Ukraine awards first shale gas contract to Shell

Ukraine opened shale gas development to Western giants on Thursday, assigning its first exploration contract to the Anglo-Dutch firm Shell in a deal worth up to $800 million (555 million euros).

“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,” the state-own Ukrgazvydobuvannya gas exploration company said.

Ukraine is widely believed to be one of Europe’s largest holders of the new energy resource with estimated reserves up to 1.5 trillion cubic metres, according to industry analysts.

But it lacks the technology to reach the deeply-buried rock that can be transformed into fuel in a difficult operation called fracking, and continues to rely heavily on gas imports from its eastern neighbour Russia.

The decision to award the contract to Shell comes amid a swell of foreign interest in Ukrainian shale, with such gas production already booming in the United States and slowly beginning to make its way into Europe.

Other Western majors as Chevron and ExxonMobil have also expressed an interest in Ukrainian shale projects, and the Anglo-Russian joint venture TNK-BP signed a preliminary agreement with the government in October.

The deal also 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,” added Energy Minister Yuriy Boiko.

The agreement will see Shell dig up to 1,000 exploration wells in northeastern Ukraine, each of which will run up to six kilometres (3.7 miles) below ground.

With the rock buried so deeply and no technology available for reaching it, Ukraine has never officially studied how much shale it might actually have.

Neither Shell nor Ukraine has estimated how much gas may be hidden in the six blocks awarded to Shell near northeastern city of Kharkiv.

But the agreement could lead to the first successful development of shale in Ukraine, providing Shell with privileged status in a potentially huge market.

Shell launched its operations in Ukraine in August 2006 when its signed a broad agreement covering both oil and gas exploration.

The company has previously operated by holding 50-50 stakes in local joint operations ventures, while not getting rights to the fields themselves.

News reports said Thursday’s agreement will see Shell make the operating decision in the project, with more strategic moves decided jointly with the state-run company.