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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Will Gazprom Bully Its Way out of a Monopoly?

Of all the European countries that feel the bite of Russia’s Gazprom gas giant every winter, Ukraine is perhaps the most scarred, now Russia is seeking another $7 billion from Ukraine for unused gas. Developing Ukraine’s shale plays couldn’t happen fast enough.

On 28 January, Gazprom demanded that Kiev pay $7 billion for using less gas than it was supposed to under a 2009 deal signed between then-Russian prime minister Vladimir Putin and then-Ukrainian prime minister Yulia Tymoshenko (who is now in prison for abuse of office and corruption connected to this very deal).

The contract calls for Ukraine to purchase 33.3 billion cubic meters of natural gas annually from Gazprom. For 2012, Ukraine only purchased 25 billion cubic meters. Ukraine is paying about $430 per 1,000 cubic meters of Russian gas—a figure its budget cannot sustain—and it wants Moscow to lower prices. Talks to that end in December and January were dead in the water.

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Ukraine’s desperation is understood. Kiev is at the center of the ongoing EU-Russian gas power struggle. Late last year, Moscow actually agreed to lower gas prices for Kiev, but what it wanted in return was too high a price for Ukraine—and for all of Europe. Moscow demanded that it be allowed to buy into Ukrainian pipelines through which Russia transits gas to Europe. It also demanded (unofficially, of course) that Ukraine join a customs union with Russia, Belarus and Kazakhstan.

The end result: Ukraine gets cheaper gas and Russia strengthens its control over Europe’s gas supply through the control not only of supplies but of pipelines.

So far, Ukraine’s efforts at diversification have been highlighted particularly by a single high-profile event: the publicly televised signed of a fake $1.1 billion deal to secure investment for the construction of the country’s first liquid natural gas (LNG) terminal on the Black Sea and a pipeline to go along with it. For months, Kiev was negotiating with a gentleman it believed was a representative of Spain’s Gas Natural Fenosa. Right after the signing, it came out that the representative was unknown to Fenosa and that the Spanish company had no intention of cutting any sort of deal with Ukraine.

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Last year was a bad year, and a humiliating one. So far, this year hasn’t worked out any better, but a deal with Shell for a Ukraine shale gas play might be Kiev’s eventual savior (It may also be the reason Gazprom sent in its $7 billion bill for unused gas).

On 24 January, on the sidelines of the World Economic Forum (WEF) in Davos, Switzerland, Royal Dutch Shell CEO Peter Voser and the Ukrainian President Viktor Yanukovich made a show of signing a $10 billion, 50-year production agreement for Ukraine’s Yuzivska gas field.

It is another boost for Ukraine’s shale gas ambitions, which are still in their early days, but which have already attracted the major players.

Ukraine is a favorite in Europe for juniors and majors chasing shale gas and tight gas plays.

Shell plans to drill 15 wells as part of a 50-year joint venture with a local company called Nadra Yuzivska.

Production is still several years away, but Ukraine is said to have Europe’s third-largest shale gas reserves at 42 trillion cubic feet (1.2 trillion cubic metres).

By. Charles Kennedy of Oilprice.com


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