Welcome to the U.S.-Ukraine Business Council


By Jim Davis, Business Ukraine magazine
Kyiv, Ukraine, Monday, July 14, 2008

In one of several hopeful signs that Ukraine was finally undertaking the
necessary partnerships that would allow it to seriously explore it
underground energy resources, in June 2007 Marathon Oil Corporation and
Naftogaz Ukrainy signed a cooperation agreement to carry out technical
studies that could lead to joint exploration for hydrocarbons in an area of
interest in the Dnipro-Donets Basin located in north central Ukraine.

However, sources in the energy field told Business Ukraine last week that
Marathon has become frustrated with its lack of progress in negotiating
acceptable agreements with the government of Ukraine and has begun the
process of closing its Kyiv office and will cease its efforts to pursue
exploration opportunities.

Another international operation shuts up shop

Marathon is Houston, Texas-based and is the fourth largest US integrated oil
and gas company. It reported revenue of USD 65 billion with profits of USD
4 billion at the end of 2007.

In addition to its refining, marketing and transportation business in the
United States and integrated gas projects around the world, Marathon has
also begun a new focus on oil sands mining, considered one of the major new directions in meeting world energy needs.

The company's last annual report said its exploration activities are focused
on adding new production in existing core areas, such as the North Sea and
the Gulf of Mexico, and developing new core areas, such as Angola, Indonesia and Ukraine.

Marathon's interest in Ukraine was centred on the Dnipro-Donets Basin, which is believed to contain an estimated 7 trillion cubic feet of natural gas,
340 million barrels of gas condensate and 956 million barrels of oil.

At the time of the signing of the initial agreement, Marathon said that
exploitation of the energy resources that it expected to discover in Ukraine
would be subject to considerable subsurface challenges and would require
the application of unique technologies.

A low-key departure

Marathon is apparently attempting to handle its abandonment of efforts in
Ukraine in a very low-key manner. Sources said that the company has not
made and is unlikely to make any official announcement.

However, it is widely known that company officials had become increasingly
frustrated because of their inability to make a satisfactory agreement with
government that would allow it to commit to the very expensive full-scale
exploration operations required.

There had been signs over the last month that Marathon was coming under the same kind of pressure as another US-based company, Vanco Energy, which has been under attack from Prime Minister Yulia Tymoshenko.

On June 23, Simferopol-based state enterprise Chornomornaftogaz suspended joint prospecting and development of oil and gas fields with UK-based CBM Oil and Marathon, Deputy Secretary of Ukraine's National Security and Defence Council Borys Sobolev told a news conference in Kyiv.

"As with the case with [Vanco], agreements on joint prospecting of other
areas of the [Black Sea] shelf with Canadian and British companies have been suspended according to instructions by the PM," Interfax Ukraine reported Sobolev as saying.

A worrying trend for investors

Neither Marathon nor government sources were having much to say about the
Marathon departure last week, but one well-informed source told Business
Ukraine on condition of anonymity that Marathon had expended considerable
resources in Ukraine but that the government and its energy companies had
continued to set up laws, rules and regulations that made it almost
impossible for private energy companies to succeed in Ukraine, he concluded.

Another highly placed source said other private companies have run into the
same brick walls faced by Marathon and are either still struggling along or
have given up. Political parties and leaders worry more about the next
election than they do about making progress on bringing Ukraine to a greater
level of energy independence, he added.

Industry insiders regularly complain that the government is preventing
state-owned energy companies who are starved for cash from accessing the
international know-how and technology the foreign partners can offer.

Ukraine remains dependent on energy supplies from Russia but is actively
seeking to move out of the Kremlin's orbit, making the energy independence
issue a national strategic priority.

The country is thought to possess significant and as yet untapped oil and
gas reserves both inland and in the Ukrainian territorial waters of the
Black Sea, but domestic energy exploration companies lack the technologies
to exploit this natural wealth.
LINK: http://www.businessukraine.com.ua/difficult-partners