* Agreement with Shell will be Ukraine's biggest foreign
* Yuzivska field one of two shale gas projects in Ukraine
* Ukraine seeking to end reliance on costly Russian gas
By Richard Balmforth and Dmitry Zhdannikov
KIEV/DAVOS, Jan 24 Ukraine took its first major
step away from dependency on Russian gas imports on Thursday
when it signed a $10 billion shale gas deal with Royal Dutch
The 50-year production sharing agreement, signed on the
sidelines of the World Economic Forum in Davos, marks the
biggest contract yet to tap shale gas in Europe and the largest
foreign investment in the former Soviet republic.
Disputes between Kiev and Moscow seriously disrupted Russian
gas flows via Ukraine in 2006 and 2009, with European Union
members Bulgaria and Slovakia left without energy in the depths
They remain at odds over the terms of a 2009 Russian supply
deal brokered by former prime minister Yulia Tymoshenko, for
which she is serving a jail sentence.
President Viktor Yanukovich presided over the signing
between Shell's Chief Executive Peter Voser and new Fuel
Minister Eduard Stavitsky. "We have witnessed a great event
today. I believe we have become almost relatives," Yanukovich
Ukraine chose Shell last May as a partner to develop the
Yuzivska field in the east of the country and regional councils
there approved the production-sharing deal last week, removing
the last hurdle to signature.
Ukraine is said to have Europe's third-largest shale gas
reserves at 42 trillion cubic feet (1.2 trillion cubic metres),
according to the U.S. Energy Information Administration.
Poland too is looking to tap shale to reduce its Russian gas
imports, though a massive downward revision in its estimated
reserves and a decision by U.S. major ExxonMobil to halt
exploration have dashed initial hopes for Europe's most
ambitious shale exponent.
Production in Ukraine is several years off and will depend
on results from 15 test wells.
The Yuzivska field could be producing 20 billion cubic
metres of gas in 2018, Stavitsky said on Thursday.
"According to Shell's optimistic scenario about 20 billion
cubic metres could be extracted annually; according to the
pessimistic one, at the very least 7-8 billion," Stavitsky,
quoted by Interfax, said in Davos.
If the top forecast were fulfilled, "this will completely
solve the problem of the (gas) shortfall in Ukraine", he said,
referring to the huge amounts of gas Ukraine has to import from
Russia to meet its domestic needs. Ukraine, he said, "might even
go into surplus".
Ukrainian officials said earlier this month that Shell saw
investment under the deal of at least $10 billion "under the
most likely scenario" and possibly as much as $50 billion.
Shell, which has projects worth many billions of dollars in
Russia, did not comment on the figures and was less outspoken
about Ukraine's dependence on Russian gas.
"We are very pleased with this big step," Voser said at the
signing ceremony. Shell will operate the projects and hold a 50
percent stake in them. Rights and responsibilities of investors
will be specified in a different agreement at a later stage.
The Yuzivska deal could revive efforts to develop
unconventional shale gas reserves in Europe which lag far behind
the United States where shale gas and shale oil development is
transforming the energy sector.
Much could depend on the outcome of a second shale gas
project in Ukraine at Olesska, where the government has
signalled it expects a tougher fight to secure local approval
because of environmental concerns.
The government chose Chevron to develop the Olesska
field in the western Lviv and Ivano-Frankivsk regions bordering
the EU. Ukraine has also chosen an ExxonMobil-led consortium to
explore for offshore gas in the Black Sea and is seeking foreign
partners to help it build a liquefied natural gas terminal.
Under the 10-year deal signed in 2009 by the preceding
government, Ukraine currently pays about $430 per 1,000 cubic
metres for Russian gas.
The present Kiev government says the price is exorbitant but
has so far failed to persuade Russia to bring it down. At the
same time, Moscow has increasingly used the issue to step up
pressure on Ukraine to join a post-Soviet Customs Union and step
back from moves towards the European mainstream.
"Before Russia did not take the Ukrainian position seriously
when it spoke of finding alternative gas supplies. This
agreement on shale gas will strengthen Kiev's position at
negotiations with Russia over a (new) gas contract," said
independent energy analyst Valentyn Zemlyansky.