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Agreement reached with Vanco for Black Sea oil and gas field

Oleksii Savytsky, The Day Weekly Digest #32, The Day, Kyiv, Ukraine, Tuesday, October 30, 2007

KYIV- Ukraine has taken an important step toward energy safety. Our government and Vanco International Ltd., a subsidiary of the Vanco Energy Company, have reached an agreement on the conditions for oil and gas production in a Black Sea oil and gas field near Kerch.

The agreement was signed by Vanco's president and founder Gene Van Dyke and Ukraine's Deputy Prime Minister Andrii Kliuiev in the presence of President Viktor Yushchenko.

"For Ukraine this is a project of strategic importance and a uniquely positive precedent for developing, first of all, the foundations of a national energy strategy as well as cooperation with leading international investors," the president said.

At the meeting before the signing ceremony Yushchenko praised the agreement, declaring that in the context of bolstering our country's energy safety this document has multifaceted value.

In his opinion, it is also a good incentive  to step up large-scale exploration of the Ukrainian part of the Black Sea continental shelf.

The agreement was the culmination of a tender that attracted the U.S.- based Hunt Oil Company of Ukraine, Shell, Exxon Mobil, Turkey's Turkiye Petrolleri, Britain's Alphex One Limited, and Ukraine's Ukrnafta. Shell and Exxon Mobil competed jointly, as did Turkiye Petrolleri and Alphex One.

The winner was Vanco International Ltd.

The subsequent negotiations on exploration and extraction in the Ukraine- owned part of the deep-sea fields in the Black Sea were launched in April 2006.

According to Van Dyke, it was not easy to reach an agreement, but both sides are satisfied with the end results and are discussing details.
The exploration will start next year.

"We will get to work right away and follow a detailed exploration program, including an all-around 3D seismic study followed by deep-sea drilling,"
he said. Three wells are scheduled for drilling within the next three years.

As far as the main conditions of the production-sharing agreement are concerned, i.e., the division of production, Van Dyke says that the approximate shares are as follows: 65 percent of the total production is reserved for the Ukrainian government and 35 percent for Vanco Energy, which will sell its share to Ukraine.

However, the press service of the Ministry of the Environment and Natural Resources says that this ratio will be valid only for the development stage. Once exploitation work begins, the production will be divided 50-50.

"We believe that this field has potentially huge deposits. Geologically, the Black Sea is very similar to the Caspian Sea, where a lot of oil and gas is being extracted.

However, the average depth of the Black Sea is two kilometers, and drilling devices designed to work at such great depths became available only four or five years ago," says Van Dyke. The 12,960-square- meter field near Kerch has an estimated 10.8 billion cubic meters of hydrocarbons.

"If our drilling is successful, it will yield two to three billion barrels of oil, which is around 400 million tons," says the president of Vanco Energy.

These are all estimates, he adds, because drilling at such great depths poses a great risk. In the event of failure, Ukraine will not suffer any losses.

"Drilling a well is a $1 million-per-day business. If the well turns out to be dry, we will lose $90 million. A few years ago we drilled a well in Turkey's part of the Black Sea, and after we had spent $25 million we discovered it was dry. It takes two to three billion dollars to develop a field like this one. So this business is very risky, and you can't insure the risk." According to Van Dyke, up to 50 percent of deep-sea wells are unsuccessful.

Even so, Van Dyke's years of experience and his undisguised delight with the agreement offer hope for a positive result because both sides to the agreement have stated that in the best-case scenario Ukraine may become an independent energy country.

Specialists at Vanco Energy say that if their efforts are successful, the project will require $20 billion more in investments. The president's press service says that Ukraine expects the agreement to attract $15 billion of investments and yield 200 million tons of hydrocarbons within 30 years.

The state budget is expected to receive over 200 billion hryvnias if the project is successful.

LINK: http://www.day.kiev.ua/190509/