Europe has well developed industries and a large population, although  it experiences a deficit of energy resources. Until 2040, European net imports of gas are projected to grow due to transition away from  coal and nuclear energy, and are currently in excess of 310 billion cubic meters of gas per annum.


All of the European states except Norway and Romania are energy-dependent.  Traditionally, Europe relied on oil and gas coming from four major sources: The Middle East, Russia, North Africa and Norway.  While the largest supplier for Western Europe is currently Norway, almost all of the energy for Eastern Europe comes from Russia  (35% of all European consumption of natural gas in 2017 was delivered by Gazprom). 


Russia’s recent military and political offensive in Ukraine has triggered an  intense desire within the European Union to secure energy independence. War in Ukraine is feared to be disruptive for major gas  pipelines from Russia to the European Union (2/3 of Gazprom’s total supply). In July 2017, U.S. President Donald Trump stood beside  his Polish counterpart, Andrzej Duda, in Warsaw and promised to help wean the nation off Russian energy imports, “so that you can  never be held hostage to a single supplier.”


Promising deposits are located within three regions: Western (Germany, France, UK); Central (Poland, Lithuania, Western Ukraine, Romania, Bulgaria, Slovakia, Hungary, Serbia); and Eastern (Eastern Ukraine).  


The Western region will be unlikely to be developed within the foreseeable future because of political reasons in host  countries (with the exception of the UK, but its potential is the smallest among three) and the Eastern region, which currently  produces more oil and gas than the other regions, is located near the Russia-Ukraine border, which makes it unattractive for  additional near-term investment. That leaves the Central region as the area of development on which we intend to focus. 


Two of the most promising countries in Europe for exploration and development of oil and gas are Ukraine and Romania.

Ukraine

Ukraine has three separate basins that have oil and gas deposits. Although not  widely known, Ukraine was a major gas producing region in the Soviet Union until late 1970s, when new fields in Western Siberia  were developed. Production was cut not because of depletion, but because of difficult reservoir characteristics and military risks  (the proximity to Western borders of USSR). After Ukraine claimed its independence in 1991, there was virtually no additional  development.

Ukraine’s Eastern basin was a focus for Shell, but war with Russia has disrupted exploration drilling in the area. Ukraine’s Western basin was of interest to Chevron, but it decided to shutdown its European explorations altogether, including exploration in Romania and Ukraine, to focus on already discovered offshore properties due to low energy prices. The Southern basin is located next to Odessa, and stretches from onshore  (primarily oil) to offshore (more gas) Black Sea locations. Active exploration in the areas adjacent to Romania and Crimea are carried by ExxonMobil, OMV, and Lukoil.

New Ukrainian laws recently significantly decreased the tax rate for royalty payments. As major oil and gas companies failed develop economic quantities of oil, small companies have found their niches in both Eastern and Western Ukraine, and many produce commercially, despite the continuing crisis with Russia. 

Highlights

  • 2nd largest natural gas basin after North Sea: 128 Tcf 
  • 671 Bcf of natural gas produced in 2015 (5)
  • Successful energy tariff reform
  • Low operation costs: lifting costs less than $5/barrel
  • New Ukrainian government ready to give full support for newcomers and recently significantly decreased tax rate for royalty payments (from 70% to 6-29%)

Poland

Amid the economic chaos of the past decade that has befallen Europe,  Poland has managed a steady, uninterrupted climb. Thanks to radical  economic reforms following the fall of the Soviet Union and eventual  admittance into the European Union, a stroll through the streets of  Gdansk or Warsaw today isn't much different from that of any other  thriving Western population hub-complete with an abundance of late-model  cars, designer brands in American-like shopping malls, and rising  condos and office buildings towering over the cityscape. 


Chevron, ConocoPhillips, ExxonMobil and Marathon were all developing assets in  Poland until recently. Each of them has decided not to pursue development because they did not feel that they could be commercially successful. National oil & gas company PGNiG is still active and producing limited quantities of hydrocarbons.  The upstream unit of major Polish refiner and retailer PKN Orlen is also still doing its part to  find and exploit local resources. In 2015 Orlen and PGNiG reported the launch of a  joint exploration and production project involving analytic and  research work in eight concession blocks in Podkarpackie province in far  southeastern Poland. 


We  believe that the weak results of the first wells drilled by major oil companies can be explained by, among other  things, the size and bureaucratic nature of large oil companies, which increased their costs of producing oil and gas to such an extent  that it made the region uneconomic at current prices for oil and gas.


Nonetheless, burst bubble left the region with numerous distressed players which possess significant acreage both inside and outside Poland, available for acquisition.

Highlights

  • 146 trillion cubic feet (Tcf) of shale gas resources, the largest in Eastern Europe
  • Only 7.3 million barrels (MMbbl) of crude oil and 217 billion cubic feet (Bcf) of natural gas produced in 2016 and 2015 respectively, far less than the country’s needs  
  • 215 million barrels oil and 946 bcf of natural gas consumed in 2016 and 2015 respectively
  • Weak results of first wells drilled by oil majors due to the lack of geological expertise for unconventional oil & gas properties
  • Independent US oil companies specializing on unconventional deposits are discouraged form expanding overseas by their shareholders   

Romania

The oil and gas industry in Romania has long been beneficial to the  country and its population since its inception in the mid-19th century.  In fact, it was well established by 1857, when Bucharest became the  first city in the world to be illuminated by kerosene lamps. Today, its  products are important in our everyday lives, from the supply of energy  to power industry, to heat and light up our homes and businesses,  providing fuel for transportation, plastics, clothing, fertilizer, and  many other items we use on a daily basis.


