related to activities and prospects of development of state-owned industrial enterprises”, delay in financing of state defence orders, aviation sector crisis, increased prices for petroleum, oil and lubricants, raw materials and accessories, imposition of the energy consumption limit, and decrease in export supplies, including to Russia.

The Russian Federation is the main export market for the products manufactured by Plant Electrotyazhmash SE, Electromashyna PJSC, Kharkiv Machine Building Plant “FED” SE, Izium Instrument-Making Plant SE, Aviacontrol PrJSC, Vovchansk Aggregate Plant PJSC, Research and Production Enterprise Teploavtomat PJSC, and ROSS LLC. The share of products manufactured by these enterprises to be exported to the Russian market was 70 to 80%. As a result, the enterprises experience a scarcity of working capital and investment project scrapping28.

At the same time, the following major enterprises in region showed a rise in production: Turboatom PJSC, Kharkiv Tractor Plant PJSC, Ukrainian State Centre for Operation of Specialized Cars SE, Kharkiv State Aircraft Manufacturing Company, Svitlo Shakhtarya PJSC, and Traktorodetal Lozova Plant PrJSC. The production of rubber and plastic products and other non-metallic mineral products declined by 4% due to decrease in the production of construction products (by 3.2%) and of rubber and plastic products (by 5.6%). There was observed a reduction in the production of cement, mortars and tiles by the sector major enterprises – Eurocement-Ukraine PJSC, Henkel Bautechnik Ukraine Branch, Kharkiv Tile Plant PJSC which account for 36% of the sector production. Among key factors contributing to the production decline, manufacturers cite reduction in the volume of construction in Kharkiv and region, decrease in the number of orders and in consumers’ paying capacity.

SECTION 2

The situation in other industrial sectors in region, such as manufacture of textiles, manufacture of wearing apparel, leather and leather products, manufacture of wood products, manufacture of paper and printing, manufacture of metals and manufacture of fabricated metal products accounting for a small share in the volume of industrial products sold (1.3%, 4.1% and 3.2% accordingly) is characterized by decline in production (by 10.5%, 5.6% and 14.2% 28

24

According to the Programme for Economic and Social Development of Kharkiv region for 2015.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OF KHARKIV REGION ECONOMY

accordingly). The slowdown in production growth in the aforementioned sectors is caused by intense competition from foreign and domestic like products, low demand and paying capacity, high taxes, lack of raw materials and supplies, outdated equipment and absence of well-run product distribution system.

The analysis of the structure of sectoral gross value added at the regional level assesses dependence of the region upon specific sectors in terms of financial indicators and, consequently, employment. According to the dynamics observed during 2010-2011, the share of production and processing industries slightly dropped (by 0.2% and 1.5% accordingly), while the share of agriculture increased by 2.7%.

Table 2: Gross Value Added Structure in Kharkiv region

Gross value added 2010 2011 Agriculture, hunting and forestry Fishery and fish farming Mining industry

6.4 % 0.0 % 3.1 %

9.1 % 0.0 % 2.9 %

Processing industry Electricity, gas and water production and distribution Construction Trade, repair of motor vehicles, household items and personal demand items Restaurants and hotels

14.8 % 3.5 % 3.8 % 15.4 % 0.8 %

13.3 % 3.9 % 3.6 % 16.9 % 0.8 %

Transport and communication Finance Real estate, lease, engineering and services to entrepreneurs Public governance Education Health care and social assistance

9.8 % 14.7 % 11.4 % 4.6 % 6.4 % 3.4 %

10.6 % 10.4 % 12.8 % 4.2 % 6.3 % 3.3 %

Utility services and personal services; culture and sport activities; household activities; activities of extraterritorial bodies

1.8 %

1.9 %

In addition, the gas sector index dropped from 179.5 in 2006 to 150.1 in 2010. In 2012, it declined to 100 and remained at this level during 2013. The same trend was observed in other industrial sectors as compared to their indices in 2005 and 2010.

Table 3: Industrial Production Indices by Types of Activity (percentage as compared to the previous year)

2005

2010

2011

2012

112.5

105.8

105.5

97.6

Mining industry

100.1

100.4

94.4

98.1

Production of mineral fuels

99.9

98.9

93.8

99.1

Production of mineral resources other than fuels

104.1

161.3

110

75.9

Processing industry

114.9

104.2

106.3

96.8

Manufacture of food products, beverages and tobacco products

119.8

93.5

95.4

99.6

Consumer goods industry

122.3

112.8

123.3

98.8

Manufacture of fur and fur products

125

Industrial sector

117.7

123.1

101.3

Manufacture of leather and articles of leather and other materials 104.8

80.5

125.3

75.8

Wood processing and manufacture of wood products, except furniture

124.6

123.6

100.6

97.8

Manufacture of pulp and paper; publishing

129.6

86.9

95.3

111.4

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

25

2005

2010

2011

2012

112.5

105.8

105.5

97.6

Manufacture of coke and refined petroleum products

110.8

91.9

99.5

99.3

Chemical and petrochemical industry

111.1

104.9

108.8

91.9

Manufacture of chemicals

111.2

103.3

100.8

93.3

Manufacture of rubber and plastic products

110.8

110.8

136.3

89

Manufacture of other non-metallic mineral products

131.4

95.1

116.2

77.5

Manufacture of fabricated metal product

127.9

116.6

123.3

113.3

Machine building industry

104.8

124.4

115.7

95.3

Manufacture of machinery and equipment

107.2

124.7

117.4

95.1

Manufacture of electric, electronic and optical products

103.9

119

115.9

107.9

Manufacture of vehicles and equipment

100

132.6

112.2

76.7

Other industrial sectors

103.2

128.4

103.4

101.5

Electricity, gas and water production and distribution

96.8

118

108

101.5

Industrial sector

SECTION 2

While the industrial production index for Kharkiv region, on the average, dropped from 112.5 in 2005 to 97.6 in 2012 (by 15.4%), during the same period the production of mineral fuels declined from 100.1 to 98.1 (by 2% only) and the processing industry output declined from 114.9 to 96.8. Most sectors of mining industry and recovery-related capacities showed higher growth rate, while the production of machinery and equipment was higher in 2010-2011.

Before 2012, the industrial production index dropped in all industrial sectors and still continues to drop, however, due to other factors29.

29

26

Statistical data indicated according to the Main Statistical Office in Kharkiv Region.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OF KHARKIV REGION ECONOMY

2.3. Workforce Kharkiv region is one of the most populated regions of Ukraine. The region is traditionally oriented towards agriculture and industrial production with a high demand for labour resources, that’s why it used to offer excellent employment prospects to its potential inhabitants.

Historically, the population is Kharkiv region was exceeding 3 million (in 1991), slightly declining through the 1990s and 2000s and reaching the level of 2.72 million of citizens in 2014. This dynamic is typical for Ukrainian population and Kharkiv region’s share in the total population is declining slightly faster, losing the share of total population from 6% in 2001 to 5.98% in 2013. The division between genders is consistent with the national population split.

Table 4: Population in Kharkiv region and Ukraine

1991

1996

2001

2006

2011

2013

2014

Resident population, thsd people

3,174.2

3,069.7

2,921.8

2,813.4

2,739.4

2,728.8

2,721.6

men

1,453.4

1,410.6

1,341.8

1,289.8

1,258.6

1,258.9

1,257.3

women

1,720.8

1,659.1

1,580

1,523.6

1,480.8

1,469.9

1,464.3

Resident population of Ukraine, thsd people

51,623.5

50,874.1

49,115.0

46,749.2

45,706.1

45,598.2

45,245.9

As for people aged 15 to 70 who are considered to be the “economically active population”, the dynamics shows that, in the period between 2000 and 2013, the economically active population in Kharkiv region dropped slightly by 2.9%, or from 1,463.5 to 1,370.6 thsd people.

The employed population showed even a smaller drop by 0.8% (from 1,272.4 thsd in 2000 to 1,282.8 thsd in 2013).

However, the total of the economically active population and economically inactive population showed a significant drop – from 2,220.3 thsd people in 2000 to 2,085.9 thsd people in 2013 (by more than 6%)30. The number of unemployed persons declined from 191.1 thsd people in 2000 to 87.8 thsd people in 2013. This decline was not attributed to a fast decrease in the number of unemployed persons due to their employment, it was rather caused by the loss of their interest in official registration of their status and by increase in shadow employment in the last 5 to 7 years. The latter phenomenon covers cases when an employee is not officially registered and receives salary in cash, not paying any personal income taxes and not getting any state social benefits as an employed person, because an enterprise does not pay relevant state budget contributions. This category of employees belongs to the most vulnerable group of population. Such people actively search for a job, but they often accept job proposals without official registration and, consequently, without relevant social benefits and perks in exchange for regular monthly payments.

30

ccording to the methodology of the State Statistics Service of Ukraine, the economically active population comprises people aged 15 to 70 who A furnish the supply of labour at the labour market during a certain period of time; the economically inactive population comprises people who are not employed and do not search for a job, i.e. they can be referred to as neither “employed” nor “unemployed”.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

27

Table 5: Kharkiv region Population in Terms of Economic Activity (people aged 15 to 70, thsd people)

2000

2005

2007

2008

2009

2010

2011

2012

2013

Economically active population

1,469.9

1,388.8

1,385.7

1,386.5

1,371.1

1,365.2

1,375.2

1,373.6

1,370.6

people of working age

1,334.9

1,279.7

1,280.8

1,282.9

1,260.4

1,264

1,272.8

1,286.9

1,296.1

128.6

109.1

104.9

103.6

110.7

101.2

102.4

86.7

74.5

Employed persons

1,272.4

1,297.2

1,311.5

1,312.9

1,265.6

1,267.3

1,279

1,280.6

1,282.8

people of working age

1,145

1,188.2

1,206.6

1,209.3

1,154.9

1,166.1

1,176.6

1,193.9

1,208.3

people over working age

127.4

109

104.9

103.6

105.5

101.2

102.4

86.7

74.5

191.1

91.6

74.2

73.6

105.5

97.9

96.2

93

87.8

189.9

91.5

74.2

73.6

105.5

97.9

96.2

93

87.8

1.2

0.1

-

-

-

-

-

-

-

756.8

833.4

827.9

807.4

793.6

771.6

737.1

718.6

715.3

445.7

515.8

501.2

485.3

490.2

463.6

434.6

420.7

423.7

311.1

317.6

326.7

322.1

303.4

308

302.5

297.9

291.6

Â

people over working age

Unemployed persons people of working age people over working age Economically inactive population people of working age people over working age

The official unemployment rate was 13.1% of the economically active population, but it has dramatically declined since 2005 (6.6%) and remained at that level (between the minimum of 5.3% in 2008 and the maximum of 7.7% in 2009) till 2013 (6.4%). According to the Main Statistical Office in Kharkiv region, in January-September 2014, the unemployment rate reached 7.6% and the employment rate was 59.2%. As compared to the previous period, in 2014 the number of registered unemployed persons was 1.1% higher than in 2013 (91 000).

There is one more interesting fact: during the period between 2000 and 2013 the economically inactive population declined only by 5.5% accounting for more than a half of the economically active population in the region (between 52% and 60%). It is a significant labour resource allowing to expand production in Kharkiv region. Therefore, lack of workforce will not serve as deterrent to any production growth.

SECTION 2

According to official data, in 2014 more unemployed persons were engaged in relief works or other casual works (23.2 thsd) than in retraining at employers’ request (16.3 thsd). However, good news for the oil and gas sector is that in 2014 trades constituted the greater part of 79.9 thsd vacancies (54.3%) and offered the remuneration between minimum and average wage, i.e. up to 3,144 UAH (95.2% of total number of vacancies).

As of January 2015, the following jobs were in the highest demand: sales manager, administrative support manager, occupational safety engineer, design engineer, systems programr, software engineer, administrator, overhead electrician, electrician engaged in repair and maintenance of electrical installations, electrical fitter, tool dresser, computer-controlled machine operator, computer-controlled machine and handler operator, machinist, milling machine operator, grinder etc.

28

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OF KHARKIV REGION ECONOMY

At the same time, there was observed a redundant number of professionals qualified as economist, accountant, sales assistant (food/non-food products), farmworker, forest worker, complete building maintenance and repair worker, motor vehicle driver and others.

The last but not least factor affecting the labour market is the presence of internally displaced persons (IDPs). According to the latest data, 766,578 people were displaced from the temporarily occupied territories and the ATO field to other regions. The largest number of IDPs was accommodated in Kharkiv region (145,052 people), including 16,997 children and 97,494 disabled persons.

Taking account of unregistered persons, another 25 to 30 000 people of working age moved to Kharkiv region. Even though at first IDPs and their families rely on their own savings, volunteer assistance and government payments, they can substantially change the labour market in the medium-term period.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

29

Section 3

OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

30

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

РЕЗЮМЕ OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

3.1. Development of Oil and Gas Fields and Their Potential In Kharkiv region, 81 special permits for subsoil use were issued, including 55 permits for commercial development of hydrocarbon fields and 11 permits for their geological exploration.

The active well stock in Kharkiv region comprises 1,243 facilities, while the operating well stock comprises 1,184 facilities.

According to Geoinform State Research and Development Enterprise, as of January 2015, in Kharkiv region there were issued 81 special permits for subsoil use, including:

• Geological study of subsoil resources, including pilot development of mineral deposits of national significance – 18 permits.

• U krgazvydobuvannya

PJSC – 12 permits (Polianska, Sheykivska, PavlivskoSvetlivska, Liubotynska, Skhidno-Kharkivska, Topoliova, Hersevanivska, Novo-Mechebylivska, Pivdenno-Kolomatska, Pivnichno-Skvortsivska fields, Krasnohradske and Narizhnianske fields);

• U krneftegazrazvedka LLC – 1 permit (Bazaliivska field); • P last PJSC – 1 permit (Khmarivska field); • G eo Alliance Myroliubivske LLC – 1 permit (Myroliubivska field); • M yronivkabudmontazh LLC – 1 permit (Pivdenno-Khrestyschenska field); • A lba Resource LLC – 1 permit (Pivdenno-Medvedivska field); • R olwood Oil LLC – 1 permit (Heniivska prospect).

• G eological study of oil- and gas-bearing subsoil fields, including pilot development of hy-

drocarbon fields with further oil and gas production (commercial field development) – 11 permits:

• G eo

Alliance Zakhidno-Yefremivske LLC – 1 permit (Zakhidno-Yefremivske field);

• G eo Alliance Taranushynske LLC – 1 permit (Taranushynska field); • L ease Enterprise Mine named after A.F. Zasyadko – 1 permit (Volodarska field); • I nter-Regional Gas Company LLC – 1 permit (Nyzhniortyschivska field); • E nergy

Service Company “Esko-Pivnich” LLC – 4 permits (Pehedivska, Derkachivsko-Voytenkivska, Kubashivska, Klubanivsko-Zubrenkivska fields);

• S ystemoilengineering LLC – 1 permit (Vodianivska field);

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

31

• N adra Yuzivska LLC – 1 permit (Yuzivska field, except for Pivnichno-Volvenkivske and Spivakivske fields, and Kamianska field);

• U krgazvydobuvannya PJSC – 1 permit (Merefiansko-Shurynska field).

• R ecovery of mineral resources (commercial field development) – 55 permits: • U krgazvydobuvannya PJSC – 38 permits (Kotliarivske, Berezivske (C-5 and B-16 Horizons), Shebelynske, Melykhivske, Skhidno-Medvedivske, Druzheliubivs­ ke, Spivakivske, Yefremivske, Kehychivske, Zakhidno-Khrestyschen­­s­ke, Volokhivske, Medvedivske, Zakhidno-Sosnivske, Chervonoyarske, Vyshnevs­ke, Stepove, Bezliudivske, Kysivske, Borysivske, Krasnokutske, Korobochkyns­ke, Maksalske, Lannivske, Skvortsivske, Shevchenkivske, Iskrivske, Yuliivske (except for Zolochivskyi block), Narizhnianske, Zakhidno-Starovirivske, PivnichnoVolvenkivske, Bezpalivske, Kobzivske, Berezivske (В-21-26 and Т-1 Horizons), Kolomatske, Kotelevske (up to and including the Serpukhovian deposits) fields, and Pivnichno-Korobochkynska field);

• U krnafta

PJSC – 3 permits (Koziivske, Kachalivske and Zakhidno-Koziivske

fields);

• E nergy 95 LLC – 2 permits (Maryinske and Denysivske fields); • N adra Geotsentr LLC – 1 permit (Yuliivske field (Zolochivskyi block); • U krgasvydobutok PJSC – 1 permit (Ostroverkhivske field); • P roduction Company “Ukrnaftoburinnia” PrJSC – 1 permit (Sakhalinske field); • E nergy Service Company “Esko-Pivnich” LLC – 2 permits (Karaykozivske and Rakytnianske (including Kaponivskyi block) fields, and Rohanska field);

• T echnokomservis Company LLC – 2 permits (Stepkivska and Oktiabrska fields); • A ldea Ukraine SE – 1 permit (Rzhavetska field); • F irst Ukrainian Gas and Oil Company LLC – 1 permit (Ohultsivske field); • P rom-Energo Product LLC – 1 permit (Vasyschivske field); • U kreastgas LLC – 1 permit (Plativske field); • K UB-Gas LLC – 1 permit (Olhivske field).

SECTION 3

As of 2014, commercial fields included 29 gas condensate fields, 19 oil and gas condensate fields, 3 oil and gas fields and 1 gas field. The Shebelynske and Zakhidno-Khrestyschenske unique gas condensate fields have the largest volume of original recoverable gas reserves in the amount of 300 bcm.

Oil and gas production in Kharkiv region reached its peak in the 1970s and 1980s. Oil production reached its second peak in 2005 and has been steadily declining since that time. Natural 32

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

Natural gas in liquefied or gaseous state, mln m3 Crude oil, including natural gas condensate, thsd tons

Fig. 6: Oil and Gas Production Dynamics in Kharkiv region

gas production dropped in 1970-2000, but it showed a slow growth during the last decades – from 6.764 bcm in 2000 to 9.338 bcm in 2013. According to the latest statistical data, in 2014 Kharkiv region produced 9.4 bcm of gas, or 47% of total natural gas production in Ukraine.

Breakdown of natural gas production by fields:

• S hebelynske field – 27%; • K obzivske field – 15%; • Z akhidno-Khrestyschenske field – 10%; • M elykhivske field – 10%; • o ther fields – 38%.

Almost all gas production (about 92%) is based on the efforts and capacities of Ukrgazvydobuvannya PJSC (UGV). 25 commercial companies account for about 6 to 8% of total production. In 2013, UGV structural divisions developed 37 hydrocarbon fields and commissioned 20 wells.

As of 2014, in Kharkiv region there were about 62 fields with commercial natural gas reserves in the amount of 367 bcm as included in the State Register of Mineral Resources of Ukraine.

Although most original C1 proved gas reserves in Kharkiv region have been already extracted, С2 inferred gas reserves at known fields amount to 75 bcm, and С3 predicted gas reserves in its territory are estimated at about 800 bcm.

At the same time, according to the Regional Program for Kharkiv region Fuel Sector Development for a period till 2020, most wells at major fields in Kharkiv region were drilled in 1960s and 1970s, and the age of the greater part of the stock is around 50 years. Redrilling of untapped deposits to replace the existing stock may require substantial material resources.

In addition, there is an increased dispersion of proved reserves in small fields (Kolomatske, Kysivske, Bezpalivske, Narizhnianske). Some fields have not proven the original commercial reserves (Korobochkynske, Shevchenkivske, Iskrivske and Volokhivske).

