The market value of Ukraine's shale gas could be as high as $1.5 trillion.
To paraphrase poet Robert Frost, there are promises to keep and miles to go before one can sleep.
That’s certainly the situation in Ukraine’s much-touted shale gas production agreements with Chevron and Shell. Last week, the Ukrainian government chose the oil and gas majors in separate projects to explore and potentially unlock shale natural gas reserves in eastern and western Ukraine.
In heavily energy-dependent Ukraine, it’s not an overstatement to say that the hopes of the nation are counting on success.
“Now our focus will be on [the] successful negotiation of the production sharing agreement with the Ukrainian government and the Joint Operating Agreement with our new partner…whom we look forward to working with,” a Shell spokesperson emailed the Kyiv Post.
The landmark projects could eventually lure billions of dollars of badly needed investment and help break dependency on increasingly expensive Russian gas imports.
But much depends on what is found underground.
And even before the exploration phase kicks in, the energy majors of this size have massive amounts of due diligence work ahead.
Lots of digging will be necessary. Many questions remain unanswered, especially when looking at the country’s shoddy 20-year track record of treating foreign investors.
At stake is some 42 trillion cubic feet of shale gas reserves. The market value of Ukraine’s shale is between $10.3 billion to $1.5 trillion, Gordon Little wrote earlier this year for the International Association for Energy Economics.
It will be welcome news if Ukraine could change its opaque energy market to improve its security outlook – Ukraine’s energy intensity is 2.5 times that of Europe due to inefficiency and it gets two-thirds of its natural gas from Russia.
On their end, Chevron and Shell could together put up to $500 million for exploration in their respective blocks: Shell could invest up to $300 million to explore in eastern Ukraine; Chevron up to $200 million in western Ukraine.
Ed Chow, a U.S.-based energy consultant
Industrial extraction of gas at the sites could begin in 2018-2019, officials said.
The deal is further complicated because the investors are being told they will need to partner up on 50/50 parity terms with two domestic partners whose contribution is being questioned by diplomats and experts.
The first is state mineral resources company Nadra Ukraine. It has limited financial resources or experience in projects of this size. The same goes for SPK-GeoServcie, a privately-owned Ukrainian company chosen by the government as Nadra’s partner in a separate tender held earlier this year.
Both companies are forming a joint venture that will control half of a venture along with Chevron and Shell. Nadra will hold a 90 percent stake in the Ukrainian side’s stake; the remaining will go to SPK-GeoService.
Eduard Stavytsky, head of Ukraine’s ecology and natural resources ministry, said that SPK-GeoService will finance the activities of the two companies that will partner with the foreign oil and gas companies.
According to Energo Biznes, SPK-GeoService was founded in 2008 by Serhiy Stovba, the company’s director of research programs; Ihor Popadiuk, chief geologist for the company; and Oksana Khriashchevska, the company’s deputy chief geologist.
Energo Biznes stated that before joining SPK-GeoService, the three founders worked for a research institute attached to the state-owned oil and gas company Naftogaz Ukrainy.
Interfax-Ukraine reported that SPK-GeoService’s 2010 income was $56,500, and net income was $33,750.
Anders Aslund, an expert on Eastern European economies at the Peterson Institute for International Economics, said that there are also concerns that Chevron and Shell’s natural gas projects could perilously get embroiled in murky dealings involving local oligarchs or, possibly, interests close to Ukraine’s leadership.
“You cannot have a deal like this go through without one of three big majors being involved who have a special relationship with government,” Aslund said.
Oil and gas industry experts have suggested that conservative companies like Chevron and Shell may have to conduct foreign corruptions act reporting on the deal if government officials are somehow involved in companies that are part of the deal.
Shell has more in-country experience of the two license winners so it should know where the land mines are and will enter the partnership with their eyes wide open, experts said.
But energy consultant Edward Chow, a senior fellow of the Energy and National Security Program at the Center for Strategic & International Studies in Washington, D.C., said both oil and gas majors “will be deliberate and cautious in their approach. They’re at the beginning of a process, not at the end. There are still a lot of bridges to cross.”
