Economically-struggling Ukraine radically altered its energy strategy Thursday, signing a massive shale gas deal with Anglo-Dutch giant Shell in hopes of reducing its dependence on Russia. The first contract of its kind puts Shell in a prime position to develop what analysts believe may be Europe's largest reserves of shale gas just as Kiev faces off with Moscow in another bitter dispute over Russian supplies.
"In case of successful exploration work and the start of intense project development, Shell's total investment under the agreement may come to $800 million (555 million euros)," the state-own Ukrgazvydobuvannya gas exploration company said. Ukraine currently lacks the technology to reach the deep-buried shale rock holding the gas which is freed in a difficult operation called fracking, and continues to rely heavily on gas imports from its eastern neighbour.
The decision to award the contract to Shell comes amid an upsurge of foreign interest in Ukrainian shale after the industry took off massively in the United States and is slowly beginning to make its way into Europe. Other Western majors such as Chevron and ExxonMobil have expressed interest in Ukrainian shale projects and the Anglo-Russian joint venture TNK-BP signed a preliminary agreement with the government in October.
Thursday's deal coincides with a drive by Ukraine to reduce the price for the gas it buys from Russia, with the two sides now engaged in a new row that threatens to disrupt European supplies for the second time since 2009. "The time will come when Ukraine will meet all of its own gas needs," news agencies quoted Prime Minister Mykola Azarov saying after the signing ceremony. "This is the first big joint activity agreement capable of quickly raising gas production in our country," Energy Minister Yuriy Boiko added.
The energy minister had earlier voiced plans to slash imports of Russian gas from 34 billion to 12 billion cubic metres within five years, and to boost Ukraine's own gas production to 27 billion from 20 billion cubic metres. Some analysts believe Russia and its natural gas monopoly Gazprom do not believe Ukraine can make the switch to domestic production in the near future, encouraging Moscow to take a tough negotiating line.
"If Ukraine had real alternatives (to Russia), Gazprom would be listening a lot more closely," UniCredit energy analyst Artyom Konchin said. Thursday's agreement will see Shell dig up to 1,000 exploration wells in north-eastern Ukraine, each of which will run up to six kilometres (3.7 miles) below ground.
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