Welcome to the U.S.-Ukraine Business Council

Neil Campbell, "What's On" (Guide to Kyiv) magazine Kyiv, Ukraine,
Tuesday, November 14, 2007

Russia sent a shock wave through the western world when it turned off the gas supply to Ukraine in January 2006. Following the 30 September elections when the Orange parties came out on top, Russia threatened to do so again, citing Ukraine's debt as the reason while denying any political motivation.

It is likely the threat of such drastic action will remain hanging over the country's head unless Ukraine becomes energy self-sufficient.
According to the experts, this could well become a possibility.

During Soviet times, many geological areas in Ukraine were extensively drilled for gas, and all the easy-to-get deposits were discovered.
Since then, the search for new fields has continued, and UGV, an affiliate company of Naftogaz, has up to 80 drilling rigs in operation at any one time However, lacking funding and access to the latest technologies when it comes to finding deeper deposits, the success rate is low.
Ukraine uses 75 to 80 billion cubic metres of gas per year, and currently about 25% of that is produced domestically.

The rest has to be imported, and most if it comes from Russia. However, that could be set to change with the arrival of the first major international oil company in the country - Shell. Shell has had a presence in Ukraine since 1992, but that was only a small retail business selling lubricants mainly to industry.

Apart from that, Ukraine remained pretty much off the radar to the oil giant until about five years ago when some studies came to light showing that Ukraine had potential - big potential.

"Well, records showed rock formations similar to other areas of the world where Shell operates. We believe there is untapped gas in the country and we know how to get it out," says Patrick van Daele, General Manager for Shell Ukraine Exploration and Production.

Exploration is as expensive as it is risky, and so more in-depth studies were required, and the idea of gas exploration in Ukraine had to be sold internally in Shell, but eventually the mandate to start negotiations came through.

It only took six months to negotiate an agreement with UGV which was signed on 8 June 2006. The initial investment from Shell will be $100 million, and the agreement allows the company to explore in eight exploration licences jointly with UGV, all of which are located in the Kharkiv and Poltava regions.

However, while Shell has one of the best exploration success rates amongst the majors, it is only 50% and so there is a chance the joint exploration operations will find nothing, but Antonius Papaspiropoulos, Communications and Government Affairs Manager with Shell Ukraine, is confident they will find gas in Ukraine.

"85% of reserves discovered up until now are gas," he says. "Onshore Ukraine is basically a gas province." Patrick van Daele also believes that Ukraine could well have major gas reserves waiting to be tapped.
"We believe that the 25% domestically produced gas can be increased substantially, reducing the country's reliance on Russia," he says.

With Ukraine's current rate of gas consumption, both men admit that gas exploration alone is very unlikely to make Ukraine energy self- sufficient, but the company sees a lot of potential in other areas as well Onshore may be gas, but offshore is looking very much like oil, and it is an area in which Shell is very interested.
The Black Sea, however, remains largely unknown territory. So far there have been a number of discoveries in shallow waters (up to 100 metres), but little has been done to explore deeper than this.

The government is now opening up deep-water exploration (up to 3 kilometres water depth), and the first licence has been awarded to Vanco.

"Most discoveries so far offshore are oil, which is a very exportable product and will bring a lot of financial benefits to Ukraine, but as the country is gas based, it probably won't contribute much to the country's energy self-sufficiency," says Antonius.
One area on which Shell believes Ukraine can capitalise is coal to gas conversion Ukraine has vast coal resources, but burning coal to produce electricity, while cheap, is very dirty producing a lot of C02. Ukraine's coal is very gassy, and this makes it ideal for converting to gas.

Shell is able to do this through its innovative 'Clean Coal Process'.
"Converting coal to gas is slightly more expensive than simply burning coal, but it is much cleaner as the C02 can be disposed of more efficiently," explains Patrick.

In the same vein, Shell is also looking at implementing a process called "coal bed methane" where coal is converted into gas while it is still in the ground. The process does away with the need for mining coal, a very risky business in Ukraine.

"As the coal here is very gassy, it is very dangerous to mine.
We are working on a process to extract gas from coal, leaving the coal in the ground. With the high level of gas content in the coal, Ukraine would be ideal for this process, and it will also be a lot safer than mining"
Ukraine also has great potential when it comes to alternative fuel LJ products and renewable energy sources. As a massive agricultural country, Ukraine could capitalise on developments in biofuels.

Originally produced from crops grown specifically for this purpose such as rape, for some time there was a strong argument against the production of biofuels because, it was argued, it ate into food production. And producing purpose grown crops increased the cost. "Things have moved on since then," explains Antonius.

"Biofuels are now predominantly manufactured from the byproducts of crops grown for food such as roots, stalks, straw and pips. This does not affect food production and is also far more economical for manufacturing biofuels. At the moment, the biofuels market in Ukraine is fragmented but there is massive potential".

Biofuel production is likely to develop in Ukraine as its agricultural industries modernise, and with its vast swathes of fertile farm land the future for this clean source of fuel looks rosey.

When it comes to renewable energy resources, Ukraine currently has very little, but there is great scope for improvement under the Kyoto Protocol.

There are already some renewable energy projects in the pipeline for Ukraine, mostly wind farms in the coastal parts of the country.
The final source of energy available to Ukraine is of course nuclear, and President Viktor Yushchenko recently announced plans to double the country's volume of nuclear energy output by 2030 in a joint initiative with Russia and the US.

In 1986, the Soviet Union was in the process of constructing a number of nuclear power stations in Ukraine, but the programme was shelved following Chornobyl.

It is now planned to reopen these sites and complete construction.
The initiative envisions financial aid for building nuclear power plants, advice on spent fuel storage, and contains obligations to ensure uninterrupted fuel supplies and other commitments.

If the president's target is met then this would further the cause of Ukraine's energy independence considerably. All these factors taken into account will improve Ukraine's energy self-sufficiency tremendously, but the problem remains that the country's use of energy is extremely inefficient and a lot of work needs to be done on improving this.

However, Ukraine currently lacks the political will. Unlike many other countries, there are no incentives for industry or local authorities to reduce energy usage, and with its current consumption the country will always fall far short of meeting its own needs.

"With things the way they are, I reckon Ukraine could be producing around 50% of its own energy in the future. Whether the percentage can rise above that will depend purely on energy efficiency improvements," says Patrick van Daele.

LINK: http://whatson-kiev.com/index.php?go=News&in=view&id=3297