In Ukraine the demand for oil and gas significantly exceeds local supply; it is a net consumer. Whilst overall, as a country, Russia is a net producer of oil and gas, the Republic of Adygea, where we operate, and the neighbouring Krasnodar region, are significant net consumers.
We believe that the opportunities open to us in these attractive gas markets will continue to expand as governments and relevant authorities look to encourage investment by non-state companies in oil and gas exploration and production; this is an attractive route towards rapidly increasing production regionally. We are well positioned to continue to exploit these opportunities.
Oil and Gas Demand
In Ukraine oil and gas consumption continues to outstrip production many times over and is forecast to do so for the foreseeable future.
The region of Krasnodar is located 1,500km south of Moscow with a population of 5 million people, of which 54 percent live in urban areas. The Republic of Adygea, where we operate, is an autonomous republic and an enclave within Krasnodar spanning 7,600sq.km. The republic has a population of approximately 0.5 million people and is a significant net consumer of oil and gas.
When the Ukraine domestic gas market opened up in 2003 we focused on increasing production to benefit from the increasing domestic gas prices. In September 2010 the Russian government made a final decision to increase gas sector tariffs by 15% on 1 July 2012 and by 15% per annum in 2013 and 2014. We believe that the Russian domestic gas price will, after accounting for net-backed transportation costs, converge with the gas prices in western Europe by around 2020.