After winning a government tender to develop shale gas in Olesska block in western Ukraine in May last year, Chervon finds itself between a rock and a hard place at the moment.
On one hand, the company is still negotiating with the government to sign a product sharing agreement, and on the other – trying to placate the opposition to the project, heated up by politicians, particularly from ultra-right Svoboda party.
Chevron’s Country Manager Peter Clark, 56, led seven seminars in Ivano-Franivsk and Lviv region this month to explain shale gas development to the local communities. Three of those seminars had small groups of protesters out in the street. Clark is not perplexed, though, and says protest are “normal”:
“If we can’t demonstrate there is a benefit to the people there, I don’t expect that they’re gonna want us around.”
In a two-hour interview with the Kyiv Post on Feb.12, Clark tried to lay out some of the arguments that he gives to the local communities.
KP: So, what stage is Chevron at?
PC: We have a separate negotiating team, and my job is to be able to execute the job when when and if the tender is signed. I was sent here to start building up a staff, figure out what we need to do, start communicating.
KP: How did the workshops go?
PC: Really well. It seemed that people in districts around Ivano-Frankivsk seemed to assume that this [venture] would eventually go forward, and their questions were more around how we can assure it’s done safely.
We did three workshops around Lviv. There were protesters at each one of those events, people outside holding sings. There were more “we don’t want this” statements in the audience. I think we made some progress, I don’t think we changed anyone’s minds.
KP: How do you feel about the local councils, who are dominated by Svoboda party, which is very vocal and public in saying that they’re against, or cautious about, shale gas?
PC: We got mixed signals. There were people who stood up and said they were representing Svoboda’s interests and that Svoboda was not opposed to shale gas development per se, but they wanted two things: to reassure everyone that it could be done without hurting the environment, and they’d like a share in the revenue stream in the region. Others stood up and said: I represent Svoboda, and we don’t want it here – there wasn’t a consistent Svoboda position that I heard.
KP: A couple of weeks ago you met with the leadership if Svoboda, I believe?
PC: My boss Derek Magness, who is the general manager of our onshore Europe initiative, came over and had several meetings and got the same sort of messages.
I met Iryna Sekh for the first time in December. We had a meeting in Lviv chaired by the administration, but council members also came. Iryna Sekh was also there, and her opening statement was: we’re not opposed to Chevron, we’re not opposed to shale gas development necessarily, we just don’t like the way the national government has orchestrated this.
KP: Your dialog with local authorities started very late, way after winning the tender. Why is that?
PC: We get both comments. We get comments that you haven’t even got a PSA yet, you haven’t picked the first well location yet, why are you coming here getting people all excited? I think we’re doing the best we can. In hindsight, I think it would have been better if we engaged earlier. Our delay in getting out to district level allowed a lot of misinformation to travel around so people got their perceptions before we had our chance to get our point across.
KP: These workshops are preparation for voting by local councils and signing the PSA. When do you feel that might be happening?
PC: I don’t know. The PSA needs to be approved by the local authorities before it can become effective. To my knowledge, they haven’t even seen it yet.
KP: Have you got got a timeline on your activities? The PSA, the first well?
PC: We hoped to reach an agreement with the central government on the PSA terms before the last election and sign by the end of last year. We missed those targets. There is some work that we’re doing now that puts us in a better position once the PSA gets moving. We’re attempting to purchase pre-existing seismic data from the area which would give us a better idea how to move forward. The tender terms, which I think are publicly available, would obligate us to a five-year exploration program starting when the PSA is executed. WIth the amount of work we have to do, that’s a pretty tight schedule.
KP: Does that mean you will start drilling five years after you sign?
PC: No, we hope to start drilling the first well perhaps a year or 1.5 years after the PSA is signed.
KP: How many wells are you going to sink during the exploration stage?
PC: That’s potentially a point of negotiations. Probably somewhere between five and 15. Some of those, the first few wells, would just be vertical wells. The purpose would be to extract some core pieces of the shale that we’re interested in to see how much gas content it has, measure the mechanical properties. If that looks good, we will drill a few horizontal wells, and – assuming we can get the permits to do that – hydraulically fracture them to get a much better idea of what initial flow rate we would get, how they tail off.
KP: So, how dangerous is fracking going to be in western Ukraine? Are there going to be mini-earthquakes?
