Rules of Oil and Gas Fields Development

Intensive extraction of unconventional hydrocarbons in Ukraine will greatly depend on the simplicity and efficiency of the licensing procedures for oil and gas fields’ development. In case if successful geological exploration for unconventional gas, which is being performed at the area of several thousand square kilometers, will prove sufficient reserves, as early as in 3-5 years there will be demand for parallel drilling of dozens or even hundreds of wells and the preceding approval of relevant design and licensing documentation. Preliminary estimates show that just for Oleska area the number of drilled wells could reach 1000 till 2030.

At the same time, geological exploration and industrial development of oil and gas fields in Ukraine is regulated by dozens of legislative documents: Natural Resources Code of Ukraine, Laws of Ukraine, resolutions of Cabinet of Ministers of Ukraine, orders of Ministry of Environment and Natural Resources, state construction norms, methodological recommendations and instructions from different state authorities and other regulations. Such large number of regulatory documents leads to complication of licensing procedures, different interpretation of legislative provisions and delays in documentation preparation. Even for international companies with significant experience it takes about a year to receive approved licensing documentation for oil or gas well drilling. In some cases, the approval of documents could last two or more years.

To integrate to the reasonable extent the regulatory provisions for the oil and gas extraction in Ukraine the Rules of Oil and Gas Fields Development have been discussed during several last years. Originally the document was developed by Ministry of Energy and Coal Industry (see draft dated 12.04.2011), and later by Ministry of Environment and Natural Resources (see draft dated 27.03.2013).

The draft Rules of Oil and Gas Fields Development was supposed to be approved in February this year, however due to political crisis and change of the government the document approval was postponed once again.

According to the analysis of regulatory impact of the draft order foreseeing the approval of Rules of Oil and Gas Fields Development, passing of the document will allow the participants of oil and gas industry to introduce modern requirements for testing and exploration works on the oil and gas fields, extraction of oil and gas during commercial development of oil and gas deposits, equipment and technologies for well drilling, construction of industrial buildings based on the requirements for integral safety of population, environmental protection and property (buildings, structures, etc.) safety.

Draft Rules of Oil and Gas Fields Development contain definitions of terms and concepts, as well as separate sections for the following issues:

  • legal relations during fields development;
  • preparation of oil and gas fields for the development;
  • geological industrial research, testing, and test production of the wells;
  • pilot commercial development of fields (reserves);
  • estimation of reserves and geological economic evaluation of oil and gas fields;
  • commercial development of fields (reserves);
  • design documents for pilot commercial development and design documents (technological schemes) for commercial development of oil and gas fields;
  • control and regulation of fields (reserves) development process;
  • support of formation pressure and influence on the hydrocarbons deposits;
  • space planning and arrangement of the wells and oil and gas fields;
  • construction and preparation of the wells;
  • exploitation of extraction wells;
  • maintenance of documentation during oil and gas fields development and wells operation;
  • conservation of oil and gas fields;
  • environmental protection and protection of mineral resources during test exploitation of the wells, pilot commercial and commercial development of oil and gas fields;
  • state monitoring and control for safe operation during oil and gas fields development;
  • requirements for industrial safety, fire protection, and accident prevention measures.

However, draft Rules of Oil and Gas Fields Development do not contain any mentions of unconventional natural gas reserves and do not cover the peculiarities of shale gas, tight sand gas or coal bed methane extraction. There is no information about the specifics of modern hydraulic fracturing and horizontal drilling technologies used for extraction of unconventional gas, as well as about the environmental risks associated with the application of such technologies. It would be appropriate at least to oblige operators and/or service companies to publish detailed chemical composition and information on the volumes of chemicals used for fracturing fluid preparation, information on the location of the wells, where fracking technology is applied, data on produced water volumes etc., as it is practiced in USA and Europe. It is also rational to include in the Rules some incentives to use best available technologies during oil and gas fields development, such as no-pit well drilling, limitation of natural gas flaring and methane emissions into the atmosphere, promotion the drilling of larger number of wells from single well pad for minimization of landscape impact etc.

Significant part of the draft Rules regulate the relationship between the owner of special license for geological exploration or commercial production of oil and gas field and a service company directly involved in operations on geological exploration or oil and gas extraction at the field. Taking into account modern market conditions regulating the relationship of such independent business entities such approach looks outdated and unlikely to be followed in real life. On the other hand, the draft Rules do not cover the possibility of simplifying the approval and licensing process for the development of typical wells at oil and gas fields. Such simplified procedures could intensify the development of large projects foreseeing the drilling of several wells at the limited area simultaneously.

The related Polish experience demonstrates that the lack of stable legal environment, clear and transparent rules applicable to every market participant could hurdle the development of unconventional gas projects. Taking into account the practical loss of access to natural gas reserves at the Black Sea shelf, unconventional gas extraction projects become vital for Ukraine’s energy security. Therefore, it is urgently needed to develop relevant regulatory base, which will streamline the approval process, ensure environmental protection, and guaranty social well-being of local communities.