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Royal Dutch Shell has been considering ending its partnership with a Ukrainian energy company in a shale gas exploration venture in eastern Ukraine because of the fighting in the region and prospect of little profit from the project.
In fact, at least two news reports say Shell already has notified Ukraine that it’s leaving in a formal “notice of withdrawal.”
The decision by the Anglo-Dutch oil major is more bad news for Ukraine, which had hoped that producing its own gas would make it less reliant on energy from its antagonistic neighbor, Russia, and potentially infuse the country’s distressed economy with much needed foreign investment.
As for Shell itself, sources identified by the Financial Times only as “insiders” said the company had concluded that the project wasn’t worth the effort because of the armed conflict and the precipitous drop in energy prices over the past year, which have made the extraction of oil and gas less cost-effective given the expense needed to ensure efficient output from underground shale formations.
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The Kyiv Post quoted a Shell spokesman as saying in an e-mail that the fighting between Ukrainian government forces and separatists supported by Russia amounted to “circumstances beyond Shell’s control.” As a result, the spokesman said, the company has “been prevented from performing its commitments under [the] Yuzivska production sharing agreement,” or PSA.
“Therefore,” the spokesman said, “we have begun discussions with the Ukrainian government and our partner Nadra Yuzivska LLC on the way forward with the PSA, pursuant to its terms.”
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Under the agreement, signed by Shell and the Kiev government in January 2013, the company was to have developed a large gas field in the eastern Ukrainian oblasts, or provinces, of Donetsk and Kharkiv, where the fighting has been ongoing for more than a year.
The field, discovered in 2010, has proven reserves of approximately 70.8 trillion cubic feet of gas. Production was supposed to begin in 2017.
A copy of the agreement, released by a Kharkiv city councilman soon after it was signed, would have been fairly lucrative for Ukraine. It required Shell to pay $25 million to the Ukrainian government for signing the agreement, another $50 million once gas production efforts began, $25 million more when the first gas was produced, and a payment of $100 million when the field reached peak production.
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Shell isn’t the first Western oil major to withdraw from gas projects in Ukraine. Late last year, Chevron ended its role in a $10 billion shale gas deal in the west of the country. One anonymous “insider” told the Financial Times that the country’s “much hoped-for shale gas boom has gone bust.”
Despite these setbacks, this sources said Kiev will maintain its effort to attract other potential energy partners at a time of capital flight and dwindling foreign direct investment. The International Monetary Fund has set up a $17.5 billion loan program for the country, but also has lowered its forecast for Ukraine’s economy, saying it will contract by 9 percent in 2015 while inflation will continue to rise.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com