PC: There are cases of drilling activity causing earthquakes. When people inject large volumes of water over a long time, and they significantly build pressure in rock formations. That can cause things to shift. If you inject into a natural fracture, it can cause a shift. It’s believed that there was an earthquake in the UK that was caused by hydraulic fracturing activity. My understanding now is that they injected directly into a structural fault, and it moved a little bit. One of the things we want to do is stay away from faults.
KP: The other two concerns are water and chemicals that you use for fracturing. How do you deal with those?
CP: There are multiple issues with water. The first one is supply. This is one of the items of misinformation. Word is out there that it takes huge amounts of water. Natural gas from shale uses very little water to produce a given amount of energy because you only fracture the well one time.
KP: Do you know where your water is going to come from?
CP: No.
KP: Are you planning to recycle your water?
CP: In the exploration phase we’ll recycle as much as we can, but it’s somewhat difficult. Maybe we can build a tank or a holding pond to hold that water. In the production phase, we will try to do the same thing as we’re doing in Pennsylvania right now, which is that a 100 percent of the Chevron’s flowback water (which is the large volume of water that comes back initially) is recycled today.
One of the commitments is that we’re going to take all the best practices that we do in the US and do the same things here – we’re not going to cut corners in Ukraine.
KP: One of the major concerns is that you’re not revealing the chemical formula you pump into the well. How do you address that?
CP: The chemicals that we pump into the wells in the US right now are listed on the website called frackfocus.org. Every well is listed individually. The properties of the shale will guide the selection of the chemicals. Even more important is the water. The chemistry of the water that we use will be critical in selecting the specific chemicals that we use.
KP: Are you planning to reveal the composition of the chemicals for each well just like you do in the States?
CP: Yes. But it is a problem that we haven’t done it in advance, so the protesters had room to complain it’s a point of contention.
KP: Another concern is that in Ukraine you will be drilling in populous areas, while in the US a lot of the operation is in the desert. How do you address that?
CP: Once the well is drilled and put into production, they’ll take away much of the equipment and reclaim the land. They still need an access road, and they still need to be able to park the truck next to the well. One of the things about horizontal drilling is instead of having well pads dotted across the landscape like you would see in a conventional oil field, you can group six, eight, 10 wells together, on one pad, and take much less land, build fewer roads, disturb less countryside.
What we would obviously do at the beginning is to look for [remote] sites. We don’t want to be next to someone’s house. We want to have absolute minimal impact.
KP: How are you going to negotiate that?
CP: We’re not going to force anyone off their land – that’s just not good business. So, we need to go out and negotiate with individual landowners. The process is that we ask the geologist not to draw an X on a map and say “I want to put a well there,” which you might do in conventional production because the geology is such that you really do need to put a well on this spot. Here we think the shale is really extensive.
We might need a road to cross other people’s land to get to their land, we need to get permission of each of those landowners.
And the people in that community have a vested interest as well – more trucks on the road, some noise for a few months, there will be lights at night – that kind of thing. And unless the village council is convinced that this is good for the village, it’s not going to go forward.
KP: When you negotiate with landowners, do you usually buy or rent land?
CP: I think it will more of a rental arrangement, or a lease.
KP: You said local councils would also have to get something out of it. What is your estimate of investment that would have to go into each project?
CP: I know Shell made some commitments in their PSA. I would expect we would be in the same sort of range. It will be a few million dollars a year potentially during the exploration phase, and something more than that set aside for social infrastructure during the production phase when, hopefully, we’ll start making money.
To be clear, the exploration phase is a five-year commitment. There will be a specific dollar amount that we’re required to spend, it will be hundreds of millions of dollars. And it’s 100 percent Chevron cost.
KP: The estimates of how much gas there could potentially be extracted from shale in western Ukraine really vary. What is your working figure?
CP: I really don’t have one. The geologists are pretty sure the shale is there, with their visions of geologic history they think it could be comparable to some of the shales that we’re producing from in the US.
KP: What are the full investment figures like?
CP: Full development will be tens of billions, assuming that it’s commercial and it goes forward on a large scale. And how much gas you can produce depends on so much more on just the gas and the rock. If it takes two years to get all the permits to drill each well, even if you had a great reservoir there, it would not be economic to produce it. It depends on free access to the distribution system.
