The Ukraine, some forecasts suggest, may hold some of Europe’s largest shale rock deposits with an estimated 42 trillion cubic feet (1.2 trillion cubic meters) of extractable shale deposits. But having large energy resources and being able to efficiently exploit them are two different things. As of now, the Ukraine lacks the technology to reach and explore the deep-buried shale rock holding the gas and therefore currently remains heavily depended on Russian gas imports (about 32.5 billion cubic meters in 2012).
Gaining more energy independence from their Russian neighbors would allow Ukrainian politicians to ease the economic stranglehold Russia had on its smaller neighbor since the dissolution of the Soviet Union and subsequently strengthen Ukraine’s geopolitical position in the region. Gaining a greater degree of economic and political independence from Russia is, however, not the only incentive for Ukrainian politicians and entrepreneurs to pursue the development of unconventional natural gas resources. Gas consumption forms a significant part of Ukraine’s energy structure, accounting for over 40% of the country’s energy usage, and leaving Ukrainian power grids extremely vulnerable. That Russia is willing and able to use its control over Ukrainian energy supply as a way to apply political pressure further intensifies the situation. Price disputes between Moscow and Kiev led to serious disruptions to Russian gas flows via the Ukraine in 2006 and 2009 impacting both Ukrainian and Western European customers. To make matters worse, the Ukraine has twice suffered complete gas cutoffs from Russia as a result of political discords leaving the nation’s energy grid at the mercy of Russia’s good will.
While Ukraine’s energy situation can, of course, not be changed overnight, it seems that Ukrainian officials have decided that it is time to take a major step away from dependency on Russian gas imports by sealing a $10 billion shale gas deal with Royal Dutch Shell. The 50-year production sharing agreement, which was signed last month, will mark the biggest contract yet to tap shale gas in Europe and the largest single foreign investment in the Ukraine. The agreement follows an exploration deal which Shell signed with Ukrainian officials in September of 2011 and covers the development of the Yuzivska field in the eastern part of the country. As a result of the deal, Shell will hold 50% of the project and the other 50 percent will be held by the Nadra Yuzovska Company, of which 90% are owned by the Ukrainian state.
According to company analysts, Shell expects to produce between 8 billion and 20 billion cubic meters of natural gas annually from the Yuzivska field. These forecasts moved Ukraine’s fuel minister to announce that the country is already planning to cut gas imports from Russia in the second half of 2013, increase in-country production and imports from Western Europe.
While the Yuzivska field marks an important milestone for Ukraine’s energy future, it is not the only major development under way in the Caucasus. As part of the country’s strategic energy plan the development of the Oleska field has also been announced as a priority project and Chevron selected to lead the project. Simultaneously, the Ukraine energy ministry has hired and ExxonMobil-led consortium to explore offshore gas reservoirs in the Black Sea in an effort to diversify their exploration campaign.
Undoubtedly, the development of the Yuzivska field and the planned development of the Oleska field signal a turning point in Ukrainian energy policy that will lessen the nation’s dependence on Russian imports and potentially mark a first step in the reorganization of Europe’s energy balance of power. If other country’s follow the trend to explore and produce their unconventional natural gas resources we might soon see an energy boom across Europe that will change the way energy is produced, delivered, and consumed all over the continent.
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