New wells are drilled at a too slow rate (in particular, by state-owned companies) to ramp up production. Thus, in 2020, incremental production received due to completing new commercial wells will amount only to 736 mcm.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

33

Q, Q, mln m33 млн.м

Видобуток газу із нових експлуатаційних свердловин, які планується пробурити протягом 2011-2020 рр.

800,0 додатковий видобуток за рахунок експлуатаційного буріння Incremental production due to development drilling 700,0

видобуток ізfrom свердловин поточного року Production the current-year wells

600,0

500,0

400,0

300,0

200,0

100,0

0,0 2011

2012

2013

2014

2015

2016

2017

2018

2019

Year Рік

2020

Fig. 7: Gas Production from New Commercial Wells to be Drilled by 2020 Source: Regional Program for Kharkiv region Fuel Sector Development for a period till 2020

Field depletion also means that to ensure maximum production they should be developed with reservoir pressure maintenance (e.g. like at the Sakhalinske field). Therefore, construction of new booster compressor stations (BCS) and modernization of existing BCSs have become the main task to ensure production stabilization and ramping up.

As of 2014, total compressed natural gas volume in Kharkiv region was around 6.8 bcm, or more than 80%! A forecast for the near future is based on the figure of 7.55 bcm, or 89%. The Shebelynske field, being the largest field in the region with remaining commercial gas reserves in the amount of 95 bcm and annual production in the amount of 2.4 bcm, may serve as an example of the use of BCS. According to Ukrburgaz (a branch of Ukrgazvydobuvannya PJSC), Kharkiv region gas fields are depleted by 65%. More than a half of reserves in the region are classified as hard to recover. Such major gas condensate fields as the Shebelynske, Khrestyschenske, Yefremivske and Kehychivske fields are depleted by 80 to 90%.

The most important achievement in the last few years is related to the discovery of the Kobzivske field which ensures annual gas production in the amount of 1.25 bcm. Other sites are not being developed due to the lack of investment and absence of the sufficient stock of licensed fields (it is especially true for Ukrgazvydobuvannya PJSC as a major player). For reference, in September 2014, Ukrgazvydobuvannya PJSC announced the discovery of the Malokrinkovske gas condensate field in Shevchenkove Raion; the planned annual production is 6.5 mcm of gas; proved reserves amount to 30 mcm. According to estimates made by the experts of the Ukrainian Research Institute for Natural Gases, total field reserves amount to 500 mcm. Another discovered field, the Olchyshne field, has the same amount of reserves31.

As for the Regional Program for Kharkiv region Fuel Sector Development for a period till 2020, the annual parameters of its implementation are gradually declining as they depend in large part on government investment.

SECTION 3

In 2013, 20 wells were commissioned and 763 operations were carried out to ensure their optimisation and stimulation. As of the beginning of 2014, 41 wells located in 32 fields and fields were drilled and tested in Kharkiv region.

31

34

http://www.epravda.com.ua/columns/2015/02/3/525569/

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

9000 8000

8802,0

8819,4

8802,0

8819,4

8869,0 8565,0

8875,0

8132,1

8880,0

7827,8

8950,1

7553,3

7000

9008,2

7305,5

9088,8

9185,3

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

10000

9297,1 9423,2

7081,9

6880,1

6000

6698,0

6533,6

5000 4000 3000

gas with increases resource baseресурсної бази видобуток газу за умови збільшення

2000

видобуток газу умови існуючої ресурсної бази gas subject toзаthe existing resource base

1000 0 2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Fig. 8: Annual Gas Production at Kharkiv region Fields: Forecast by 2020 Source: Regional Program for Kharkiv region Fuel Sector Development for a period till 2020

Due to implementation of gas and liquid hydrocarbon production stabilization and ramping up activities, in 2013 Shebelinkagazvydobuvannya received an increment of gas production (275.437 mcm) and of liquid hydrocarbon production (36.545 thsd tons), having invested more than 700 mln UAH. In January-November 2014, Shebelinkagazvydobuvannya GPD spent 25.3 mln UAH on implementation of production stabilization and ramping up activities (412.0 mln UAH in 2013).

During 11 months of 2014, exploration and development drilling was performed in 10 fields and 52 fields, 14 wells were commissioned and 12 operations were carried out to ensure their optimization and stimulation in the territory of the region.

In 2013, Ukrburgaz Drilling Department performed 56.4 thsd m of development drilling and 44.6 thsd m of exploration drilling. Planned meterage to be drilled by the end of 2014 was established at the level of 104.4 thsd m, including 54 thsd m of exploration drilling and 50.4 thsd m of development drilling.

In 2015, exploration and development drilling is planned to be performed at 22 fields and 2 fields. Planned target of exploration drilling is 42.8 thsd m, planned target of development drilling is 48.6 thsd m. It is planned to complete testing of 9 wells and construction of 19 well on new sites. These wells are expected to produce 485 mcm per year.

In general, in 2015, Kharkiv region authorities expect gas production to increase at least by 631 mcm and condensate production to increase by 83.2 thsd tons. It will be achieved through exploration and development drilling, commissioning of 25 wells, implementation of production stimulation activities, modernization and technical retrofit, and well optimisation activities32. Financial support will include own funds of enterprises and investors’ funds in the amount of 1,482.4 mln UAH. According to the Program for Economic and Social Development of Kharkiv region for 2015, fuel and energy sector enterprises account for a third of the total volume of industrial products sold in the region (in January-October 2014, the figure was 18.4 bln UAH).

Oil and gas field development in Kharkiv region is still very productive in terms of gas and condensate. Gas production increased from 8.829 bcm in 2011 to 9.338 bcm in 2013. Similarly, condensate production increased by 2.8% in 2013, as compared to the previous year.

32

See Kharkiv Region Development Strategy for a Period till 2020

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

35

Table 6: Material Production Data in Mining Industry and Quarrying

2011

2012

2013

Crude oil, including oil obtained from bituminous minerals, thsd tons

143.1

105.9

100.3

Associated petroleum gas recovered from oil deposits, mcm

61.4

52.7

48.8

Natural gas condensate recovered from natural gas reserves, thsd tons

179

174.3

179.2

Natural gas in liquefied or gaseous state, mcm

8,829

8,859

9,338

Natural sands, thsd tons

1,459

1,213

1,158

Common clays and shales for construction use; andalusite, kyanite, sillimanite; mullite; chamotte or dinas earths, thsd tons

234.9

123.3

83.7

It is important to note that associated mining of sands and clays proves the significance of regional resources for construction and drilling. Kharkiv region is active not only in upstream development, producing oil and gas. It has a potential to expand its petrochemical and chemical production within the region and hold to larger value added within the region, presenting an opportunity for additional regional employment and taxes.

In addition to oil production, Kharkiv region produces heavy fuel oils (65.1 thsd tons). The statistics includes data on production of plastics in primary forms (766 tons), paints and varnishes based on acrylic or vinyl polymers (1,365 tons), paints and varnishes based on polyesters, acrylic or vinyl polymers, dispersed or dissolved in a non-aqueous medium (588Â tons), obtained as a result of further oil processing.

Table 7: Material Production Data in Selected Categories

Manufacturing of coke and refined petroleum products Heavy fuel oils, thsd tons

71.1

‌

65.1

471 1,702

399 1,552

766 1,365

610

588

936 3063

610 2350

588 2181

2,554 Organic surface-active preparations put up for retail sale, whether or not containing soap 3,063

2,826 2,350

2,605 2,181

(other than those used as soap), tons Washing and cleaning preparations, tons Beauty or make-up preparations and preparations for the care of the skin, including

8,174 1,324

8,955 1,366

11,602 1,435

sunscreen or sun tan preparations, other than medicaments, tons Preparations for oral or dental hygiene, including denture fixative pastes and powders;

73

112

85

dental floss, tons Shaving preparations; personal deodorants and antiperspirants; bath preparations;

13,560

14,097

13,978

perfumery, cosmetic and toilet preparations, not elsewhere specified or included, tons Synthetic monofilament yarn; strip and the like of synthetic textile materials, tons

3,406

3,942

‌

Manufacturing of chemicals and chemical products Plastics in primary forms, tons Paints and varnishes based on acrylic or vinyl polymers, dispersed or dissolved in an

aqueous medium, tons Paints and varnishes based on polyesters, acrylic or vinyl polymers, dispersed or dissolved 936 in a non-aqueous medium; solutions, tons Soap; organic surface-active products and preparations for use as soap; paper, wadding,

SECTION 3

felt and nonwovens, impregnated, coated or covered with soap or detergent, tons

36

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

Other products of olefin transformation include soap and surface-active preparations (4,786 tons), washing and cleaning preparations (11,602 tons), cosmetic and toilet preparations (15,499 tons). In addition to ready-made consumption products, Kharkiv region has a welldeveloped production of pharmaceutical products and plastics. The production of antibiotics showed a substantial growth (almost twice) during 2011-2013: from 279.7 tons to 409.8 tons, while the production of other medicaments declined. The production of medicaments, containing alkaloids or derivatives thereof, remained at the same level of 2,878 tons (2013).

Table 7: Material Production Data in Selected Categories (continued)

Manufacture of basic pharmaceutical products and pharmaceutical preparations Medicaments, containing penicillin and other antibiotics, tons

279.7

408.5

409.8

Medicaments, containing hormones but not containing antibiotics

20.6

20.5

6.5

Medicaments, containing alkaloids or derivatives thereof but not containing hormones or antibiotics, tons 2,865

2,949

2,878

Sera and vaccines, tons

4.6

2.8

8.4

Manufacture of derivatives from ethane-ethylene-polyethylene chain shows a substantial potential for chemical industry growth in the region. The production of plates, sheets, film, foil and tape of plastics, not reinforced or combined with other materials, increased by more than 35% during 2011-2013. During the same period, the production of ethylene polymer sacks and bags increased by 17.1% and reached 6,683 tons per year. The production of plastic bottles and floor, wall or ceiling coverings of plastics slightly declined, but it shows a potential for development under favourable conditions.

Table 7: Material Production Data in Selected Categories (continued)

Виробництво гумових і пластмасових виробів 2011

2012

2013

Plates, sheets, film, foil and tape of plastics, not reinforced or combined with other materials, tons

15,613

18,291

21,176

Sacks and bags (including cones) of polymers of ethylene, tons

5,705

6,274

6,683

Carboys, bottles, flasks and similar articles of plastics, mln pcs

503.5

442.3

453.1

Floor, wall or ceiling coverings, in rolls or in the form of tiles, thsd m

2,017

1,898

1,646

Manufacture of other mineral products and construction materials shows economic potential for production of important materials used by suppliers for oil and gas production and construction works which accompany oil and gas development (a potential of other industrial sectors in the midstream and downstream sectors).

Such products include glassware, brick, cement, lime and blocks, ready-mix concrete and mortars, and articles of asphalt. These materials may be used for construction of oil and gas infrastructure as well as directly in drilling process (as cements and mortars).

The mere presence of certain production within the region does not guarantee automatic acceptance as a supplying company to oil and gas production, especially to foreign companies using sophisticated equipment and technological processes requiring strict quality controls.

However, it identifies availability of equipment and trained labour, which if desired can be Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

37

reoriented towards supplying to oil and gas production if willing to improve technological processes and following quality and safety standards.

Table 7: Material Production Data in Selected Categories (continued)

Manufacture of other non-metallic mineral products Multiple-walled insulating units of glass, thsd m

326.5

280

317.7

Non-fireproof ceramic building bricks, other than those of siliceous fossil meals or of diatomaceous earths, mln pcs of conditional brick

17.5

16.8

20.4

Portland cement, aluminous cement, slag cement and similar hydraulic cements, thsd tons 1,889

1,295

1,230

Quicklime, slaked lime and hydraulic lime, thsd tons

51.5

48.4

34.7

Building blocks and bricks of cement, of concrete or of artificial stone, mln pcs of conditional brick

140.3

145.8

146.6

Ready-mix concrete, thsd tons

583.6

557.5

623.9

Dry-mix mortars, thsd tons

177.7

170.4

166.2

Articles of asphalt or of similar material (petroleum bitumen or coal tar pitch), in rolls, thsd m 7,277

5,679

5,089

The oil and gas sector in Kharkiv region has a potential for development in other fields, not only in the upstream sector. It is related to crude oil and gas processing which delivers such end products as plastics and pharmaceutical materials. The strength of the sector lays in downstream development due to the strong resorce base and service companies supplying and developing oil and gas. This competitive advantage can enable further development of oil and gas sector in Kharkiv.

3.2. Major Service Companies on the Regional Level As of the beginning of 2014, in Ukraine there were registered about 80 service companies in the oil and gas sector, 25% of which intensely operate in the East (including Kharkiv region), however, all of them implement projects throughout Ukraine.

At the same time, a high level of centralisation in the Ukrainian oil and gas industry, probably, affects the activities of independent sub-contractors. The following enterprises play an important role in providing services to the oil and gas sector:

• Ukrburgaz Drilling Department of Ukrgazvydobuvannya PJSC is a major enterprise engaged in construction of exploration wells and commercial wells for oil and gas, and wells intended for other uses.

• T he Ukrainian Research Institute for Natural Gases of Ukrgazvydobuvannya PJSC is the only research institute in Ukraine with such specialization.

• The Research and Design Institute for Gas Transportation of Ukrtransgaz PJSC is the only

SECTION 3

institute in Ukraine for automation of technological processes of drilling, gas production and transportation.

Kharkiv region has, inter alia, an extensive experience in and a high potential for production of equipment for oil and gas sector enterprises. Developments of Kharkiv engineers are in 38

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

demand in many countries throughout the world as well as in the CIS, but they are very slowly implemented in Ukraine.

Turbogaz PJSC is a major enterprise engaged in design and manufacture of equipment used in the gas industry. Its main activities include research, development and implementation of turboexpanders, low temperature turbine-refrigerator expanders (centrifugal compressor expanders) at units of low-temperature separation of natural gas and energy-saving power turbine expanders (turbo expander generators) for conversion of excess pressure of gas at gas distribution stations, gas distribution points and compressor stations into electric energy. All equipment produced by Turbogaz may be used by oil and gas sector enterprises in Kharkiv region.

Potentsial Plant PJSC is a company engaged in manufacture of electrical equipment for the oil and gas sector (electrical drills with a high ratio of power transfer to deeper depths, including to directional wells).

Region LLC is engaged in the process of study, exploration and development of oil and gas fields pursuant to global standards. It provides a complete set of services related to construction of new wells, workover and rehabilitation of marginal and temporarily abandoned wells based on the use of advanced global technologies.

Burova Technika Research and Technical Enterprise has qualified personnel, necessary equipment, required permits and licenses as well as experience in design and rendering a full package of engineering and technological services related to construction of straight, slanted and horizontal wells.

Major companies in specific service fields include:

• supply of equipment to the oil and gas sector (Smith Ukraine, Orion Research and Production Enterprise);

• exploration of reserves (Vikoil Ltd, Nadra Group, Ukrnaukageotsentr SE); • w ell drilling, workover, coiled tubing services (Ukrburservis, Diament, UPSC DIAMENT LLC, Poltava Drilling Company LLC);

• emergency rescue services (Special Purpose Rescue Detachment of the Main Department of the State Emergency Service of Ukraine in Poltava region, LIKVO SE).

When the volume of work (orders) increases, some companies establish regional representative offices offering part-time (seasonal) or full-time jobs for professionals and odd-job workers in the region. It is remarkable that some companies from Poltava region which has its own oil and gas facilities show their interest in upstream projects in Kharkiv region. It may result in improvement of inter-regional competition.

In Kharkiv region, there are domestic enterprises and some foreign companies which provide services to the oil and gas sector. Branches of foreign companies (Schlumberger, Baker Hughes, Halliburton, Weatherford, Saipem)33 have some advantages related to the use of re33

Data on the branches are based on the results of search in the Unified State Register of Legal Entities and Individual Entrepreneurs. In particular, the

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

39

sources of international companies, modern equipment and high performance technologies as well as best practices for well construction and workover.

At the same time, branches of foreign companies face some problems, primarily related to the lack of understanding of domestic clients’ ability to finance projects as according to the Western standards the cost of well construction services is 2 to 3 times higher than that in the Ukrainian market. One more problem is that drilling facilities, both completed and in the process of drilling, are not ready, in terms of casing collapse resistance and reliability of drilling equipment and tools, for the use of advanced technologies with high pressure and load.

In addition, these service companies have to legalize their technologies and technical equipment to confirm their compliance with safety and labour protection requirements established by the Ukrainian laws.

According to domestic drilling companies, foreign service firms usually receive orders for performance of works from foreign-funded companies, such as Shell, Poltava Petroleum Company, Regal Petroleum, Cadogan, KUB-Gas and others34, which operate within common system of prices and have modern drilling equipment and personnel using Western standards and technologies.

Domestic companies have better understanding of the sector problems, know work processes, have all necessary licenses and permits, work in close cooperation with drilling and production companies and have accumulated knowledge of mining and geological conditions of drilling at major fields. At the same time, they do not have sufficient quantity of modern drilling equipment, high quality materials and tools, and adequate technical resources.

It is remarkable that companies from neighbouring countries try to win the Ukrainian market.

For example, Service Oil Company registered in January 2013 is a subsidiary of Production Association Belorusneft. The company has obtained permits to carry out hydraulic fracturing in Ukraine35.

As of the beginning of 2015, drilling and geological exploration were performed on 383 sites in Kharkiv region. According to some sources in the industry, a month of drilling works costs 200 to 240 000 UAH. This amount includes labour costs and expenses for main stock rehabilitation (replacement of drills). A home-produced drill costs around 30 000 UAH and a foreignmade drill costs up to 60 000 UAH. The lease price for drilling rigs with a hook load capacity of up to 125 tons is between 40 and 100 000 UAH per day; the lease price for drilling rigs with a hook load capacity of up to 225 tons is between 80 to 200 000 UAH per day. The price depends on the intended use, configuration and age of equipment, type of works, term of agreement, availability of a tool kit and own personnel36. At present, state-owned and private companies may provide about 90 active rigs. However, almost all rigs in state-owned companies are outdated fixed drilling facilities, some of which are reconditioned to be used for shallow-depth drilling,

SECTION 3

aforementioned branches are registered as Schlumberger Services Ukraine LLC, Schlumberger Ltd LLC, Baker Hughes Ukraine LLC, Weatherford Ukraine LLC and Saipem Ukraine LLC.

40

34

http://www.ntpbt.com/ua/statt/v-tal-j-v-trik-z-pochatkom-bumu-vidobutku-v-ukra-n-u-nas-ne-bude-v-dboyu-v-d-propozits-j-nvestor-v

35

http://first-drilling.com.ua/article/article_item/1279

36

According to Oil and Gas Consulting Center Newfolk LLC

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

well workover and emergency operations. Thus, according to expert estimates, the cost of drilling by Ukrgazvydobuvannya PJSC is more than twice as high as the cost of deep drilling and even that of directional drilling by private companies.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

41

LIST OF POSSIBLE SERVICES Geological exploration services: • geophysical operations; • seismic tomography (2D, 3D); • geological support for geological exploration operations; • development of projects and cost estimates; • data processing and interpretation; • geological and economic appraisal of fields; • calculation of mineral reserves; • topographic and geodetic works; • creation and development of survey networks; • geodetic works relating to inventory and determination of land boundaries; • topographic survey; • cadastral survey.

Pad construction and well drilling: • oil and gas well drilling; • controlled directional drilling and redrilling; • geological support for geological exploration operations; • laboratory testing of drilling fluids; • s cientific and technical support for design, design works and development of design and estimate documentation; • f ull set of environment works during oil and gas well construction (topsoil stripping, pit insulation, neutralization of drilling waste water and drilling wastes, drilling pad reclamation); • i nstallation, dismantling, repair, start-up, commissioning and maintenance of process equipment and other instruments used in the oil and gas sector.

