Ukraine’s shale gas lures western companies

The shale gas revolution has been slow to gain momentum in Europe – held back by environmental concerns, political caution and tricky geology. But one country where it may be taking off is Ukraine. Last week, Kiev signed a potentially $10bn production-sharing agreement with Chevron of the US – its second of the year – to explore for and produce shale gas in the 6,300 sq km Oleska field in western Ukraine. In January, Royal Dutch Shell signed a similar deal covering the nearly 8,000 sq km Yuzivska field in the east of the country.

But Ukraine is not solely doing deals for “unconventional” gas exploration. It is in talks on a production-sharing agreement (PSA) with an ExxonMobil-led consortium to exploit a field off the western coast of the Black Sea, expected to be signed by the year-end. This field is next to the Romanian-controlled Neptun Block, where Exxon and Austria’s OMV discovered a large gasfield in 2012.

Talks are under way, too, on a PSA with a consortium of France’s EDF and Italy’s Eni to develop a Black Sea field off the eastern coast of the Crimean peninsula.

Viktor Yanukovich, who became president in 2010, seems unclear even now whether he wants to sign landmark trade agreements with the EU at a summit later this month. But he has shown a welcome pragmatism in terms of opening domestic hydrocarbons production to the west. Industry officials say legislation has greatly improved.

In many ways, Kiev has had little choice. Gas remains a key fuel for its heavy industry, and Russian imports make up 60 per cent of consumption. But, after Ukraine turned away from Russia under the Orange leadership, Moscow began raising the price – and cut off supplies twice, in 2006 and 2009, amid pricing disputes. The agreement that ended the 2009 cut-off left Ukraine paying some of the highest prices in Europe.

Two of the other European countries most keen to exploit domestic shale gas reserves – Poland and Lithuania – are similarly dependent on Russian imports, and squeezed on price. Unlike Poland, however, which downgraded its estimated shale reserves in 2011, Ukraine is still reckoned to have Europe’s third-largest reserves: the US Energy Information Administration estimates recoverable reserves at 1.18tn cubic metres.

Ukraine’s gas consumption last year was about 50bn cubic metres, with domestic production of about 20bcm. According to government estimates, on a base scenario, Chevron’s Oleska field could produce 8-10bcm a year.

Eduard Stavytsky, the country’s energy minister, has said that if the two shale projects and offshore ExxonMobil project worked out as hoped, they could together produce 20bcm annually within 10 years. That would double current production and potentially enable Ukrainian production to completely meet its gradually falling domestic demand.

It would be a blow, too, for Russia’s Gazprom, for whom Ukraine has long been the biggest foreign customer.

Some experts suggest such projections may be optimistic – even wildly so. But if Shell, Chevron and Exxon demonstrate that international majors can operate successfully in Ukraine, even more modest production could have big implications.

Edward Chow, a senior fellow at the Center for Strategic and International Studies, said the PSAs could “trigger sound energy policy”, including protection of investor rights, and rule of law.

Success by the majors and expansion of Ukraine’s domestic energy industry could also lure in foreign oil services groups and smaller independents. Cheaper energy, meanwhile, could help efforts to develop new sectors of the economy.

Some of that scenario may be threatened if Ukraine, as now looks possible, fails to sign an EU free trade deal this month, and turns instead to Russia. A big cut in Russian gas prices – say, to levels paid by neighbouring Belarus – could make new domestic production in Ukraine less competitive.

A price cut of that size, however, seems unlikely unless Kiev takes the extra step of joining a Russian-led customs union – to which Mr Yanukovich still seems resolutely opposed. As long as that remains true, Ukraine will hold increasing allure for western oil groups.

Fonte: ft.com