That judicious approach is attributed, according to Chow, to the Ukrainian government’s poor 20-year track record in dealing with foreign investors.
“If the Ukrainian government does this properly, and these are the kind of companies you want to do business with, then it’s a very good thing. But if they fool around like they did the last 20 years, and like they did with Vanco, then it’s another missed opportunity,” Chow, a former Chevron executive, told the Kyiv Post.
Eduard Stavytsky, head of Ukraine’s ecology and natural resources ministry
In 2008, one of Houston-based Vanco Energy Company’s subsidiaries had its license to explore the Black Sea shelf revoked in 2008 amid revelations that the four parity shareholders of the Vanco subsidiary were: DTEK, owned by Ukrainian tycoon Rinat Akhmetov; Shadowlight Investments, Ltd., owned by Russian businessman Evgeny Novitsky; Vanco International of Bermuda, a subsidiary of Vanco Energy Company; and Integrum Technologies of Austria.
The Vanco project remains frozen to this day. The Houston parent company has been sold by its original American founders to Russian interests. Vanco’s project in Ukraine, which admits to having Akhmetov as a partner but has struggled to reveal who its other beneficial owners are, is in talks with Ukrainian officials on resuming the project.
Diplomats, representatives of energy companies involved in the shale gas bidding and Ukrainian officials admit that there are concerns that SPK-GeoService might be in a front for a rent-seeking arrangement by Ukrainian officials.
However, experts also noted that because of their high profile and level of public scrutiny Shell and Chevron receive, they cannot bend corners as Vanco, a relatively small US-based energy company, did.
Energy experts did admit though that the Vanco production sharing agreement was concluded when Yanukovych was prime minister in 2007, and when many current top officials served in his government.
I wouldn’t expect Ukraine to be any different. The oil companies will respond with both their internal studies, safety records and independent studies to demonstrate that fracking can be done safely if properly regulated and supervised.
– Robin Matthews, director in Deloitte CIS, Financial Advisory Services
Due diligence in Chevron and Shell’s case could take up to four months and carry a $100,000 price tag, said Sviatoslav Belei, an associate with the Gide Loyrette Nouel law firm.
And the depth of quality of due diligence, Belei said, depends on the professional knowledge specialists have of the local environment and legislation. The lawyer moreover said much will hinge on how much information state officials are willing to disclose during the data collection process.
Experts said that in traditional production sharing agreements, the investor usually bears exploratory costs since the government owns the underground resources. But in this case, the oil and gas majors are technically dealing with private companies. Everybody involved usually covers development costs.
Other questions that linger are what kind of company data access level that Chevron and Shell will get, how much freedom they’ll have to procure services, to sell future production freely, what kind of market access they’ll receive and whether they’ll have access to pipelines and other infrastructure.
And since the shale gas extraction method of using high-pressure water and chemicals is environmentally dangerous, some studies have shown, underground water tables could be affected, a resource that Ukraine lacks in quantity.
On May 15, the Lviv Oblast council where one of the shale gas sites is located announced that it was troubled that local authorities weren’t included on the inter-body government commission for the production shale agreement.
“Just about everywhere else in the world local communities or environmental groups have raised the issue about community water supplies and fracking,” said Robin Matthews, director in Deloitte CIS, Financial Advisory Services.
“I wouldn’t expect Ukraine to be any different. The oil companies will respond with both their internal studies, safety records and independent studies to demonstrate that fracking can be done safely if properly regulated and supervised,” Matthews added.
Bulgaria lawmakers earlier this year foiled Chevron’s plans for shale gas exploration using the controversial fracking method at the company’s 4,400 square-kilometer Novi Pazar block in the country. Local opposition has also put Chevron on the defensive after it was forced to acknowledge it had no plans to use fracking there in the future.
Popular resistance to fracking has emerged in Romania over speculation that Chevron would use the extraction method at its four exploration blocks there.
In addition, France has imposed a moratorium on fracking, while the U.K. is still mulling whether to allow the use of the technique to resume.
Kyiv Post staff writer Mark Rachkevych can be reached at [email protected].