SECTION 3

Comprehensive support services: • oil and gas well drilling (horizontal and directional wells); • well repair and workover; • hydraulic fracturing; • use of drilling muds and special fluids; • well completion (casing and finishing); • hydraulic jet perforation; • water zone insulation in wells; • stimulation by coiled tubing; • acid treatment; • sand plug cleaning; • bit programs, coring programs; • environmental measures; • drilling waste sorting for further management or recycling.

42

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

3.3. Infrastructure. Gas Transportation and Consumption Kharkiv region boasts a well-developed gas market infrastructure. The fields in the region generally supply gas to the gas transportation network, in particular, to the main gas pipeline systems: Yefremivka – Dykanka – Kyiv, Shebelynka – Dykanka – Kyiv, and Shebelynka – Poltava – Kyiv.

Main flows of gas produced at the Shebelynske field go north (gas supply to the customers of Kharkiv industrial hub through Shebelynka – Kharkiv and Shebelynka – Belgorod – Kursk – Bryansk systems) or west (gas transportation from Chervonodonetska BCS through the territory of Kharkiv region and Poltava region, including gas intake and distribution from the Yefremivske, Melykhivske, Kehychivske and other fields to Khrestyschenska BCS and compressed gas supply to Dykanka Compressor Station). Actually, Dykanka Compressor Station is a centre for collection of gas of own production. The aforementioned main gas pipelines transport gas to its entry point.

Shebelinkagazvydobuvannya Gas Production Division of Ukrgazvydobuvannya PJSC is one of major enterprises in the sector. One more structural division of the company – Shebelynske Gas Condensate and Oil Refinery Department – is one of major enterprises processing nearly 90% of own raw materials.

Shebelynske Gas Condensate and Oil Refinery Department produces light petroleum products (gasoline grade А-98, А-95, А-92 and А-76, diesel fuel, white spirit, liquefied gas) and dark petroleum products (bitumen, bituminous mastic, boiler oil). Though it can process 1 mln tons of raw hydrocarbons per year, during 11 months of 2014 the enterprise processed only 434.6 thsd tons of raw materials, which is 18.6% less than during the same period in 2013.

Due to commissioning of the almost finished motor gasoline blending unit, Shebelynske Gas Condensate and Oil Refinery Department will enhance motor gasoline production and increase the production of alternative fuels (bioethanol-gasoline blend) up to 5 thsd tons per month.

One more major state-owned gas and oil sector enterprise is Kharkivtransgaz Main Gas Pipelines Department, a structural division of Ukrtransgaz PJSC, engaged in gas transport and transit, underground storage, construction and overhaul of main gas pipelines and process equipment at compressor stations. Kharkivtransgaz infrastructure in Kharkiv region comprises 979 km of main pipelines and 472.7 km of pipeline branches, 6 compressor stations and 106 gas distribution stations as well as Kehychivske underground gas storage. The aggregate capacity of 56 gas compressor units at the compressor stations of Kharkiv region main gas pipelines is 357 MW. The company provides for reliable gas transportation in the average annual volume of 14 bcm, including 2.7 bcm for consumers in Kharkiv region. Kharkivmiskgaz PJSC and Kharkivgaz PJSC are engaged in gas supply and distribution through distribution networks in the region with the total length exceeding 17 000 km. The list of consumers includes about 900 000 households, 550 industrial enterprises and more than 8 000 utility facilities.

In addition, in Kharkiv region there are 74 facilities of Kehychivske underground gas storage (UGS), including 52 commercial and injection wells as well as 22 plugged and abandoned, Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

43

SECTION 3

44

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

Fig. 9: Map of Gas Transportation System in Kharkiv region Source: Regional Program for Kharkiv region Fuel Sector Development for a period till 2020

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

45

temporarily abandoned, monitoring and other wells. UGS total gas storage capacity is 1.3 bcm, including 700 mcm of working gas volume and 600 mcm of buffer gas volume. The planned comprehensive reconstruction of Kehychivske UGS provides for connection and commissioning of the eastern block to increase the working gas volume up to 868 mcm.

The gas transportation system in some fields of Kharkiv region needs reconstruction in view of pipeline demolition or insufficient flow efficiency. Due to resource depletion, standard costs, losses and natural gas imbalance volumes amount to 1.5 to 6%. It is remarkable that Kharkiv region has a high level of gas infrastructure development: 70.9% in 2013, including 83.2% of towns and urban type settlements, and 53.8% of villages. There were commissioned 67.077 km of gas pipelines in 2013 and 58.52 km (11 facilities) in 2014. The lowest rate of gas infrastructure development (below 30%) is observed in Velykyi Burluk Raion and Blyzniuky Raion.

Being the largest natural gas producer in Ukraine, Kharkiv region also consumes hydrocarbons. Due to a substantial decrease in industrial production, consumption of petroleum products and natural gas reduced, especially as compared to 2005 when the country experienced an economic upturn. Kharkiv region consumes more boiler oil and less energy resources traditionally used for further processing, except for crude oil. In 2013, regional oil consumption was 76.9 thsd tons, as compared to 2.8 thsd tons in 2005, as a result of activities of Shebelynske Gas Condensate and Oil Refinery Department.

It was accompanied by a substantial reduction in the use of gas condensate (from 899.1 thsd tons in 2005 to 505.2 thsd tons in 2013), motor gasoline (from 104.4 thsd tons to 54.7 thsd tons), and gasoil (diesel fuel) (from 235.5 thsd tons to 215 thsd tons).

Conventional fuels, such as bituminous coal, liquefied propane and butane, firewood and other types of primary fuel, were in higher demand, most likely, due to substitution of such expensive heating source as natural gas.

Table 8: Use of Certain Types of Energy Resources and Refined Petroleum Products  Aviation gasoline, thsd tons

2012

2013

0

0.1

0.1

‌

104.4

66.4

59

54.7

Gasoil (diesel fuel), thsd tons

235.5

202.5

221.2

215

Heavy fuel oils, thsd tons

15.6

10.9

3.5

8.4

3,398.4

2,482.1

2,246.5

2,114.6

Liquefied propane and butane, thsd tons

10.1

16.4

13.9

13.4

2,359.8

3,220.3

3,764.2

3,862.8

Firewood, thsd solid cub. metres

18.1

19.4

24.2

27.9

Crude oil, thsd tons

2.8

63.6

71.5

76.9

Gas condensate, thsd tons

899.1

604.9

594.1

505.2

Bituminous coal, thsd tons

SECTION 3

2010

Motor gasoline, thsd tons

Natural gas, mcm

46

2005

Other types of primary fuel, thsd tons of reference fuel

18.1

40.2

38.9

30.2

Kerosene, thsd tons

1.1

0.3

0.3

0.2

Coke and semi-coke of coal, of lignite or of peat, thsd tons

2.7

0.5

0.7

1.5

Petroleum bitumen and shore bitumen, thsd tons

16.4

13.3

8.5

5.3

Other intermediate fractions, thsd tons

2.1

1.7

1.7

2.3

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

In accordance with Kharkiv region Development Strategy for a Period till 2020, special emphasis is placed on energy production cycles (primarily, due to the government strategy for substantial growth of own hydrocarbon production accompanied by implementation of import substitution, energy saving and energy efficiency programs). Here belongs a petrochemical cycle (comprises gas, condensate and oil production, processing and pipeline transportation).

Demand for gas is stimulated by the fact that energy has the largest share in the structure of industrial goods produced in Kharkiv region (33%). As of the beginning of 2014, in the region there were 1,841 boiler houses with an aggregate capacity of 7,173.8 Gcal per hour supplying heat and hot water for domestic and public utility use, including 1,413 gas-fired boiler houses (77%) and 401 solid fuel fired boiler houses (22%).

In accordance with the Regulation of the Cabinet of Ministers of Ukraine setting gas consumption limits from 1 August 2014 to the end of 2014/15 heating season (i.e. for a minimum of 8 months)37, taking account of 30% reduction expected at that time, Kharkiv region was to consume 1.095 bcm of gas, including 0.653 bcm for heat generation and supply enterprises, 0.416 bcm for industrial consumers, 0.026 bcm for budget-financed institutions.

Main sources of power supply to consumers in Kharkiv region are 6 substations of Kharkiv bulk electric system (KBES) and power plants: Zmiivska TPP (bituminous coal) as well as gasfired Kharkiv CHP-5, Eskhar CHP-2, CHP-3 and others. In the regional power generation balance, heat generation accounts for almost 100%, 20% of which belong to gas-fired CHPs. By the way, a high share of gas consumption in Kharkiv and Derhachi Raion can be attributed to a high concentration of energy generation facilities, and a high share of gas consumption in Balaklia Raion can be attributed to a high concentration of gas processing facilities.

Table 9: Natural Gas Consumption (cub. metres)

2013 Total in the region

2,114,642

cities of regional subordinance Kharkiv

1,039,054

Izium

12,375.2

Kupiansk

8,642

Lozova

36,052.7

Liubotyn

1,826.4

Pervomaiskyi

15,654.5

Chuhuiv

12,645.8

raions Balaklia Raion

287,560.1

Barvinkove Raion

585.6

Blyzniuky Raion

603

Bohodukhiv Raion

5,880.4

Borova Raion

2,322.9

Valky Raion

1,291.9

Velykyi Burluk Raion

975

Vovchansk Raion

5,837.8

Dvorichna Raion

755.6

37

http://zakon.rada.gov.ua/go/296-2014-%D0%BF

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

47

2013 Derhachiv Raion

449,256.9

Zachepylivka Raion

431.8

Zmiiv Raion

64,214

Zolochiv Raion

6,422.9

Izium Raion

742.7

Kehychivka Raion

1,364

Kolomak Raion

5,294.3

Krasnohrad Raion

11,490.2

Krasnokutsk Raion

5,478.7

Kupiansk Raion

393.9

Lozova Raion

3,148

Nova Vodolaha Raion

6,435.8

Pervomaiskyi Raion

55,948.3

Pechenihy Raion

212.6

Sakhnovschyna Raion

1,473.9

Kharkiv Raion

48,712.1

Chuhuiv Raion

19,546.3

Shevchenkove Raion

2,012.8

In general, according to Naftogaz of Ukraine NJSC, during 2009-2013 average gas consumption in Kharkiv region amounted to 3.21 bcm per year.

SECTION 3

Strategic plans for a period till 2020 provide for the development of new energy generation cycles. Thus, in the course of development of prospective gas and gas condensate fields in the north-west of Kharkiv region, it is possible to create Krasnohrad energy generation and petrochemical production centre for gas and condensate production, processing and pipeline transportation.

48

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

3.4. Labour Market in the Oil and Gas Industry and Related Sectors As it was mentioned in the previous sections, overall employment in Kharkiv region was growing between 2012 and 2013. Dramatic changes Ukraine was going through in 2014, most likely changed this statistic, however this section will comment of the latest data available and address capacity and opportunities of further employment within the regional economy.

While regional employment increased from 1,280.6 thsd to 1,282.8 thsd employees, many sectors dismissed their employees. In 2013, lower employment rate, as compared to 2012, was observed in the industrial sector as well as in the following sectors: power and gas supply, waste management, professional activities, research and development, public governance and defence, and education.

There was observed a slight increase or reduction in the number of persons employed in some service sectors, which may be regarded as normal dynamics within the limits of annual variations. Such sectors include accommodation and catering, information and telecommunications, finance and insurance, real estate, administrative and support services, health care and social assistance, arts, sports, recreation and entertainment as well as other services.

A handful of other industries were increasing their employment, sometimes by a margin. The most profound growth was observed in agriculture which accounts for more than 13% of regional employment. The number of persons employed in agriculture, forestry and fish farming increased from 1,280.6 thsd employees in 2012 to 1282.8 thsd employees in 2013. More than a half of them worked under contract (i.e. they were regarded not as companies’ employees, but as business owners or persons engaged under contract for a specific volume of work or function).

In mining industry, employment grew from 5.5 to 5.7 thsd jobs in 2013. The construction sector ranked the second: in 2013 it employed 1,200 persons more than during the previous year.

There was observed a rise in employment in two key sectors of service industry: wholesaling and retailing (from 297.3 to 303.2 thsd persons) as well as in transport, warehousing, mail and courier services (from 71.2 to 73.7 thsd persons).

Table 10: Employment by Types of Economic Activity (thsd persons)

Total employed persons

Total

Including employees of enterprises, institutions and organisations

2012

2013

2012

2013

1,280.6

1,282.8

760.4

716.6

Agriculture, forestry and fish farming

166.3

172.6

44.6

35.2

Industrial sector

251.3

248.8

193.9

184.9

Mining industry and quarrying

5.5

5.7

5.2

5.5

Processing industry

196.9

197.4

141.9

137.2

Electricity, gas, steam and conditioned air supply

30.4

28.5

30.4

28.5

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

49

Total employed persons

Including employees of enterprises, institutions and organisations

Water supply, sewerage, waste management

18.5

17.2

16.4

13.7

Construction

54.2

55.4

25.5

21.6

Wholesaling and retailing, repair of motor vehicles and motorcycles

297.3

303.2

79.6

73.1

Transport, warehousing, mail and courier services

71.2

73.7

51.8

53.7

Temporary accommodation and catering

18.4

18.6

7.4

7.4

28

27.9

13.6

13.7

Finance and insurance

16.8

16.1

16.4

15.5

Real estate

39.2

39

19.3

15.9

Professional activities, research and development

47.5

44.3

40.2

36

Administrative and support services

19.5

19.2

15.7

15.8

Public governance and defence; mandatory social insurance

61.2

55.3

61.2

55.3

Education

107.9

106.6

107.1

105

Health care and social assistance

71.3

71.8

68.9

69.5

Arts, sports, recreation and entertainment

11.6

11.5

9.3

8.9

Other services

18.9

18.8

5.9

5.1

Information and telecommunications

To deeper investigate what industries were adding employees, it is useful to understand what particular industries sectors were growing. Besides steady employment in the mining industry during 2010-2013 time period, four industries within manufacturing worth attention as those related to oil and gas production. Three out of these four industries added employees between 2010 and 2013, namely,

• manufacture of coke and petroleum products – from 1.2 to 1.3 thsd; • manufacture of chemicals and chemical products – from 2.7 to 2.9 thsd; • m anufacture of basic pharmaceutical products and pharmaceutical preparations – from 2.6 to 4 thsd;

• manufacture of rubber and plastics products, and other non-metallic mineral products showed a slight reduction from 10.4 to 9.9 thsd.

SECTION 3

During this period, only two sectors among other industries showed an increase in the number of employed persons: manufacture of electrical equipment and manufacture of machinery and equipment n.e.c.

50

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

Table 11: Average Payroll Number of Employees by Types of Industrial Activity (thsd persons)

2010

2011

2012

2013

183.8

189.2

184.2

174.8

5.3

5.2

5.1

5.3

134.8

138.3

133

128

Manufacture of food products, beverages and tobacco products

27

27.7

26.4

25

Manufacture of textiles, wearing apparel, leather and goods from leather and other materials

4.8

5.2

4.9

4

6

5.7

5.8

5.5

1.2

1.2

1.3

1.3

2.7

2.8

2.5

2.9

Manufacture of basic pharmaceutical products and pharmaceutical preparations

2.6

3

3

4

Manufacture of rubber and plastics products, and other nonmetallic mineral products

10.4

10.8

11.3

9.9

14.3

10.7

9.6

5.8

6.7

6.2

4.8

4.5

12

12

13

14

21.6

26.8

26.5

25.7

Manufacture of motor vehicles, trailers and semi-trailers, and other vehicles

12.3

11.8

13.7

15.6

Manufacture of furniture, other manufacturing, repair and installation of machinery and equipment

13.2

14.4

10.2

9.8

29.3

30.2

30.1

28.3

14.4

15.5

15.9

13.2

 Industrial sector Mining industry and quarrying Processing industry

Manufacture of woodwork, manufacture of paper and printing Manufacture of coke and refined petroleum products Manufacture of chemicals and chemical products

Manufacture of metals, manufacture of fabricated metal products, except machinery and equipment Manufacture of computer, electronic and optical products Manufacture of electrical equipment Manufacture of machinery and equipment n.e.c.

Electricity, gas, steam and conditioned air supply Water supply; sewerage, waste management

The fact that in 2009, during Ukraine’s economic recession, some sectors showed growth at the regional level suggests that there are some local competitive advantages related to the oil and gas sector. Strong regional base in agriculture and availability of potential production facilities in the oil and gas sector may form a future economic base of Kharkiv region which will grow and offer jobs and higher wages for employees.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

51

Nominal wage in most industrial sectors in Kharkiv region increased in 2012-2013, showing the most remarkable increase since 2010. Official consumer price indices (109.1; 104.6; 99.8; 100.5 for each year since 2010 till 201338) do not reflect actual inflation rate. For instance, though in 2012-2013 wages in the mining industry were down by 0.4%, nominal wage growth from 3,895 to 4,876 UAH (by 25.2%) does not reflect total official inflationary wage increase by 4.9% during 2010-2013.

According to the Fuel and Energy Department of Kharkiv region State Administration, in the last few years the number of employed persons varied within the limits of 1%, and the average wage in the sector was 5,445 UAH in 2014.

In general, average wage in the industrial sector increased by 9.1%, or by 48.65 UAH (in nominal terms). Four sectors related to oil and gas industry also showed wage increase between 2010 and 2013:

• manufacture of coke and refined petroleum products – by 38.2%; • manufacture of chemicals and chemical products – by 37.8%; • manufacture

of basic pharmaceutical products and pharmaceutical preparations –

by 75.6%;

• manufacture of rubber and plastics products, and other non-metallic mineral products – by 52%39.

It should be noted that wage increase in 2012-2013 corresponded at large to increased employment and value added.

Table 12: Average Nominal Monthly Wages of Full-Time Employees by Types of Industrial Activity (UAH)

2013

SECTION 3

52

2010

2011

2012

UAH

Percentage as compared to 2012

Industrial sector

2,183

2,597

2,938

3,197

108.8

Mining industry and quarrying

3,895

4,334

4,897

4,876

99.6

Processing industry

2,014

2,432

2,743

2,993

109.1

Manufacture of food products, beverages and tobacco products

2,196

2,489

2,850

3,092

108.5

Manufacture of textiles, wearing apparel, leather and goods from leather and other materials

1,014

1,411

1,634

1,562

95.6

Manufacture of wood products, manufacture of paper and printing

1,844

2,084

2,180

2,425

111.2

38

http://index.minfin.com.ua/index/infl/

39

Wages may also rise as a result of increased prices for the products of these sectors.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY OIL AND GAS SECTOR IN THE ECONOMY OF KHARKIV REGION

2013

 Â

2010

2011

2012

UAH

Percentage as compared to 2012

Manufacture of coke and refined petroleum products

3,181

3,820

4,201

4,397

104.7

Manufacture of chemicals and chemical products

1,768

1,924

2,260

2,437

107.8

Manufacture of basic pharmaceutical products and pharmaceutical preparations

2,162

2,734

3,070

3,796

123.6

Manufacture of rubber and plastics products, and other non-metallic mineral products

1,751

2,162

2,415

2,661

110.2

Manufacture of metals, manufacture of fabricated metal products, except machinery and equipment

1,744

2,016

2,507

2,213

88.3

Manufacture of computer, electronic and optical products

1,605

1,914

2,194

2,179

99.3

Manufacture of electrical equipment

2,155

2,764

3,064

3,569

116.5

Manufacture of machinery and equipment n.e.c.

