Shale gas in Poland and Ukraine: a great potential and an uncertain future

Ukraine

Ukraine’s total shale gas deposits are estimated at around 7 trillion cubic meters, which places the country at the third place in Europe after Poland and Norway. There are two major shale gas fields: Yuzivs’ka, located in Eastern Ukraine (Donets’k and Kharkiv regions) in the Dnipro-Donbas petroleum basin, and Oles’ka in Western Ukraine (L’viv and Ivano-Frankivs’k regions), part of the Poland’s Lublin gas basin. Yuzivs’ka field is said to contain around 2 trillion cubic meters of gas, while Oles’ka’s deposits are estimated at 1.5 trillion cubic meters. It is yet unknown just how much of these deposits is technically recoverable.

The two shale gas fields have already found their concessionaires. On January, 25 Ukraine (a joint company of the state-owned NAK Nadra-Yuzivs’ka and the private SPK-Geosrvis) signed a 50-year tripartite production separation agreement (PSA) with Royal Dutch Shell. The agreement stipulates Shell’s exclusive rights for the exploration and tax-exempt industrial extraction of shale gas on more than 1000 square km of the Yuzivs’ka field. The contract has been locally contested after the Donets’k and Kharkiv regional councils passed a decision to allow Shell’s operation in the respective regions without a due consultation with stakeholders. In fact, it was said that the authorization of local administrations came under the political pressure from the President’s Party of Regions. In contrast, the American multinational Chevron became interested in the Oles’ka field, and while some initial accords have been reached, Chevron has so far been unsuccessful in negotiating with local authorities in the two regions controlled by the far-right opposition party “Svoboda”.

The Ukraine-Shell PSA on the Yuzivs’ka field could result in the largest foreign direct investment in Ukrainian history. “Shell’s basic scenario would be investing more than USD 10 billion, optimistic scenario — USD 50 billion,” commented the deal the Environment and Natural Resources Minister Oleh Proskuryakov. The PSA puts all expenses on Shell until the moment when the actual production will begin. This means the company will have to invest more than USD 400 million in exploration investments before actually knowing whether shale gas production will be profitable.

According to an optimist scenario, Shell would start industrial-scale shale gas extraction not sooner than in 2017. However, it is not yet known whether shell gas extraction in Ukraine will be profitable: after the turn in business expectations in Poland, there are chances that both Shell and Chevron might walk away. Yet, Ukrainian Government has opted for a different regulatory model of the shale gas business than Poland: Ukraine, with generally low levels of market freedom, totally exempted the British-Dutch multinational from taxation. The PSA is confidential and the exact share of production that Shell will own is unknown, but various sources put it at 40 to 69%, specifying that the number is contingent on profitability and production volumes. What is known, though, is that the gas allocated to the state, namely, the joint state-private company, will be divided at 85 to 15 % between Nadra-Yuzivs’ka and SPK-Geoservis.

In several years the real prospects of Yuzivs’ka field will be known better: Shell started test drilling already in 2012 at a lot leased before the PSA on Yuzivs’ka field was signed. Yet, already now shale gas production is severely contested by Gazprom and Russian high state officials. It is also a topic of hot domestic debate, with ecological concerns being the main contentious issue. It has became clear that the possible prospects of gas price reduction that the shale gas could bring to Ukraine is not merely a matter of economic losses for Gazprom, but also the one of political stakes for Russian foreign policy.

via Shale gas in Poland and Ukraine: a great potential and an uncertain future.