Ukraine’s current energy situation stunts its economical and political development. While domestic production expertise is highly developed, the Eastern European country is completely dependent on importing energy products from Russia, placing unsustainable financial and political stresses on the country. Ukraine’s interest in capitalizing on the shale gas and LNG revolutions open opportunities to cut overall energy costs, expand supply diversification, and reduce reliance on Russian imports.
Shale Gas
Shale gas is a newly perfected form of extracting natural gas from shale rock. It has great potential in Eastern Europe – especially in Romania, Lithuania, Poland and Ukraine have substantial reserves.Ukraine, one of an estimated 32 countries with extractable shale reserves, has up to 1.2 trillion m3 of shale gas according to the U.S. Energy Information Agency, with an annual national gas consumption of 44 billion m3. Ukraine is attempting to produce at least 15 billion m3 of gas from shale as a preliminary goal, and is making substantial progress toward this.
According to A.T. Kearney’s report on industry development in Europe, Ukraine will become a regional leader in shale technology in the near future.
In January 2013, Royal-Dutch Shell signed a 50 year contract for exploitation of the Yuzivske gas field in the eastern Donetsk Oblast, worth USD $15 billion, with work due to start in 2015. Oleh Proskurayov, Ukraine’s Minister of Environment & Natural Resources, hailed the agreement as having the “potential of evolving into the largest investment in Ukrainian history.”
A second major deal was announced in May 2012 with Chevron to explore the Oleske field in Ivano-Frankivisk Oblast in western Ukraine, beginning in 2017. The government contract allocates approximately USD $150 million for studies and another USD $2.8 billion for developing any finds.
The overall aim of shale gas exploration and exploitation is to reduce the currently overwhelming price Ukraine pays for Russian gas. The current contract with Russia locks Ukraine into paying USD $440-460/m3 of gas, compared to the USA, a shale leader, which has reduced payments to USD $100/m3 by exploiting shale resources.
Yet, according to A.T. Kearney partner Kurt Oswald, “… shale gas is a long-term, capital-intensive and risky project.” Ukraine risks following the footsteps of Poland, which had promising initial shale forecasts that were later crippled by disappointing early extraction attempts. These revealed exploitation would be financially unviable with current levels of technology. Ukraine, however, is not yet at the stage that Poland reached before failure, so all deals and exploration contracts must be viewed in this context, considering opportunity for failure.
Another consideration is Ukraine’s political and environmental challenges surrounding the primary method of extraction – hydraulic fracturing, or ‘fracking.’ This technique is controversial, as reports of unwanted seismic activity and groundwater pollution make environmental lobbyists critical of shale gas. Radislav Vidic, the author of a detailed study on the subject from the University of Pittsburgh, acknowledges that the evidence is inconclusive either way, and notes that there are no ‘advanced data collection networks’ suited to investigating the matter at this stage.
Ukraine is still in the early stages of experimentation with shale, receiving varying levels of optimism about the future of the industry. Certainly if extraction yields positive results, the future of Ukrainian energy diversification looks bright. Shale technology is becoming increasingly economically viable, and the two major deals signed are a positive indication.
Liquid Natural Gas (LNG)
LNG may also become a viable option for Ukraine. The Office of the President of Ukraine established the Ukrainian LNG Terminal National Project to develop a LNG terminal on the Black Sea coast in order to diversify Ukraine’s gas imports.This project materialized this past April when the Ukrainian LNG Terminal National Project, 25% state controlled, signed a contract with Excelerate Energy, an American LNG solutions firm, to provide a 5 billion m3 per year capacity floating storage and regasification unit (FSRU). In total, the system will cost approximately USD $1 billion. According to the National Project’s leadership team, if it is successfully integrated into Ukraine’s domestic gas infrastructure and can regularly receive LNG deliveries, it could lower Ukraine’s imported gas price by 15-20%.
The project will be completed in two phases. The first includes delivery of the FSRU, which will be moored to a jetty alongside the Ukrtransnafta’s oil terminal in Odessa’s Yuzhny Port, slotted for installation mid-2014 according to Interfax Ukraine.
