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Ukraine to Become Shale Gas Superpower?

By John Daly | Thu, 31 January 2013 22:42 | 1

Who says that the World Economic Forum meetings in Davos, Switzerland are useless?

Certainly not the Ukrainians, who on the sidelines amidst the champagne and caviar inked a 50-year profit sharing shale natural gas deal with Royal Dutch Shell PLC, worth up to $10 billion.

Underlining the significance of the contract between Royal Dutch Shell PLC and Nadra Yuzivska LLC, it was signed in the presence of the Ukrainian President Viktor Yanukovych and Dutch Prime Minister Mark Rutte by Ukrainian Minister of Energy and Mines Eduard Stavytskyy and Royal Dutch Shell PLC CEO Peter Voser.

Royal Dutch Shell PLC and Nadra Yuzivska LLC will each have a 50 percent interest. Nadra Yuzivska LLC is 90 per cent owned by the Ukrainian state. The agreement commits Royal Dutch Shell PLC to explore and drill for natural gas in shale rock formations in eastern Ukraine using hydraulic fracturing. Royal Dutch Shell PLC stated that it intends to drill first exploratory wells in areas near Donetsk and Kharkiv "believed to hold substantial natural gas."

Related article: Are There Really Benefits to U.S. LNG Exports?

Yanukovych gushed to the Dutch Prime Minister, "We have become close friends, almost family, we now have a shared responsibility. Today we gave birth to a new business," adding that the agreement is beneficial for Ukraine, "Beneficial because this investment because through these investments we increase domestic gas production, profitable, because we will create jobs, benefit because we will increase the economy and thus will increase revenue part of the budget. From now on we will also be able to find a flexible method of co-operation that will add value to both our countries' economies."

Stavitsky was equally enthusiastic, telling journalists that Ukraine might even generate a surplus of gas within five years if all goes well, remarking, "Now we can only evaluate Shell’s optimistic scenario, which is to produce about 20 billion cubic meters  per year, according to the pessimistic projections, at least 7-8 billion cubic meters annually... If we reach the optimistic scenario it would completely resolve the nation’s deficit issues and even generate a surplus." Further drifting into reverie, Stavytsky portrayed his vision of how the agreement could transform Ukraine, currently a major transit route for Russian gas flows to Europe and consumer held hostage by Gazprom, into a liberalized energy market similar to the European Union, an integrated “energy hub” open to any and all energy producers.

The PSA follows an exploration contract that Royal Dutch Shell PLC signed with Ukraine in September 2011, committing it to invest up to $800 million in exploring for shale natural gas. Quickening the pace for the agreement, on 23 January the Ukrainian Cabinet approved a draft agreement between Royal Dutch Shell PLC’s Exploration and Production Ukraine Investment BV subsidiary and Nadra Yuzivska LLC.

Related article: Romania and the Shale Question

What’s in it for Royal Dutch Shell PLC? Well, the agreement exempts the Dutch energy giant from environmental taxes, charges for water use, land tax, customs duties, royalties for gas extraction and surcharges on gas extraction for mandatory pension insurance. No wonder an editorial in Ukraine’s “Komentari” website carried the title, “Shell deal deprives Ukraine of almost all tax revenues.

And oh, a possible tiny wisp of cloud on the horizon. Doing the math, the 10 percent of Nadra Yuzivska LLC not owned by the Ukrainian government is owned by a small private firm that the Ukrainian media has linked to family members of Yanukovich.

In 2004 Ukrainian former Prime Minister Pavlo Lazarenko, who fled to the U.S. was found guilty by a federal jury in San Francisco on charges of money laundering, wire fraud and extortion with some of the funds that he acquired through dealings with Yedyni Energosystemy Ukrayiny (United Energy Systems of Ukraine), a monopoly that imported Russian natural gas.

Lazarenko’s sentence?

Nine years.

United Energy Systems of Ukraine CEO at the time, with whom he had a close working relationship?

Former Ukrainian Prime Minister Yulia Tymoshenko,.

On 11 October 2011 a Ukrainian court sentenced Tymoshenko to seven years in prison after she was found guilty of abuse of office when brokering the 2009 gas deal with Russia.

Let the games begin!

By. John C.K. Daly of Oilprice.com

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  • Anna on February 02 2013 said:
    Yanukovich family are such thieves! They rob from Ukraine government 10% of of Nadra Yuzivska LLC, which more than 5% of 10 billion

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