KYIV & LONDON - Ukraine is expected to sign a potential $10bn-plus natural gas exploration and production deal on Thursday with Royal Dutch Shell, marking the biggest investment to date in “unconventional” gas in Europe.

The production-sharing agreement, set to be signed in Davos in the presence of President Viktor Yanukovich of Ukraine and Peter Voser, Shell’s chief executive, could become by far the largest foray by foreign investors into the former Soviet republic. It is a potentially big step in reducing Ukraine’s reliance on costly imports from Gazprom in what is the Russian monopoly’s largest foreign customer.

It could also help restore momentum to efforts to develop unconventional and shale gas in Europe. These have been hit by environmental moratoriums in several countries on the controversial “fracking” technology used to exploit shale gas, and downgrades of reserve estimates.

Ukraine, estimated to hold Europe’s third-largest shale gas reserves, hopes to lead the way in Europe in repeating the North American shale gas boom that has transformed the US in the past decade from net importer to prospective gas exporter.

Eduard Stavytsky, Ukraine’s newly appointed energy minister, who led negotiations with Shell, told the Financial Times: “If the geology turns out as expected, we expect at least $10bn to be invested.”

Shell declined to comment before the signing but confirmed the production sharing agreement had been approved by Ukraine’s government. “The next step is for [it] to be signed by the relevant parties,” it added.

Jorge Zukoski, president of the American Chamber of Commerce in Ukraine, called the agreement “a paradigm shift for Ukraine, a major step towards energy independence”.

Shell won the right last May to explore shale and other unconventional gas resources in eastern Ukraine’s vast Yuzivska field, which by some estimates could hold as much as 4tn cubic metres of natural gas and coal-bed methane. The agreement allows exploration to begin this year, with an initial investment by Shell of $400m.

Some opposition parties are protesting over the environmental risks of shale gas. But Mr Yanukovich appears to have sufficient command over government and parliament to push ahead, and the prospect of weakening Russia’s energy grip – and reducing prices – is enticing for Ukraine.

Russia has twice since 2006 cut off gas to Ukraine in midwinter as the result of pricing disputes, causing disruption to onward supplies to western Europe through the Soviet-built pipelines across Ukraine.


Mr Stavytsky said Kiev’s focus would now shift to signing production-sharing agreements with two US energy giants.

Chevron won a second tender last year to explore shale gas opportunities in western Ukraine, though it faces much stronger local opposition. An ExxonMobil-led consortium, also including Shell, was chosen to explore for gas off Ukraine’s Black Sea coast.

Mr Stavytsky suggested that if those projects worked out as hoped, they could produce as much as 20bn cubic metres a year within 10 years – doubling current Ukrainian gas production to cover completely its gradually decreasing domestic gas demand.

Though Ukraine will remain dependent on Russian imports for some years, the prospective shale gas production will strengthen its hand in continuing efforts to renegotiate a 10-year, 2009 supply contract with Gazprom. Kiev says that it set an unfairly high price.

“If our Russian colleagues at Gazprom do not agree to lower gas prices, they risk losing their biggest customer,” Mr Stavytsky said.


USUBC NOTE:  Shell, Chevron and ExxonMobil are members of the U.S.-Ukraine Business Council, Washington, D.C.,
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