2,189

2,662

2,857

3,288

115.1

Manufacture of motor vehicles, trailers and semi-trailers, and other vehicles

2,329

2,668

3,069

3,099

101

Manufacture of furniture, other manufacturing, repair and installation of machinery and equipment

2,005

2,595

2,850

2,686

94.2

Electricity, gas, steam and conditioned air supply

2,669

3,181

3,643

3,911

107.3

Water supply; sewerage, waste management

2,155

2,359

2,593

2,958

114.1

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

53

Section 4

UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

54

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

РЕЗЮМЕ UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

4.1. Shell as a Pioneer in Large-Scale Exploration Preparations to attract investors to unconventional gas field development in Kharkiv region started from Ukrainian-American consultations in 2010. On 15 February 2011, there was signed the Memorandum of Understanding Between the Government of the United States of America and the Government of Ukraine on Unconventional Gas Resources40. The document provided for the development of direct contacts and cooperation among government agencies, universities, research centres, institutions, exploration and production companies and other entities, especially for the purpose of Ukraine’s unconventional gas resource assessment.

On 23 February 2012, the State Service for Geology and Mineral Resources of Ukraine announced a call for tender for production sharing agreements (PSA)41 for the Yuzivska field (Kharkiv region and Donetsk region) and the Oleska field (Lviv region and Ivano-Frankivsk region). As estimated by the State Service for Geology and Mineral Resources of Ukraine, a production plateau in the Yuzivska field may amount to 10 bcm per year42. According to the Press Service of the Cabinet of Ministers of Ukraine43, predicted resources of the Yuzivska field are estimated at 4.054 Tcm of gas.

Table 13: Production Forecasts for the Yuzivska field

Indicator

bcm per year

Pessimistic scenario Base scenario Optimistic scenario Gas reserves as predicted by the State Service for Geology and Mineral Resources of Ukraine

over 10 around 15 to 20 30 to 40 1 to 3

Source: Ministry of Ecology and Natural Resources of Ukraine

On 10 May 2012, the meeting of the Cabinet of Ministers of Ukraine approved the winning bidders to enter into PSA for development of the Yuzivska field (7,886 km2) and the Oleska field (6,324 km2) – Shell and Chevron accordingly. On Ukraine’s part, there were engaged Nadra Ukrayny NJSC and SPK-GeoService LLC44 which received 10-percent stakes in the newly established Nadra Yuzivska and Nadra Oleska project companies.

In January 2013, Shell and Nadra Yuzivska entered into the Production Sharing Agreement for the Yuzivska field (including the territories located in Izium, Balaklia, Barvinkove and Blyzniuky Raions of Kharkiv region). According to Shell, based on available geological data, gas-bearing capacity of this field is not related to shale rocks. Exploration works in this field are expected to confirm the presence of gas-bearing consolidated sandstones.

40

http://www.kmu.gov.ua/control/uk/publish/article?art_id=244618889&cat_id=244276429

41

I t is a specific type of agreement under which the state grants the investor, on a paid basis and for an indefinite period, exclusive rights to prospecting, exploration and extraction of minerals in the subsurface area as specified in the agreement as well as the right to perform associated works. The investor undertakes to perform the specified works using its own resources and at its own risk in consideration for a part of recovered resources as defined in the agreement on a case-by-case basis.

42

http://dgs.kiev.ua/main/203-derzhavna-sluzhba-geologyi-ta-nadr-ukrayini-ogolosila-konkurs-na-ukladennya-ugod-schodo-yuzvskoyi-taoleskoyi-dlyanok.html

43

http://www.kmu.gov.ua/control/uk/publish/article?art_id=245202646

44

http://dgs.kiev.ua/main/201-komsya-derzhavnoyi-sluzhbi-geologyi-ta-nadr-ukrayini-viznachila-yuridichnih-osb-scho-provodyat-dyalnst-zgeologchnogo-vivchennya-nadr.html

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

55

Commercial gas production will start only if geological exploration and prospecting works, which require, according to Shell, at least 5 years, give positive results. Initial stage of the Yuzivska field exploration requires 200 mln USD of investments and drilling of 15 wells45.

Due to developments in Donbas, in July 2014, Shell declared force majeure on46 its main activities as there was a threat to the employees’ safety. Shell is not going to resume its operations (prospecting and exploration works)47, but will perform other types of activities, such as geophysical survey, social investments, grants for young scientists, internship for students from Kharkiv higher educational institutions.

In addition to PSA, investors used other possibilities and forms of work for unconventional gas exploration. In September 2011, Shell and Ukrgazvydobuvannya PJSC signed the updated Joint Activity Agreement providing for performance of prospecting and exploration works in six licensed fields covering about 1,300 km2 in Kharkiv region48. According to Shell, it was planned to spend about 200 mln USD at the stage of prospecting and exploration49. Drilling was expected to confirm the presence of gas-bearing consolidated sandstones50.

In fact, by March 2014 there were drilled two exploration wells: Biliaivska-400 (Pervomaiskyi Raion of Kharkiv region) and Novo-Mechebylivska-100 (Blyzniuky Raion of Kharkiv region). As a result of drilling both facilities and Biliaivska-400 stimulation, the operator did not obtain any commercial gas flows from consolidated sandstones.

SECTION 4

On 12 March 2015, Shell and Ukrgazvydobuvannya PJSC announced the completion of prospecting and exploration works and geological data assessment under the Joint Activity Agreement. With reference to the received exploration results, the parties agreed that their further activity is economically unviable and decided to terminate the Agreement. At present, the wells are being prepared for abandonment and drilling pads are being prepared for reclamation.

56

45

http://www.shell.ua/aboutshell/media-centre/news-and-media-releases/2013/20130916.html

46

http://uk.reuters.com/article/2014/07/31/shell-ukraine-idUKL6N0Q63VX20140731

47

http://www.rbc.ua/ukr/news/shell-poka-ne-budet-vozobnovlyat-razvedku-po-slantsevomu-gazu-06032015150600

48

http://www.shell.ua/home/content/ukr/aboutshell/our_business_tpkg/ep/

49

http://www.epravda.com.ua/news/2012/07/5/328524/

50

http://www.shell.ua/home/content/ukr/aboutshell/our_business_tpkg/ep/

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Fig. 10: Layout of the Yuzivska Field Source: Geoinform of Ukraine Research and Development Enterprise

Layout plan Yuzivska field scale 1:500000

Legend oblast borders raion borders major motor roads railways rivers lakes and impoundments forests relief settlements the Yuzivska field contour the Pivnichno-Volvenkivske field the Spivakivske field the Kamyanska field contour corner point number

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

57

Sumy region

Kharkiv region

Luhansk region Poltava region

Slobozhanska field Yuzivska field

Dnipropetrovsk region

Donetsk region Fig. 11: Licensed Fields in the East of Ukraine Source: Presentation by P. Holub, Director General of Ukrnaukageotsentr SE

4.2. Prospective Regional Projects to Continue Development In 2012, the Ministry of Ecology and Natural Resources of Ukraine planned to announce a call for tender for PSA for the Slobozhanska field (Kharkiv region) covering 6 thsd km2. Recoverable reserves in the field were estimated at 50 to 70 bcm for shale gas and basin-centered gas, and at 2 mln tons51 for gas condensate. The Slobozhanska field is attractive for investment. Total amount of investment in the Slobozhanska field was estimated at 25 to 30 bln USD. Predicted annual gas production was 6 to 8 bcm52.

A call for tender for the Slobozhanska field was to be announced in 2012, but later it was moved to 201353, and then it was postponed indefinitely. Eni, TNK-BP and Naftogaz of Ukraine NJSC expressed their interest in the PSA. It should be noted that in case of successful implementation Ukraine may receive about 130 to 150 bln UAH of budget revenues. In addition, according to experts, annual gas production from this field will allow to increase Ukraine’s own production by a quarter.

Apart from PSA, investors should focus on standard ways to obtain access to licensed fields.

As of 1 January 2015, in Ukraine there were issued 46 special permits for subsoil use in the fields which may be used for unconventional gas production (shale gas and/or consolidated sandstone gas), including 12 permits for gas recovery from shale formations in Kharkiv region:

• Energy

Service Company “Esko-Pivnich” LLC – 6 permits (Pehedivska, DerkachivskoVoytenkivska, Kubashivska, Klubanivsko-Zubrenkivska, Rohanska fields, Karaykozivske and Rakytnianske (including Kaponivskyi block) fields);

• Systemoilengineering LLC – 1 permit (Vodianivska field);

SECTION 4

• T echnokomservis Company LLC – 2 permits (Stepkivska and Oktiabrska fields);

58

51

http://newgas.org.ua/node/116

52

http://ua-energy.org/post/20079

53

http://www.gasua.com/ru/news/2887.html

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

• Aldea Ukraine SE – 1 permit (Rzhavetska field); • First Ukrainian Gas and Oil Company LLC – 1 permit (Ohultsivske field); • KUB-Gas LLC – 1 permit (Olhivske field).

In the middle of 2014, the State Service for Geology and Mineral Resources of Ukraine announced a list of 45 oil-and gas-bearing subsoil fields to be put out to tender in 2015. 17 fields on the list are located in Kharkiv region, including 7 fields with the right to perform geological exploration for shale gas (“gas from shale formations”):

• Mazharivska field (Zachepylivka Raion); • Hersevanivsko-Brytayska field (Lozova Raion); • Ohiivsko-Kalynivska field (Zachepylivka Raion, Krasnohrad Raion, Sakhnovschyna Raion); • Bilozirsko-Lavrykivska field (Zmiiv Raion, Balaklia Raion); • Lozivska field (Lozova Raion); • Murafynska field (Bohodukhiv Raion); • Zakhidno-Hutska field (Bohodukhiv Raion, Krasnokutsk Raion).

4.3. Potential Supply Chain of Exploration and Production A few major process innovations in oil and gas production enable the efficient development of reserves considered before as not economically feasible. These innovations include new techniques in hydraulic fracturing, higher precision in directional and horizontal drilling, and construction of multiple wells from a single pad that allows for significantly smaller impact on surface land. Moreover, during the unconventional oil and gas development significant updates of existing infrastructure or construction of new infrastructure occur. The heavy equipment needed to bring in drilling equipment and to haul water and other materials requires heavy-duty roads to be built and maintained. The other infrastructure includes upgrade of bridges and culverts, developing electrical lines to the drilling sites, building water pipeline system or drilling water wells (depending on the source of water used for production process), and finally, and building necessary midstream infrastructure to transport the hydrocarbons to a processing facility, or directly to a market. Depending on the extracted product (dry gas, wet gas or oil), appropriate infrastructure should be built. It might requires building an elaborate gathering pipeline system, compressors, processing plants, fractionation plants, storage facilities, and railroad loading terminals.

The development of appropriate infrastructure depends on the development stage of the reserves. In early stages, mainly exploratory wells will be drilled and heavy investment emphases will be made on the technological processes to obtain production results. At this stage

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

59

only necessary infrastructure will be build to warrant safe resource development and minimal intrusion into the environment.

When the production results will outline the area of main development, construction of more permanent infrastructure takes place. The supply chain is forming for each stage of the product development within upstream, midstream and downstream phases.

In the lifetime of a well, there are three distinct phases: pre-drilling, drilling and production.

Each phase is consisting of several tasks that, in turn, break to smaller steps.

In pre-drilling phase, there are three main tasks: identifying oil and gas resources; contracting and permitting the site for exploration; and site planning, preparation and construction. In the drilling phase, there are three more tasks including drilling, casing and cementing a well; performing hydraulic fracturing of the well (stimulation); and well completion. Finally, in the well production phase, there is a commercial recovery of oil and gas, construction of gathering pipeline, and after certain time (5 – 10 years), closing of the well and remediation of the drilling site.

This study concentrates on the upstream development due to the early stage of the exploration of oil and gas shale resources in Ukraine. Therefore the upstream development for countries that don’t grant the subsurface ownership rights to people includes seven stages.

Preparation for drilling

Research

Permits

Boring

Construction playground

Boring

Production

Hydraulic fracturing reservoir

Construction wells

Extraction and pipeline construction

Each stage opens opportunities for different businesses to subcontract to a main producing company depending on the degree of producer’s centralization of business functions.

Traditionally in former Soviet Union and subsequently in Ukraine over the last decade, the large national oil and gas companies were highly integrated and accounted for multiple internal divisions specializing in certain business functions. With the emergence of smaller private companies, the integration around business functions is happening on a much smaller scale and the network of private suppliers is building up in the country.

Each stage includes certain operations and requires multiple supplies and services.

Exploration

SECTION 4

Exploration requires completion of the number of seismic and data analyses: During this phase of well construction, also initial vertical drilling will occur; samples of the core will be taken for evaluation of shale formations. Within this stage, companies whose products are seismic surveying, Geographic Information Systems (GIS), geologists, and low-skilled construction workers (to run lines, dig holes, drive trucks) will be in demand.

The corresponding industries will include The Geological exploration for oil and gas; Geophysical engineering services, Seismic geophysical surveying services, GIS mapping services, Geological 60

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

research and development labs, and temporary employment services or miscellaneous construction. After shale resources are evaluated at the first stage, the process will move to creating contracts with the state on developing the site for exploratory and commercial drilling.

Contracting and permitting During this phase of well development, companies whose products are real estate, attorneys, surveying, GIS mapping, Title abstractors, environmental engineers, tax planners, accountants, banking, community development will be in demand. The industries to which these companies belong include Commercial banks, Financial planners & investment services, Landman services, Real estate brokers, Attorneys’ offices, title companies and government institutions, Public accountants, accounting services, Topographic, land, hydrographical surveying services.

Drilling in shale or tight sands formations is typically conducted in a manner more similar to offshore drilling than to traditional onshore drilling. That is, drilling is conducted from a central location, called a “pad”, which operates like an offshore platform, and has as many as 6 to 8 slots available from which to drill new wells. Use of the central pad reduces not only the cost of drilling, but also the surface and environmental impact because the number of traditional well sites is reduced significantly.

Site construction Besides multiple construction tasks, during this phase, a producing and/or drilling company establish emergency response plan on site and other safety procedures corresponding to environmental and regulatory requirements.

Products and services of companies on mapping services, civil engineers, construction engineers, excavation and other heavy construction machinery, sand and gravel, fencing, construction materials, plastic liners, trucking, heavy equipment, safety services, emergency response services will be in demand.

Industries that include these companies are Drilling site preparation, Sand and gravel quarrying, Road construction, Excavation contractors, Heavy equipment rental, Fencing contractors, Construction and mining machinery, Fencing & construction materials supplies, Civil engineering services, Aerial geographic surveying services, Topographic and hydrographical surveying services, General labour contracting, Landscaping services, Heavy machinery and equipment repair and maintenance services, and others.

Drilling A typical well takes about two months to drill, depending upon the vertical depth and whether the well has a horizontal outreach. It is not uncommon for a producer to first drill a vertical “exploratory” well(s) to obtain critical reservoir rock and fluid property data necessary for planning and constructing further commercial wells with or without horizontal segments. It might be expected to see as many vertical slots for vertical sections of the wells as for horizontal (if horizontal segment is planned to be drilled).

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

61

Unlike conventional reservoirs, the shale formations are ubiquitous, and productive in some amount everywhere within the basin. The so called “success rate� for shale drilling has been estimated to be approximately 98% -- a remarkable number for the high risk, high reward oil and gas industry. This also controls drilling strategy, as the wells generally cost about the same amount to drill (estimated to be around $10-13 million per exploratory well and about 50%-80% of that amount for a commercial well depending on the well depth and technical conditions of drilling).

Although the drilling conditions are similar for the whole basin, they differ from well to well.

Geologists and engineers needs to collaborate with the drilling crews to analyze and tune the drilling process and regularly obtain the data on the core rock, especially for exploratory drilling.

Large number of supplying products and services are required for this phase. Companies with products such as drilling contractors and drilling workers, site managers, still pipes and casings, cement, wellhead equipment, drill bits, reamers, tools, drilling mud and chemicals, fuel to operate the rig, diesel generators, trucking , water, water pipelines, water tanks, geologists, engineers, catering, apartment rentals, hotels and motels, onsite security, storage containers, garbage hauling, and many-many more.

The companies providing these services and products are likely to be located within such industries as oil and gas well drilling, geological exploration for oil and gas, oil and gas drilling services, mud service for oil field drilling, cementing, building and repairing oil and gas rigs, construction of non-residential facilities, crane rental, manufacturing of steel pipes, manufacturing of water tanks and storage tanks, gas well machinery and equipment, tracking services, cement wholesalers, cement manufacturing, other types of wholesalers offering supplies to oil and gas industry, crane rental and leasing, generator rental and leasing, security guard services, garbage collection services, hotels and motels, catering services, appeal manufacturing, laundry services, and many more.

As a result of this phase, the wellbore is drilled to the desired depth, the potential reservoir is identified, and production casing is installed and ready for well stimulation.

Hydraulic fracturing The phase of well stimulation requires such services and materials as trucking equipment and trucks, water tanks, high pressure water lines, water pumps, frack sand, chemicals used in fracturing fluid, pressure washing, cranes, pressure control equipment, and traditional for all stages catering, hotels and motels, apartment rentals, miscellaneous tools and services rentals, onsite security, and others.

SECTION 4

The valuable industries for this stage of well construction are sand quarrying, gas well drilling, building oil and gas rigs, crane rentals, manufacturing of steel pipes, generators and electrical wholesalers, industrial chemical wholesalers, trucking services, water tank manufacturing/ rental, oil and gas well drilling equipment manufacturing/leasing, pressure washing services, and many others.

After the completion of hydraulic fracturing, the stimulating equipment is disassembled and producing is tested for commercial production.

62

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Well completion During this phase, the installation of surface facilities and ancillary services are completed.

The water retention pond is removed, surrounding site land is re-countured, unnessesary roads are removed and topsoil is spread. Final landscaping and replanting takes place.

In demand products and services for this stage include drill bits for plugs, hauling wastewater, wellhead installatiopn services, wellhead, metering system, fencing company, landscaping services, road repair, trucking (equipment, water).

These products and services are produced by such industries as Gas well drilling, stone mining, road construction and repair, fencing contractors, gas well manufacturing, trucking services, oil and gas drilling machinery and equipment wholesale/leasing, lanscaping services, and others.

The final stage of a well lifetime includes production, contruction of pipelines and, after a while, closing the well and remidiation of the site.

Production and pipeline During this phase, the products and services in demand are natural gas metering equipment, pipelines, construction wprkers, construction equipment, welding supplies, welding workers, pipeline equipment inspections, landscaping services, environmental engineers, civil engineers.

These products and services are produced by such industries as the Steel pipeline manufacturing, Pipeline contruction, Heavy equipment manufacturing/rental, Metering devices, Gas leak detectors, Welding machinery and equipment, Welding services, agricultural supplies, Natural gas pipeline operations, General labor contractors, Civil engineering services, Environmental engineering services, Landscaping services and others.

All materials necessary for discovery of the resources, well drilling, completion and production have special quality requirements. Producing company is responsible for overall quality of site development and well drilling and completion, is going to impose their quality requirements upon subcontracting companies. Having necessary equipment does not guarantee that a subcontracting company will be allowed to conduct services for a producer. Special safety and quality requirements will be imposed through the assessment of subcontractor’s technical capabilities, skills of its workers, culture and technology used in a process, and through conducting training if necessary.

However, the presence in Kharkiv region many companies within required industries create a potential to supply for a nascent unconventional oil and gas development industry.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

63

4.4. Regional Materials, Services and Labour for Unconventional Gas Production In order to assess the potential impact of unconventional oil and gas development on Kharkiv region economy, a typical cost of a well development to extract unconventional gas resource will be presented.

Pre-drilling operations typically cost between $1 to $2 million dollars and performed within 6 months to 1 year before the site is drilled. Depending on the stage of the field development (early stage of development takes longer), the cost of this stage completion depends on the available infrastructure at the site or near the prospective site for drilling.

