Welcome to the U.S.-Ukraine Business Council

Ford Gunter, Houston Business Journal Houston, Texas
Friday, October 12, 2007

Executives from Houston-based Vanco Energy Co. are scheduled to fly to Kiev, Ukraine, this weekend to officially sign the first-ever deepwater drilling agreement in the Black Sea.

Vanco, a well-established independent that rivals the majors in deepwater drilling off West Africa, beat out Hunt Oil Co., a Shell/Exxon partnership, a Turkish company and a domestic Ukrainian producer for the rights.
Previously, only Ukrainian companies had been allowed to drill in Ukrainian waters.

"This is the first deepwater license awarded in the Black Sea by the Ukraine," says Janice Van Dyke Walden, a spokeswoman for Vanco. "There has been some shallowwater activity, but it hasn't been too successful. The deepwater is a whole different scene."

A scene where Vanco has plenty of experience. Over the last decade, Vanco has secured about 30 million deepwater acres worldwide, and is among the top two deepwater acreage leaders in Africa every year, far surpassing Shell Oil Co., Devon Corp., Chevron Corp. and other majors.

"We got it because of our ability to work fast," Walden says of the 3.2 million-acre block off Crimea called Prykerchenska, which reaches depths of 6,500 feet.

Doug Stinemetz, a Houston- and Moscow-based oil and gas attorney who founded The Stinemetz Law Firm earlier this year, says Vanco has a long history of similar work in Africa.

"They went in early and got a lot of deepwater prospects before they were proved out, which seemed to work well as a whole," says the former head of Haynes and Boone LLP's Moscow office. "It's an opportunity to develop deepwater reserves that the majors haven't taken advantage of yet."

Stinemetz says Vanco operates outside the typical oil and gas mold. "Very seldom do you see people take big leaps," he says of the drilling industry.

"Vanco can't compete with the majors, so they make bold leaps and set up bases somewhere else and take large acreage and find a structure to drill on. They are way ahead of traditional oil companies." Walden agrees, admitting the company abandoned the North Sea once the majors moved in.

But the 21-employee independent from Texas also won the Black Sea bid because of its commitment to drill, not just survey. "We were the only bidder to guarantee two wells," Walden says. "The others' bids included only conditional wells."

Companies were hesitant because a three-dimensional seismic survey of the area has never been conducted, but Vanco thinks highly of the gas probability based on a 1994 2-D seismic survey it bought for $3 million from Houston-based WesternGeco.

Gene Van Dyke, the 80-year-old president and CEO of Vanco (and Walden's father), told the Houston Business Journal last summer that Vanco found 50 to 60 major structures, all leaking gas.

Van Dyke, who is leading the Vanco team to the former Soviet republic, also credits his face-to-face meetings with Ukrainian leaders throughout the bidding process with helping his company win.

The $100 million it will take to complete 3-D imaging and the drilling of two wells over the next two years will come from a partnership with JNR Eastern Investments Ltd., a London house controlled by the Rothschild family.

The concession comes at a critical time for the Ukraine, which has seen its landbased gas reserves deplete significantly.

At the time of the bidding, Ukrainian gas production only satisfied one-third of the country's demand, and the government declared its intention to bump production from 20 bcm to 26 bcm.

A dispute with Russia over gas supply and transcontinental lines passing through Ukraine borders further strained the country's crunch.

As part of the deal, Vanco will foot all costs and take home 80 percent of production income until the costs are recouped, at which point Vanco will take 60 percent to Ukraine's 40 percent.

Ukraine also reserves the right to buy any hydrocarbons discovered at market value. Vanco can sell the rest on international markets.

Ford Gunter, fgunter@bizjournals.com • 713-960-5931



October 9, 2007

Vanco is very pleased to have concluded successfully negotiation with the Government of Ukraine on the Prykerchenska Production Sharing Agreement.  Although the discussion were long and intensive they were always conducted in a positive and constructive atmosphere.

The Agreement approved by the Cabinet of Ministers satisfies Vanco's three key criteria of fairness, openness and durability and provides an effective framework for the major investments needed to complete what is a very risky deep water exploration and production project.  The PSA also ensures that the State of Ukraine will receive the major share of the benefits arising from any hydrocarbon discoveries within the Prykerchenska area.

Dr Jim Bown, Vanco's Representative in Ukraine commented:  "Vanco looks forward now to the completion of the formalities and the signing of the Agreement within the next 7 to 10 days so that work can begin immediately on the implementation of the exploration programme."

"If there are hydrocarbons in the Prykerchenska area the geology even at this early stage suggests that resources could be very large indeed. So Vanco's job now is to find the hydrocarbons and produce them.  The Government's approval of the Production Sharing Agreement is the first step on the road that we all hope will lead towards Ukraine's energy Independence."