EBRD and Baringa Partners LLP

1. Copyright © Baringa Partners LLP 2018. All rights reserved. This document is subject to contract and contains confidential and proprietary information.
A roadmap for increased investment
in natural gas exploration and
production in Ukraine – Summary
EBRD and Baringa Partners LLP
23 November 2018

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Contents
Introduction to the project
Project overview: what we did
The economic case for production
International analogues: comparing regimes
Assessing the Ukrainian opportunity: in the shoes of an IGC
Recommendations

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Introduction
This report is the work product of Baringa's engagement by EBRD over approximately 10 weeks investigating, assessing and
analysing the upstream natural gas sector in Ukraine
This work was undertaken with the principle aim of identifying ways in which the Ukrainian upstream gas sector could be
made a more attractive prospect for international investors to support Ukraine's stated strategic objective of being self-
sufficient in gas production by 2020
Baringa undertook a programme of work as described on the following page, including speaking with around 20
organisations and stakeholders, comprising Ukrainian producers, trade associations, NGOs and advisors. Baringa also spoke
with around 10 international upstream companies, including majors, independents, oil service companies, regional players
and national gas companies*
Their participation was on the basis of non-attribution and as such we have kept their identities private
Findings and conclusions derived from this work were shared with EBRD themselves but also the Energy and Fuels
Committee at the Ukrainian Rada, other international donors and invited stakeholders and interested parties at a
roundtable event at EBRD’s London offices
* We thank these organisations for providing us with their perspectives and insights. Whilst we have drawn from these stakeholder views, it is
important to note that the consolidated output presented in this document is based on Baringa’s review and analysis, and is independent of any
stakeholder
EBRD has asked Baringa to undertake a study into Ukraine's upstream gas sector

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Project Overview
The project ran for 10 weeks and included both desktop analysis and research as well as time spent in Ukraine
talking to stakeholders
Specifically, in undertaking this work programme, EBRD identified four tasks:
– Task # 1: Define three virtual regions in Ukraine and international benchmarks
– Task # 2: Define two virtual investors
– Task # 3: Define the strategic investment barriers and opportunities
– Task # 4: Define the action plan to catalyse / attract investments
Scope and plan as set out in the agreed approach:
Having identified and invited, in coordination with
EBRD, a group of relevant stakeholders, Baringa
undertook a series of interviews to establish a strong
understanding of the status quo, their expectations and
desires regarding investments into natural gas
upstream in Ukraine and to engage them in the project
process
Based on the interviews and desktop research and
analysis, and drawing on the Consultant’s experience
and expertise, Baringa developed this report to act as a
‘primer’ for the workshops held subsequently
Identified and invited key stakeholders to attend a
workshop in Kyiv, Ukraine (to be done in coordination
with EBRD)
Prepared for and executed a two-hour workshop in
London
Documentation of outputs of workshop and follow-up
review session with EBRD, including:
– Capture of key terms agreed by stakeholders in
workshop
– Identification of a Road Map

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Gas produced in Ukraine vs imported: Economic Impact Assessment
Investments in gas exploration, development and production generate a significant positive impact on the
economy of Ukraine
Scenario 1 : Local Gas production Key findings
Base case:
Base case scenarios assumes 65% of the expenditure (CAPEX+ OPEX) will be spent
in Ukraine and 50% of the margin will remain in Ukraine.
• Margin for each BOE is estimated to be 15.1 USD/BOE out of which 7.6
USD/BOE is expected to remain in Ukraine
• The value of the expenditure on the exploration, development and
production was estimated at 16.2 USD/BOE. From this total investment, 10.5
USD/BOE is estimated to remain in Ukraine
• The direct impact that this investment would have on state revenues
through tax contributions is 8.7 USD/BOE
• We estimate that the economic impact would thus be equivalent to 26.8
USD/BOE
Sensitivity Case:
45% of the expenditure (CAPEX+ OPEX) and only 30% of the margin will remain or
will be spent in Ukraine.
• Economic impact would still be equivalent to 20.5 USD/BOE
BasecaseSensitivityCase
40
7.6
6.9
3.6
8.7
7.6
3.7
2.0
0
5
10
15
20
25
30
35
40
45
Average
reference gas
price in
USD/BOE
Margin Capex Opex Tax
USD/BOE Domestic Foreign
40
4.5
4.8
2.5
8.7
10.6
5.8
3.1
0
5
10
15
20
25
30
35
40
45
Average
reference gas
price in
USD/BOE
Margin Capex Opex Tax
 Importing natural gas has a limited economic impact on Ukraine as
more than 90% of each USD/BOE will leave the national economy
 The economic impact improvement of producing natural gas instead
of importing it under the base case and sensitivity case are
22.8 USD/BOE and 16.5 USD/BOE respectively – demonstrating the
tremendous case for increased domestic gas production, even
under conditions that are relatively favourable to international
investors
 If we consider that in 2017 Ukraine imported around 14.1 bcm of
gas, this economic impact is equivalent to $1.5 billion – $2.1 billion
/ year
Conclusions

