Region: Ukraine may look to open energy sector

By Vlad Lavrov

For the Kyiv Post

While Ukraine has made some progress in recent years in encouraging alternative energy production through wind and solar projects, experts say the only way to wean the country off expensive energy supplies from Russia is to attract foreign investment and expertise.

There are signs that Ukraine's government is finally starting to listen and may be prepared to open up the energy sector, long monopolized by powerful state-run groups, to major international energy giants.

Those foreign companies that haven't been deterred from operating in Ukraine by years of barriers may finally find more luck in developing unconventional gas resources, like shale and methane gas, or investing in the country's first liquefied natural gas (LNG) terminal.

At the moment, none of the potential deals has progressed further than preliminary discussions, indications of interest and the signing of non-legally binding memorandums of understanding. But such unexpected activity in the energy sector has prompted many experts in Ukraine and abroad to claim the government has finally seen the light.

"Our government seems to have finally realized Ukraine's economy will have a bleak future if it continues to neglect the development of the country's own [untapped alternative energy] power and primarily oil and gas base," said Olexander Martinenko, senior partner at the Kyiv office of international law firm CMS Cameron McKenna, which represents the interests of a leading international oil and gas company.

Analysts from Wood Mackenzie, an Edinburgh-based research and consulting firm specializing in energy and metals industries, went even further in a recent report, calling the current state of affairs in Ukraine's energy sector "a golden opportunity for a renaissance in the country's upstream industry."

Niall Rowantree, an analyst with Wood Mackenzie, said such optimism in Ukraine's assessment, first and foremost, is explained by the fact that in the past, foreign investors simply lacked access to Ukraine, while the current government says it's open to negotiations.

"What we are seeing is that things are moving positively in Ukraine," Rowantree said.

Major international players like Shell, TNK-BP, ExxonMobil, Chevron, Total and Eni have recently expressed strong interest in entering Ukraine's energy sector.

While in most cases the companies remain tight-lipped about their negotiations with the government, TNK-BP went as far as to pledge $1.8 billion of investment over the next six to seven years into Ukraine's shale deposits in the eastern Donetsk province.

The British-Russian consortium is targeting six licenses that could produce up to 3 billion cubic meters of gas annually. Citing data from the U.S. Geological Survey, Ukrainian officials say their nation's shale gas reserves could be 1.5 trillion to 2.5 trillion cubic meters, enough to cover consumption at the current rate for more than 30 years.

Another potential project government officials hope will help lure foreign investment into the country is the billion-dollar construction of an LNG terminal intended to help the country diversify its gas supplies.

Currently, most of Ukraine's gas imports flow from Russia, which accounts for nearly two-thirds of the 50 billion cubic meters Ukraine consumes annually.

Vitaliy Demianiuk, deputy head of the State Agency for Investment and National Projects Management, said nearly 50 major international companies have expressed interest to take part in the tender to perform a feasibility study of the LNG project and come up with a business plan.

According to Demianiuk, the winning bid will be selected in August, and by early next year they hope to form a consortium of potential investors, expected to put from $1.5 billion to $2 billion into construction of the terminal. Demianiuk hopes it will start receiving gas, primarily from Azerbaijan, as early as 2014.

Vlad Lavrov can be reached at lavrov@kyivpost.com