Ukraine’s Gas Future: Two Chances

Given Ukraine’s energy dependence on Russian natural gas, the Ukrainian government is taking unconventional gas into consideration, according to Michael Gonchar, Director of Energy Programs at the NOMOS Centre, an Ukrainian non-governmental think tank, who gave an exclusive interview to Natural Gas Europe.

“Ukraine has a serious dependence on energy imports and consequently the country would like to decrease that dependence,” he said, explaining: “We have approximately 20-21 bcm per year of domestic gas extraction, but it’s not enough because every year Ukraine consumes approximately 56-59 bcm. So the rest must come from imported gas from Russia.”

One prospect, he said, was connected with natural gas extraction from the Black Sea shelf. “Nowadays we have only 1 bcm of gas extraction there, which is provided by a national operator. It’s a very small volume in the context of our annual consumption.

“Our second chance in unconventional gas,” added Mr. Gonchar. “Now we have only taken the first step. The first memorandum of understanding (MOU) was signed in the middle of February 2011 between the Ukrainian Ministry of Ecology and Natural Resources and the USGS in Washington D.C.”

He reported that several MOUs had also been signed last year between Ukraine’s national joint-stock company Naftogaz and several majors from the US and Europe.

“In total, 21 companies, for example, ExxonMobil, Shell, Chevron, ENI and so on. So this signals some prospects, but we won’t have any estimates in the near future. It’s an early stage to make general conclusions, only preliminary estimations - no more.

“If we take into consideration the analysis by the US Energy Information Administration, from April 2011 they estimated Ukrainian unconventional gas resources: 42 Tcf could be ultimately technically recoverable from 197 Tcf of total potential. If we compare ours with that of Poland, we are now at an early stage, where Poland was approximately five years ago, if we consider that the first license in Poland was issued in 2007,” he recalled.

“Ukraine will have its first license in 2012, because we’ve had our first call for tenders, which was announced by the Government on 23 February with a deadline of 23 May for the tender. So there will be only two licenses, because we have two main fields: one in the eastern part (Yuzivska field, for tight gas; applicants are Shell, ExxonMobil, and TNK-BP) and one in the west (Olesska field, for shale gas; applicants are Chevron and ENI), which is a continuation of Poland’s Lublin basin.”   UPDATED

According to him, it would take at least three years at a minimum to make a preliminary estimation of Ukraine’s unconventional gas prospects. Mr. Gonchar reported that a working group had been established by McKinsey and the Ukrainian  Foundation for Effective Governance, both of which received the assignment from the Ministry of Energy to create a new edition of the Energy Strategy of Ukraine till 2030, and had issued a preliminary vision of prospects for unconventional gas extraction for Ukraine.

Mr. Gonchar said there were two scenarios: “Optimistic and pessimistic. The pessimistic scenario predicts 30 bcm/year of internal gas extraction in 2030 including 6 bcm of shale gas, 7 bcm of tight gas and 3 bcm of coal bed methane and coal mine methane. The optimistic scenario has 47 bcm/year in 2030, with 11 bcm of shale gas, 4 bcm of CBM and CMM; 9 bcm of tight gas.

“If this document is adopted as a strategy it will be corrected in the near future,” said Mr. Gonchar, “as we have new information on new prospects and the real procedure when western companies and Ukrainian companies explore our gas fields.”

He said he was optimistic, especially within the context of the Polish situation.

“We have very high pressure from Russia to involve Ukraine’s gas pipeline system into the empire of Gazprom in exchange for cheaper gas, but it’s a very high price for this so it’s impossible for Ukraine,” he explained. “Unfortunately, the former and present Ukrainian governments lost three years from the point of signing the Brussels declaration – signed between the European Commission and the government of Ukraine and investment banks like the EBRD and EIB– concerning the modernization of Ukraine’s gas transit system.”

It was signed, said Mr. Gonchar, in March 2009, following the gas dispute between Ukraine and Russia that shut down natural gas supplies to Ukraine and EU.

“After the second gas crisis, we have had only little progress. The first step was realized by the Government in the summer of 2011, the so-called first stage of modernization of the gas pipeline system, without European support, because the Commission, together with the IMF, proposed the reform of Ukraine’s energy sector, first of all the gas sector, to make it more transparent and more attractive.

“Since 1 February 2011, Ukraine is a member of the Energy Community Treaty, which means that it has very concrete obligations: to provide reforms of the energy legislative base in accordance to European directives,” he explained.

“Some steps have been taken since then, but it’s not enough because we have a non transparent national joint stock company and have new promises from the EC to provide the first tranche of finance for the early stage of modernizing the gas pipeline system if Ukraine will reform Naftogaz.”

Mr. Gonchar said that now the Ukrainian government was ready, announcing a huge program to reform Naftogaz in accordance with European practice and according to the national law for internal gas market, which was passed by the Ukrainian parliament in 2010, basically a copy of the EU’s Second Gas Directive. But that was not enough.

There could be trouble down the line, he admitted, but the situation had been a driver for change in Ukraine’s energy sector.

“We will have very serious difficulties, first of all from Russian sources. This situation creates pressure for the Government to realize steps which we need in the future, so it’s better late than never,” he commented.

Challenges remained for Ukraine’s energy future.

“There are very serious changes on the European gas market, like increased LNG availability, more gas from non Russian sources for Europe, etc. meaning our gas pipeline system doesn’t have great prospects in terms of transit volumes, but maybe we will have new opportunities, for example Europe supplying gas to Ukraine when we realize some technical upgrades, reverse flow first of all.”

Ukraine’s Naftogaz, he said, was the first company to realize the huge task of reverse flow within the pipeline system, from its western underground gas storages to the east of Ukraine, when Russia stopped the flow of gas.

“Now we have the technical capabilities to reverse the flow of existing pipelines with our neighboring countries, like the Slovak Republic. So we need to take some small steps to synchronize our technical conditions and to provide not only in crisis situations, but also for business opportunities,” concluded Mr. Gonchar.