At the Wellhead: Ukraine’s civil strife has a shale angle

In so many of the world’s hot spots, now and in the past, hydrocarbons have played a big role or at the very least, a secondary one. In this week’s Oilgram News column, At the Wellhead, Ukraine correspondent Alexander Bor looks at the country’s shale gas prospects in light of the turmoil there.

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Slovyansk is a city in Ukraine’s Donetsk region, where some of the fiercest fighting between the government’s armed forces and pro-Russian separatists have take place.

Perhaps less known is the fact that Slovyansk also sits on a huge deposit of shale gas, known as Yuzivska, which Ukraine has planned to tap to reduce dependence on the Russian energy.

This, along with Russia’s recent annexation of Crimea, a Black Sea peninsula with major offshore gas projects, underscores a curious pattern: Moscow, its troops and pro-Russian rebels have been targeting areas that harbor Ukraine’s key upstream gas projects.

“In the context of the conflict between Russia and Ukraine, one can say with high probability that the shale gas project will now be frozen,” Yuriy Korolchuk, the head of the Energy Research Institute, a Kiev-based think tank, said. “Certainly, in this situation Russia wins, remaining nearly a monopoly supplier of gas.”

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For decades Ukraine has been dependent on imports of Russian natural gas that has allowed Moscow to influence Kiev’s foreign policy. Ukraine produced about 20 billion cu m of gas in 2013 and imported about 24 billion cu m from Russia and about 2 billion cu m from Europe.

Ukraine has Europe’s fourth-largest shale gas reserves at 42 trillion cubic feet, or 1.2 trillion cu m, according to the U.S. Energy Information Administration, after Poland, France and Norway.

Eduard Stavytskiy, then Ukrainian energy and coal industry minister, said in April 2013 that with the help of shale gas and Crimean offshore gas projects, Ukraine could start exports of gas to Europe in four to five years and to become a net energy exporter by 2020.

Yuzivska is one of such upstream projects. Located between two eastern regions of Ukraine, Kharkiv and Donetsk, the field is believed to contain up to 4 trillion cu m of shale gas, according to the Ukrainian government.

Shell signed a production sharing agreement with the government in January 2013 opening way for a potential $10 billion investment. In an optimistic scenario, Yuzivska alone was supposed to produce up to 20 billion cu m of gas annually by 2030, as much as Ukraine’s current overall gas output.

The fighting that ensued around Slovyansk, the stronghold of the pro-Russian separatists, unfolds on the top of the Yuzivska deposits. “All events in the Donetsk region are unfolding on the territory of the Yuzivska deposit,” Korolchuk said, adding that the project may now be delayed by at least 2-3 years due to the fighting.

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This project, however, now faces major delays due to ongoing fighting between the armed forces and pro-Russian separatists in the Donetsk and Luhansk regions. Both regions held referendums on May 11 to declare independence and both have appealed to Moscow seeking to join Russia.

“This gives reasons to suggest that the true cause for the destabilization of the Donetsk region is Russia’s desire to stifle in the bud production of shale gas in Ukraine as an alternative to Russian gas,” he said.

Pavel Gubarev, the self-proclaimed leader of pro-Russian separatists in Donetsk, in an interview with Russian television Rossiya-24 on May 19, said one of the key reasons for the fighting is Kiev’s push to “continue development of shale gas on the territory of Ukraine.”

In the meantime, all work on the Yuzivska deposit has been suspended. “Concerning the Yuzivska section, no actual work is currently underway,” Shell said in a statement posted in its website. “The work can only begin after a comprehensive assessment of the project’s potential impact on the environment and social affairs.”

Ukraine, keen to start production from shale gas deposits, has sought to assure Shell the government is committed to the project.

But the confrontation between Ukraine and Russia over Crimea has already forced Shell to withdraw from at least one major upstream offshore project, known as Skifske, in the Black Sea. Shell quit a consortium led by ExxonMobil and that also included Petrom of Romania and the Ukrainian state-owned resources company Nadra Ukrayiny.

Economic sanctions from the US and the EU against the local Crimean energy company Chornomornaftogaz will effectively bury development of the Skifske project, industry analysts said. Skifske was expected to produce between 8 billion cu m and 10 billion cu m of gas annually. The same fate awaits the Foroske offshore project in Crimea, which was supposed to produce 3 billion cu m of gas annually.

Ukraine’s only shale gas project that will probably stay intact is the Olesska field in the Lviv and Ivano-Frankivsk regions that border Poland. Chevron signed the PSA with the government in November 2013, opening door for $10 billion investment in the project that is expected to produce up to 10 billion cu m of gas annually, according to Ukrainian officials. — Alexander Bor in Kiev

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  1. Mykola Shlapak at June 2, 2014 10:21 am

    Here is the map of Yuzivska area with marked spots of the armed clashes http://shalegas.in.ua/en/karta-zitknen-na-shodi-ukrayiny/

     

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