Identifying oil and gas resources and collecting and analyzing data typically cost between $800,000 to $1.2 M and might require an engegement of 15 highly skilled people and 30 workers of the mid skills. A small number of low skilled workers is also required. Since the geological assessment crew will be employed for a short period of time, it create an about 3 to 5 full-time employment equivalent (FTE) on an annual bases. The further site planning and preparation withing the pre-drilling operations takes usually from 1 to 2 months and require about $500,000. At this stage about 5 high-skilled and 15 mid-skilled workers are required to conduct environmental planning and assessment, civil engineering services and some construction operations. It creates an FTE equivalent of another 3 to 5 workers.

The legal work on developing contractual relationships requires operations of a legal crew but for a short time period (usually after the initial contract took place), and create less than 1 FTE job in this field. Finally, heavy euqipemnt-operating construction crew usually consists of 18-20 workers for typically 2 to 3 weeks to contract te site and conclude this phase of development. Depending on the length of access road that needs to be contructed, number and state of bridges and calverts, the construction phase might start at $300,000 and stretch to $1M. The average cost of drilling vary significantly from field to filed. Even within the same productive basin, the well cost fluctuate depending on specific depth of the well, the length of the laterls segmet (if a well has one), the type of the well (exploratory or commercial), and some management decisions. Very first exploratory wells cost significantly more due to unknown geo-physical factors of drilling. In addition, drilling in countries that do not have a well developed supply chain to unconventional drilling, like in Ukriane, will yuild higher expenditures due to the need to import many supplies and contract a crew and equipment that is not redily available in Ukraine and therefore cost more.

SECTION 4

In Ukraine, the cost of an exploratory well (without a horisontal segment) is hypothesized to be on average $10 million.54 Later on, when the comercial vertical wells might be drilled the cost might drop to $6-7 million or to be at the lvel of $10 million while adding the horizontal segment. In Marcellus wells in Pennsylvania, the initial cost of exploratory wells was in an $8 million range, dropping quickly to $3.5-5 million and later on to $1-$1.5 million on more shallow gas wells (a depth up to 1 kilometer) with horizontal segment. In Utica wells in Ohio and West Verginia where the depth of drilling exceeds 2-2.5 kilometers the initial cost of an exploratory well was $10-$12 million, dropping within one year to $7-8 million and later to $5-7 million. With the perfection of technologies, the cost of drilling is slightly increasing due 54

64

Some prices are given in U.S. dollars for a comparison with the international practse of drilling.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

to significalty longer horizontal segment of a well, which in some cases reaches up to 2-2.5 kilometers.55 For the purpose of this study since the industry does not share their specific plans for future drilling and complex economic and polirical situation ina country, the assuption is made based on a $10 million cost of a well. The calculations for the future could be lineary scalled, i.e. the cost of two wells would assumed to be $20 million and a cost of 4 wells is assumed to be $40 million. Only when the significant supply chain is developed within the country, the economy of scale will take place and the cost reduction will be applied to the calculations.

The drilling phase includes the cost of drillinga welbore, cementing the welbore with steel pipes and conducting hydraulic fracturing of a well. Again, in typical Marcellus and Utica wells the cost of hydraulica fracturing is about 50% of the total drilling cost of a well. In Ukraine, where only vertical wells were invisioned to be drilled during the exploratory phase, it is expected to be not more than 1/3 of the total cost of a well.

Finally, sine the were no results reported on a production of any commercially viable well, this study does not model an impact of a production phase. Amount of a product produced per well will define the necessary production infrastructure, including processing plants, fractunation plants, compressors and pipelines. For the purpose of this study, only gathering lines’ cost included in a cost of drilling.

Methodologically, the calculations in this prospective assessment of an economic impact is based on a calculation of an economic impact from drilling a single well with the cost of $10 million dollars and contraction work of preparing sites for drilling at the cost of another $10 million, which typically should prepare the sites for 6-8 well pads. Typically the unconventional drilling is conducted from well pads on which a company can locate several wells.

About 58% of all wells drilled in unconventional formations in the U.S. are donw by using well pads for drilling multiple wells. Such operations are done in the Bakken, Eagle Ford, Permian, Marcellus, Utica, Niobrara, Fayetteville, Haynesville and Woodford shales decresing costs, surface impact and time of drilling. The drilling of several wells from a multi-well pad typically saves 15-30% of expenditures per well. U.S. Energy Information Administration indicates that average Bakken, Eagle Ford, and Marcellus well-related expenses per horizontal well can vary between approximately $6.5 million and $9 million. The cost of completing and hydraulic fracturing typically exceeds the cost of drilling the well.56 The input-output model measures how the economy will respond to the expansion of a specific industry. For example, growing demand for hydrocarbons may cause producing companies to increase activity, and in the process invest in drilling and creating midstream infrastructure and hire more people. The first round of industry expansion is a direct effect from the investment. The producing companies may also contract out to suppliers, such as drilling and service companies, and those suppliers may in turn contract to others for parts and services, such as sand, pipe, cement and energy. This can be thought of as purchases made in the supply chain that are an indirect result of the demand to drill the well. There is a third round of spending that must also be captured. This is the spending that comes from existing and new Gulfport Company drilled the longest lateral well in Utica’s Point Pleasant reaching 7,974 feet. There were 28-stage hydraulic fracuring in their Wagner 1-28H well. Oil and Gas Journal, 6/21/2012.

55

56

Pad drilling and rig mobility lead to more efficient drilling. September 11, 2012. http://www.eia.gov/todayinenergy/detail.cfm?id=7910

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

65

employees of producing companies and their suppliers. This is consumer spending that is induced by the spending of the employees and all who serve them, from hotels and restaurants to barbers and grocery stores.

In this section the results of direct and indirect impact from the prospective construction and drilling operations. The induced effect on the economy of Kharkiv region will be discussed in the following section.

Traditional economic impact is measured by four economic indicators.

Output: Additional value of goods and services produced in the region as a result of the expenditures by oil and gas producers involved in unconventional resources development.

Value-added: Additional output created in the region as a result of the expenditures of oil and gas producers less the value of intermediary goods. Intermediary goods and services–such as energy, materials, and purchased services–are purchased for the production of other goods and services rather than for final consumption.

Employment: The number of additional jobs created in the region as a result of the expenditures of oil and gas producers and midstream companies.

Labour income: Additional household earnings created in the region due to the expenditures of oil and gas producers and midstream companies.

There are limits the impact modelling. One major assumption that is part of the arithmetic of an input-output model is that the model cannot account for scale economies. The model assumes that the supplies for one well are strictly proportional to the supplies for 100 wells.

Difficulties caused by the inability of input-output models to handle scale economies are less important for capital-intensive industries, such as the oil and gas industry, because of the fixed nature of the investment. This is especially true with drilling sites where drilling pads are replicated and spread out over a large area and the cost of gathering lines and trunk lines are estimated by their lengths.

The construction impact and the economic impact from drilling is presented separately due to the asumption that contracution of a well pad and pther pre-drilling operations is not as much specialized as drilling, requires minimal training and could be completed by the local labor. The drilling operations require special safety instructions, specific knowledge and skilles and might engage drilling crew and other personall with more specialized knowledge.

SECTION 4

Since the cost structures in Ukraine significantly differ from the cost stucture in the U.S., the modeling results are presented in terms of employment as a primary variable demonstration the economic impact. Other indicators are presented in terms of percentage structure in relations to the direct impact. In other words, the direct impact of labor income, total value added and output presented as a base, 100%, and the indiract and induced effects are presented in relations to this base.

The conducting pre-drilling construction operations at the amount of about $10 million will require a direct engagement of 45 full-time and part-time employees. In addition, companies that will supply to construction need to engage additional labor due to increased 66

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

requirements for supplies. Most likely, the jobs created in the supplying companies will be increamental, i.e. only a fraction of a job will be created due to a specific contract (in our example, construction project for $10 million). The summation of the fractures of jobs across many industries constitute the indirect employment that will be created in a region due to a nesessity to supply construction processes related to gas extraction. The total indirect employment required due to additional $10 million construction operations durinf pre-drilling phase will sum up to 30 full-time and part-time jobs. Overall, every 3 jobs directly created by a need of construction projects create 2 jobs in supply industries. The companies/industries with the highest generated number of jobs in the supply chain to the construction companies are listed in the following table.

Table 14: Employment Impact of Wellpad Construction (1 Well)

Total Employment Impact

Direct

Indirect

Industrial sectors

45

30

Construction of new highways and streets

45

Wholesale trade

3

Truck transportation

2

Architectural, engineering, and related services

2

Employment services

1

Retail - Nonstore retailers

1

Ready-mix concrete manufacturing

1

Retail - Clothing and clothing accessories stores

1

Real estate

1

Retail - Miscellaneous store retailers

1

Commercial and industrial machinery and equipment rental and leasing

1

Stone mining and quarrying

1

Management of companies and enterprises

1

Commercial and industrial machinery and equipment repair and maintenance

1

Full-service restaurants

1

Accounting, tax preparation, bookkeeping, and payroll services

1

This table illustrates that construction companies will buy their supplies from the wholesalers (or directly from companies-produsers); they will use trucking services in transporting equipment, soil, sand, gravel and other materials and supplies; they will requre architectural and engineering services and other supplies to complete their projects.

Assessing the prospective economic benefits by the labor impact, it is suggested that if the labor income for 45 direct jobs in construction will amount to 100%, the additional 30 jobs in the supply chain will create about 62% of an additional labor income in supplying industries.

Table 15: Labour Market Impact of Wellpad Construction (1 Well)

Impact Type

Employment

Labour Income

Total Value Added

Output

Direct Effect

45

100.0%

100.0%

100.0%

Indirect Effect

30

61.9%

103.6%

62.5%

Likewise, if 45 direct jobs will create 100% of the total value added and 100% of output, additional 30 supplying jobs will be associated with creating addiational value added at 103.6% and 62.5% of output. Since we hypothesized that the direct output is $10 million, we can interpret that additional output in supplying industries will be at the level of $6.25 million.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

67

The top industries that will create additional output are consistent with those creating highest impact in labor but reflect high impact at materil supplying industries. The following table illustrates companies/industries that will generate at least $50,000 of additional output (total value of jobs and services, including interim products and operations). This additional output is created bacause of a $10 million construction project to build drilling pads and performed other pre-drilling construction operations.

Table 16: Indirect Industry Impact of Wellpad Construction (1 Well)

Industry

Indirect Output

Pct of total Increase of Output in Supplying Industries

Total

$6,250,006

100.0%

Wholesale trade

$642,905

10.3%

Petroleum refineries

$584,897

9.4%

Asphalt shingle and coating materials manufacturing

$378,947

6.1%

Ready-mix concrete manufacturing

$327,118

5.2%

Truck transportation

$315,878

5.1%

Stone mining and quarrying Commercial and industrial machinery and equipment rental and leasing

$210,290

3.4%

$208,023

3.3%

Extraction of natural gas and crude petroleum

$205,584

3.3%

Architectural, engineering, and related services

$194,546

3.1%

Real estate

$163,262

2.6%

Management of companies and enterprises

$155,091

2.5%

Retail - Nonstore retailers

$141,177

2.3%

Asphalt paving mixture and block manufacturing

$133,976

2.1%

Monetary authorities and depository credit intermediation

$115,671

1.9%

Fabricated structural metal manufacturing

$104,671

1.7%

Miscellaneous nonmetallic mineral products manufacturing

$95,297

1.5%

Retail - Clothing and clothing accessories stores Commercial and industrial machinery and equipment repair and maintenance

$87,940

1.4%

$73,436

1.2%

Employment services

$67,843

1.1%

Legal services

$67,063

1.1%

Sand and gravel mining

$59,576

1.0%

Electric power transmission and distribution

$55,394

0.9%

Maintenance and repair construction of non-residential structures

$54,049

0.9%

Other concrete product manufacturing

$53,099

0.8%

Accounting, tax preparation, bookkeeping, and payroll services

$47,823

0.8%

Asphalt, concrete, stones, gasoline and other petroleum products togather with industrial machinery and trucking are major supplies for the construction of well pads and improving roads to suit transporting equipment and materials for further drilling.

Overall, every $10 spent for construction of wellpads generates about $6 of output in supply industries.

SECTION 4

The potential economic impact from drilling operations on one well with an average cost of $10 million can be measured by creating 36 direct full-time and part-time jobs in oil and gas well drilling and 12 jobs across the supply industries/companies that provide materials and services to drillers. Since the drilling requires supply of more specialized labour and Kharkiv does not have yet a developed supply chain companies that will successfully cater to required 68

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

quality of drilling, the available supply and therefore prospective economic impact is more limited than the impact from construction.57 Table 17: Employment Impact of Drilling (1 Well)

Total Employment Impact

36

12

Industrial Sectors 36

Drilling oil and gas wells Support activities for oil and gas operations

4.2

Legal services

1.5

Services to buildings

0.5

Architectural, engineering, and related services

0.4

Wholesale trade

0.3

Employment services

0.3

Maintenance and repair construction of non-residential structures

0.3

Management of companies and enterprises

0.3

Other nonmetallic minerals services

0.2

Other financial investment activities

0.2

Truck transportation

0.2

Securities and commodity contracts intermediation and brokerage

0.2

Monetary authorities and depository credit intermediation

0.2

Real estate

0.2

Limited-service restaurants

0.2

Accounting, tax preparation, bookkeeping, and payroll services

0.1

Commercial and industrial machinery and equipment rental and leasing

0.1

Business support services

0.1

Automotive repair and maintenance, except car washes

0.1

Electronic and precision equipment repair and maintenance

0.1

Insurance carriers

0.1

Full-service restaurants

0.1

Investigation and security services

0.1

Management consulting services

0.1

Nondepository credit intermediation and related activities

0.1

Insurance agencies, brokerages, and related activities

0.1

Cutting tool and machine tool accessory manufacturing

0.1

Metal mining services

0.1

Incremental jobs are created across large number of supplying companies/industries from drilling a single well. The economy of scale is desired to create full-time positions and significantly impact regional employment. The drilling a single well will create at least 4.2 jobs in oil and gas service companies/industries that provide specialized services and operations to the drilling process. Such services might include cementing services, hydraulic fracturing, and coring. Less specialized services will create smaller amount of jobs in supplying industries. For example, two wells with an average cost of $10 million each will create 1 job in supporting legal services and another job in the Architectural, engineering, and related services industry.

Overall, every three jobs created directly in drilling will require one additional job created in supplying industries.

In future, when significant supply chain for drilling operations will be established, a larger number of supplying jobs can be engaged to serve the drilling projects regionally. In coun57

T he methodology intentially used early stage of unconventional oil and gas development in non-oil and gas traditional states to model prospective results for Ukraine.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

69

tries and regions that have developed significant sector of unconventional drilling every three jobs created directly at drilling generates two jobs in the supply industries.

Table 18: Labour Market Impact of Drilling (1 Well)

Impact Type

Employment

Labour Income

Total Value Added

Output

Direct Effect

36

100%

100%

100%

Indirect Effect

12

26.4%

23.6%

22.4%

If 36 direct jobs in drilling will create 100% of the total value added and 100% of output, additional 12 supplying jobs will yield additional 26.4% of labour income. In addition, these additional supplying jobs will be associated with creating additional value added at 23.6% and 22.4% of output. Since we hypothesized that the direct output is $10 million, we can interpret that additional output in supplying industries will be at the level of $2.24 million.

The top industries that will create additional output are consistent with those creating highest impact in labour. The following table illustrates companies/industries that will generate about $10,000 (or 0.5%) of additional output. This additional output is created because of a $10 million drilling of a single well.

Table 19: Indirect Industry Impact of Drilling (1 Well)

Description of Industry

Indirect Output

Pct of total Increase of Output in Supplying Industries

$2,235,855

100.0%

Total

SECTION 4

Drilling oil and gas wells

70

$6,779

0.3%

Support activities for oil and gas operations

$988,157

44.2%

Legal services

$210,405

9.4%

Wholesale trade

$76,549

3.4%

Management of companies and enterprises

$69,255

3.1%

Petroleum refineries

$58,664

2.6%

Maintenance and repair construction of non-residential structures

$55,150

2.5%

Architectural, engineering, and related services

$46,950

2.1%

Monetary authorities and depository credit intermediation

$43,064

1.9%

Other nonmetallic minerals services

$41,213

1.8%

Other financial investment activities

$40,123

1.8%

Commercial and industrial machinery and equipment rental and leasing

$39,538

1.8%

Insurance carriers

$32,306

1.4%

Real estate

$32,302

1.4%

Truck transportation

$29,981

1.3%

Services to buildings

$29,579

1.3%

Extraction of natural gas and crude petroleum

$21,528

1.0%

Employment services

$16,682

0.7%

Wired telecommunications carriers

$15,234

0.7%

Petroleum lubricating oil and grease manufacturing

$14,576

0.7%

Accounting, tax preparation, bookkeeping, and payroll services

$13,690

0.6%

Insurance agencies, brokerages, and related activities

$13,077

0.6%

Metal mining services

$12,908

0.6%

Electronic and precision equipment repair and maintenance

$12,813

0.6%

Securities and commodity contracts intermediation and brokerage

$12,710

0.6%

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

Indirect Output

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Description of Industry

Pct of total Increase of Output in Supplying Industries

Nondepository credit intermediation and related activities

$12,563

0.6%

Lessors of nonfinancial intangible assets

$12,027

0.5%

Cutting tool and machine tool accessory manufacturing

$11,930

0.5%

Management consulting services

$10,551

0.5%

Electric power transmission and distribution

$10,090

0.5%

The most of supplies (44.2% of all supplies measured by the output) will be provided by the companies enlisted within the Support activities for oil and gas operation industry. This industry comprises establishments primarily engaged in performing support activities on a contract or fee basis for oil and gas operations (except site preparation and related construction activities). Services included are exploration (except geophysical surveying and mapping); excavating slush pits and cellars, well surveying; running, cutting, and pulling casings, tubes, and rods; cementing wells, shooting wells; perforating well casings; acidizing and chemically treating wells; and cleaning out, bailing, and swabbing wells.

Assuming that 7 drilling pads will be built for $10 million and those pads will accommodate drilling of 3-4 wells each (total of 21-28 wells), the total expenses will reach over $210 million accounting for about 30% decrease of the drilling cost during the first year of operation. The combined impact of the pre-drilling operations including construction of drilling pads and the drilling of wells will potentially create 757 full-time and part-time direct jobs. The construction and drilling operations will require supply chain which will create another 264 full-time and part-time jobs in supporting industries. Overall, such a project will generate more than 1,000 of potential full-time and part-time jobs, 75% of these jobs will be created directly in construction and drilling companies and another 26% in companies supporting their operations.

Table 20: Labour Market Impact of Construction and Drilling (Project)

Impact Type

Employment

Labour Income

Total Value Added

Output

Direct Effect

757

100%

100%

100%

Indirect Effect

264

28.1%

25.5%

24.3%

Assessing the prospective economic benefits by the labor impact, it is suggested that if the labor income for 757 direct jobs in construction and drilling will amount to 100%, the additional 264 jobs in the supply chain will create about 28.1% of an additional labor income in supplying industries.

If 757 direct jobs in construction and drilling will create 100% of the total value added and 100% of output, additional 264 supplying jobs will be associated with creating additional value added at 25.5% and 24.3% of output.

