Ukraine: Beyond the 'Point of No Return'

"The point of no return has been crossed," declared Dr. Volodymyr Ignashchenko, Adviser to the Minister, Ministry of Ecology & Natural Resources of Ukraine.

He reported to delegates at the Ukrainian Energy Forum, that positive things had been happening due to the significant investments attracted for unconventional gas projects. Special permits for sub soil use and licenses, he said, could now be obtained by private and state-owned companies, including Shell, Chevron and ENI, in Ukraine.

Nine licenses had been issued thus far, he said

"Shale and tight gas production will result in a production increase. By the mid 2020s Ukraine could become a net exporter of gas," remarked Dr. Ignashchenko, who added that the Government was open towards such initiatives and enthusiastically supported the creation of new jobs.

There, of course, were concerns.

He said, "We keep hearing about negative public opinion from the possible environmental damage. People from the industry are attentive to this. We must apply to best industry practices, and be sensitive to the issue of preserving water resources, drilling through the water table."

The leading companies were very sensitive about the serious injury to their reputation if there were accidents. "Those companies are invited show to the public it is indeed possible to work in a safe way, then will be no moratorium on fracking."

According to him, North American companies had already identified technologies to reduce water usage, so such issues could be resolved in Ukraine as well.

Dr. Ignashchenko spoke of the first steps toward a gas hub in Ukraine: "Eradication of the gas import monopoly of Naftogaz, or reverse gas supplies from Poland. There's also the possibility of reverse gas supplies from Slovakia and Hungary and increasing gas production."

As for Ukraine's role in exploration and production, he said that the country's traditional role had been about maintaining stable transmission for Europe, "but we're now developing interest as a potential component of the European gas market. Consultations are taking place for a Central European natural gas hub and storage capacities increasing.

"Underground facilities are an important component that neither Nord Stream or South Stream have," he added.

A Central European gas hub could help smooth pricing fluctuations and might help create a broader natural gas market, he said.

"We are open for cooperation with small companies, too," declared Dr. Ignashchenko. "We know that small companies pioneered this project."

In a session dedicated to Ukraine's National Energy Strategy, Robert Bensh, Strategic Adviser, Cub Energy, noted that the document had many of the necessary elements: encouraging foreign investment, the sanctity of contracts, increasing the amount of PSAs issued.

He commented, "What my advice is and what I would encourage all of you to do is to take a more pragmatic approach. It is important to increase the amount of PSAs. I think what's happened in the past 18 months is Ukraine has experienced a significant amount of success and, to a certain extent, quite a bit of joy in the PSA process - they've gone out and done proper tenders, unlike what occurred a few years ago in the Black Sea tender process. In a fair tender process they raised quite a bit of capital. The PSA law was enacted and seems to be working with Shell coming out with the first PSA.

"You have that deal, Chevron, ExxonMobil - that's good for the treasury, the government and also for companies like Arawak to encourage others like them to enter the country. Companies like these have been looking at Ukraine for many years, looking for a government that's open and willing to let them come in and develop the resources of the country."

Mr. Bensh said an acceleration of the PSA process was likely, with more tenders for shale and offshore development in Ukraine in the next 18 months.

"That raises additional capital," he explained, "bringing in the smaller operators. We need 15 more Arawaks coming into the country, because they are the ones the country needs; it's great to have Shell and others here, but they're not the ones that are going to be producing a lot of oil and gas over the next 18 months to three years. It's the smaller independent operators that are going to do that."

He said that the legal structure at present was not suitable for increasing a significant amount of investment in Ukraine's oil and gas sector. Proper joint venture contracts and oilfield service sector improvement would also be crucial.