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Summary comparison of international analogues with UKR opportunities
International analogues provide examples of best practice, areas for enhancement for Ukraine
- Quality and availability of data key to success
- Transparency and probity of regulator increases investor confidence
- Flexibility in licence / PSA type, commercial approach and licence liquidity key to effective development and monetisation
- Mexico – Round Zero – provides example of how to balance National and International Gas Company interests
Emerging themes
Romania Mexico Australia
Background – National producers part-
privatised
– EU membership driver for
deregulation / market reform
– Legal and constitutional change to facilitate
private participation in upstream sector
– Pemex reformed to align it more closely with a
private enterprise
– Mature, established hydrocarbon province
Legal and
Regulatory
Framework
– Unusually, upstream regulator is
counterparty to concession
agreements
– Multiple relevant laws and regulators – Clear expectations of national regulatory authorities
– Varying approaches reflects nature of devolution of
power in Australia
Licencing – Structure comparable with
international norms
– There are a number of different agreements
available for upstream development
– Pemex had preferential access to upstream
acreage, transparent mechanism to bring in
international partners (‘Round Zero’)
– Various types of licences are available to maximise
activity and encourage E&P players to invest
Availability of
upstream data
– Somewhat open and transparent
access to information and
regulator
– CNH operates on a principle of transparency
and data-availability
– Data availability is reasonable
– Leading example of how high quality geological data
is transparently made available to the market
– Facilitated by technology (e.g. databases, websites,
visualisation tools)
Mechanism for
accessing
acreage
– JVs permitted (unincorporated),
active with Romgaz
– Licences awarded on technical
merit
– Divestments of stakes in licences
allowed and controlled
– Joint ventures permitted
– Bidders in licencing round provide ‘additional
royalties’ bids or share of operative profit in the
case of PSAs
– Bids judged on combination of upfront payment
and commitment to work programme
– Licences made available transparently, predictably
and regularly
– Assessment of bids is not price-based but on basis of
maximum exploitation
– JVs the norm – allows participants to book reserves
and market production and share risk / investment
– Licence holders free to sell out or sell down

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Summary comparison of international analogues with UKR opportunities
International analogues provide examples of best practice, areas for enhancement for Ukraine
Romania Mexico Australia
Government
take
– Lower tax royalty regime implemented to
attract investors
– More sophisticated tax regime for
offshore
– Recent offshore regime change has had
significantly negative impact on
investment climate and prospects
– Mexico uses variable royalty offerings as a
mechanism for assessing bids
– Beneficial depreciation rates in the oil and gas
sector
– Royalty contribution to landowners
– The tax and royalty regime (including
levels) similar to that in Ukraine
Regulatory
stability
– Example of risks of radical and
unanticipated legal and regulatory change
– Political change has created slow-down and
uncertainty
– International trade agreements (e.g. NAFTA)
– Some tax/royalty instability
– Maturity, transparency, accountability
track record mitigate risks
Route to market – Domestic supply obligation likely to reduce
upstream investment
– Exports require approvals – Some domestic obligations – exports
otherwise facilitated and encouraged
Establishing and
managing a
business in-
country
– EU-membership sets basis
– New Offshore Law requires minimum
employment of Romanian employees,
preference to be given to Romania
providers of goods and services
– Administrative challenges for foreign companies
to establish themselves
– Can however bid on acreage without a local office
– Requirements for local content, Mexican
employees
– Organisations can operate via Australian
subsidiaries or as foreign-registered
entities
– There is no requirement to ‘buy Australian’
HSE – No explicit need for an EIA = risk – HSE considerations given high profile,
enforced consistently
Transparency – Rank 59 on the Corruption Perceptions
index (Transparency International)
– Mexico has formalised its approach to tackling
corruption at a national level
– Rank 135 on the Corruption Perceptions index
– Rank 13 on the Corruption Perceptions
index
- Ukraine Tax & Royalty regime credible
- Fiscal and Regulatory stability is key
- Ease, cost of compliant business supports rapid growth
- Transparency desirable and allows for more state-friendly conditions to be implemented (as in Aus) – EITI membership a key step
Emerging themes