The top industries where direct and indirect employment will be created are listed in the following table.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

71

Table 21: Employment Impact of Construction and Drilling (Project)

Total Employment Impact

Direct

Indirect

Description of Industries

757

264

Drilling oil and gas wells

712

Construction of new highways and streets

45

Support activities for oil and gas operations

84

Legal services

30

Services to buildings

11

Wholesale trade

10

Architectural, engineering, and related services

9

Employment services

8

Maintenance and repair construction of non-residential structures

7

Management of companies and enterprises

6

Truck transportation

6

Other nonmetallic minerals services

5

Other financial investment activities

5

Real estate

4

Monetary authorities and depository credit intermediation

4

Commercial and industrial machinery and equipment rental and leasing

4

Securities and commodity contracts intermediation and brokerage

4

Accounting, tax preparation, bookkeeping, and payroll services

4

Limited-service restaurants

3

Automotive repair and maintenance, except car washes

3

Business support services

3

Full-service restaurants

2

Electronic and precision equipment repair and maintenance

2

Insurance carriers

2

Retail - Nonstore retailers

2

The project of constructing 7 drilling pads and drilling about 21-28 wells, will generate opportunities in the Support activities for oil and gas operations (84 full-time and part-time jobs), about 30 potential jobs in the Legal services, 11 jobs in the services for buildings, 10 jobs in the Wholesale trades and other industries.

SECTION 4

Table 22: Industry Impact of Construction and Drilling (Project)

72

Description of Industry

Direct Output

Indirect Output

Total

$210,000,003

$50,967,099

Drilling oil and gas wells

$200,000,002

$135,676

Construction of new highways and streets

$10,000,000

$0

Pct of total Increase of Output in Supplying Industries 100%

Support activities for oil and gas operations

$19,775,829

9.4%

Legal services

$4,275,153

2.0%

Wholesale trade

$2,173,887

1.0%

Petroleum refineries

$1,758,168

0.8%

Management of companies and enterprises Maintenance and repair construction of nonresidential structures

$1,540,187

0.7%

$1,157,044

0.6%

Architectural, engineering, and related services Commercial and industrial machinery and equipment rental and leasing

$1,133,543

0.5%

$998,790

0.5%

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

Monetary authorities and depository credit intermediation

$976,951

0.5%

Truck transportation

$915,494

0.4%

Other nonmetallic minerals services

$827,262

0.4%

Other financial investment activities

$821,572

0.4%

Real estate

$809,306

0.4%

Insurance carriers

$689,059

0.3%

Extraction of natural gas and crude petroleum

$636,148

0.3%

Services to buildings

$615,239

0.3%

Description of Industry

Direct Output

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Indirect Output

Pct of total Increase of Output in Supplying Industries

About 9% ($19.8 million) of all support services measured by the output will be delivered by the Support activities for oil and gas operations companies. Another 2% (44.3 million) of the additional output will be generated in legal companies. Other activities of support products and services are spread across the large number of industries and companies. The top industries providing support to construction and drilling will generate at least $600,000 of additional output each. These industries will account for companies in the Wholesale trade, the Petroleum refineries, the Management of companies and enterprises, the Maintenance and repair construction of non-residential structures, the Architectural, engineering, and related services and many others.

Main industries that contribute to the labour income in supplying companies are listed in the following table.

Table 23: Industries-Donors of Labour Income Support activities for oil and gas operations

35.3%

Legal services

12.0%

Management of companies and enterprises

4.6%

Wholesale trade

4.6%

Architectural, engineering, and related services

4.1%

Other nonmetallic minerals services

2.7%

Maintenance and repair construction of non-residential structures

2.5%

Truck transportation

2.2%

Commercial and industrial machinery and equipment rental and leasing

1.7%

Services to buildings

1.6%

Employment services

1.6%

Monetary authorities and depository credit intermediation

1.5%

Accounting, tax preparation, bookkeeping, and payroll services

1.2%

Metal mining services

1.1%

Insurance carriers

1.0%

Electronic and precision equipment repair and maintenance

1.0%

Other financial investment activities

0.9%

Securities and commodity contracts intermediation and brokerage

0.9%

Management consulting services

0.8%

Nondepository credit intermediation and related activities

0.8%

Automotive repair and maintenance, except car washes

0.8%

Largest share of the labour income is contributed by companies within high-paying industries, i.e. the Support activities for oil and gas operations, the Legal services and the Management of companies and enterprises.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

73

The largest contributions of value added among supplying companies is created by those that belong to the industries listed in the following table.

Table 24: Industries-Donors of Added Value Support activities for oil and gas operations

46.4%

Legal services

9.4%

Wholesale trade

4.5%

Management of companies and enterprises

3.0%

Commercial and industrial machinery and equipment rental and leasing

2.3%

Monetary authorities and depository credit intermediation

2.1%

Real estate

2.1%

Other nonmetallic minerals services

1.8%

Architectural, engineering, and related services

1.8%

Extraction of natural gas and crude petroleum

1.7%

Maintenance and repair construction of non-residential structures

1.4%

Services to buildings

1.3%

Petroleum refineries

1.2%

Truck transportation

1.2%

Insurance carriers

1.1%

Employment services

1.0%

Accounting, tax preparation, bookkeeping, and payroll services

0.8%

Almost half of all additional value added is created by companies in the Support activities for oil and gas operations, which also contributes the largest share of potential economic growth by employment, output and labour income. Besides of the Legal services and the Management of companies and enterprises that are also atop of the potential growth measured by other indicators, companies that deliver architectural, engineering, and related services, services to building, maintenance and repair construction of non-residential structures and truck transportation.

The hypothesized scenario of a potential economic growth in Kharkiv region, besides being hypothetical, also creates the opportunities for a growth but does not guarantee it. Any economic growth highly depends on the ability of the regional labour and regional companies to respond and offer their services.

4.5. Economic Trickle-Down Effect of the Regional Unconventional Gas Development With the fossil fuels sector expanding in various parts of the United States thanks to unconventional gas development, a number of studies have been undertaken to estimate the resulting effects on employment and economic output. Input-output (I-O) models have been used in most of these studies.

These models are designed to describe linkages along the supply chain for industries being studied in an economy – an economy that is defined in geographic terms, such as a city, a state, or perhaps an entire nation. These linkages comprise the basis for estimating:

SECTION 4

• d irect effects (or impacts), which relate to the economic activity created as an industry being studied buys goods and services from other sectors;

74

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

• i ndirect effects, which are registered as the firms that provide goods and services to that same industry make their own purchases; and

• induced effects, which result as the industry’s employees spend some or all of their wages.

The previous section analyzed a potential direct impact and the impact of supplying companies (indirect impact). The induced impact will be discussed in this section.

As three types of economic impact are analyzed, I-O researchers must deal with two basic and interrelated issues. One issue has to do with transfers, which can be inter-sectoral or interregional. The other relates to the “leakage” of impacts, to places outside of a particular region.

The “leakages” largely relate to the assessment of the induced effect.

Transfers refer to expenditures that are not true economic impacts yet frequently positively accounted for in studies concerned with a specific economic locale. In Kharkiv region, which has significant infrastructure of the oil and gas drilling and producing and accounts for a large number of supplying companies, there still will be “leakages” due to lack of experience in development of unconventional resources and special requirements to the quality of work and products offered by service companies. If many services will be provided by companies from other regions of Ukraine or by foreign companies, Kharkiv regional economy will lose some of the direct economic benefits and will gain only a portion of the induced spending that takes place in the region from spending of employees that will relocate to the region for working during the project.

Another aspect of engaging labour from Kharkiv region is related to so called “substitution effect.” This effect occurs when workers transfer into the new industry from other industries within the region. If so, employment will have shifted from one industry to another, increasing labour costs for existing employers as new workers need to be attracted to the workforce, and muting the positive employment impacts from the drilling. However, at the current level of unemployment and underemployment of existing regional workforce, the substitution will have very limited effect on the regional economic benefits.

4.5.1. Impact of Wellpad Construction Economic impact of construction activities for building well pads is assessed not only through the direct impact of construction and the indirect impact of companies supplying to the construction. The impact from spending wages and salaries earned by workers employed in the construction companies and companies supplying to the construction constitutes the induced impact from the construction activities. The induced impact reflects changes in spending from households due to the increased income of employees in construction companies and companies supplying the construction.

Unlike the direct and indirect impacts, the induced impact reflects a trickle down effect of new investments made in construction of well pads penetrating through all sectors of the regional economy. Industries creating the most job opportunities from the effect of construction are illustrated in the following table.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

75

Table 25: Induced Employment Impact of Wellpad Construction (1 Well)

Industrial Sector

Total

Induced Employment Impact

Pct of Total Increase of Induced Employment

30.1

100%

Hospitals

1.8

6.1%

Full-service restaurants

1.6

5.4%

Limited-service restaurants Real estate

1.6 1.2

5.3% 3.9%

Offices of physicians

0.9

3.0%

Nursing and community care facilities

0.9

2.9%

Retail - Food and beverage stores

0.9

2.8%

Retail - General merchandise stores

0.8

2.8%

Wholesale trade

0.7

2.4%

Employment services

0.7

2.3%

All other food and drinking places

0.7

2.2%

Individual and family services

0.6

2.1%

Personal care services

0.6

2.0%

Home health care services

0.6

1.9%

Automotive repair and maintenance, except car washes

0.6

1.9%

Labour and civic organizations

0.5

1.8%

Insurance carriers

0.5

1.6%

Elementary and secondary schools

0.4

1.5%

Junior colleges, colleges, universities, and professional schools

0.4

1.4%

Child day care services

0.4

1.4%

A worker of a construction company that builds well pads, for example, is using restaurants, food and beverages stores, and doctors due to the increased income. A small fraction of an additional income of a cook in a restaurant, a cashier in a food store, and a doctor are created due to the additional visit and spending of the construction worker. These newly created tiny fractions of the additional income, employment, value added, and output are combined in the total number across of the industries in a region.

The most jobs created as a result of induced economic impact will be in hospitals, restaurants, real estate, retail stores, wholesale and many other service industries. Out of the top 20 industries, 13.9% of jobs will be created in the healthcare, 12.9% in restaurants and other food and drinking places, 8% in wholesale and retail, and 6.4% in the individual, personal and employment services.

SECTION 4

Together direct, indirect and induced impacts, create a total employment impact on the regional economy. The following table presents the industries with the highest overall employment impact. The highest total employment impact is created in the construction itself as a result of the direct employment. Other highly affected industries represent a mix of those reflecting the indirect impact of suppliers and the induced income created by all industries in the region. The Wholesale trade, Truck transportation, and Architectural, engineering and related services are the top three industries where employment opportunities are created due to the indirect impact, via the worker employed in the supplying companies. The restaurants, employment services, and real estate – are the top three industries affected through the induced effect.

76

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Overall, every additional 3 jobs created in construction presented an employment opportunity for 7 jobs in the regional economy: 3 jobs directly in construction, 2 jobs in supply companies and another 2 jobs would be accumulated from the induced effect across the myriads of the regional industries.

Table 26: Total Employment Impact of Wellpad Construction (1 Well)

Industrial Sector

Direct

Indirect

Induced

Total

Total Employment Impact

45

30

30

106

Construction of new highways and streets

45

Wholesale trade

2.9

0.7

3.7

Truck transportation

2.1

0.3

2.4

Full-service restaurants

0.5

1.6

2.1

Employment services

1.4

0.7

2.1

Real estate

0.8

1.2

2.0

Limited-service restaurants

0.3

1.6

1.9

Hospitals

0.0

1.8

1.8

Architectural, engineering, and related services

1.6

0.1

1.7

Retail - Nonstore retailers

1.3

0.4

1.7

Retail - Clothing and clothing accessories stores

1.1

0.3

1.3

Retail - Miscellaneous store retailers

0.8

0.4

1.1

Retail - General merchandise stores

0.3

0.8

1.1

Ready-mix concrete manufacturing Automotive repair and maintenance, except car washes

1.1

0.0

1.1

0.5

0.6

1.1

Retail - Food and beverage stores

0.0

0.9

0.9

Offices of physicians

0.0

0.9

0.9

Nursing and community care facilities

0.0

0.9

0.9

Management of companies and enterprises Monetary authorities and depository credit intermediation

0.6

0.2

0.9

0.4

0.4

0.8

Retail - Health and personal care stores Commercial and industrial machinery and equipment rental and leasing

0.5

0.3

0.8

0.8

0.0

0.8

Legal services

0.5

0.3

0.7

All other food and drinking places

0.1

0.7

0.7

Accounting, tax preparation, bookkeeping, and payroll services

0.5

0.2

0.7

Services to buildings Commercial and industrial machinery and equipment repair and maintenance

0.4

0.3

0.7

0.6

0.1

0.7

Stone mining and quarrying

0.7

0.0

0.7

Retail - Building material and garden equipment and supplies stores

0.2

0.4

0.6

Retail - Motor vehicle and parts dealers

0.3

0.4

0.6

Individual and family services

0.0

0.6

0.6

Retail - Gasoline stores

0.4

0.2

0.6

Personal care services

0.0

0.6

0.6

Insurance carriers

0.1

0.5

0.6

Securities and commodity contracts intermediation and brokerage

0.3

0.3

0.6

Home health care services

0.0

0.6

0.6

Labour and civic organizations

0.0

0.5

0.5

Business support services

0.3

0.1

0.5

Couriers and messengers Nondepository credit intermediation and related activities

0.4

0.1

0.5

0.2

0.2

0.5

45

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

77

Overall, the top 40 industries illustrated in the Total employment impact from construction table identify over 82% of employment opportunities that can be created in the regional economy. From the total of 106 jobs, 57.5% will be created with the producers responsible for oil and gas development and their supply chain companies, 7.5% of job opportunities will be with companies providing business services, 5.9% of job opportunities will be with companies providing business and personal services, and 11.1% of the total additional jobs will be created across personal services generated through the induced effect.

Similar to the induced impact measured by employment, the induced economic impact measured by the output will spread through a large number of population-serving industries. Every $100 invested in the regional economy will generate a trickle-down effect at the amount of $63 across the regional economy. About 18% of all induced output effect will be created in the real estate activities, 12.8% in healthcare, and 6.8% in food-related services. Of all induced output, 6.6% of jobs will be created in the field development companies and their suppliers, 5.1% in business services, 15.3% in services of the mixed demand, personal and business, and 35.6% in personal services.

Table 27: Induced Output Impact of Wellpad Construction (1 Well)

SECTION 4

Induced Output

Pct of total Increase of Output in Supplying Industries

Industrial Sector

$3,937,194

100.0%

Owner-occupied dwellings

$463,347

11.8%

Hospitals

$246,218

6.3%

Real estate

$236,639

6.0%

Wholesale trade

$162,152

4.1%

Insurance carriers

$153,678

3.9%

Offices of physicians

$120,529

3.1%

Monetary authorities and depository credit intermediation

$106,906

2.7%

Limited-service restaurants

$85,814

2.2%

Full-service restaurants

$76,005

1.9%

Wired telecommunications carriers

$67,540

1.7%

Electric power transmission and distribution

$57,938

1.5%

Retail - General merchandise stores

$57,856

1.5%

Petroleum refineries

$56,897

1.4%

Retail - Food and beverage stores

$54,831

1.4%

Management of companies and enterprises

$54,614

1.4%

Nursing and community care facilities

$53,609

1.4%

Other financial investment activities

$52,355

1.3%

All other food and drinking places

$49,266

1.3%

Automotive repair and maintenance, except car washes

$47,411

1.2%

Insurance agencies, brokerages, and related activities

$46,502

1.2%

Retail - Motor vehicle and parts dealers

$45,557

1.2%

Truck transportation

$42,511

1.1%

Offices of dentists

$40,690

1.0%

Legal services

$39,668

1.0%

Outpatient care centers

$39,536

1.0%

Together direct, indirect and induced effects create a total output effect of construction on the regional economy. Every $100 invested in the construction creates a total of $202 in the 78

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

regional economy: $100 in the Construction industry itself, $63 in the supply sector to construction companies, and $39 in the companies affected by the induced impact.

Table 28: Total Output Impact of Wellpad Construction (1 Well)

Industrial Sector

Direct

Indirect

Induced

Total

Total Output Impact Construction of new highways and streets

$10,000,000

$6,250,006

$3,937,194

$20,187,200

Wholesale trade

$642,905

$162,152

$805,058

Petroleum refineries

$584,897

$56,897

$641,794

Owner-occupied dwellings

$0

$463,347

$463,347

Real estate Asphalt shingle and coating materials manufacturing

$163,262

$236,639

$399,901

$378,947

$831

$379,778

Truck transportation

$315,878

$42,511

$358,389

Ready-mix concrete manufacturing

$327,118

$1,122

$328,241

Hospitals Extraction of natural gas and crude petroleum Monetary authorities and depository credit intermediation Commercial and industrial machinery and equipment rental and leasing

$0

$246,218

$246,218

$205,584

$22,026

$227,610

$115,671

$106,906

$222,577

$208,023

$4,265

$212,288

Stone mining and quarrying Management of companies and enterprises Architectural, engineering, and related services

$210,290

$649

$210,939

$155,091

$54,614

$209,705

$194,546

$11,882

$206,428

Insurance carriers

$42,937

$153,678

$196,614

Retail - Nonstore retailers Asphalt paving mixture and block manufacturing

$141,177

$37,859

$179,036

$133,976

$621

$134,597

Offices of physicians Electric power transmission and distribution Retail - Clothing and clothing accessories stores

$0

$120,529

$120,529

$55,394

$57,938

$113,332

$87,940

$20,965

$108,905

Legal services Fabricated structural metal manufacturing

$67,063

$39,668

$106,731

$104,671

$163

$104,834

Wired telecommunications carriers

$36,545

$67,540

$104,085

Limited-service restaurants

$17,341

$85,814

$103,155

Employment services

$67,843

$33,263

$101,106

Full-service restaurants

$24,642

$76,005

$100,647

$10,000,000

$10,000,000

Of the total output impact from construction, 27 top industries listed in the Table of the Total Output impact from Construction illustrate 81.1% of all industries creating additional output due to new construction of wellpads. Of the total output impact, 67.4% output will be created in the companies of oil and gas developers and their suppliers, 3.2% in business service companies, 4% in companies of the mixed demand, and 6.5% in companies providing personal services.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

79

Table 29: Summary of the Total Economic Impact of Wellpad Construction (1 Well)

Impact Type

Employment

Labour Income

Total Value Added

Output

Direct Effect

45

100.0%

100.0%

100.0%

Indirect Effect

30

61.9%

103.6%

62.5%

Induced Effect

30

73.6%

75.4%

63.0%

Total Effect

106

235.6%

279.0%

225.5%

Besides created jobs and output, the economic impact can be assessed by additional labour income and value added. If the labour income for 45 direct jobs in construction will be assumed at 100%, the additional 30 jobs will be associated with additional 62% of labour income in supply-chain companies and 30 more employment opportunities will be associated with additional 73.6% of labour income potentially created as a part of induced effect across many personal service industries.

If 45 direct jobs in construction will create 100% of the total value added, additional 30 supplying jobs will be associated with creating additional value added at 103.6%% and another 30 jobs of the induced effect will be associated with 75.4% of value added created across many personal supply industries.

4.5.2. Impact of Drilling The induced economic impact from drilling a single well can create additional 24 jobs across large number of sectors in the regional economy. Most of induced jobs will be created in foodrelated industries (15.8%) and healthcare (14.8%). The 24 industries captured in the following table illustrate the type of companies where 82% of all job opportunities will be potentially created.

