Exploration & Production | Operational Updates | Government & Regulatory | Quarterly / Earnings Reports | First Quarter (1Q) Update | Drilling Activity
Cub Decreases Production; Updates Ukraine Drilling Ops, Legislation
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Cub Energy Inc. reported the following update for its operations for the first quarter of 2015. This update includes ongoing operations from KUB-Gas LLC, which Cub has a 30% ownership interest, and Tysagaz LLC, Cub's 100% owned subsidiary.
First Quarter Production
Average production for the first quarter was approximately 1,654 boe/d (Cub WI), representing a 21.7% decrease from 2,112 boe/d in the fourth quarter. Production for the first nine days of April has averaged 1,609 boe/d. Production in Ukraine continues to be below capacity due to the lingering effects of government legislation attempting to reserve a large share of the natural gas market for the state owned National Joint Stock Company Naftogaz.
The estimated prices received in Ukraine during the quarter were $7.98 per thousand cubic feet and $36.63 per barrel for natural gas and liquids respectively. The comparable prices realized in Q4 2014 were $9.62/Mcf and $72.34/bbl. Cub is paid in UAH, so the realized price in USD will continue to be influenced by changes in the exchange rate. The exchange rate has deteriorated further during the first quarter as the rate went from 16.4 UAH/USD at the end of the fourth quarter to 23.5 UAH/USD at the end of the first quarter, or a 30.3% devaluation.
Drilling & Workover Update
Completion and testing operations are underway in the M-22 well in Ukraine. A total of six zones are being tested. Logs and drilling data indicated 18 metres of net pay in two zones, including the S13a, which has not been previously tested in the area. The well also encountered four other zones with aggregate thickness of 22 metres that have resource potential. All testing is expected to be completed in the second quarter. A flowline was pre-built in 2014, and the tie-in is anticipated to be finished in the second quarter, pending regulatory approvals.
Ukraine Legislative Developments
As disclosed in the Company's press release of December 4, 2014, during November 2014, the Ukraine government issued three decrees (No.'s 596, 599, and 647), which cumulatively required 170 of the largest gas consumers in Ukraine to purchase their gas solely from Naftogaz until the end of February 2015. A Ukraine court subsequently overturned these regulations, and this decision was subsequently upheld on appeal. The government appealed again, but on March 31, 2015, the High Administrative Court of Ukraine dismissed the government's claims in their entirety. The market has started to readjust, with increased volumes starting in April.
On March 3, 2015, the National Bank of Ukraine issued Resolution No. 160, which extended most of the existing restrictions on foreign currency transactions set out in Resolution No. 758, including the cross-border dividend restriction, and introduced several additional restrictions, all to be effective until June 3, 2015. These restrictions continue to make it difficult for repatriating dividends from Ukraine.
Also on March 3, 2015, the government passed a bill reinstating the two-year royalty relief period for new gas wells. The effective rate for natural gas from new wells will be 30.25% (for wells with depth less than 5,000 metres) for two years, commencing on the spud date. Tysagaz's RK-23 well and KUB-Gas' M-17 and M-22 wells will both qualify as new, for royalty purposes, effective April 1, 2015.
Outlook
Cub is re-evaluating its future capital programs on its 100% owned and operated Tysagaz assets in light of the recent changes in royalty rates and the temporary cross-border dividend restriction. At present, the Company is considering several workovers in late 2015. At KUB-Gas, the current plans remain unchanged and include completion, testing and tie in of the M-22 well (currently underway), and field compression for Olgovskoye field (second quarter). The Company and its partner may consider further drilling opportunities, but will be dependent on keeping expenditures within operating cash flow and no further material adverse changes in either the fiscal terms or the security situation in and around the Ukraine licences. More specifically, once economic conditions improve, KUB-Gas has a significant inventory of drilling locations and other projects in the Ukraine licences including:
- Firm drilling locations at M-15, M-24, M-25 and NM-4. Management anticipates that this inventory will increase pending a successful test on M-22, as those results are assimilated into the geological model for the area.
- Fracture stimulations candidates at M-16, O-11, O-15 and NM-3.