At the extremes, Shell Ukraine is either part of the nation’s salvation or the big villain in its next environmental calamity.
At the extremes, Shell Ukraine is either part of the nation’s salvation or the big villain in its next environmental calamity.
More likely, the multinational energy giant will be neither. But the Anglo-Dutch firm’s unconventional search for natural gas in eastern Ukraine – hydraulic fracturing in sandstone – is generating lots of interest and intense emotions.
Supporters, including its Ukrainian government partner, envision tens of billions of dollars in new investment and 20 billion cubic meters of new domestic gas production every year – helping Ukraine break free from its dependence on expensive Russian gas imports. Last year the country consumed 54.8 billion cubic meters of gas, according to the Energy Ministry, with domestic production at roughly 20 billion cubic meters.
Some critics paint a much gloomier scenario of earthquakes, polluted drinking water and increased carbon emissions by a secretive, unresponsive global giant in cahoots with a secretive, corrupt government.
British citizen Graham Tiley, Shell’s top representative in Ukraine, is confident these fears will eventually be erased as Ukrainians see the lasting benefits of the company’s work.
In America, for example, the shale gas revolution has caused natural gas prices to plummet. Together with more easily transported liquefied natural gas, America is set to become a gas exporter for decades to come. In Europe, by contrast, opposition to shale gas on environmental grounds is much fiercer.
Environmentalists say that some of the carcinogens used in the fracking fluid remain in the ground after wells run dry, and that the process produces airborne pollutants like methane, benzene and sulfur dioxide.
“A lot of it is fear of the unknown,” Tiley told the Kyiv Post during an interview from his Kyiv office, only a few weeks after Shell on Jan. 24 entered into a 50-year production sharing agreement with Ukraine’s government. The deal was signed in the presence of President Viktor Yanukovych on the sidelines of the World Economic Forum in Davos, Switzerland.
“In the past, oil and gas companies were not always respectful of the public’s need for information, of its right to be informed,” Tiley said. “We certainly learned our lesson.”
Others beg to disagree. Ivan Varchenko, an oppositional deputy on the Kharkiv Oblast Council and an active campaigner against shale gas, says people in the Yuzivska area have been kept in the dark about key issues, such as environmental impact, that will affect their lives. They have had no communication with Shell as the product sharing agreement was rushed through and hushed up ever since, Varchenko says.
A London native with a Ph.D. in geological sciences, Tiley has spent 15 months in Ukraine and 25 years with Shell. He is confident in the environmental safety of “fracking.”
“More than a million wells have been hydraulically fracked in the United States,” Tiley said. “To my knowledge, there are no documented cases linking fracking to significant damage to the environment. There is no ‘Chornobyl’ to the fracking world. There is no ‘Three Mile Island.’ That is important to recognize. Fracking itself is demonstrably safe. It’s been done for decades. It’s been done in Ukraine since the 1950s.”
He’s also convinced that natural gas is a purer, more environmentally friendly hydrocarbon than oil or coal and noted that, even under optimistic scenarios, renewable energy sources will only cover 30 percent of the world’s demand by 2030.
The fracking process involves drilling holes deep underground and injecting a high-pressure mixture of water, sand and chemicals into the tight sandstone to create fissures that allow gas to escape and be captured. Tiley said the aquifers that are drilled through on the way down are insulated from dangerous chemicals by steel casings.
Shell’s Yuzivska project encompasses the heavily populated eastern oblasts of Kharkiv and Donetsk. Future steps include: developing a formal agreement with the state partner, Nadra Ukraine; doing environmental assessments; and, if all goes well, the start of exploration. If everything is promising, 15 wells will be drilled and Shell will then know more about how much commercially viable gas can be extracted.
Government officials believe the Yuzivska field can produce 20 billion cubic meters of natural gas annually, and have also said the government will be entitled to 31 to 60 percent of the gas produced. They expect Shell will invest at least $10 billion.
Tiley will not confirm or deny those numbers. He said that a minimum investment of $200 million will be made initially and, if exploration is successful, that amount could rise to $3.75 billion. He won’t talk about the 360-page production sharing agreement, even though details have been leaked to the public. He won’t confirm or deny whether big tax breaks have been granted for purposes other than gas exploration.
“It’s supposed to be confidential,” he said. “Other people may have leaked stuff. I’m not going to.”
But he defends the principle of a 50-50 partnership with the state as a guarantee that the interests of both sides are protected.
“Production sharing agreements were invented to give governments more direct benefits from these projects,” Tiley said. “The government and the people of Ukraine will get the lion’s share of the benefits.”
Varchenko, who leaked a version of the agreement on the web, claims the agreement is written in such a way that Ukraine effectively will get between 31 to 40 percent of gas produced by the joint venture with Shell.
Ihor Shvaika, a member of parliament with the opposition Svoboda Party, said he has challenged in court the procedure for approval of the product sharing agreement by the Kharkiv Oblast Council, which was a precondition for the signing of the agreement, “The first hearing is scheduled for Feb. 27,” he said.
But Tiley said he’s not aware of any lawsuits affecting Shell. In contrast to the refusal to discuss details of the production sharing agreement, Tiley said Shell is open about the investments it will make in the regions where it works as well as the steps it will take to protect the environment.
But Tiley said that Ukraine’s energy future is distinctly brighter with the emergence of Shell’s Yuzivska project in eastern Ukraine, Chevron’s western Ukraine Olesska project and ExxonMobil’s deepwater Black Sea Skifska project (in partnership with Shell).
Taking the optimistic scenario, “it’s entirely possible Ukraine could double or triple its domestic production into the next decade,” Tiley said.
Tiley says he is not particularly vexed by the opposition on political, legal and environmental grounds as people learn more about the technology.
As for the politics of energy, Shell appears to prefer to let Ukraine’s government battle critics, which include the Communist Party, the opposition Svoboda Party, numerous citizens, and, truth be told, probably Russian Gazprom, which wants to keep selling Ukraine lots of gas.
“Oil and gas have been at the heart of politics for 100 years,” Tiley said. “I don’t think I’m going to change that overnight. We learned not to get mixed up with politics; we’ve made a deal with the legitimate government of Ukraine – a good deal and fair deal.”
Kyiv Post chief editor Brian Bonner can be reached at [email protected]
