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There’s a lot going on this week in energy, but rather than go through the eternal drama of Keystone XL, we want to get in front of an issue that’s going to become critical in the coming weeks: Ukraine. As we head into the cold winter months, and more significantly, as Ukraine moves towards signing agreements with the European Union in November, we are reaching a crucial turning point.
On Tuesday, as Russia’s state-run Gazprom was demanding that Ukraine pay an overdue gas bill urgently, sparking fears of a rerun of the Russia-Ukraine gas war that shocked (and froze) Europe in Winter 2009, Ukrainian Vice Prime Minister Yuriy Boyko was in Houston, stirring up interest among small- and mid-cap US exploration and production companies.
Moscow says the non-payment issue is now critical—but what is really critical, for Russia, is the fact that Kiev is set to sign an association agreement with the EU on closer trade links at a summit in Vilnius on 29 November.
Boyko, speaking in Houston, remains steadfast, though, and the emerging picture is one of a Ukrainian oil and gas industry that has everything its needs for independence forced from shale—except drillers.
The drilling and service industry is virtually non-existent … as an “industry”. There has not been much in the way of new investment in the country because the new technology isn’t making its way to Ukraine—still, you have a country bursting at the seams with expert engineers and geologists, none of whom have been introduced to Western technology that would catapult exploration and production to new levels. As a result, the focus is on keeping existing production steady—and nothing more.
But consider this: the Lublin Basin, which lies under Poland and Ukraine could be 10-15 times as large as the US Barnett formation and have a pay zone close to 4,000 feet compared to 200-300 feet for Barnett. Shell’s contract area covering the Yuzivska field in Kharkiv and Donestsk could contain as much as 4 trillion cubic feet of gas—almost as much as Algeria. Overall, Ukraine’s gas resources are assessed at around 1.2 trillion cubic meters. By 2020, Ukraine plans to extract four to five billion cubic meters of shale gas annually.
The geology is there, the potential is astounding—and drilling and investment is something we can control. And significantly, by comparison with the rest of Europe, Ukraine is more suitable for horizontal drilling because it is less densely populated.
The investment environment is also changing for the better. What investors want is a solid production-sharing agreement. In Ukraine, they will find this, and the government is now looking to improve the investment environment further by actively reforming energy legislation to bring it in line with European standards.
The situation in Ukraine today has changed from the last decade, when it was difficult to maneuver amongst the oligarchs. Russia is starting to bypass Ukraine’s transit pipelines increasingly, and as for the oligarchs … well, they are now seeing the need to share. They need cheaper gas for their factories.
Here is the key message: Ukraine is ripe for investment, and the junior players have the most to gain here. There is already an enviable domestic pipeline network and a gas price of about $12 per mmbtu (compared to about $3.50-$4 mmbtu in the US market).
Boyko has been the key force behind new development deals and creating an environment for a real pay-out for unconventional gas in particular. Ukrainian gas prices are now high enough to recoup the costs of shale and coal-bed gas development, and there is a local market for this to replace Russian imports, and easy access to European Union markets, not to mention voracious demand.
Ukraine controls the transit of 90% of Russian gas to Europe, which makes Ukraine’s pipeline infrastructure a highly-prized strategic asset and the single most important transit route to Europe. Next month we should see Ukraine sign a European Association Agreement, which will play a key role not only in Ukraine’s own energy independence, but in forging energy security for all of the European Union.
The Ukrainian playing field is not only now open and suitable for mid-size North American E&P companies—it is ideal. Conditions are now in place for mutually beneficial partnerships with local companies and there is genuine prospect for rapid payback. The investment environment has been de-risked and secured, gas prices support payout, infrastructure in place for getting product to market is unrivaled, joint ventures can be quickly organized, and unlike the rest of Europe—horizontal drilling meets with little public blowback.
That’s it for our Ukrainian update.
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That’s it from us this week.