REFILE-UPDATE 2-Shell, Chevron likely to win Ukraine shale gas deals

Thu May 10, 2012 9:30am EDT

* Ukraine ranks 3rd in Europe by estimated shale gas reserves

* Winners expected to invest hundreds of millions in exploration

* To team up with state firm and its private local partner

* Ukraine hopes to ease its dependence on Russian gas supplies

By Pavel Polityuk

KIEV, May 10 (Reuters) - Ukraine is likely to award tenders to two Western energy companies for potentially large shale gas fields, a government source said on Thursday, as Kiev tries to reduce its dependence on gas imports from Russia.

Anglo-Dutch Shell and Chevron of the United States are likely to win the right to explore and develop the fields, seeing off rival bids from Italy's Eni, Exxon Mobil and Russia's TNK-BP, the source told Reuters.

One contract area, Yuzivska, is in the eastern Donetsk and Kharkiv regions with the other, Olesska, in the western Lviv region. "(The likely winners are) Shell for Yuzivska and Chevron for Olesska," the source said.

President Viktor Yanukovich has improved relations with Moscow, but Ukraine still hopes to develop its own reserves as Russia has used gas supplies as a political weapon in dealings with its smaller former Soviet neighbour in the past.

Ukraine has Europe's third-largest shale gas reserves at 42 trillion cubic feet (1.2 trillion cubic metres), according to the U.S. state Energy Information Administration, trailing France and Norway.

Exploiting the fields will require the drilling method known as fracking, which helps companies to tap gas and oil from previously inaccessible shale formations.

UKRAINE OPTIMISM

Ukraine's State Geological Service, which is more optimistic that the U.S. EIA, estimates the reserves of the Yuzivska area alone at 2 trillion cubic metres and those of Olesska at 0.8 to 1.5 trillion.

The geological service has also said the Yuzivska area would require $250-$300 million in exploration investment, while Olesska would need $150-$200 million. Tender application fees were $1.9 million for Yuzivska and $1.3 million for Olesska.

Apart from Shell and Chevron, Exxon Mobil and TNK-BP bid for Yuzivska last month while Eni bid for Olesska.

Western energy groups, especially in the United States, are ahead of Russian firms in developing the controversial technology of fracking (hydraulic fracturing). Environmentalists say the practice, which involves injecting chemical-laced water into underground wells, may contaminate groundwater and trigger earth tremors.

However, Ukraine has no strong green movement that could put real pressure on the government over the issue.

The winners of the tender will enter production sharing agreements with state firm Nadra Ukrainy and SPK-GeoService, a privately-owned Ukrainian company picked by the government as its partner in a separate tender this year.

Ukraine's Ministry of Environment and Natural Resources confirmed on Thursday it had picked the winners but declined to name them, according to a report by Interfax news agency.

Ukraine imports about two-thirds of the gas it consumes from Russia at a price which has been rising steadily for the last few years and is expected to average about $415 per thousand cubic metres this year.

Russia says it would give Ukraine a discount only if Russian gas giant Gazprom is allowed to buy into Ukrainian gas pipelines which tranship the bulk of Russian gas to Europe, a trade-off Ukraine is reluctant to accept.

Talks on reviewing the price have lasted for over a year but so far failed to produce any results, unnerving Russia's European consumers who have in the past suffered from supply disruptions due to conflicts between Moscow and Kiev.

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