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2014-12-20 14:45:00

UKRAINE: NO GAS HOPE

UKRAINE: NO GAS HOPE

Shale gas was supposed to be Ukraine's ticket to greater energy independence from Russia. Chevron Corp. (CVX)'s decision to pull the plug has smashed those hopes.

The second-largest U.S. energy producer will pull out of an agreement for exploring the Oleska field in western Ukraine, a government official said this week. It was the final blow to the country's dream of becoming a big shale-gas producer after Royal Dutch Shell Plc (RDSA) retreated earlier this year from a similar deal in eastern provinces riven by a bloody war with pro-Russian separatists.

While Chevron can walk away unscathed, for Ukraine it's another blow to the prospects of reviving a chaotic economy that remains dependent on Russia, a country it claims to be in armed conflict with. Already weighed down by the war that's killed more than 4,600 people and teetering on the verge of default, Ukraine was counting on foreign capital to develop its domestic gas resources.

"Foreign investment will start to flow only if there is a healthy, predictable investment environment based on the rule of law," said Ulrich Benterbusch, managing director at German energy agency Dena. "This includes drastic measures to reduce the endemic corruption."

Chevron grew frustrated with the Ukrainian government's failure to modify tax rules under which foreign explorers have to operate in the country, said Allen Good, an energy industry analyst at Morningstar Inc. in Chicago.

The second-largest U.S. oil producer never even got an opportunity to drill any exploratory wells, which indicates the reason for pulling out was regulatory rather than any problems with the geology, Good said.

Chevron declined to comment beyond a statement that they've given the Ukrainian government their decision.

Mammoth Discoveries

The $10 billion value of the prospect Ukraine politicians had mooted was ''an inflated, blue-sky'' estimate that assumed mammoth discoveries, decades of drilling and no obstacles to bringing the fields into production, Good said.

Other western explorers including Exxon Mobil Corp. (XOM) and Eni SpA (ENI) saw their aspirations in Ukraine wither after the February collapse of the pro-Russian regime. Shortly after the ouster of then-president Viktor Yanukovych, Russia invaded and annexed Crimea, appropriating potentially gas-rich offshore fields in the Black Sea.

Ukraine is grappling with the deepest recession since 2009, with the hryvnia plunging 48 percent against the dollar this year. The $17 billion bailout from the International Monetary Fund is proving insufficient and President Petro Poroshenko has pleaded with the U.S. government to provide at least $10 billion more to stave off default.

Gas Exporter

The country is locked in a dispute over the price of gas with Russia, which used to supply more than half of Ukraine's needs. Russian gas exporter OAO Gazprom (GAZP) halted deliveries to Ukraine from June to last month over a dispute on prices and unpaid bills, while also lowering supplies to neighbors such as Hungary and Slovakia to discourage them from sending the fuel back to Ukraine through reverse flows.

Ukraine has the potential to cut its gas consumption by half simply by improving its energy efficiency through measures such as better building insulation and modern infrastructure, Dena's Benterbusch said. The country could reduce its import costs by up to $9 billion a year if it managed to get to German efficiency levels, according to the European Bank for Reconstruction and Development.

However, that comes with a steep price tag: modernizing the country's energy sector will cost "multiple billions" of euros, EBRD said.

Chevron Departure

Ukraine may have as much as 1.2 trillion cubic meters of gas trapped in its shale rocks, Europe's third-largest deposit after France and Norway, according to the U.S. Energy Information Administration estimate.

Chevron's departure again demonstrates the failure of repeating the U.S. shale boom in Europe, where investors have repeatedly clashed with bureaucratic obstacles, popular opposition to fracking, difficult geology and, in some cases, corruption. Even in Poland, once viewed as a very promising territory, red tape and difficult-to-exploit deposits discouraged investors, including Chevron.

"Ukraine and the rest of eastern Europe, despite the potential, haven't come to fruition," as shale gas suppliers, Good said.

bloomberg.com

Tags: UKRAINE, GAS, RUSSIA, CHEVRON, SHELL, EXXON, ENI

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