Ukraine set to sign landmark $10 billion shale gas deal with Shell

KIEV (Reuters) - Ukraine will take a first major step away from dependency on Russian gas supplies on Thursday when it seals a $10 billion shale gas deal with Royal Dutch Shell RDSa.L.

Snow covered Shell logo is seen at a petrol station in Istanbul February 17, 2012. REUTERS/Osman Orsal

Due to be signed at the World Economic Forum in Davos, the production sharing agreement will mark the biggest contract yet to tap shale gas in Europe and the largest single foreign investment in the former Soviet republic.

Shell has not publicly confirmed the deal. But the Ukrainian government signed off on it on Wednesday as it pushes forward in a bid to end its reliance on costly Russian gas imports.

Clashes between Kiev and Moscow sparked serious disruptions to Russian gas flows via Ukraine in 2006 and 2009, with EU members Bulgaria and Slovakia left without energy in the depths of winter.

The two sides remain at odds over terms of a 2009 Russian supply deal brokered by former prime minister Yulia Tymoshenko and for which she is serving a jail sentence.

President Viktor Yanukovich is to meet Shell Chief Executive Peter Voser in Davos with new Fuel Minister Eduard Stavitsky set to sign the agreement in Davos on Thursday evening, officials in Kiev said.

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 meters), 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 XOM.N to halt exploration have dashed initial hopes for Europe's most ambitious shale exponent.

Production in Ukraine is several years off and will be dependent on results from 15 test wells.

But the Yuzivska shale gas field could be producing 20 billion cubic meters of gas in 2018, Stavitsky said on Thursday.

“We can only forecast at the moment. According to Shell’s optimistic scenario about 20 billion cubic meters 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 amount of gas Ukraine has to import from Russia to meet its domestic requirements.

Ukraine, he said, “might even go into surplus”.


Under the 10-year deal signed in 2009 by the preceding government, Ukraine currently pays about $430 per 1,000 cubic meters for Russian gas.

The present Kiev government says the price is exorbitant yet has so far failed to persuade Russia to bring the price 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.

“This is a signal for Russia that Ukraine is serious in its intentions to rid itself of today’s gas dependency,” independent energy analyst Valentyn Zemlyansky said.

“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,” he told Reuters.

Officials said earlier this month that Shell saw investment under the production-sharing agreement of at least $10 billion “under the most likely scenario” and possibly as much as $50 billion.

Quite apart from the gas produced, Kiev government officials see huge spin-off in terms of employment and contracts and say the huge project could help revive flagging foreign investor interest in the country.

“The agreement with Shell will be a beacon for other foreign investors,” said Zemlyansky.

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 signaled it expects a tougher fight to secure local approval because of environmental concerns.

The government chose Chevron CVX.N to develop the Olesska field in the western Lviv and Ivano-Frankivsk regions bordering the European Union.

Local opponents from powerful nationalist groups say the “fracking” process - in which in water and chemicals are injected at high pressure into beds of rock to access trapped gas reserves could threaten underground water sources and have other repercussions on the environment.

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.

Additional reporting by Pavel Polityuk; editing by Jason Neely