January 18, 2013 / 2:00 PM / 5 years ago

Ukraine, Shell expected to sign $10 bln shale deal Jan 24-PM

* Production-sharing deal would be for field in east Ukraine

* Deal for a field in west Ukraine faces political opposition

* Shale exploration could ease dependence on Russian gas imports

By Richard Balmforth

KIEV, Jan 18 (Reuters) - Ukraine is expected to sign a landmark shale gas deal with energy major Royal Dutch Shell next week while a second deal in the west of the country faces local opposition, Prime Minister Mykola Azarov said on Friday.

The former Soviet republic, which hopes its big shale gas reserves will help end reliance on costly imports of Russian natural gas, chose Shell last May as a partner to develop the Yuzivska field in the east of Ukraine.

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.

Earlier this week, local authorities in the two regions concerned - Donetsk and Kharkiv - approved the Yuzivska deal with Shell, removing the final hurdle to an agreement.

Meeting a group of journalists from foreign news outlets on Friday, Azarov said: “The Kharkiv regional council and the Donetsk council yesterday and the day before took these decisions. On Jan. 24, the production-sharing agreement will definitively be signed.”

Neither Azarov nor other government officials would say where the deal would be signed. But officials informally suggested it might take place in Davos on the fringes of the international economic forum.

Shell in London would not comment on the date given by Azarov.

Ukraine says if exploration is successful at the Yuzivska site, production could begin within five to six years with production running at 8-10 billion cubic metres (bcm) per year in 10 years time.

“If everything goes as we plan ... in the foreseeable future, in about three years, we’ll have a good supply of gas,” Azarov said.

“At its peak, in 13-15 years, annual production may exceed 20 bcm. This will not only strengthen our energy independence but will also significantly reduce gas prices,” Environment and Natural Resources Minister Oleh Proskuryakov said this week.

In May 2012, the Kiev government also chose Chevron to develop shale gas at Olesska in the western Lviv and Ivano-Frankivsk regions bordering the European Union.

But Azarov said this second possible shale gas deal had run into local opposition, particularly from nationalist groups, throwing into question whether a production-sharing agreement would win regional support.

“In the west of the country, things are going slowly because of political considerations. The majority on the Lviv regional council is made up of well-known political forces,” he said.

The far-right nationalist Svoboda party, which surged on to the political landscape in parliamentary elections in October, is strong in the west of the country and leads opposition to shale gas exploration because of ecology considerations.

Shale gas technology uses a process called “fracking” in which fluid and chemicals are injected at high pressure into beds of rock, often situated deep in the ground, to access gas reserves trapped there.

A Svoboda deputy, Iryna Sekh, who heads a parliamentary committee on ecology this week said local authorities in the east had voted blindly in support of the Yuzivska agreement without being aware of its details and the possible ecological repercussions.

The extraction process, she said on Svoboda party’s website, risked pollution of water reserves deep underground and endangered natural animal and plant life.

Azarov is one of the principal actors in protracted talks with Moscow aimed at getting it to reduce the price of the gas it sells to Ukraine under a 10-year deal signed in 2009 by the preceding government.

His government says the price of $430 per thousand cubic metres is exorbitant, but it has so far failed to persuade Russia to lower it.

It sees projects such as shale gas exploration and liquefied gas imports from sources other than Russia as ways of reducing its dependence on Moscow.

On Friday, Azarov said Ukraine also wanted to renew imports of cheaper gas from Turkmenistan which needs to be shipped via Russian pipelines.

Officials have also issued figures to support the impression that Ukraine is gradually weaning itself off Russian gas imports.

“We cut our consumption of Russian gas by about 10 billion (cubic metres) in 2012,” Azarov said on Friday.

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