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Context – key investment considerations: Overview
International Gas Companies utilise a number of critical dimensions when assessing upstream opportunities,
these are reflected in Baringa’s Upstream Investment Framework
Economic
Assessment
Hurdle rates
met
Materiality
Size and scale
of resource
appropriate for
organisation
Employee safety
Challenges and
cost of assuring
safety of
personnel
Political Risk
Stability;
Proximity to
conflict zones Tax Stability
Agreed tax
approach or
confidence in
regime
Licence Title
Supportiveness
of licence
regime
Organisational
Fit
Suitability of
opportunity to
company
Technological
approach
Degree of
challenge /
novelty
Fiscal Regime
Nature and
structure of
government
take
Route to
Market
Economic
accessibility of
end-market
Geology
Conventional v.
Unconventional;
complexity;
depth; reserve
quality
Government
Participation &
Local Content
Mandated role?
Economic
Considerations
Technical
Considerations
Political &
Regulatory
Considerations
Baringa Upstream Investment Framework
Environmental
Issues
Specific costs &
challenges
assuring
environ. safety
Financibility
Ability to raise
finance off
opportunity

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Yes
IGC decision-making process and key questions
International investors will ask a series of fundamental questions in sequence – if they cannot get comfortable
with the answers, they will not proceed
1. Can I
adequately
assess the
opportunity?
2. Can I gain
exploration &
production access
to the acreage cost-
effectively?
4. How does UKR
compare to other
opportunities being
considered?
3. Can I operate
the acreage
cost-
effectively?
No
Not of interest
Yes
No No
Yes
- Is comprehensive geological data
available?
- Can I assess the fullest geological
context (i.e. the regional / basin
view)?
- What is the process for getting
the data?
- From whom do I get it?
- What are the costs?
- Materiality
- Gross government take (tax,
royalty, corporate taxation etc.)
- Margin
- Dos it rank high enough to claim
some of the finite E&P investment
dollars?
- Any specific technical challenges (e.g. sour
gas, high CO2 content etc.)
- Ease of getting relevant permits and local
approvals
- Ease / cost / availability to bring in equipment
/ service companies / people from abroad
- Ease of running local business – setting up /
running in-country subsidiary
- Security risks
- Are the insurmountable? (rarely)
- Means / costs of managing them?
- How is upstream acreage made
available? (e.g. Licencing rounds?
Bilateral negotiations? PSAs? Open
access to all land?)
- Is the process fair and transparent?
- Are timeline sufficient and realistic?
- Licence liquidity / ways of working
- Are JVs possible / encouraged?
- Can I buy into or buy out
licences from holders?
- Can I farm out/down/in?
Go / no-go Go / no-go and cost impact Cost impact Competitiveness of opportunity
- The dimensions of Baringa's Upstream Investment Framework are applied through the decision-making process described below
- Initial considerations (1.) relate particularly to the Materiality and Geology: something to be reviewed and re-considered as more
information is available
- Thereafter (2.), Political Risk and Licence Title (and associated acquisition processes) is key to understanding whether the desired acreage
is accessible
- Thirdly (3.), Route to Market, Fiscal Regime (and Tax Stability), Technological Approach, HSE considerations, need for Government
Participation and Local Content and the general business environment, Financibility and Organisational Fit all impact the final
consideration: overall Economic Assessment of the opportunity, including (4.) in comparison to other opportunities globally

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Three representative regional opportunities
In considering the specific dimensions of the upstream opportunity in Ukraine, we have developed three,
regionally-based, ‘virtual’ opportunities in upstream gas
Poltava (Dniepr-Donets Basin)
• Onshore
• Mature, brownfield assets
• Highly developed, historically (and
currently) very significant production
– 18.9 bcm in 2017 (94.5% of
Ukrainian production)
• Reserves* estimated at 724 bcm
• UGV dominant
• Many mature / shut-in production
assets
• Focus area for UGV Production
Enhancement Contracts (PECs)
• Special Permits (licences) active
• PSAs negotiated but not operated
• Challenging local authority
• Relatively close to conflict areas
Odessa (North Black Sea Basin)
• Offshore
• Relatively undeveloped, greenfield
• Reserves* estimated at 68 bcm
• No local authority approval needed
• Contiguous with Romanian offshore production areas
• Close to Crimea, security challenge
• Special Permits and PSAs under consideration
• Opportunity for UGV partnership
Lviv (Pre-Carpathian Basin)
• Onshore
• Historically very significant
production
• Less developed / prolific
area recently – 1.1 bcm in
2017 (5.5% of Ukrainian
production)
• Reserves* estimated at
113 bcm
• Special Permits (licences)
active
• PSAs negotiated but not
operated
• Mixture of greenfield and
brownfield opportunities
• Supportive local authority
• Synergies with
neighbouring resources
(e.g. Slovakia)
• Conventional and
unconventional potential
* Based on Ukrainian definition of ‘booked
reserves’

