You're reading: Shale gas tenders may mean bonanza for local law firms

The upcoming shale gas tender launched last week is on track to become Ukraine’s biggest auction to investors ever, an economic bonanza and a game-changer for the country’s Russia-dependent energy sector.

The multibillion-dollar hydrocarbon exploration and production investments that could follow in coming years imply a tremendous amount of legal work, with lawyers eager for business set to come their way.

With Europe’s fourth largest shale gas reserves, according to the U.S. Department of Energy, the production stakes in Ukraine have aroused international interest. The list of potential bidders includes America’s Exxon Mobil, Royal Dutch Shell, the Russian-British TNK-BP, and Italy’s Eni.

According to Volodymr Ignashchenko, advisor to Ukraine’s Ministry of Ecology and Natural Resources, the government expects up to five bidders for the vast Yuzivska field in eastern Ukraine and three or four bidders for the Olesky region to the west.

The purchase of the tender documents alone costs $2 million. The price tag for exploration and production work is expected to surge into the billions.

This is potentially excellent news for law firms in Ukraine. They were swamped with work before the 2009 global recession, but have seen foreign investment activity in Ukraine dry up since.

Vitaliy Radchenko, head of energy projects at international law firm CMS Cameron McKenna, explained that each energy company would have to hire a law firm to assist them with the bidding process.

“All the majors are interested,” he said. “It’s a game-changer.”

Further down the line law companies will be able to cash in on due diligence, assisting in negotiating and concluding investment agreements, obtaining additional licenses, dispute resolution, tax services, conducting analyses and a whole series of other activities.

Sviatoslav Belei, a lawyer at the Kyiv office of French law firm Gide Loyrette Nouel, which has extensive experience in energy dealings, explained that the potential value of such contracts depended on the depth of involvement, potentially running up to $1 million. Belei also pointed to ecology as a major source of business.

Hydraulic fracturing – or fracking – is the process of cracking open shale rock with a mixture of sand and chemical-laced water to extract shale gas. Environmental concerns have led to bans on this practice in France and Bulgaria and a suspension on shale gas recovery operations in Britain. Moreover, local authorities in Ukraine from the areas of prospective exploration have recently raised concerns. “We try to identify all the potential risks for the project,” Belei said.

At least one party is unhappy with the developments, though.

Russian gas giant Gazprom has repeatedly stated that shale gas presents significant environmental risks and is not economically viable. Experts, however, say this stance obviously reflects Russian fears over loss of market share in its natural gas exports.

There is still no sign that Gazprom will agree to sharply cut natural gas import prices for Ukraine, but it has reportedly in recent weeks offered a 10 percent discount. Gazprom, however, holds firm to its position that sizable gas price reductions hang on Kyiv handing over its strategic gas transit system and joining the Russia-led Customs Union with Belarus and Kazakhstan.

It could take years to start pumping sizable volumes from fields in Ukraine, but the mere shift – bringing the world’s energy majors in to help unlock potentially large shale gas reserves – could boost Kyiv’s leverage in price negotiations with Gazprom.

But tenders in Ukraine, a country where vested interests and oligarchs rule, are notoriously murky. The upcoming shale gas tender could end up as no exception.

The controversial inclusion of a little known private company in the production sharing agreement has caused unease among some investors, and highlights Ukraine’s patchy history in dealings between the private and public sectors.

The Adam Smith Energy Forum, held in Kyiv on Feb. 27- March 1, investors expressed unease about the tender requirements which require the winning bidders to partner up not only with state mineral resources company Nadra, but with a relatively small firm called SPK-Geoservice.

SPK-Geoservice was picked in weeks ago in a tender as a minority partner, but its role and value in the deal remain unclear.

Said to be owned by Ukraine’s top geologists, SPK-Geoservice has a 10 percent stake in a partnership with Nadra which will form a 50/50 joint venture with the energy company that wins the two separate tenders. Some energy majors were tight lipped in talking about SPK-Geoservice, others were lukewarm saying they have worked with the group’s geologists in the past.

Radchenko said the inclusion of SPK-Geoservice may be partially motivated by Ukraine’s desire to learn the know-how and technologies involved in unconventional gas extraction, to be used in future state endeavors. He noted that Brazil’s oil and gas giant Petrobras used similar arrangements in the 1970s before going at it solo.

Nonetheless, Radchenko expressed concern about the lack of information as to the length of the production sharing agreement, and how much funds, if any, the state side of the joint venture would be contributing.

Vladimir Zhmak, executive director of the Kyiv-based subsidiary of TNK-BP, questioned SPK-Geoservice’s credentials, pointing to the fact that it only posted $57,000 in revenue in 2010. Picking a company without the necessary financial resources discredited the tender, he claimed.

“The results of the first tender were surprising for us. We did not see transparency and openness,” Zhmak said.

TNK-BP is certainly peeved about shutting down its Lysychansk refinery on April 1, having found government ears deaf to requests of support or sector reform. Some Ukrainian officials speculate that TNK-BP, a partially Russian owned business, is sounding alarm bells about the tender’s transparency for political reasons.

Zhmak denied these allegations, claiming that TNK-BP was motivated by pure business interests.

So what’s really going on and will these strategic projects proceed, bringing in badly needed investment in the process?

“The state is very interested in energy projects, and this is no secret,” said Oleh Malskyy, partner at AstapovLawyers. He noted that investors were wary of moving into Ukraine’s energy business at the moment, as this often meant joining up or competing with state-based organizations, or groups that could be linked to state officials or their relatives.

“This is the message flying around at the moment: you don’t want to be against those guys, but you don’t want to be with them,” Malskyy said.

Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].