SECTION 4

Table 30: Induced Employment Impact of Drilling (1 Well)

80

Industrial Sector

Induced Employment Impact

Pct of Total Increase of Induced Employment

Total

24.1

100%

Hospitals

1.5

6.0%

Full-service restaurants

1.3

5.4%

Limited-service restaurants

1.3

5.3%

Real estate

0.9

3.8%

Offices of physicians

0.7

2.9%

Nursing and community care facilities

0.7

2.9%

Retail - Food and beverage stores

0.7

2.9%

Retail - General merchandise stores

0.7

2.8%

Wholesale trade

0.6

2.5%

Employment services

0.5

2.3%

All other food and drinking places

0.5

2.2%

Individual and family services

0.5

2.1%

Personal care services

0.5

2.0%

Home health care services

0.5

1.9%

Automotive repair and maintenance, except car washes

0.5

1.9%

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

Pct of Total Increase of Induced Employment

Labour and civic organizations

0.4

1.8%

Insurance carriers

0.4

1.6%

Elementary and secondary schools

0.4

1.5%

Junior colleges, colleges, universities, and professional schools

0.4

1.5%

Child day care services

0.4

1.5%

Monetary authorities and depository credit intermediation

0.3

1.4%

Retail - Building material and garden equipment and supplies stores

0.3

1.3%

Retail - Motor vehicle and parts dealers

0.3

1.3%

Retail - Miscellaneous store retailers

0.3

1.2%

Retail - Nonstore retailers

0.3

1.2%

Offices of dentists

0.3

1.1%

Retail - Health and personal care stores

0.2

1.0%

Services to buildings

0.2

1.0%

Other financial investment activities

0.2

1.0%

Securities and commodity contracts intermediation and brokerage

0.2

1.0%

Truck transportation

0.2

1.0%

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Industrial Sector

Induced Employment Impact

The total economic impact from drilling a single well will create approximately 70 jobs if measured by employment; about half of these jobs will be created immediately in the Drilling of oil and gas industry and another half in supply industries and multiple companies providing personal services to employees of oil and gas companies and their suppliers.

Of the total employment impact, 71% of all additional jobs will be created in companies developing oil and gas and their suppliers, 4.7% in companies providing business services, 7% in companies serving both population and businesses, and 17.1% of jobs will be created as a result of a trickle down effect through the regional economy.

Table 31: Total Employment Impact of Drilling (1 Well)

Industrial Sector

Direct

Indirect

Induced

Total

Total Employment Impact

36

12

24

71

Drilling oil and gas wells

36

Support activities for oil and gas operations

4.2

0.0

4.2

Legal services

1.5

0.2

1.7

36

Hospitals

0.0

1.5

1.5

Limited-service restaurants

0.2

1.3

1.4

Full-service restaurants

0.1

1.3

1.4

Real estate

0.2

0.9

1.1

Wholesale trade

0.3

0.6

0.9

Employment services

0.3

0.5

0.9

Services to buildings

0.5

0.2

0.8

Offices of physicians

0.0

0.7

0.7

Retail - General merchandise stores

0.0

0.7

0.7

Nursing and community care facilities

0.0

0.7

0.7

Retail - Food and beverage stores Automotive repair and maintenance, except car washes

0.0

0.7

0.7

0.1

0.5

0.6

All other food and drinking places

0.0

0.5

0.5

Individual and family services

0.0

0.5

0.5

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

81

Industrial Sector

Direct

Indirect

Induced

Total

Monetary authorities and depository credit intermediation

0.2

0.3

0.5

Personal care services

0.0

0.5

0.5

Insurance carriers

0.1

0.4

0.5

Architectural, engineering, and related services

0.4

0.1

0.5

Management of companies and enterprises

0.3

0.2

0.5

Other financial investment activities

0.2

0.2

0.5

Home health care services

0.0

0.5

0.5

Similar to the induced impact from drilling measured by employment, the induced economic impact measured by the output will spread through a large number of population-serving industries. Every $100 invested in the drilling of a single unconventional well will generate a trickle-down effect at the amount of $31 across the regional economy. About 17.7% of all induced output effect will be created in the real estate activities, 12.5% in healthcare, and 6.8% in food-related services.

SECTION 4

Table 32: Induced Output Impact of Drilling (1 Well)

82

Industry

Induced Output

Pct of Total Increase of Induced Output

Total

$3,141,372

100%

Owner-occupied dwellings

$372,118

11.8%

Hospitals

$193,808

6.2%

Real estate

$184,154

5.9%

Wholesale trade

$129,906

4.1%

Insurance carriers

$124,331

4.0%

Offices of physicians

$94,873

3.0%

Monetary authorities and depository credit intermediation

$85,675

2.7%

Limited-service restaurants

$68,561

2.2%

Full-service restaurants

$60,718

1.9%

Wired telecommunications carriers

$52,895

1.7%

Retail - General merchandise stores

$46,422

1.5%

Electric power transmission and distribution

$45,415

1.4%

Petroleum refineries

$44,790

1.4%

Retail - Food and beverage stores

$44,001

1.4%

Management of companies and enterprises

$43,604

1.4%

Nursing and community care facilities

$42,216

1.3%

Other financial investment activities

$41,958

1.3%

All other food and drinking places

$39,377

1.3%

Automotive repair and maintenance, except car washes

$37,609

1.2%

Insurance agencies, brokerages, and related activities

$37,571

1.2%

Retail - Motor vehicle and parts dealers

$36,541

1.2%

Truck transportation

$34,204

1.1%

Junior colleges, colleges, universities, and professional schools

$32,396

1.0%

Offices of dentists

$32,029

1.0%

Legal services

$31,772

1.0%

Outpatient care centers

$31,120

1.0%

Retail - Nonstore retailers

$30,363

1.0%

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Together direct, indirect and induced effects create a total output effect from drilling of a single well on the regional economy. Every $100 invested in new drilling of unconventional well creates a total of $153 in the regional economy: $100 in the Drilling of oil and gas wells industry, $22 in the supply sector to the drilling companies, and $31 in the companies affected by the induced impact.

Table 33: Total Output Impact of Drilling (1 Well)

Industrial Sector

Direct

Indirect

Induced

Total

Total Output Impact

$10,000,000

$2,235,855

$3,141,372

$15,377,227

Drilling oil and gas wells Support activities for oil and gas operations

$10,000,000

$6,779

$4

$10,006,783

Owner-occupied dwellings

$988,157

$523

$988,680

$0

$372,118

$372,118

Legal services

$210,405

$31,772

$242,177

Real estate

$32,302

$184,154

$216,456

Wholesale trade

$76,549

$129,906

$206,455

Hospitals

$0

$193,808

$193,808

Insurance carriers Monetary authorities and depository credit intermediation Management of companies and enterprises

$32,306

$124,331

$156,637

$43,064

$85,675

$128,739

$69,255

$43,604

$112,859

Petroleum refineries

$58,664

$44,790

$103,454

Offices of physicians

$0

$94,873

$94,873

Other financial investment activities

$40,123

$41,958

$82,081

Limited-service restaurants Maintenance and repair construction of non-residential structures

$8,133

$68,561

$76,695

$55,150

$20,322

$75,471

Wired telecommunications carriers

$15,234

$52,895

$68,129

Full-service restaurants

$4,214

$60,718

$64,931

Truck transportation Architectural, engineering, and related services Electric power transmission and distribution Insurance agencies, brokerages, and related activities

$29,981

$34,204

$64,184

$46,950

$9,492

$56,441

$10,090

$45,415

$55,505

$13,077

$37,571

$50,649

$1,491

$46,422

$47,913

Retail - General merchandise stores Automotive repair and maintenance, except car washes

$9,539

$37,609

$47,148

Retail - Food and beverage stores

$256

$44,001

$44,256

Services to buildings

$29,579

$13,751

$43,330

Employment services Commercial and industrial machinery and equipment rental and leasing

$16,682

$26,384

$43,066

$39,538

$3,411

$42,950

Nursing and community care facilities

$0

$42,216

$42,216

Other nonmetallic minerals services

$41,213

$20

$41,232

All other food and drinking places Nondepository credit intermediation and related activities

$1,606

$39,377

$40,983

$12,563

$28,167

$40,730

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

83

Industrial Sector

Direct

Retail - Motor vehicle and parts dealers Extraction of natural gas and crude petroleum

Indirect

Induced

Total

$2,844

$36,541

$39,386

$21,528

$17,348

$38,876

$3,756

$30,363

$34,119

Retail - Nonstore retailers Junior colleges, colleges, universities, and professional schools

$42

$32,396

$32,437

Offices of dentists

$0

$32,029

$32,029

Other local government enterprises

$2,706

$28,569

$31,276

Outpatient care centers Securities and commodity contracts intermediation and brokerage

$0

$31,120

$31,120

$12,710

$17,469

$30,178

Of the total output impact from drilling, 39 top industries listed in the Table of the Total Output Impact from Drilling illustrate 92% of all industries creating additional output due to new construction of an unconventional well. Due to high specialization of drilling and its services, of the total output impact, 81.4% output will be created in the companies of oil and gas developers and their suppliers, 5.6% in business service companies, 4.7% in companies of the mixed demand, and 8.3% in companies providing personal services.

Besides created jobs and output, the economic impact can be assessed by additional labour income and value added. If the labour income for 36 direct jobs in oil and gas drilling will be assumed at 100%, the additional 12 jobs will be associated with additional 26% of labour income in supply-chain companies and 24 more employment opportunities will be associated with additional 37% of labour income potentially created as a part of induced effect across many personal service industries.

Table 34: Summary of the Total Economic Impact of Drilling (1 Well)

Impact Type

Employment

Labour Income

Total Value Added

Output

Direct Effect

36

100.00%

100.00%

100.00%

Indirect Effect

12

26.42%

23.61%

22.36%

Induced Effect

24

36.61%

30.03%

31.41%

Total Effect

71

163.03%

153.64%

153.77%

If 36 direct jobs in drilling will create 100% of the total value added, additional 12 supplying jobs will be associated with creating additional value added at 23.6% by supply-chain companies and another 24 jobs of the induced effect will be associated with 30% more of value added created across many personal supply industries in the regional economy.

4.5.3. Impact of Construction and Drilling

SECTION 4

Making the same assumption that 7 drilling pads will be built for $10 million and those pads will accommodate drilling of 3-4 wells each (total of 21-28 wells), the total expenses will reach over $210 million accounting for about 30% decrease of the drilling cost during the first year of operation due to the improved technology and some supplies

84

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

that will be used regionally. The combined impact of this entire project will potentially create 511 induced part-time and full-time jobs. Almost 16% of the total induced jobs will be created in restaurants and other food-related stores and places, 12.3% in the Insurance, financial, legal and real estate services, 11.7% in non-food retail, and 6.5% in across educational institutions, employment and other labour services. The detailed industries on the additional induced employment opportunities are listed in the following table.

Table 35: Induced Employment Impact of Construction and Drilling (Project)

Industrial Sector

Induced Employment Impact

Pct of Total Increase of Induced Employment

Total

511

100.0%

Full-service restaurants

27.37

5.4%

Limited-service restaurants

27.14

5.3%

Real estate

19.34

3.8%

Retail - Food and beverage stores

14.57

2.9%

Retail - General merchandise stores

14.33

2.8%

Wholesale trade

12.53

2.5%

Employment services

11.59

2.3%

All other food and drinking places

11.07

2.2%

Automotive repair and maintenance, except car washes

9.58

1.9%

Labour and civic organizations

9.21

1.8%

Insurance carriers

8.08

1.6%

Junior colleges, colleges, universities, and professional schools

7.49

1.5%

Monetary authorities and depository credit intermediation

6.92

1.4%

Retail - Building material and garden equipment and supplies stores

6.65

1.3%

Retail - Motor vehicle and parts dealers

6.42

1.3%

Retail - Miscellaneous store retailers

6.32

1.2%

Retail - Nonstore retailers

6.06

1.2%

Retail - Health and personal care stores

5.20

1.0%

Services to buildings

5.10

1.0%

Other financial investment activities

4.99

1.0%

Securities and commodity contracts intermediation and brokerage

4.89

1.0%

Truck transportation

4.86

1.0%

Other educational services

4.83

0.9%

Legal services

4.70

0.9%

Insurance agencies, brokerages, and related activities

4.39

0.9%

Retail - Clothing and clothing accessories stores

4.30

0.8%

Retail - Gasoline stores

4.07

0.8%

Grantmaking, giving, and social advocacy organizations

3.80

0.7%

Management of companies and enterprises

3.79

0.7%

Hotels and motels, including casino hotels

3.75

0.7%

Nondepository credit intermediation and related activities

3.73

0.7%

Accounting, tax preparation, bookkeeping, and payroll services

3.45

0.7%

Retail - Sporting goods, hobby, musical instrument and book stores

3.39

0.7%

Dry-cleaning and laundry services

3.20

0.6%

Other personal services

3.09

0.6%

Other amusement and recreation industries

3.08

0.6%

Retail - Electronics and appliance stores

3.01

0.6%

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

85

The total employment impact from the construction of wellpads and other structures and drilling of unconventional wells can be potentially widely spread across many industries in the regional economy. Unlike any other type of economic impact analyzed in this report, the total employment impact of construction and drilling presented by 49 industries’ opportunities in the following table capture only 35% of the total employment opportunities that can be created in the region. About 7.7% of total additional employment within the listed 49 industries will be generated in the field development industries – oil and gas drilling, construction and their supply-chain companies; 8.2% can be created by the business service companies; 6.4% by the companies that serve both, population and businesses; and 12.9% is the only fraction of the myriads of personal service companies that might increase their operations and employment due to new economic activity in the region.

SECTION 4

Table 36: Total Employment Impact of Construction and Drilling (Project)

86

Industrial Sector

Direct

Indirect

Induced

Total

Total Employment Impact

757

264

511

1,532

Support activities for oil and gas operations

84.1

0.0

84.2

Legal services

29.8

4.7

34.5

Limited-service restaurants

3.4

27.1

30.5

Full-service restaurants

2.3

27.4

29.7

Real estate

4.0

19.3

23.3

Wholesale trade

9.9

12.5

22.4

Employment services

8.3

11.6

19.9

Services to buildings

10.7

5.1

15.9

Retail - General merchandise stores

0.7

14.3

15.0

Retail - Food and beverage stores Automotive repair and maintenance, except car washes

0.1

14.6

14.7

2.8

9.6

12.4

All other food and drinking places

0.5

11.1

11.6

Architectural, engineering, and related services

9.3

1.7

11.0

Truck transportation Monetary authorities and depository credit intermediation

6.1

4.9

11.0

3.7

6.9

10.6

Insurance carriers

2.1

8.1

10.2

Management of companies and enterprises

6.3

3.8

10.1

Other financial investment activities

4.6

5.0

9.6

Labour and civic organizations

0.0

9.2

9.2

Maintenance and repair construction of non-residential structures

6.5

2.4

9.0

Securities and commodity contracts intermediation and brokerage

3.6

4.9

8.5

Retail - Nonstore retailers

2.0

6.1

8.1

Junior colleges, colleges, universities, and professional schools

0.0

7.5

7.5

Retail - Miscellaneous store retailers

1.2

6.3

7.5

Retail - Motor vehicle and parts dealers

0.7

6.4

7.1

Retail - Building material and garden equipment and supplies stores

0.4

6.6

7.0

Accounting, tax preparation, bookkeeping, and payroll services

3.5

3.4

6.9

Retail - Health and personal care stores Insurance agencies, brokerages, and related activities

0.7

5.2

5.9

1.5

4.4

5.9

1.6

4.3

5.9

Retail - Clothing and clothing accessories stores Nondepository credit intermediation and related activities

1.8

3.7

5.5

Business support services

2.7

2.5

5.2

Other educational services

0.0

4.8

4.9

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

Direct

Retail - Gasoline stores

Indirect

Induced

Total

0.6

4.1

4.7

Hotels and motels, including casino hotels

0.5

3.7

4.2

Investigation and security services Commercial and industrial machinery and equipment rental and leasing

1.8

2.2

4.0

Management consulting services Grantmaking, giving, and social advocacy organizations

3.7

0.3

4.0

1.8

2.0

3.8

0.0

3.8

3.8

Retail - Sporting goods, hobby, musical instrument and book stores

0.3

3.4

3.7

Dry-cleaning and laundry services

0.2

3.2

3.4

Couriers and messengers

1.3

2.0

3.3

Wired telecommunications carriers

0.8

2.5

3.3

Other amusement and recreation industries

0.2

3.1

3.3

Warehousing and storage

0.8

2.5

3.2

Other personal services

0.1

3.1

3.2

Landscape and horticultural services

0.5

2.6

3.1

Retail - Electronics and appliance stores

0.0

3.0

3.0

Advertising, public relations, and related services

1.1

1.9

3.0

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Industrial Sector

The induced economic impact from construction and drilling measured by the output will spread through a large number of population-serving industries. Every $100 invested in the new construction and drilling will generate a trickle-down effect at the amount of $31.8 across the regional economy. The industrial pattern of the industries most affected by output induced effect is similar to other already discussed patterns. About 17.7% of all induced output effect will be created in the real estate activities, 13.4% in healthcare, and 9.7% in foodrelated services.

Table 37: Induced Output Impact of Construction and Drilling (Project)

Industrial Sector

Induced Output Impact

Pct of Total Increase of Induced Output

Total

$66,764,645

100.0%

Owner-occupied dwellings

$7,905,700

11.8%

Hospitals

$4,122,377

6.2%

Real estate

$3,919,719

5.9%

Wholesale trade

$2,760,274

4.1%

Insurance carriers

$2,640,303

4.0%

Offices of physicians

$2,017,999

3.0%

Monetary authorities and depository credit intermediation

$1,820,408

2.7%

Limited-service restaurants

$1,457,040

2.2%

Full-service restaurants

$1,290,359

1.9%

Wired telecommunications carriers

$1,125,448

1.7%

Retail - General merchandise stores

$986,294

1.5%

Electric power transmission and distribution

$966,236

1.4%

Petroleum refineries

$952,706

1.4%

Retail - Food and beverage stores

$934,847

1.4%

Management of companies and enterprises

$926,696

1.4%

Nursing and community care facilities

$897,934

1.3%

Other financial investment activities

$891,515

1.3%

All other food and drinking places

$836,809

1.3%

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

87

Industrial Sector

Induced Output Impact

Pct of Total Increase of Induced Output

Automotive repair and maintenance, except car washes

$799,583

1.2%

Insurance agencies, brokerages, and related activities

$797,928

1.2%

Retail - Motor vehicle and parts dealers

$776,384

1.2%

Truck transportation

$726,582

1.1%

Junior colleges, colleges, universities, and professional schools

$686,169

1.0%

Offices of dentists

$681,260

1.0%

Legal services

$675,110

1.0%

Outpatient care centers

$661,935

1.0%

Retail - Nonstore retailers

$645,121

1.0%

Offices of other health practitioners

$611,442

0.9%

Retail - Building material and garden equipment and supplies stores

$611,000

0.9%

Other local government enterprises

$607,178

0.9%

Nondepository credit intermediation and related activities

$598,550

0.9%

Employment services

$560,938

0.8%

Maintenance and repair construction of residential structures

$509,636

0.8%

SECTION 4

Together direct, indirect and induced effects create a total output effect from the construction of wellpads and drilling of unconventional wells on the regional economy. Every $100 invested in new construction and drilling creates a total of $156.1 in the regional economy: $100 in the Construction and Drilling of oil and gas wells industries, $24.3 in the supply sector to the construction and drilling companies, and $31.8 in the companies affected by the induced impact across the regional economy.

