Exxon Mobil Corp. (NYSE: XOM) has so much faith in the potential for Ukrainian gas reserves that it plans to spend $735 million in a drilling operation off Ukraine’s coast.
Information released last Thursday by Exxon shows efforts being made in just two deep-water offshore wells – throwing its eggs in two baskets, so to speak – indicating just how confident the Texas-based oil company is in the region.
The Black Sea in general is setting up to be the next big adventure in offshore drilling. The oil industry has hardly touched it. If you compare it to the North Sea, which has more than 7,000 areas drilled, the Black Sea has less than 100 wells drilled.
To get a greater understanding of just how little is known about the Black Sea’s potential, consider that the International Energy Agency (IEA) and BP Plc (NYSE: BP) have not even made estimates for its reserves, simply because not enough is known.
The reason for its under-exploration is simple: a lack of money and technology.
Deep-water exploration has been a no man’s land up until quite recently. As technology did begin to advance, national companies were ill-equipped with the know-how and proper funds for such an advanced undertaking.
But now, with energy demand on the rise, supplies waning, and the price of oil hovering over $100 a barrel, those who control the Black Sea are welcoming oil giants like Exxon with arms wide open. In no time, operators will find themselves a mile deep in the heart of the Black Sea.
And the Ukraine in particular is eager to become less reliant on Russian imports, which have had Ukraine bending to Mother Russia’s will for decades now; it imports more than half of its gas, and a large portion of that comes from the Russian export monopoly Gazprom OAO (MM: GAZP).
The two countries came to a head in 2009 in a dispute over gas prices that left Ukraine at the mercy of decisions made in Moscow.
Before that, Ukraine always had a bargaining chip because the only pipeline from Russia to Western Europe crossed over Ukraine. But when a new pipeline was completed in 2011, the Nord Stream pipeline that ran from Russia directly to Germany, it took away any and all leverage the Ukraine might have had.
Exxon Moves In
So this deal with Exxon couldn’t come soon enough.
But with so little exploration in the Black Sea, how can Exxon be so sure of its potential?
A lot of those answers fall almost exclusively on a discovery made last year called the Domino-1, a gas find in Romania’s Neptun block, where Exxon partnered up with OMV Petrom SA. That little find is expected to yield as much as 630 million cubic feet a day.
To put that in perspective, the Domino-1 is such a large reserve that it could have Romania becoming a gas exporter by 2018.
And that’s exactly why Exxon likes its chances working off the coast of Ukraine. The Skifska area, where Exxon would be licensed to operate, is adjacent to the Domino-1.
Before the Domino-1, companies like Exxon and Royal Dutch Shell Plc (NYSE: RDS-A) largely ignored the region because it was more of a hassle than it was worth. And countries like the Ukraine and Romania satisfied their own demands, either by domestically drilling onshore or importing from Russia.
In the effort to gain independence, it was vital to seek the help of international companies who could provide the capital, the technology, and the expertise for deep-sea drilling.
With the agreement in place, all that’s left to do now is sign the license and start exploration. Of the $735 million, $400 million will be used for conducting seismic surveys and the drilling of the two wells. The remaining $335 million will be included as a signing bonus once the license is signed off on – that will go to the Ukrainian government.
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Ukraine recently completed more negotiations with another American-based company, Chevron Corp. (NYSE: CVX), on a second gas project. These talks have been ongoing for months now and will focus on exploration of the Olesska field in Western Ukraine.
A draft of the agreement has been sent to local authorities for review, something that must be done under Ukrainian law.
Once the Domino-1 was discovered, that’s when the flood gates really opened up. With that much potential, the Black Sea is destined to become rampant with activity.
Exxon and OMV Petrom, while investing heavily in the Domino-1, also are set to bid on new offshore blocks as they become available in Romania; as many as eight are expected in the third quarter.
Turkey is starting to open its waters, too. It is ready to throw billions of dollars into offshore exploration. Exxon has teamed up with state-owned energy company TPAO. And Shell is present, as well as Petroleo Brasileiro Petrobas SA (NYSE: PBR) and Chevron.
Exxon seems to be leading the way in the Black Sea and has its sights set on Bulgarian and even Russian waters.
Now that technology is in place and countries like the Ukraine have the aid of companies like Exxon on their side, the Black Sea is set to realize its full potential.
How much that is – only time will tell.
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