Chevron and Ukraine Set Shale Gas Deal

Over five years, Chevron says it hopes to conduct seismic surveys and to drill exploratory wells on a 1.6 million-acre area called the Oleska Block, which is heavy with shale rock deposits. The effort is likely to include hydraulic fracturing, or fracking, of the shale rock to see if oil and gas can be produced in commercially viable amounts. Because of the risks that environmentalists say fracking poses to groundwater and geological stability, it is out of favor in much of Europe.

A Chevron spokesman, Cameron van Ast, declined to comment on investment figures.

The deal with Chevron and one that Ukraine signed this year with Royal Dutch Shell “will let Ukraine satisfy its gas needs completely and, under the optimistic scenario, export energy resources by 2020,” President Viktor F. Yanukovich said on his website Tuesday.

Like other Eastern European countries, Ukraine has much to gain if it can create an environment in which energy companies can successfully explore for oil and gas.

Last year Ukraine consumed about 50 billion cubic meters of natural gas, most of it imported from Russia, while producing about 19 billion cubic meters, according to the BP Statistical Review of World Energy.

Production from the Chevron and Shell tracts has the potential to substantially narrow the gap between Ukraine’s domestic output and demand, according to government estimates.

If the companies find and produce gas, “it would reduce dependency on foreign imports significantly,” said Menno Koch, a gas analyst at Lambert Energy Advisory in London. If Ukraine or other Eastern European countries became prolific producers, that “would be a game changer,” Mr. Koch said, by creating competition for the big suppliers to Europe, not only Russia but also Norway and Algeria.

Shale gas technologies are altering the geopolitics of energy from Russia to the Middle East. Three territories — Russia, Iran and Qatar — hold about half the conventional reserves of natural gas. But shale is found in many other places, including India, China, Australia and in Eastern Europe, undercutting the power of the oil sheikhs and the Kremlin.

Ukraine, despite producing some domestic gas by conventional extraction, remains highly dependent on Russia’s Gazprom, which cut off its supplies in 2006 and 2009 in pricing disputes. As a result, Ukraine pays exceptionally high prices for natural gas, making the economics of shale gas extraction even more attractive for companies like Chevron.

As a legacy of the Soviet era, Ukraine controls the pipelines through which Gazprom transports most of its natural gas to Europe. That remains the case even after the completion of the Nordstream pipeline from Russia to Germany under the Baltic Sea. Europe depends on Russia for about 40 percent of its imported gas, most transmitted through Ukraine.

In the past, if Ukraine threatened to raise the transport price, Russia could threaten or cut off winter heating fuel. By finding a greater source of its own natural gas, Ukraine would reduce Russia’s leverage in negotiations over transport prices.

The appearance of imported cheap liquefied natural gas on the European market from Qatar and reduced demand have already led Gazprom to negotiate cuts of about 10 percent in contracts with Western European utilities, costing it billions of dollars.

Gazprom maintains that shale gas drilling inherently causes pollution and is more expensive than gas extracted from traditional deposits that are abundant in Russia. It also argues that shale gas wells are quickly depleted and that rising gas prices expected to accompany a European economic recovery will again make Gazprom’s long-term contracts appear competitive.

Despite the potential gains from shale gas, Eastern European societies are not fully convinced that pursuit of the fuel is in their interest. Fears of polluting water supplies and disrupting local lifestyles are widespread.

Recently, Chevron stopped work on a site in eastern Romania after local protests. Last month, Chevron decided not to proceed on shale gas acreage it had won in Lithuania, citing new, unfavorable regulations. The company remains a partner in a Lithuanian venture.

Still, for Chevron, which has made big bets on the shale potential of Eastern Europe since entering Poland in 2009, the signing is a step forward in talks that have dragged on for more than a year with the government.

But obstacles could arise. Chevron needs to work out the details of a 50-50 agreement with a local partner, Nadra Oleska, a private company. Local opposition could halt drilling, though government councils in the area have approved Chevron’s plans.