January 16, 2013 / 5:01 PM / 7 years ago

UPDATE 1-Ukraine moves closer to $10 bln shale gas deal with Shell

* Ukraine says Shell estimates investment at $10 bln-$50 bln

* Project is key to easing dependence on Russian gas imports

DONETSK, Ukraine, Jan 16 (Reuters) - Ukraine took a step closer to a breakthrough shale gas deal with global energy major Royal Dutch Shell on Wednesday when local authorities in the eastern Donetsk region approved a planned production sharing agreement.

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 shale gas field.

Deputies of the Donetsk regional council voted to approve the deal with Shell, removing one of the final hurdles to an agreement.

Ukraine is said to have Europe’s third-largest shale gas reserves at 42 trillion cubic feet (1.2 trillion cubic metres) behind those of France and Norway, according to the U.S. Energy Information Administration.

“If exploration is successful in the Yuzivska area, we will be able to produce a few billion cubic metres (bcm) of gas per year in just five-six years and eight to 10 bcm in 10 years,” Environment and Natural Resources Minister Oleh Proskuryakov told the council.

“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.”

Ukraine currently pays about $430 per thousand cubic metres for Russian gas under a 10-year deal signed in 2009 by a preceding government. The present Kiev government says the price is exorbitant, but it has so far failed to persuade Russia to bring it down.

“Secondly, the Yuzivska area production sharing agreement is the biggest project in Ukraine that will attract tens of billions of dollars in investment,” Proskuryakov said.

“Shell sees investment at $10 billion under the most likely scenario and over $50 billion under the optimistic scenario.”

Shell’s office in Ukraine declined to comment on the figures or to say any expected date for signing a deal. Under the terms of the tender, the two sides have until May to sign a contract.

Proskuryakov, whose office also had no immediate comment on an expected date of signing, had earlier said his ministry expected to finalise and sign the deal in the first quarter of this year.

Shale gas exploration requires a process called “fracking” in which fluid is injected at high pressure into beds of rock, often deeply situated in the ground, to access gas reserves trapped there.

In a separate tender also carried out last May, Ukraine picked Chevron to develop another shale gas area, Olesska in western part of the country. The government has not yet signed a production sharing agreement with Chevron either.

Some countries which were initially encouraged by the success of the shale gas industry in the United States have faced disappointment after starting their own exploration.

Ukraine’s neighbour Poland, whose reserves were estimated by a 2011 U.S. study at 5.3 trillion cubic metres, slashed the estimate to about a tenth of that in a government report last March.

U.S. oil major Exxon Mobil agreed to sell two shale gas exploration concessions in Poland to the local refiner PKN Orlen for an undisclosed price last month after its test wells failed to produce commercial quantities of gas.

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