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The Jamestown Foundation

The Jamestown Foundation

Founded in 1984, The Jamestown Foundation is an independent, non-partisan research institution dedicated to providing timely information concerning critical political and strategic developments in China,…

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Ukraine’s Shale Dream Falls Apart

Ukraine’s hopes to cut its dependence on gas imports from Russia through shale gas development have been dashed. The two multinationals that won government tenders to develop non-traditional gas deposits in Ukraine, Chevron and Shell, stopped their works last year, and there is no clarity about possible shale gas development in western Ukraine by the Italian company Eni.

Shale gas proponents have suffered fiascos across Europe due to the opposition from environmentalists, poor geology, and a recent fall in traditional gas prices. But in Ukraine, all these factors have been exacerbated by war and its extremely negative consequences for the domestic economy.

The now fugitive Ukrainian President Viktor Yanukovych gave a green light to shale gas projects in 2011–2012, when his government failed to persuade Russia to cut its natural gas price for Ukraine, and global economic recovery sent Russian gas prices to new highs.

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At that time, the United States’ Energy Information Administration (EIA) estimated that Ukraine had Europe’s third largest shale gas reserves behind France and Norway, equaling 1.2 trillion cubic meters, while the Ukrainian National Agency for the Efficient Use of Energy Resources estimated domestic shale gas deposits at more than 2 trillion cubic meters.

In May 2012, Shell and Chevron won government tenders to develop shale gas, respectively, in Yuzivska area (in the eastern provinces of Donetsk and Kharkiv) and in Oleska area (in the western provinces of Lviv and Ivano-Frankivsk) (see EDM, May 22, 2012). The Ukrainian government expected that commercial shale gas exploration would begin in 2016–2017. Yanukovych claimed that the projects with Shell and Chevron would allow Ukraine to stop importing gas by 2020 (UNIAN, November 5, 2013).

While Shell signed a production sharing agreement (PSA) with the government in January 2013, and immediately proceeded to drill exploration wells (Minprom.ua, January 25, 2013), Chevron signed its PSA only in November 2013 due to opposition from local environmentalists and bureaucracy. Later the same month, the Maidan revolution began in Kyiv, scaring investors, so the PSA with Chevron was never practically implemented.

The war with Russia-backed rebels that erupted in eastern Ukraine in spring 2014 prompted Shell to scale down its work there, as the towns of Slovyansk and Kramatorsk, where heavy fights took place, happened to be located right above the Yuzivska field. This even prompted conspiracy theories that Russia sponsored the rebels in that area specifically to prevent Ukraine from diminishing its dependence on Russian gas (Gazeta.ru, April 30, 2014).

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Despite that, Shell said a year ago that it planned to resume its work after eastern Ukraine became stable (BBC–Ukrainian service, June 24, 2014). However, with the conflict reaching a stalemate, there have been no indications that Shell will become more active in eastern Ukraine. Moreover, this past March, Shell announced it would not continue exploration works in Kharkiv province (Companion.ua, March 12).

The war and economic crisis prompted the government to hike Ukraine’s mineral extraction tax to 70 percent, from 28 percent last year, in order to increase state budget revenues and defense spending. This prompted the remaining investors in the oil and gas sector to revise their projects in Ukraine and alarmed more potential investors (Zn.ua, December 26, 2014). Hardly by coincidence, Chevron terminated its shale gas contract with the Ukrainian government the same month (Kyiv Post, December 15, 2014).

Chevron’s Ukrainian project was probably also affected by the shale gas exploration difficulties in Poland, where exploratory wells failed to meet expectations. Indeed, western Ukraine’s Oleska field is part of the disappointing Lublin basin shared with Poland (FT, November 16, 2014).

After Poland and Ukraine, Chevron abandoned its shale gas projects also in Romania (Balkan Insight, February 23).

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The head of the Ukrainian state geology service, Dmytro Kashchuk, claimed in an interview last December that 16 US firms expressed interest in Ukrainian shale gas. However, he admitted that it was difficult to conduct talks with potential investors when war continued in Ukraine. Kashchuk also said he hoped Shell would return to the Yuzivska field after the conclusion of war (Rbc.ua, December 11, 2014).

For the moment, the government is apparently pinning its hopes exclusively on Italian Eni. The Ukrainian Environment and Natural Resources Ministry said last December, after a meeting between Minister Ihor Shevchenko and Eni-Ukraine CEO Luigi Barberis, that Eni was ready to develop shale gas fields in Ivano-Frankivsk province (Interfax-Ukraine, December 24).

In 2012, Eni bought 50.01 percent of shares in the Ivano-Frankivsk-based company Zakhidhazinvest, which holds rights to several shale gas license areas in Ukraine. In January 2015, Shevchenko said Eni would begin drilling its first exploration well in western Ukraine by the end of the year (Rian.com.ua, January 21).

Kyiv officials are no longer making loud statements about cutting Ukraine’s dependence on Russian energy supplies with the help of domestic shale gas. Furthermore, shale gas development has all but disappeared from public discourse in Ukraine of late. If natural gas prices remain relatively low, and the Ukraine-Russia conflict continues to simmer, investors are unlikely to return to the local gas industry, especially to the risky non-traditional shale gas sector.

By Oleg Varfolomeyev (Jamestown.org)

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