Ukraine signed a deal with Chevron Corp. to develop shale gas in western Ukraine on Nov. 5, ending a lengthy and difficult negotiation process that lasted nearly 1.5 years since the company won the tender. The production sharing agreement is the second one of its kind in Ukraine and a further attempt by the country to wean itself off expensive Russian natural gas.
President Viktor Yanukovych, who oversaw the signing
in Kyiv, said that once production gets going by Chevron and Royal Dutch Shell,
which concluded a similar deal in January to explore Yuzivska field in eastern
Ukraine, the nation can become self-sufficient in gas extraction.
“Agreement with Shell and Chevron will allow us by
2020 to become self-sufficient in gas, and, according to the optimistic
scenario, to become an exporter,” the president said before the signing.
At the moment, however, Ukraine is highly dependent on
Russian gas. This year, it plans to import 27 billion cubic meters, paying
about $400 per 1,000 cubic meters. Extraction from shale is expected to be much
cheaper.
“It will be much cheaper than the natural gas we buy
from our partners – about three times less,” said Eduard Stavitsky, the energy
minister.
Ukraine has Europe’s fourth-largest shale gas reserves
of about 1.2 trillion cubic meters, according to the U.S. Energy Information
Administration. The nation estimates that its reserves are much larger, though.
According to the government data, the Oleska field alone might have 2.98
trillion cubic meters of gas.
The government’s base scenario suggests that once full
production capacity is reached, the annual extraction in this area, which
stretches over Ivano-Frankivsk and Lviv Oblast, will be 5 billion cubic meters
per year, according to Stavitsky. He said the government’s optimistic scenario
puts the potential extraction figure at $8-10 billion cubic meters per year.
Chevron pledged to invest $350 million into the
exploration, and the investment could go
“In case on confirmation (of gas volumes), about 2,000
wells will be drilled, costing at least 4 billion dollars for drilling itself
and the surrounding territory,” Stavitsky said.
He also said that Chevron pledged to invest into
social and business infrastructure, including production of drilling equipment
in the area. He said the contract has the potential of creating “tens of
thousands jobs.”
But the government’s plans might still be frustrated,
as it happened just across the border, in neighboring Poland. In June,
ExxonMobil, another global energy giant, quit exploration there because of
disappointing tests drillings.
Subsequently, Poland’s Geological Institute and US.
Energy Information Administration downgraded their estimates of shale gas
reserves in the nation. Previously, it was thought that the nation has shale
gas reserves equivalent to 65 years’ worth of consumption.
Geology,
however, might not be the only obstacle for the investors. More than 10 months
after signing an agreement to explore Yuzivska field in Kharkiv and Donetsk
Oblast, Shell is not yet drilling in that field. Corruption, lack of
specialized regulation for and resistance in local communities have slowed the
company’s progress in Ukraine.
Chevron has also struggled to sign its production
sharing agreement as ecological and political groups in western Ukraine
campaigned against its plans, fearing pollution and damage from hydraulic
fracturing – or fracking – a technology used to extract gas from shale and
tight rock, when water and chemicals are pumped underground at high pressure.
Moreover, the central government did not make the
process much easier, according to industry experts. The company continued to
negotiate its conditions even on the day of signing, a source at the
president’s administration said.
ExxonMobil, which won a tender last August to extract
gas offshore as a part of an international consortium, is still haggling with
the government over the jurisdiction of their agreement. The company insists on
signing under the English law, while Ukraine continues to balk. Stavitsky said,
however, that the government hopes to sign this month.
At the same time, Ukraine awarded the right to explore
two more offshore fields in the Black Sea to Italian Eni and French EDF, in
conjunction with Ukraine’s own Ukrgazvydobuvannya. “We’re
counting on quick signing,” Stavitsky said.
The following is a statement from Chevron Ukraine’s country manager Pete Clark:
On Nov. 5, Chevron Ukraine B.V., the government of Ukraine and Nadra Oleska Limited Liability Company signed a production sharing agreement for the exploration and production of hydrocarbons in the Oleska Block that is located in portions of L’viv and Ivano-Frankivsk regions.
President of Ukraine Viktor Yanukovych and Jay Johnson, president of Chevron Europe, Eurasia and Middle East, witnessed the signing by Eduard Stavytskyi, Minister of Energy and Coal Industry of Ukraine, Derek Magness for Chevron Ukraine B.V., and Viktor Ponomarenko for Nadra Oleska Limited Liability Company. The signing took place during Ukraine’s Domestic and Foreign Investment Advisory Council meeting.
Johnson said Chevron was pleased to partner with Ukraine in the exploration and development of energy resources in Western Ukraine. “This strategically-important project provides an opportunity for Ukraine to achieve greater energy security, stimulate economic growth, and create jobs,” he said.
The investors – Chevron Ukraine B.V. and Nadra Oles’ka Limited Liability Company – will each hold a 50 percent interest in the project, with Chevron Ukraine B.V. being the operator. The rights and responsibilities of the investors will be established in their operating agreement.
The PSA covers a term of up to 50 years, with the initial five years devoted to an exploration phase focused on acquiring seismic data and the drilling of exploration wells. The Oleska Block covers 1.6 million acres in western Ukraine. For more information, please go to www.chevron.ua
Kyiv
Post deputy chief editor Katya Gorchinksaya can be reached at katya.gorchinskaya@gmail.com.