KP: Are you negotiating that yet?
CP: We’re suggesting legislation that would continue to open up the pipeline system so that multiple producers could put gas in, and multiple customers could pipe the gas out in some kind of market system.
KP: Are you hoping to sell in Ukraine or export?
CP: We’re hoping to sell to the highest bidder, to be honest. We are a business. The local market is advantageous because the transportation tariff would be less. So, there is a built-in advantage to use the gas locally.
KP: What are your estimates for extraction costs?
CP: If we look at the cost of the first exploration well, and applied that cost to production phase, that cost would not be economic. We’re starting a survey now of local contractors, Ukrainian companies: who’s going to shot seismic? who’s going to drill the first well? who’s going to provide trucking services? who’s going to provide the earth moving services? There is a whole range of activities that we need to contract for on that first well.
KP: You have said the deposit in Ukraine may be similar to Pennsylvania. How much does it cost to extract gas there? There is probably an extrapolation that you can apply to Ukraine.
CP: If we found the Marcellus shale (which is the big shale in Pennsylvania), if we found its twin in Ukraine, if five years from now the industry had advanced to the same point in Ukraine that Pennsylvania had advanced to, the price would be $100 per 1,000 cubic [meters].
KP: That would be the very, very optimistic scenario.
CP: But the interesting thing is that the price of gas in Pennsylvania was not that much lower than your price here today before the drilling started.
KP: What is the pessimistic scenario?
CP: The pessimistic scenario is that we don’t have an open market, we may have a hard time producing the gas for $430 per 1,000 cubic meters. I think in today’s environment we probably can’t beat Gazprom’s price.
KP: You’re supposed to be signing a deal in the same style as Shell has done, with a Ukrainian daughter company of Naftogaz and SPK Geoservice, a Ukrainian company that has been tied to the Family, or grouping close to President Viktor Yanukovych’s son. How do you feel about that?
CP: The first point to make is that it’s not unusual to have an assigned partner. It’s very common in the beginning of a PSA for the government to assign somebody to represent the national interest. So, our partnership will be with Nadra Olesska, who was assigned to represent the government’s interest.
KP: Does this company exist yet? Is there a registered office? Is there a director who talks to you as your partner?
CP: There have been some discussions. I am not part of the negotiating team, so I am not sure how frequent those discussions have been. As to legal registration, I don’t know. Certainly they have to be legally registered before we can partner with them.
KP: What about SPK Geoservice? Do they provide any services? Do you see them at all? Do they take part in workshops etc?
CP: We don’t have an agreement with them. There are actually two agreements we’re negotiating. One is the PSA, which is the contract that allows us to operate in the Olesska block. The other is the joint operating agreement, which is an agreement between Chevron and Nadra Olesska, which defines the relationship between the partners: who proposes the budget, who votes on the budget, how the funds are provided, how the funds are dispersed. Those negotiations are going on as well.
KP: Is this second agreement going to be signed before the PSA?
CP: I think it was originally envisioned that it was going to be signed before the PSA. Now I understand that they can be signed concurrently.
KP: If there is any corruption discovered associated with your partner SPK Geoservice, you could potentially fall under the Foreign Corrupt Practices Act in the US. Do you see any risk in it?
CP: My job, and the job of the legal team’s job, is to make sure it does not happen.
KP: How can you make sure of it?
CP: We’re going to abide by all the FCPA rules and regulations; we’re going to keep our books straight – we’re just going to run a very clean ship here. There were people inside Chevron who didn’t want to make this tender. Because they looked at the charts that rank countries in ease of doing business. And Ukraine is not high on the ease of doing business chart. And there are people who said: why are we going there? Others said: there is an opportunity, let’s give it a try. If we don’t find gas, or if we can’t do business in a clean way, then we’re just gonna have to leave.
KP: A representative of Svoboda party told us that Ukraine is better off buying technology from you and drilling ourselves. Are you willing to sell?
CP:It’s not so much the existing technology that’s the issue. You want to be tapped into further technological improvements. So, a company like Shell or Chevron is going to continue to spend money on research and refine the technology – we’re always looking for ways to do it safer, with less impact.