88

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Table 38: Total Output Impact of Construction and Drilling (Project)

Industrial Sector

Direct

Indirect

Induced

Total

Total Output Impact

$210,000,003

$50,967,099

$66,764,645

$327,731,746

Drilling oil and gas wells Support activities for oil and gas operations Construction of new highways and streets

$200,000,002

$135,676

$76

$200,135,754

$19,775,829

$11,113

$19,786,943

$10,000,000

$10,000,000

Owner-occupied dwellings

$0

$7,905,700

$7,905,700

Legal services

$4,275,153

$675,110

$4,950,263

Wholesale trade

$2,173,887

$2,760,274

$4,934,161

Real estate

$809,306

$3,919,719

$4,729,025

Hospitals

$0

$4,122,377

$4,122,377

Insurance carriers Monetary authorities and depository credit intermediation

$689,059

$2,640,303

$3,329,362

$976,951

$1,820,408

$2,797,359

Petroleum refineries Management of companies and enterprises

$1,758,168

$952,706

$2,710,874

$1,540,187

$926,696

$2,466,883

Offices of physicians Other financial investment activities

$0

$2,017,999

$2,017,999

$821,572

$891,515

$1,713,087

Truck transportation

$915,494

$726,582

$1,642,077

Limited-service restaurants Maintenance and repair construction of non-residential structures Wired telecommunications carriers

$180,007

$1,457,040

$1,637,047

$1,157,044

$432,019

$1,589,064

$341,227

$1,125,448

$1,466,675

Full-service restaurants Architectural, engineering, and related services Electric power transmission and distribution Insurance agencies, brokerages, and related activities Commercial and industrial machinery and equipment rental and leasing Retail - General merchandise stores Automotive repair and maintenance, except car washes Extraction of natural gas and crude petroleum

$108,916

$1,290,359

$1,399,275

$1,133,543

$201,713

$1,335,256

$257,201

$966,236

$1,223,437

$279,883

$797,928

$1,077,811

$998,790

$72,490

$1,071,280

$47,393

$986,294

$1,033,687

$232,171

$799,583

$1,031,754

$636,148

$368,983

$1,005,131

Employment services

$401,484

$560,938

$962,421

Retail - Food and beverage stores

$7,899

$934,847

$942,746

Services to buildings Nursing and community care facilities Nondepository credit intermediation and related activities

$615,239

$292,207

$907,446

$0

$897,934

$897,934

$290,912

$598,550

$889,462

All other food and drinking places Retail - Motor vehicle and parts dealers

$37,737

$836,809

$874,546

$87,824

$776,384

$864,208

Retail - Nonstore retailers Other nonmetallic minerals services

$216,300

$645,121

$861,421

$827,262

$422

$827,685

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

89

Of the total output impact from the construction and drilling, 35 top industries listed in the Table of the Total Output Impact from Construction and Drilling illustrate 90% of all industries creating additional output due to new construction of wellpads and drilling unconventional wells. Of the total output impact, 72.4% of output will be created in the construction and drilling companies developing oil and gas fields and their suppliers, 6.7% in business service companies, 3.5% in companies of the mixed demand serving both population and business, and 7.5% in companies providing personal services.

Besides created jobs and output, the economic impact from construction and drilling can be assessed by additional labour income and value added. If the labour income for 757 direct part-time and full-time jobs in construction and drilling will be assumed at 100%, the additional 264 jobs will be associated with additional 28.1% of labour income in supply-chain companies and 511 more job opportunities will be associated with additional 37% of labour income potentially created as a part of induced effect across many personal service industries in the region.

If 757 direct jobs in construction and drilling will create 100% of the total value added, additional 264 jobs in supplying to oil and gas companies will be associated with creating additional value added at 25.5% and another 511 jobs of the induced effect will be associated with 31.2% of value added created across many personal supply industries in the region.

Table 39: Summary of the Total Economic Impact from Construction and Drilling (Project)

Impact Type

Employment

Labour Income

Total Value Added

Output

Direct Effect

757

100%

100%

100%

Indirect Effect

264

28.1%

25.5%

24.3%

Induced Effect

511

37.0%

31.2%

31.8%

Total Effect

1,532

165.2%

156.7%

156.1%

Overall, every job created as a new employment due to the construction and drilling will create another job in the regional economy across the supply companies and companies satisfying increased demand for the consumer goods due to the increased income of workers in the oil and gas field development companies and their suppliers.

Every additional dollar earned in the construction and drilling due to new projects will generate 28 additional cents in companies that provide supplies to oil and gas developmers and another 37c in companies providing population products and services across a large number of companies that constitutes induced effect.

For every $1 of new value of products and services created in the process of new construction and drilling, additional 57 c will be generated across supplying companies and compnies sutisfying incresed population demand for goods and services.

SECTION 4

For every new $1 of total output created in the construction and drilling, 56c of overall additional economic activity will be created in the region.

90

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY UNCONVENTIONAL GAS DEVELOPMENT IN KHARKIV REGION

Table 40: Summary of the Relative Total Economic Impact from Construction and Drilling (Project)

Impact Type

Employment, jobs

Labour Income, $

Total Value Added, $

Output, $

Direct Effect

1.00

1.00

1.00

1.00

Indirect Effect

0.35

0.28

0.26

0.24

Induced Effect

0.68

0.37

0.31

0.32

Total Effect

2.02

1.65

1.57

1.56

All the results are based on an assumption that the current relationships between industries in Kharkiv region are similar to those used in the econometric modelling. This assumption is supported by the structure of Kharkiv economy described in earlier chapters of this study.

Being specialized in agriculture and industry, with reach history and inventory of companies in the oil and gas industry, the region is capable of building a significant supply chain of companies supporting the development of unconventional resources.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

91

Section 5

OPPORTUNITIES FOR THE COMPANIES TO CONTRIBUTE TO THE SOCIAL AND ECONOMIC DEVELOPMENT OF LOCAL COMMUNITIES

92

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

РЕЗЮМЕ OPPORTUNITIES FOR THE COMPANIES TO CONTRIBUTE TO THE SOCIAL AND ECONOMIC DEVELOPMENT OF LOCAL COMMUNITIES

5.1. Partnership with Local Companies In the previous sections we discussed the need for a supply chain. In this section, it goes about the opportunities to become a part of this chain just as Shell did when it started conventional gas development as well as about positions of other companies which might join this business in future.

Most works (services) under the Joint Activity Agreement with Ukrgazvydobuvannya PJSC were performed or rendered by companies registered in Ukraine. This definition also covers works performed by Ukrainian subsidiaries of foreign companies. At the same time, it is important to understand the scope of activities. A minimum scope of exploration works (drilling 1 to 2 wells per year) is a restriction for transnational service companies oriented towards large-scale orders. Therefore, regional and local companies, including those operating in the service sector, stand a better chance58.

At the same time, as for equipment and materials used for well construction (casing and tubing, X-tree etc.), their essential part is purchased from foreign suppliers. When equipment is purchased from a foreign supplier, foreign professionals may be invited to perform commissioning and start-up.

In the course of main works and the most comprehensive works (pad construction, well drilling, cementing and other well operations, logistics support), contractors tend to form crews from Ukrainian professionals or mixed crews.

Purchase of goods, especially those specifically intended for unconventional gas drilling, presents greater challenge to local contractors as it is necessary to ensure conformity with international standards. It is related to the fact that construction of wells, especially deep ones with high temperature and pressure, is associated with substantial risks. Therefore, approval of a new supplier comprises several stages and may take a lot of time.

A classic example is supply of well casing pipes and materials in which INTERPIPE, a Ukrainian company, expressed its interest. Piping quality assessment carried out jointly with the Ukrainian manufacturer confirmed the need for certification which is a long-term process (as a rule, 2 to 3 years).

One more factor is that unconventional gas exploration is associated with high risk and provides no guarantee of being in demand. Selection is also influenced by such factors as well design which may provide for some restrictions, and contracting companies’ capacities. In addition, big investors may have suppliers at a global level with established economic ties and contractual terms.

For instance, in the course of Biliaivska-400 well construction there were used 4,500 reinforced concrete slabs manufactured by Reinforced Concrete Structures Plant (Kharkiv). Ukrainian companies also performed seismic data acquisition, pad construction, service water well drilling, supply of slabs and fuel, equipment delivery, security services, construction camp arrangement and maintenance (accommodation for up to 80 workers), and associated works

58

According to the interview with Leonid Klimov, Contracts & Procurement Manager at Shell Ukraine.

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

93

(catering, health care, accommodation)59. In addition, Ukrainian companies are engaged in complete site reclamation after completion of works.

Main categories of non-Ukrainian materials and equipment:

• casing pipes of different diameter; • tubing pipes of different diameter; • drill bits; • wellheads and X-mas trees; • liner hangers.

During most well operations (geophysical survey, coiled tubing, hydraulic fracturing etc.), the contractors also used foreign equipment and materials. For instance, hydraulic fracturing equipment included 8 high pressure pumps, a coiled tubing unit, 2 blender units, a wireline unit (geophysical station), guns, hydraulic fracturing wastewater treatment plant, a mobile testing unit, a temporary tent for chemicals and propane, 4 insulated water pits, a metal container for hydraulic fracturing solid wastes (silica sand, rock cuttings)60.

According to Shell representatives, they are currently working to ensure that casing and tubing pipes are manufactured in Ukraine. Long-term cooperation may be required for production of drilling rigs, drilling, associated well services (e.g. preparation of drilling fluids), well testing and stimulation, and logistics services61. The following jobs are expected to be in demand: gas plant operators, welders, erectors, loader men, excavator operators and others.

Under the Yuzivska project in Ukraine, Shell undertook to choose Ukrainian goods, works and services. At the same time, they should be offered on equal or better terms and conditions concerning price, time schedules, quality, supply terms and other criteria, as compared to foreign ones, as well as comply with international standards. The following aspects of company’s activities shall be assessed in the first place: occupational safety and ability to comply with general principles of Shell activities, transparency of activities and absence of any corrupt conduct62. The next stage will include pre-qualification that may involve visits to specific companies, meetings with management, production process inspection, and on-site visits.

SECTION 5

On-the-job training of Ukrainian professionals is organised by both Shell and contractors. One of the tasks entrusted to foreign professionals provides for knowledge and experience transfer to gradually increase a share of Ukrainian professionals in the staff composition. Contractors usually have their own training programs.

94

59

According to the interview with Leonid Klimov, Contracts & Procurement Manager at Shell Ukraine.

60

http://hi.dn.ua/index.php?option=com_content&task=view&id=40389&Itemid=149

61

http://vk.com/wall-46015582_54

62

http://www.shell.ua/aboutshell/our-business-tpkg/cooperation.html

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY РЕЗЮМЕ OPPORTUNITIES FOR THE COMPANIES TO CONTRIBUTE TO THE SOCIAL AND ECONOMIC DEVELOPMENT OF LOCAL COMMUNITIES

5.2. Cooperation with Educational Institutions in Staff Training for Operators and their Contractors Kharkiv region is a powerful scientific and educational centre comprising 56% of core scientific and technological capacities, 15% of all Ukrainian research institutes, 20% of design companies, and more than 16% of research scientists.

In 2013/2014, there were 847 general educational institutions (220 000 students) and 54 vocational educational institutions (17.9 thsd students). Profession-specific higher education could be obtained in 70 higher educational institutions, including 33 higher educational institutions of the I-ІІ accreditation levels and 37 higher educational institutions of the ІІІ-ІV accreditation levels.

Table 41: Higher Educational Institutions by Type (as of the Beginning of the Academic Year)

2013/14 I-ІІ accreditation levels

33

technical schools

8

vocational schools

6

colleges

17

institutes

1

universities

1

ІІІ-ІV accreditation levels

37

academies

9

universities

21

institutes

7

Kharkiv is rightfully considered to be the students’ centre of Ukraine. More than 210 000 people study in the higher educational institutions of the city63. Local higher educational institutions include internationally recognized educational brands, such as V. N. Karazin Kharkiv National University, National Technical University “Kharkiv Polytechnic Institute”, National University “Yaroslav the Wise Law Academy of Ukraine”, M. Zhukovsky National Aerospace University “Kharkiv Aviation Institute”, Kharkiv National University of Radio Electronics, National University of Pharmacy. Kharkiv region ranks the second in the country after Kyiv for the number of scientific organisations.

Table 42: Breakdown of Employees by Qualification and Types of Economic Activity (as of the End of 2013)

Including those who attained the following higher educational levels incomplete and basic higher complete higher education education Payroll number of employees, persons

Percentage of Total, persons payroll number of employees

Percentage of Total, persons payroll number of employees

Total

634,761

127,727

20.1

259,858

40.9

Industrial sector

175,122

31,440

18

55,763

31.8

63

http://www.compet.kh.gov.ua/ukr/potential/kharkiv-region

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

95

In the mining industry, it is not humanities or economic disciplines but engineering disciplines that are in high demand: geology, chemistry, ecology, geography and drilling. At the same time, companies’ qualification requirements do not always correspond to employees’ level of professional training. It can be attributed to the following key factors: lack of experience in project management, too narrow field of specialization and language barrier (it may emerge when handling documents or equipment)64.

When developing cooperation with production companies, universities independently determine their needs. In particular, Shell cooperates with V. N. Karazin Kharkiv National University as a priority partner among other educational institutions. On 5 September 2014, the parties signed the Memorandum of Cooperation in Research and Internships65. The Memorandum of Cooperation will be in force till 31 December 2015 and may be prolonged.

The cooperation under the bilateral Memorandum shall include the following components:

• development and launching of new Master’s degree programs; • improvement of Bachelor’s degree programs; • enhancement of material and technical resources (printing of training materials, purchase of laboratory equipment);

• participation of Shell professionals in guest lectures, scientific and technical conferences; • engagement in Shell activities (internship program).

A 3-year Master’s degree program in occupational safety engineering is currently prepared to be launched. This fully privately funded program is designed on the basis of three KNU departments: Geology and Geography Department, Ecology Department and Chemistry Department. Shell total expenses are estimated at 300 000 USD, including 200 000 USD for the purchase of equipment and 40 000 USD for the program development66.

In general, the academic research program under PSA for the Yuzivska field provides for annual budget in the amount of 300 000 USD. The company will support the University’s research and publishing activities related to unconventional hydrocarbon exploration and recovery.

The internship program was launched in 2014 and provides for a 6-month internship in the company. Shell plans to engage up to 10 students annually from Kyiv, Kharkiv and Donetsk.

According to the company, the expenses for annual internship program amount to about 600 000 UAH, 10 to 11 000 UAH for one person per month67. In 2014, 10 students were selected in their universities based on Shell requirements and successfully completed internship in the company68. The program was extended for 2015.

SECTION 5

Shell also supports research activities, including research by higher educational institutions as well as research by companies, think tanks and civic society organisations. For instance, in

96

64

According to the interview with Svitlana Kravtsova, HR Account Manager at Shell Ukraine Exploration and Production.

65

http://www.shell.ua/aboutshell/media-centre/news-and-media-releases/2014/20140904-reservoir-engineering.html

66

According to the interview with Svitlana Kravtsova, HR Account Manager at Shell Ukraine Exploration and Production.

67

Idem.

68

http://www.shell.ua/aboutshell/media-centre/news-and-media-releases/2014/20140919-students-joined-shell.html

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY РЕЗЮМЕ OPPORTUNITIES FOR THE COMPANIES TO CONTRIBUTE TO THE SOCIAL AND ECONOMIC DEVELOPMENT OF LOCAL COMMUNITIES

accordance with PSA for the Yuzivska field, Shell, jointly with the British Council in Ukraine, implements Ukrainian Unconventional Gas Institute program (UGI) which costs 2 mln USD per year. It provides for analysis of both technical and non-technical aspects of unconventional gas prospecting and recovery.

The objective of the Program is to promote exchange of experience between Ukrainian and foreign professionals in the field of unconventional hydrocarbon recovery, to enhance knowledge, skills and qualification of professionals in this field, to study economic, environmental and social effects of such projects on the development of country and regional and local communities, and to raise public awareness of responsible development of hydrocarbons. This study is prepared within the UGI framework.

5.3. Social Responsibility and Development of Local Communities Direct social investments for the benefit of citizens are relatively new for Ukraine. State-owned companies mostly care about their employees’ welfare, while most private companies point out to their payment of taxes and levies, including local taxes, as a form of obtaining a “social license”.

In the course of social performance, investors usually seek to obtain approval of their activities from local communities and predict the impact of such activities and associated operations on the social environment. Western standards applied by Shell in Kharkiv region are based on a dialog with the representatives of local councils in the territorial communities situated near hydrocarbon exploration site.

Within the framework of the project completed by Shell and Ukrgazvydobuvannya PJSC, social investments were made since the beginning of 2013. A joint committee considered proposals by local councils in the territorial communities situated near hydrocarbon exploration site. These proposals had to be agreed with the raion authorities (raion state administrations), i.e. they should comply with or at least should not contravene social and economic development programs in relevant communities.

Proposals relating to Pervomaiskyi Raion and Blyzniuky Raion were submitted on a voluntary basis. In average, the support was granted to 6 to 8 projects per year which cost up to 400 000 UAH. In 2013, the program budget amounted to 1.5 mln UAH. In 2014, it was estimated at 1.2 mln UAH. Total allocated funds amounted to about 2.7 mln UAH. The following projects were implemented under this program: heating system replacement in two schools in Pervomaiskyi Raion and Blyzniuky Raion, V-shaped roof installation in a school in Pervomaiskyi Raion, overhaul of a village kindergarten in Blyzniuky Raion, installation of street lighting, road repair, purchase of drugs for two raion hospitals69.

To satisfy the needs of inhabitants of Vesele Village, Pervomaiskyi Raion, an artesian well was drilled, properly arranged and transferred into the ownership of the village council. Mostly local contractors were selected to perform works. Shell entered into tripartite agreements with 69

http://www.shell.ua/aboutshell/our-business-tpkg/onshore/where-we-operate.html

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

97

them. The third party was the beneficiary – a village council or, as it was the case with schools, relevant departments of the raion state administration70.

As for the Yuzivska project, Shell obligations related to social investments provide for spending at least 2 mln USD per year. In December 2013, Shell signed the Memorandum on Social Investments with Donetsk and Kharkiv region State Administrations. It provides for investments in the amount equivalent to 1 mln USD in the social infrastructure of village communities and raions where exploration wells are planned to be constructed or prepared for construction as well as for investments in projects at the regional level in the same amount, 500 000 USD for each region. In view of the Yuzivska field location, the program covers 10 raions in two regions, including 3 raions in Kharkiv region (Balaklia Raion, Izium Raion and Barvinkove Raion).

In 2014, the competition was held for the selection of projects. The coordination committee which determined winners comprised the representatives of Regional State Administration and investors. The shortlist of winning programs was approved by government organisations at the level of the state.

The social investment strategy under the Yuzivska project defines the following fields of investment71:

• access to clean drinking water, water supply, purification and disposal in the Yuzivska field; • environmental protection; • health care, including emergency care; • development of entrepreneurship (for local communities); • safety (including road traffic safety).

SECTION 5

In 2014, the implementation of 8 projects of regional significance started in Kharkiv region.

In particular, the company purchased drugs and equipment worth about 200 000 USD and transferred them to raion hospitals, rural outpatient clinics and first aid stations72 to provide for emergency care in Izium Raion and Barvinkove Raion. The remaining seven projects approved in Kharkiv region are implemented by civic society organisations in the following fields: environmental protection, ensuring access to clean drinking water, development of entrepreneurship and public culture.

98

70

http://www.shell.ua/aboutshell/media-centre/news-and-media-releases/2013/20130902-invest-school.html

71

http://www.shell.ua/aboutshell/media-centre/news-and-media-releases/2014/20140210-si.html

72

http://www.rbc.ua/ukr/news/shell-poka-ne-budet-vozobnovlyat-razvedku-po-slantsevomu-gazu-06032015150600

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region

SUMMARY РЕЗЮМЕ OPPORTUNITIES FOR THE COMPANIES TO CONTRIBUTE TO THE SOCIAL AND ECONOMIC DEVELOPMENT OF LOCAL COMMUNITIES

99

Socio-Economic Potential of Unconventional Gas Development in the Kharkiv Region