Ukrainian Shale Gas Profits

Brian Hicks

Written By Brian Hicks

Posted November 6, 2013

Ukraine has had a tumultuous history of invasion and fracturing going all the way back to the ninth century, when Scandinavian warriors invaded what was then known as Kievan Rus in the ninth century. Ukrainians have been subjugated under the Mongols, the Polish, and the Russians up until the downfall of the Soviet Union. So you can probably understand why Ukrainians are a tad suspicious of foreign influence – especially when it comes to their Russian brethren.

But even though Ukraine has traditionally been part of the Eastern sphere of influence, there were times when Western Ukraine was part of Austria and Poland. This link with the West has also manifested today with Ukrainian President Viktor Yanukovich’s desire to be part of the European Union, although this desire is somewhat perplexing considering the dilapidated state of the governmental body.

chevron logoBut Ukraine has been known as the bread basket of Europe because of its once prosperous agricultural fields, and the desire for national independence has always been inherent in the Ukrainian people.

That is why desire has been so strong to break Russia’s monopoly hold over the nation’s energy by allowing companies like Shell (NYSE: RDS-A) and Chevron (NYSE: CVX) to develop domestic shale gas resources.

Yesterday, Chevron signed a $10 billion shale gas production agreement with the Ukrainian government that will last 50 years. $350 million will be spent on geological surveys, followed by billions more for at least 2,000 wells, Reuters reports.

One of the crown jewels of Ukraine is the Olesska field, located in the western portion of the state. The Olesska could produce 5 billion cubic meters per year (roughly 176 billion cubic feet), and if operations are successful, Chevron could generate an output of 8 to 10 billion cubic meters annually

And if all goes well in the Yuzivska field under Shell, Ukraine could get anywhere from 11 to 16 billion cubic meters (388 to 565 billion cubic feet) within five years.

The president is hopeful that agreements with these two companies will allow Ukraine to utilize its domestic resources and even engage in exports if circumstances are ideal.

However, Europe as a whole has not had the best of luck in discovering a vast amount of shale reserves, with Chevron previously pulling out of Lithuania and Romania. And Exxon Mobil (NYSE: XOM) and Marathon Oil (NYSE: MRO) also pulled out of Poland after failing to find commercially sustainable hydrocarbon reserves.

But Ukraine is certainly in good hands with Chevron and Shell, since these two companies specialize in shale exploits around the world, particularly natural gas.

And the country could certainly use the help.

Ukraine Peril

Ukraine is dependent on Russia for 60 percent of its gas needs.

The nation claims to pay the highest prices in Europe for natural gas – paying $400 per thousand cubic meters. There have been ongoing negotiations since 2010 to try to bring prices down.

But the Russians aren’t budging. Gazprom OAO (MM: GAZP) is even demanding payment for a gas bill that is overdue in the amount of $882 million.

The best way to get out from under Russia’s energy influence is domestic production.

Needless to say, this has Russia a bit worried – and so does Ukraine’s intention to sign a trade agreement with the EU that could eat away Russia’s hold.

There is talk of a so-called “gas war” between Russia and Ukraine. Russia has withheld gas deliveries to Ukraine in the past, and talk has lingered over whether or not deliveries will be halted in the future.

But Ukraine does have an ace up its sleeve.

Ukrainian Goldmine

Although little luck has favored Europe when it comes to gas exploration, there is hopeful optimism for Ukraine.

The country has 42 trillion cubic feet of natural gas reserves, considered the third largest in Europe.

Exxon Mobil has large aspirations in the Ukraine around the Black Sea, heading a production agreement in the Skifska field by the end of November. Other companies, including Eni (NYSE: E) and Electricite de France SA (Paris: EDF), are also interested in exploring the Ukrainian coast.

This is a good area to look into for investment. I would never underestimate the passion for national independence.

The country is swelling with demand for cheaper natural gas, and if operations are successful, it could change the landscape of natural gas in Europe.

In an effort to get away from Russian influence, Ukraine has been sliding under the good graces of Western Europe, and there is speculation that the country is hoping to take advantage of safety nets offered by the International Monetary Fund by joining the EU.

However, this is not likely to happen anytime soon.

Ukraine is already heavily indebted to Russian creditors, and to depend on more nations for assistance is the wrong way to go.

Instead of looking to the crumbling EU for help, Ukraine’s best bet would be to encourage more foreign investment to develop its reserves.

And I would keep an eye on the nearby region and parts of Asia as well.

Although Romania and Poland have had little success with shale, their time could come in the future. These two nations have also been dying to escape Russia’s monopoly grip, and so has Mongolia – a country that is trying to ease expensive imports from Russia’s Rosneft OAO (MM: ROSN).

Ukraine is increasingly becoming open to foreign investment. The Chinese are investing more in the region to develop the country’s agricultural potential, and you can expect more energy companies interested in Ukraine in the future.


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