Ukraine – Shale Gas a help or hinderence?

Ukrainian Prime Minister Mykola Azarov’s recent (unsuccessful) trip to Moscow to ask for a discount on natural gas imports was yet another reminder of Ukraine’s energy dependence.

Hopes run high that shale gas extraction, a  technology revolution that is already transforming production in the United States, offers hope to wean energy-hungry Ukraine off its reliance on Russian energy imports

With shale gas – natural gas trapped in rock rather than porous reservoirs – already accounting for  for 20 percent of U.S. production., energy giants such as Royal Dutch Shell and TNK-BP are now eyeing Ukraine as a potential source.

“We are interested in various opportunities,” said Patrick Van Daele, Shell’s country chair in Ukraine. “However, more technical data will have to be obtained to make definite statements about the country’s hydrocarbon resources, especially unconventional ones.”

The new shale gas technology has transformed production in the United States by opening up vast sources of hard-to-reach gas. The rise of unconventional gas is already challenging the global dominance of major gas producers, such as Russia, forcing Gazprom to show rare flexibility in its supply contracts.

Having missed out on the shale technology revolution in the United States, multinationals don’t want to miss future opportunities in Europe.

The International Energy Agency has estimated that Europe, which gets 25 percent of its gas from Russia, has around 35 trillion cubic meters of unconventional gas reserves – half of which is in shale. That’s around six times its remaining conventional gas reserves.

Energy giants such as ExxonMobil and ConocoPhilips are parked in Ukraine’s backyard. ExxonMobil is already drilling in Germany, ConocoPhillips is exploring in Poland and Austria’s OMV is test drilling at home.

The new technology requires work in wide-open spaces, making it more suitable to a country like Ukraine, which could possess some of the most promising shale deposits, than densely-populated Europe.

“No real work has been performed on Ukraine’s shale gas opportunities, though geologic conditions theoretically exist,” said Edward Chow, a senior fellow in the energy and national security program of the Center for Strategic and International Studies in Washington.

The complexity of extracting shale gas means that Ukraine will need international help and long-term thinking to unlock supplies.

“The U.S. experience testifies that development of the unconventional gas reserves requires years of dedicated exploration effort and the drilling of a large number of wells, inevitably leading to quite substantial investments,” Van Daele said.

He added that unlocking gas resources will be “technically challenging and extremely costly,” and require “significant financial, technological, manpower and infrastructure resources.”

This is likely to be a major stumbling block. Analysts caution that the country’s long history of stifling foreign investment into the hydrocarbons sector means the trips to Moscow to ask for gas discounts are unlikely to end soon.

“Lousy domestic policy remains the single greatest impediment to gas investments in Ukraine,” said Chow.

Not only foreign start-ups such as Cadogan and Cardinal complained about official pressure on their companies, ranging from price ceilings on gas sales to their licenses being challenged in court. Even larger players, such as Houston-based Marathon, the fourth-largest U.S. integrated oil and gas company, closed up shop in Ukraine in mid-2008.

Chow also questioned Ukraine’s interest in capitalizing on its hydrocarbon resources. “Ukraine already has an abundance of conventional gas and coal bed methane opportunities, so why bother with shale gas, which is much more difficult to extract?” he asked.

Valentyn Zemlyansky, spokesman for Ukraine’s state oil and gas company Naftogaz Ukrayiny, said his company is nevertheless “very interested in developing new, non-traditional sources of gas.” And the country boasts large shale deposits. “But for now, no large-scale geological studies aimed at mining shale gas are being conducted,” he told the Post. Ukraine’s Energy Ministry, however, held a meeting in March, and “it was noted that in order to increase the effectiveness in studying and organizing the mining of shale gas in Ukraine, experienced foreign companies must be attracted,” he added.

Shale gas production costs are high, which means the cost of conventional gas has to justify the additional efforts. The team of President Viktor Yanukovych has already pledged to try and renegotiate lower gas prices with Moscow, rather than sticking to the more transparent market scheme agreed under Prime Minister Yulia Tymoshenko.

Moscow, which has been accused of using its growing gas exports to Europe as a geopolitical weapon, is not likely to welcome any attempt to loosen its energy stranglehold.

Efforts led by the United States and the European Union to circumvent Russian gas supply lines have met with Kremlin hostility. Last month, Gazprom deputy chief Alexander Medvedev called shale gas “dangerous,” saying he doubted whether European environmental regulators would allow it.

In the short run, the new shale technology could actually hurt Ukraine, said Chow of the Center for Strategic and International Studies, as it has already reduced the amount of gas transited from Russia to Europe.

“Shale gas is a threat to Ukraine in the short to medium term and an opportunity in the medium to longer term, assuming it gets its gas sector policy right one day,” he said.

Source: KyivPost