Ukraine Signs Drilling Deal With Shell for Shale Gas

By STANLEY REED: Published: January 24, 2013

LONDON — Royal Dutch Shell, the largest oil company in Europe, has signed a contract to drill for natural gas in Ukraine.

The company’s chief executive, Peter Voser, and the Ukrainian president, Viktor F. Yanukovich, signed a production agreement Thursday for the potentially prolific Yuzivska gas field in the eastern part of the country. The signing took place at the World Economic Forum in Davos, Switzerland.

Winning an active Shell drilling program is a potential boon for Ukraine, which is thought to be one of the best bets in Europe for so-called shale gas and tight gas. Such gas, found in porous underground shale rock, is usually withdrawn through the process known as hydraulic fracturing, or fracking. The technique is controversial, because of the potential environmental effects, but Ukraine is more politically receptive to it than some other countries.

The project could also give momentum to unconventional gas extraction in Europe, which lags far behind the United States in this sector.

“All the big boys are there,” said Menno Koch, an analyst at Lambert Energy Advisory in London, speaking of Ukraine. “They see the huge potential of the country.”

Shell has bet heavily on gas globally and wants to make sure it has an entree into any important new production area. Moving into Ukraine would give it access to another potentially significant production area, alongside its efforts in China, South Africa, Canada and Brazil, said Iain Pyle, an analyst at Bernstein Research in London.

Europe is widely thought to have substantial shale gas and related tight gas potential, but it is moving far slower than the United States to scope out and develop its resources. Analysts figure the Continent is 5 to 10 years behind the United States in shale gas development and is unlikely to ever achieve the same scale.

Shell plans to drill 15 wells as part of a 50-year joint venture with a local company called Nadra Yuzivska. It would be the latest in a series of steps ahead for unconventional gas development in Europe.

In December, the British government gave a cautious green light to shale gas exploration. Cuadrilla Resources, a British company backed by the U.S. private equity firm Riverstone Holdings and whose chairman is John Browne, the former chief of BP, says it is planning to seek new permits for hydraulic fracturing at a well near the resort town of Blackpool, England.

Cuadrilla, which has a large swathe of acreage in the area, was ordered to halt most exploration after fracking at one of its wells caused minor earthquakes in 2011.

Drilling for shale gas in densely populated, wealthy West European countries like Britain is a hard sell. Residents worry about potential water pollution from fracking and the disruption and noise of an industry that requires large numbers of wells.

The oil and gas industry is betting that former Soviet states and satellites like Poland and Ukraine, which are heavily dependent on gas imports from Russia, will be more receptive politically to shale gas exploration and fracking. Ukraine has a particular incentive to develop its own gas resources because in recent years it has twice suffered cutoffs from Russia during disputes.

During a recent interview, Paolo Scaroni, chief executive of the Italian energy company Eni, which is emerging as a major player in natural gas, said he was doubtful about unconventional gas prospects in Western Europe. But “we are extremely active in Poland and Ukraine,” Mr. Scaroni said.

Shell’s Ukraine contract covers the Yuzivska field in the Kharkiv and Donetsk regions. The Ukrainian prime minister, Mykola Azarov, says on the government’s Web site that the area could contain as much as 113 billion cubic meters, or 4 trillion cubic feet, of gas, nearly as much as the confirmed gas reserves of Algeria, a large gas exporter.

It remains to be seen how much if any of the Ukraine gas is recoverable. The government said on its Web site that Shell’s development area could produce 8 to 11 billion cubic meters of gas annually. That would be around 20 percent of Ukraine’s consumption.

Chevron is negotiating for shale gas acreage in Ukraine and is drilling in Poland. The local councils in Ukraine have so far declined to approve Chevron’s deal, though, prompting displeasure from the central government. The local authorities in Shell’s area have approved development.

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