Russia Claims Ukraine’s Black Sea Oil And Gas Bounty

Russia's annexation of Crimea has totally upended Kiev's plans for Black Sea and Sea of Azov offshore oil and natural gas production.

Before the peninsula's March 16 independence referendum, followed two days later by Russian annexation, Ukraine's state-owned Chornomornaftogaz ("Chernomorneftegaz" in Russian) owned 17 hydrocarbon fields, including 11 natural gas fields, four gas condensate fields, and two oil fields, along with 13 offshore platforms in the Black Sea and Sea of Azov.

Among foreign companies interested in Crimea's offshore hydrocarbon assets were ExxonMobil, Royal Dutch Shell and Petrom.

Pre-annexation, Chornomornaftohaz also held a 100 percent interest in five offshore license blocs - Vostochno-Kazantipskoe in the Sea of Azov and Odesskoe, Bezymiannoe, Subbotina and Palasa in the Black Sea. Crimea was third in Ukrainian natural gas production after the Kharkov and Poltava regions.

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After the referendum, the Crimean Parliament nationalized both Chornomornaftohaz and state-owned Ukrtransgaz, which owned the national gas transmission network belonging to Ukraine's state-owned Naftogaz company. It then chartered a new company, the Crimean republican enterprise (PKK) "Chernomorneftegaz." The Crimean Parliament also claimed the peninsula's "continental shelf and exclusive economic zone" in the Black Sea.

On March 26, Crimea's Supreme Council speaker Vladimir Konstantinov told journalists that the nationalization of the Ukrainian Chornomornaftohaz state company had been fully completed, adding that the enterprise had a new director and was "working normally."

Russia's annexation of Crimea has also had an immediate and chilling effect on the energy deals that ousted Ukrainian President Viktor Yanukovych's government had been negotiating with foreign energy firms. On March 19, Royal Dutch Shell announced that it was abandoning negotiations to sign a production sharing agreement (PSA) to develop Crimea's offshore Skifska field, saying it had "decided to focus its strengths and capital on other opportunities in our world projects portfolio."

Ukraine's transitional government was quick to respond to its Crimean losses. On April 3, Minister of Justice Pavel Petrenko announced that a review of  Ukraine's "losses in Crimea, including Ministry of Energy property, the Black Sea shelf and Chornomornaftohaz, and Ministry of Infrastructure and Transport property (railway, real estate, ships and planes" had been completed with an eye toward launching a case at the Council of Europe to recover compensation for damages.

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As to the legal status of Crimea's offshore waters, Deputy Natural Resources and Ecology Minister Denis Khramov said March 19 that Crimean offshore projects would become subject to Russian law. "If Russian law is extended to Crimea, then law [imposing] requirements on participants in projects on the shelf will be extended," Khramov said, adding, "Only one thing is important. If this is a part of Russia then it is subject to Russian law."

According to Russian natural resources law, offshore deposits can only be worked by companies with state ownership of at least 51 percent and five or more years experience working in Russian waters.

As for the future of Chernomorneftegaz, Aleksandr Donskoi of Russian brokerage firm "Aton" believes that the company is unlikely to sell at its estimated price of $500 million-$1 billion market price. "Most likely, the tender evaluation will be below the market value," he said, adding that the company will likely be bought by Gazprom.

Whatever Chernomorneftegaz's future, bids for the firm or future PSAs are unlikely to involve U.S. or European energy firms in the short term, since on April 11, the U.S. Treasury sanctioned the firm.

For the present then, Crimea's energy future is indissolubly linked to Russia's, for better or worse.    

By John Daly of Oilprice.com