Welcome to the U.S.-Ukraine Business Council

By Fraser Allan, Business Ukraine magazine Kyiv, Ukraine
Monday, December 10, 2007

As one of the world's top oil and gas companies, Shell is now looking to Ukraine as a new market to which it can offer a wide range of its products and services. However, it was the country's potential as producer of natural gas and condensate that made the company take its first major step into Ukraine.

Shell's lubricants division may have been in Ukraine for several years, but it is only since last year that the brand has really been making a mark on the local energy industry. Shell Exploration and Production's General Manager in Ukraine Patrick van Daele says a number of important deals were concluded by the company during 2006 on downstream and exploration and production, taking Shell into the major league of oil and gas firms in Ukraine.

"Those were multimillion dollar investments that have made Shell a lot more visible in Ukraine," he says.

The agreements were made in partnership with the Ukrainian government on the exploration side and with a Russian firm on the company's retail expansion in the country which aims to see a large chain of Shell filling stations across Ukraine.

As Shell has expanded its exploration operations in Ukraine, other subsidiaries have shown interest in its emerging market, van Daele says.
"We have had people from our aviation, technical consultancy services, project management and trading companies visiting over the last year.

The fact that people in other parts of Shell see us moving forward on the exploration side is giving them the confidence to work in Ukraine."

Van Daele however stresses that each Shell company has made its own decisions about the Ukrainian market based on their own studies. "But once you have a few companies in a country," he says, "various synergies evolve which help the later entrants."

Shell's most important licensing deal - an agreement that gives them the legal right to prospect in Ukraine - was signed in June 2006 forming a partnership with the state gas company Natfogaz. "The eight licences held for sites in the Kharkiv-Poltava area are for us to jointly explore for mostly gas and some condensate," van Daele explains.

However, Shell has more ambitious goals. "We are looking for resources that are deeper and harder to exploit than current sites in the area," he says, adding that this is because only international companies such as Shell have the necessary technology and funding to viably access these harder-to-reach reserves.

"We are happy to be in this partnership and with the licences we hold - we believe they are attractive - but we are also not hiding the fact that we intend to grow and become a more important player in Ukraine than these licences alone could make us."

POLITICAL INSTABILITY HINDERING PROGRESS Van Daele understandably preferred not to comment specifically on the current political situation, but admitted that political events were a contributor to making doing business in Ukraine more difficult at times.

This, he says is not only frustrating for Shell but also unfortunate for Ukraine as the country has significant resources which could generate much- needed revenue. "The state is sitting on a lot of resources without the investment and technology to exploit them," he says.

Frequent changes in personnel among government officials and state gas firm management have also hindered Shell's progress, van Daele admits. "In the one and a half years I have been here," he says, "I have seen two ministers of fuel and energy, four CEOs at Naftogaz and four directors at the state gas company we have been working with.

The fact that most of these appointees are political and change every time there is a new government doesn't help."

On the recent wide press speculation that deep-water deposits in the Black Sea could prove to be a goldmine for Ukraine, van Daele offers a few words of caution.

"This is being hyped in the press as something that will make Ukraine energy independent from its neighbours, but nobody can correctly say this yet because no wells have been drilled there. If you look at the map of the Black Sea, then you will see that on the shelf, that's 80-100 metres water depth, there have been quite a few discoveries with some made quite recently."

However, those deposits, like many onshore, are lying undeveloped due to a lack of state investment and willingness to open up to more foreign capital.
"Many are just waiting for the technology and investment to start production," van Daele says.

LINK: http://www.businessukraine.com.ua/global-firm-local-potential