Canada-based gas producer Serinus Energy has opted to sell its majority 70% stake in Ukrainian gas producer KUB-Gas due to the difficult operating environment caused by regulatory changes in the eastern European country.
Serinus, which bought into a number of Ukrainian gas assets in 2010, also warned that Ukrainian gas production was at risk of falling further as development economics become increasingly "marginal" due to the high cost of production caused by government policy and natural decline.
It said it was selling out to an unnamed private company and would now instead focus on a gas discovery in Romania.
"Geopolitical events in the region over the past two years and unfortunate policy decisions by the Ukraine government have seriously eroded the economic viability of our business there," Serinus CEO Tim Elliott said in a statement late Wednesday.
"Legislative efforts to reduce the royalty rates on natural gas back to reasonable levels have stalled, and we have little visibility or indication as to when that process may resume," Elliott said.
"With appropriate fiscal conditions, we believe that the natural gas business in Ukraine could return to growth, but with the great uncertainty surrounding the country, we believe that our shareholders are better served by exiting Ukraine with this transaction."
During the course of 2014 and 2015 the government of Ukraine introduced a series of laws and regulations that had a "material adverse effect" on KUB-Gas' business, Seriunus said.
Serinus said that, since August 2014, the nominal royalty rates on gas increased to 55% from the previous level of 28%.
OTHER RESTRICTIONS
It added that other legislation placed restrictions on the gas market, causing realized prices in the private sector to fall significantly below regulated prices, resulting in effective royalty rates as high as 64%.
A bill was passed in October this year to reduce the nominal royalty rate to 29% in its first reading in the parliament, but it has yet to pass a second reading and move on to presidential assent.
"It is uncertain as to when and if this legislation might be enacted," Serinus said.
The Canadian producer also said that foreign exchange control measures introduced by Kiev had hit its business.
"While Serinus reports in US dollars, restrictions on foreign exchange transactions means that most of that cash flow remains in Hryvnia held in accounts in Ukraine," it said. "With lower prices and higher royalties, development economics have become marginal so production is expected to fall further as natural declines assert themselves."
Serinus said that it had agreed to sell its stake in KUB-Gas for $30 million and that the proceeds from the sale would be used to further the development of the company's Moftinu gas discovery in Romania.
KUB-Gas owns 100% of and operates six licenses in Ukraine which contain the Olgovskoye, Makeevskoye, Vergunskoye and Krutogorovskoye gas fields.
The blocks hold estimated gross reserves of 64.5 Bcf of gas, and gross production in Q3 2015 was 23.5 MMcf/d.