The other issue is money. Shell has committed to hundreds of millions of dollars upfront, if it does not work – they lose. It’s the same for us: we’ll commit hundreds of millions of dollars upfront. Frankly, I think this is a pretty risky play.
KP: What other risks have you identified in Ukraine?
CP: First of all, there are geological risks. Another risk is that if he have an industrial accident – the consequences are huge, we’ll probably be out of Ukraine, and it it would tarnish our reputation around the world. One of the things that we hope we are bringing to Ukraine is a record of good, safe operations compared to anybody else. We need to drive the risk of an accident down to zero.
There is a risk that we won’t have access to the pipeline system. There is a risk that the regulatory environment does not advance. And I see several ways that it needs to advance over the next five years to make this viable. A lot of the regulations don’t really focus on, or anticipate producing natural gas from shale, hydraulic fracturing, horizontal wells, how you pick a well location.
KP: Are you joining effort with Shell and ExxonMobil to help produce this legislation?
CP: There are several ideas floating around there, whether the Ministry of Ecology would drive this process forward. I think one of the avenues we would anticipate using would be the American Chamber of Commerce, where we have participated before in suggesting modifications. I think we need to find any way we can.
KP: So far, the regulatory tide is going against you. Batkivshchyna is suggesting a moratorium on exploration of alternative hydrocarbons, Svoboda is holding hearing on shale gas in March. Are you going to attend?
CP: I read in the press that Svoboda is going to hold a hearing on March 20. I haven’t heard anything ever since. I hope we’re asked to participate.
KP: Have you tried to reach out to people who have expressed concerns and drafted laws against your shale gas?
CP: Not directly. We helped the American Chamber of Commerce draft a consolidated opinion.
KP: One of the concerns of those campaigning against shale gas is a risk of industrial accident. I presume there is a provision in the PSA which spills out how to deal with that?
CP: The short answer is that if we cause a problem, we fix the problem. The law in Ukraine is pretty specific on it as well, and there will be further language in the PSA to that effect.
KP: How specific is that part on the document?
CP: The document is still under negotiation, so I cannot comment. One of the points we made in the workshop, is we’re gonna go out to every water well within a two-kilometer radius [of a planned gas well], and will offer to test the water at our expense.We’ll use certified laboratories in Ukraine. We’ll probably send some sample out of Ukraine to cross-check and verify. The results will be shared by the local authorities, with the well owner, and we’ll keep a copy. At various times we will come back to the same wells, run the same tests and compare, and share that information. So, there will be measurements whether or not things have been damaged.
There has been no case when somebody was able to demonstrate that fracturing [at two to four kilometers under the ground] has contaminated ground water.
KP: There are also concerns about a potential source of water. How are you going to address it?
CP: In Poland, we have been using deeper aquifers, where the water is not drinkable or not used for anything. Other options are to use fresh water, if there is lots and lots of it and nobody objects. But somebody is going to object, that’s probably not going to be our first choice.
We were advised there are some waste pits around Ivano-Frankivsk and Lviv, old industrial processes with polluted water. In some of them the water level is rising because creeks feed them and rain falls into them. They’re worried they’re going to spill or get into a river.You’d have to filter it, so there is a processing cost. But if you use a water supply that’s relatively clean, you have to pay for the water. If you help somebody to get rid of some toxic problem, you just have to pay for the filtering.
KP: What other potential benefits are you offering?
CP: The primary list is jobs. If we got into production phase, it’s everything from geologists and engineers, and lawyers, and office managers, and logistics managers, and truck drivers, and security guards. All those people are going to stay in hotels, and eat in restaurants, they’re gonna need their laundry done. So, the ripples just go out through the economy.
Also, social investment projects. If we’re operating in the community, we’re wishing to be a good neighbor. We will contribute to things like schools and water supply systems, and so forth.
[In the US], tax collections have gone up over the last five years over 30 percent on average for the areas that have shale gas development. For the areas that don’t have shale gas development, tax collections have gone down because of the general economic slowdown in Pennsylvania over the last five years.KP: Are there people from western Ukraine who have traveled to see it?
CP: We have an open offer to people from western Ukraine to come and look at our operation in Poland. It gets complicated because a lot of people in the audience are government officials, so for me to buy them a bus ticket is gonna get me in trouble. But if they can get out there, we can arrange them a tour of well site.