Phase two will be the construction of an onshore terminal and storage facility with the capability of receiving large 178,000 m3 LNG tankers. According to information provided by the Coordinating Council of the Ukrainian LNG Terminal National Project, it will be composed of three 180,000m3 tanks, a total LNG storage capacity of 540,000m3, doubling the capacity of the FSRU alone, and a send-out capacity of 10 billion m3 per year (1,141,553 Nm3/h.) This phase will cost approximately USD $962 million, paid for by an investor consortium and scheduled for completion by 2018.
Kyiv Post reports that installation of the FSRU, to include preparation and dredging of the Black Sea seabed, offshore and subsea construction, and other technical procedures, will cost approximately USD $158 million paid for by the Ukrainian LNG Terminal National Project. Integrating the terminal into Ukraine’s high pressure gas pipeline will be another USD $148 million to be paid for by Ukrtransgaz.
The Ukrainian government via the Ukrainian LNG Terminal National Project has a 25% stake in the total endeavour and maintains that the estimated investment payback period is 8-9 years.
According to the head of the State Agency for Investment and National Projects of Ukraine, Vladyslav Kaskiv, this project creates for Ukraine an LNG possibility that can be implemented faster than any onshore gas diversification option with results achievable in 2014. Moreover, Kaskiv says, the total “direct financial contribution of the state is equal [to]… three day payments to Gazprom [at the current rate].”
Theoretically, so long as Ukraine can successfully develop the terminal, it could significantly reduce its energy dependency granted that it can receive tankers in the Black Sea and sign contracts for gas delivery. If importable, this would allow Ukraine to become even more important of a transit country supplying European States with foreign supplied energy products.
Yet, real challenges are present that may hamper LNG operations now or in the future.
Even though Ukraine’s Minister of Energy and Coal Industry, Eduard Stavytsky, indicated that Ukraine is considering regional LNG imports from Georgia, Azerbaijan, and Turkmenistan, infrastructure is not currently present to degasify the products for tanker transport across the Black Sea.
As no installations exist elsewhere along Ukraine’s Black Sea coast to supply such products by tanker, Ukraine at present will only be able to import foreign gas, from countries such as Qatar and Angola through the Bosphorus and Dardanelles, both controlled by Turkey.
American Law firm Baker Botts argues that LNG tankers have the right to transit both the Dardanelles and the Bosphorus unrestricted. This statement draws support from the 1936 Montreux Convention which guarantees use of the straits by merchant vessels, including tankers.
Turkey itself seeks to be a regional LNG transit hub, as it has the optimal strategically located position to assume this role. As such, it views the Ukrainian project not only as competition, but as an economic and energy threat.
Turkey hopes Ukraine would purchase LNG from one of Turkey’s two existing terminals, Marmara Botas LNG Terminal or Aliaga LNG Terminal, ship it on Turkish vessels via the Bosphorus, or even better via an overground route that bypasses the Bosphorus all together. This, Turkey argues, would ensure Turkish control of LNG transit, reduce tanker traffic and subsequent potential accidents, thus minimizing environmental security risks in the strait.
Ukraine acknowledges Turkish concerns, but seeks to appease them with the lure of increased thru transit, and subsequently increased revenue from transit tariffs that all vessels pay when navigating the Bosphorus. Ukrainian Prime Minister Mykola Azarov indicates Ukraine will continue talks with Turkey on transit of LNG carriers through the Bosphorus, though maintains that the Turkish side is apprehensive to accept proposals for LNG traffic destined for Ukraine’s new terminal. Such political obstacles may hinder the success of the LNG terminal and Ukraine’s subsequent attempt to achieve gas diversification.
About the authors:
Alex Flather graduated from University College London after studying Politics with a regional focus on Eastern Europe. He subsequently pursued tailored research, both academic and in the field, on various topics related to energy and political issues across the region with a focus on South Eastern Europe. He is now undergoing professional training to become a solicitor at Clyde and Co in London.
Simon O. Williams is an independent analyst specializing in maritime and security issues. He previously worked in the American and European private sectors as well as supporting the United States Government, and studied in the US, UK, and Russia. He has undertaken substantial research at the intersection of energy, politics, and security in the region and is now a freelance consultant advising security organizations, media and policymakers while pursuing a Master of Laws degree from the University of Tromsø, Norway.
Williams and Flather studied together at the University College London’s School of Slavonic and Eastern European Studies. They’ve together undertaken extensive research and project development in Ukraine and Moldova.
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