Issue link: http://resourceworld.uberflip.com/i/198816
the oil patch report Joe l C hury Cub Energy active in Ukraine and Turkey D ue to an ongoing low commodity price, when companies strike dry natural gas in North America they tend to be punished by the market. But the game changes completely in countries where a local market is accessible and pays top dollar prices. Houston-based Cub Energy [TSX.V -KUB] has found two such markets – Ukraine and Turkey. Due to supply restrictions and a lack of current domestic development in each country, Cub appears to be going after two markets that are now paying higher prices per thousand cubic feet of gas (Mcf) than what was seen in Canada during the natural gas boom of the early 2000s. Thanks to an oppressive supply deal with Russian gas giant, Gazprom, Ukrainians are paying the equivalent of more than $12/Mcf. The Turks aren't doing much better, as they too are shelling out more than $10/Mcf. Compare that to today's prices in the US, which are hovering around the $4 mark, and the decision to go for foreign natural gas markets makes sense. At the prices in Ukraine, Cub is set for $7 per Mcf in netbacks alone. "Our netbacks used to be even higher before the royalty taxes went up a bit a few months ago," says Mikhail Afendikov, President and CEO of Cub Energy. "It's very similar to what we have in Turkey, except in Turkey it's an even better royalty structure." "In Turkey the royalties are 12.5%, whereas in Ukraine it's now 22%. Before it actually was 17% in royalties in Ukraine, but it's still incredibly profitable to work in both countries." The Turkey properties came into Cub's portfolio earlier this year after the company acquired Anatolia Energy. Prior to the takeover, Anatolia's story was similar to Cub's. Set up shop in a country with high natural gas prices and reap the rewards. Now with both sets of assets together under one roof, Cub can tackle this strategy on two fronts. Should one of the regions change significantly in its price and tax structures, the company can still pursue high netbacks in the other region. However, Cub has faith that each situation will remain positive for years to come. "We foresee gas prices in both countries will be high for the next few years, hence why we're trying to push development as fast as we can," says Afendikov. "Gas prices in Ukraine are determined by Russian/Ukrainian agreements, and the reason for that is that Ukraine is a big importer for domestic needs. Thus, all gas produced in Ukraine is sold locally." Around 50 years ago, Ukraine was a big natural gas producer. However, due to changes in government structure and many other factors, the country did not maintain the same levels of production. However, the country is tied tightly to the price of gas. Every apartment is fitted for natural gas, as are many of Ukraine's biggest businesses such as chemical industries and fertilizer plants. 56 www.resourceworld.com "It's an exciting market, that can swallow literally as much gas as you can sell," says Afendikov. "The government is determined to increase domestic production simply because it doesn't have a great relationship with the Russians." Like Ukraine, Turkey too must depend on imports and is determined to ramp up domestic production as quickly as possible. Cub has drilling campaigns on two fronts. In Eastern Ukraine, the company, and its partner, actually own the drilling equipment and is set to increase its current 1,600-barrel-equivalent-per-day production. The company and its partner have already spent $30 million on their own machinery, and have a drilling team ready. Last year they were able to drill six wells from the same rig. In Turkey, Cub won't be using their own equipment, but they do have the advantage of working with an experienced partner with deep pockets. Right now they're drilling with a multi-billion dollar private Turkish partner with plenty of experience in the region. Despite having their own equipment at work in Ukraine, Cub is planning on drilling some deeper wells next year, which will require the use of contractors. "The reality is that not even our best rig will be capable of drilling more than 3.4-3.5 kilometres, so for the deeper wells we have in mind, we'll have to bring in something with a higher drilling capacity," says Afendikov. The company has drilling campaigns in both countries planned through 2014. Starting in Q4 2013, Cub will be working more on properties in which they own 100% working interests. Cub is fully financed and, on deck, are a few more wells in each country to close out the year. Cub will receive about $10 million in 2013 as dividends from its Ukrainian JV, so they'll be putting that into developing their 100% working interest wells. As they ramp up production, it'll be "the sooner the better," so they can reap the rewards of some of the world's best natural gas netbacks on two fronts. n november 2013