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Summary comparison
Based on current conditions, IGC interest is likely limited to the extent to which the reformed Special Permit
process and offered acreage is attractive to them – greater interest could be achieved with further reform
Ukrainian Opportunity –
based on existing
conditions
Opportunity Characteristics Big Gas Co. Regional
Power House
Frontier
Exploration
Co.
Lviv Special Permit
• New Special Permit block (Licence)
• Limited geographic scale
• Non-producing acreage
• Close to western borders
No Maybe Maybe
Poltava Partnership
• PEC with UGV for enhanced recovery of gas from brownfield
asset in eastern Ukraine
• PEC is only UGV partnership deal available in practical terms –
JVs are not possible and JAAs have been phased out
No No No
Offshore PSA
• Greenfield offshore – significant exploration needed
• Specifically including a partnership with UGV
Maybe Maybe No
Onshore PSA
• Greenfield onshore
• Significant geographical scope
Maybe Yes Maybe
Ukrainian Opportunity –
requiring some
modifications to conditions
Opportunity Characteristics Big Gas Co. Regional
Power
House
Frontier
Exploration
Co.
Brownfield JV with UGV • Brownfield acreage – proven reserves, active production
• Joint title – partners can book reserves
• IGC likely operates
Yes Yes No
Exploration only focus • E&P licence
• Sell-down out is facilitated through enabling easier sale down /
divestment of interests
Yes Yes Yes
Strategic Partnership with
UGV
• Multi-asset cooperation
• Major undertaking across multiple assets
• Includes corporate enhancement
Yes Maybe No
Key
Yes
-
Likely to be of
interest
Maybe
-
May be of interest,
subject to specific
conditions
No
-
Unlikely to be of
interest

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Summary of recommendations
There are some actions that can be implemented quickly and have relatively rapid impact:
1. Comprehensively implement the transparent, electronic Special Permit system
• Demonstrate that a transparent, equitable and credible process will be followed for the awarding of new Special Permits
• Once demonstrated, make additional acreage available
2. Accelerate and increase the scope of geological data to be made available
• Ensure that basin-wide geological data, from all repositories (state-owned companies, ministries and government agencies) is rapidly made available
• The more the better – available at ‘one shop stop’
• Mature hydrocarbon provinces (e.g. Australia, Norway, UK) provide best practice models
• Absence of access to quality data is currently causing organisations to turn away from Ukraine
3. Power up government PSA capacity
• A number of international players are eager to bid for and negotiate PSAs – it is not clear that here is sufficient political support for this process or that there is
committed and concerted resource to support the process from the state side
• Ensure clarity on point of contact for PSA communications
4. Allow for greater ‘Licence Liquidity’
• Increase the ability for investors to transfer ownership of licences, including in forming Joint Ventures
• Safeguard against abuse through proper regulations and controls
• Provisions for unexplored or non-producing licences to be made available to the market
5. Clarify and simplify the role and functions of the State Geological Survey (SGS)
• An effective and efficient SGS – built on principles of transparency, accountability and availability will provide a significant boost
6. Increase productivity potential of existing acreage, new acreage for UGV
• Legal and regulatory reform may be needed, but by enabling UGV to effectively partner with IGCs to jointly develop resources, it could greatly increase its
productivity. Service contracts may provide only limited returns and will not attract IGCs
• Consider Mexican ‘Round Zero’ concept – allows UGV to hold the resource / licences whilst holding a competitive process to bring in investment to partner
Key changes likely to have greatest impact in the shortest timeframe

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Summary of recommendations
Over a longer period of time, further changes / reforms will increase Ukraine's attractiveness for international investors:
7. Wider gas market reform
• Developing a liberalised gas market, underpinned by a gas exchange, removal of the PSO, will have direct impact on the attractiveness of Ukraine to foreign
investors
8. Increase ease of doing business for a non-Ukrainian player (incremental changes)
• Removal of bureaucracy, increased transparency, administrative reform across multiple agencies and bodies will take time
9. Revision of subsoil code
• The EU has initiated a programme to fund the revision of the subsoil code, likely to bring together a number of reforms – but this will take time and require
primary legislative change
10. Align upstream accounting practices with global standards
• Aligning to standard practices of upstream accounting will ease some of the administrative challenge of international players operating in Ukraine
• Including building on EITI membership
Key changes likely to have greatest impact in the shortest timeframe

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