Region: Ukraine turns West for promising gas deals

Ukraine hopes to further reduce its dependence on Russian gas after announcing an agreement that will see Anglo-Dutch energy giant Shell search for shale gas in the east of the country.

Predictions suggest up to 20 billion cubic meters of gas could be produced annually through the agreement, although doubts have been raised over how realistic these figures are. The $10 billion deal, signed Jan. 24, comes as Ukraine explores multiple alternative sources of gas and cuts gas imports from Russia this year to a projected 24.5 billion cubic meters, down from 27 billion cubic meters last year.

The deal involves a 50-year production-sharing agreement that will see Shell drill 15 wells in east Ukraine's Yuzovska field to search for shale gas. U.S. estimates have put Ukraine's shale gas reserves at as much as 1.2 trillion cubic meters. According to Ukrainian Environment and Natural Resources Minister Eduard Stavitsky, Shell has indicated the field should produce at least 7 billion or 8 billion cubic meters of gas annually, a figure that could rise as high as 20 billion cubic meters.

"If we follow the optimistic scenario, our existing [gas] deficit problems will be solved," media quoted Stavitsky as saying on the sidelines of the World Economic Forum in Davos, where the deal was signed.

Some analysts say, however, there is no guarantee such a scenario will play out. It is "too early to say" whether the project will significantly reduce Ukraine's need for Russian gas, according to Vitaly Kryukov, oil and gas analyst at IFD Kapital in Moscow.

"We compared information on shale gas deposits, and shale gas differs much in its geology in the different regions. If shale gas has been successful … in the United States, it doesn't mean it will be successful as well in Ukraine. The geology differs on the shale gas," he told The Prague Post. "I am not sure they will be able to produce as much as 20 billion or 30 billion cubic meters. The volume will be much lower."

The Yuzovska project, 50 percent owned by Shell and 50 percent by the mostly state-owned company Nadra Yuzovska, comes as Ukraine explores other potential major gas sources.

ExxonMobil is heading a consortium exploring for gas beneath the Black Sea, a project that Prime Minister Mykola Azarov said Jan. 18 could provide 2 billion cubic meters, while Chevron is exploring shale gas fields in the west of Ukraine.

The country also hopes to build a liquefied natural gas (LNG) terminal with foreign partners, echoing efforts by Poland, which signed a contract three and a half years ago to buy LNG from the Gulf state of Qatar.

In addition, reports indicate gas from Germany's RWE could be supplied to Ukraine via Slovakia. The recent purchase by Energetický a průmyslový holding (EPH), a Czech and Slovak investment fund, of a large share in the Slovak gas group Slovenský plynárenský priemysel is said to have made the project more likely.

Yet it remains doubtful, according to Kryukov, that Ukraine could secure the 5 billion cubic meters of gas annually from RWE that Azarov has spoken of. "I don't think they will benefit much [from] this gas from Germany. I don't think they will be able to contract all 5 billion cubic meters," he said.

Once transport costs and the market price were taken into account, Ukraine would be unlikely to realize substantial savings by buying from Germany, he suggested. "Prices could be cheaper [compared to buying from Russia], but it won't be much cheaper," he said.

As well as seeking new sources of gas supplies, Ukraine has made efforts to cut gas consumption as it moves to reduce imports from Russia, which in 2010 were as high as 40 billion cubic meters. In August, it was announced six power plants had been converted from gas to coal, and studies are under way to switch over a further five. Factories have also cut consumption.

Relations between Moscow and Kyiv have been difficult at times, and in early 2009 Russian gas supplies through Ukraine were cut following a pricing dispute, leading to shortages in several European countries, including the Czech Republic.

More recently, Ukrainian authorities have branded as excessive the approximately $430 per 1,000 cubic meters they are paying Russia for gas. They have, however, refused Russian offers to buy Ukrainian pipelines in return for cheaper prices.

Just as Ukraine is looking to diversify its gas supply base, so Russia is reducing its dependence on Ukraine for gas transit, partly through the construction of the Nord Stream pipeline, an offshore pipeline that takes gas directly from Russia to Germany. Other facilities distribute the gas widely into Europe, including the Opal pipeline which takes supplies south into Central Europe. The Czech Republic recently inaugurated the Gazela pipeline, which attaches to the Opal system. Belarus has also become more important for the transit of Russian gas and these trends away from using Ukraine will continue, predicted Kryukov.

"The dependence of Russia on Ukraine will decline," he said.

Daniel Bardsley can be reached at
business@praguepost.com