The industry is a major employer of Romanians, covering a wide range  of disciplines from engineers, earth scientists, environmental, health  and safety specialists, lawyers, accountants, and many others too  numerous to describe here. The industry makes a major contribution to  the economy in terms of tax revenues, manufacturing and technology  transfer, and exports.

The Romanian oil and gas industry was nationalized soon after the end  of World War II, peak production was reached in 1976, and it continued  to be managed under the communist regime until 1989.


The first post-communism licensing round in 1992 attracted a number  of international companies, but in the years that followed there was  little foreign investment. The majority of the concessions within the  country were held by the national oil (Petrom) and gas (Romgaz)  companies for much of the next two decades, and investment in the oil  and gas industry as a whole dwindled.

Partial privatization of Petrom led to the purchase of a majority  share in the company by the former Austrian state company, OMV, in 2004. 

 

Foreign investment in the industry has gradually increased with the  arrival of super-major, major, large to medium independent, and smaller  companies all with a role to play in the development of the country’s  oil and gas resources.


Currently there are numerous players that operated on upside-sharing basis, with strong technology teams but with very limited access to actual reserves.

Highlights

  • 51 Tcf of natural gas reserves
  • 28 MMbbl of crude oil and 394 Bcf of natural gas produced in 2016 and 2015 respectively
  • Active exploration activities carried out by foreign majors (ExxonMobil, OMV, Lukoil, etc.) 
  • Well established regulations and seasoned oil & gas personnel, CEE headquarters for Schlumberger

Black Sea shelf

By its geographical position in the neighborhood of large proved  reserves of natural gas and crude oil, the Black Sea region has a triple  geostrategic and geo-economic dimension, as direct source of energy,  major transport corridor for Eurasian energy resources to EU consumers,  on the emerging Caspian Sea - Black Sea - Mediterranean Sea axis, and  major factor of energy security for the EU and Romania. From this triple  perspective it is necessary to assess whether a coordinated approach of  the Black Sea region will be able to improve and sustain the European  energy security and first of all Romania's and Ukraine's national energy security, by applying strategies for diversifying supply sources, stimulating  competition on the supply side, through the efficient turning to account of its own resources and by connecting to the infrastructure projects allowing diversification of transport routes and access to new sources  of energy, including return flows from West Europe. 


There is potential for oil and gas reserves in The Black Sea to be  massive. Until recent years, countries showed little interest in the sea  that sits between South East Europe and Western Asia, but due to a  rapidly evolving energy landscape, diversification is moving to the top  of the agenda.


The sea is surrounded by Romania, Bulgaria, Turkey, Ukraine, Georgia  and Russia; all of which have started explorations in different regions.  Turkey and Russia have previously supplied other surrounding countries  with reasonably priced oil and gas, but technological advances mean that  more countries have the opportunity to search for their own resources.


Total, OMV, Repsol, Turkish Petroleum Company (TPAO), Shell and  ExxonMobil are all interested in what lies under the Black Sea. TPAO  estimates there are up to ten billion barrels of oil in the region, and  the various companies are working on several projects in different  sections which are divided into ‘blocks’.


Exploration in the sea had been limited and sporadic until 2012 when  the huge Romanian well Domino-1 provided the largest discovery in the  Black Sea to date; 84 billion cubic meters of gas, in the country’s  block called Neptun.


Spurred on by this discovery, ExxonMobil teamed up with Austria’s OMV  to join the exploration of Neptun. Together the companies built the  Ocean Endeavour rig, which is drilling a well called Pelican South-1  wildcat in the hope of finding further hydrocarbon reserves.


The year 2020 is looming as a common deadline  for Europe in achieving several strategic objectives (the possibility of  starting shale gas production in some European countries, the  completion of major transport gas corridors gas, early operations of  natural gas development in Black Sea waters etc) each of them marked by a  substantial dose of uncertainty. 


The natural gas reserves in Romania’s Black Sea section may be around  200 billion cubic meters (bcm), in the perimeters where exploration  drilling has taken place, which may allow Romania to double its current  gas production for a period of 20 years, according to the National Mineral Resources Agency (ANRM). Some 9-10 bcm of gas will come from the Romanian Black Sea sector each year, for a period of 20 years.


US group ExxonMobil and Romanian company OMV Petrom operate the  biggest gas perimeter in the Black Sea, in which they have invested  close to USD 2 billion so far. They will announce their decision on the  commercial exploitation of the Black Sea gas by the end of this year and  production should start in 2021-2022. They may produce some 6 bcm per  year in the Neptun Deep perimeter.


Black Sea Oil and Gas may start to extract gas from the Black Sea as  early as next year, after investing some USD 200 million in the Midia  and Pelican perimeters. The company, which is owned by US investment  fund Carlyle, may produce about 1 bcm of gas per year.


Russian group Lukoil, which has invested some USD 500 million in  exploring the Black Sea perimeter, may also start production in about four  or five years.


Ukraine enjoys shallow waters with already well studied reserves, left unassigned after its main operator, Chernomornaftogaz, which was already at 2 bcm of annual gas production, was annexed by Russia in 2014, creating a perfect opportunity for Trident to finance its projects in the area.

Highlights

  • Area for active exploration during the recent decade
  • Growth of production at Ukrainian Chernomorneftegaz (now annexed with Crimea by Russia) – from zero to 71 Bcf of gas production
  • Loss of Chernomorneftegaz leaves opportunities on Odessa shelf
  • Convenient geographic location, developed infrastructure (pipelines, railroads, large industrial enterprises, refineries)
  • Possibility to both import and export oil by sea
  • Territorial dispute (now resolved) between Romania and Ukraine over potential oil & gas reserves near Zmeinyi island highlights high interest for the area