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Shale Gas in Ukraine: Opportunity to Reality?

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Shale gas has had a revolutionary impact on the US energy market  and its energy security. The production of shale gas is expected to turn the US from a net importer of natural gas to a net exporter.

Ukraine has been blighted by crises in its gas supply from Russia in 2006 and 2009 which was also felt in the European Union.  The US Energy Information Administration (EIA) has stated that Ukraine has the third largest shale gas resources in Europe. This opportunity to secure its energy supply has been recognised by the Ukrainian government where strides towards shale gas production are being taken. If Ukraine seizes this opportunity, Europe’s drive for energy security will also benefit.

Energy Insecurity
The winters of 2006 and 2009 highlighted the vulnerability of Ukraine and the European Union’s gas supply from Russia.

Ukraine is the largest importer of Russian gas at 47-57 billion cubic metres per year and 36% of all the EU’s gas imports come from Russia.

In January 2006 the Russian-Ukrainian gas dispute highlighted the insecurity created by such dependency. Following disagreement over Ukrainian payments for Russian gas, and arguments over Ukraine siphoning off gas destined for European clients, Russia cut its supply on 1 January 2006. Because Ukraine is a critical transit country for oil and gas, the dispute also impacted gas supplies to the European Union with Member States such as Hungary losing 40% of its Russian supplies. In 2009 another Russian-Ukrainian gas dispute occurred, this time more serious than before. On 1 January 2009 Gazprom cut all supplies for Ukrainian consumption which resulted in economic disruption in the EU and gas deliveries to Southern Europe completely frozen, leading to humanitarian concerns.

The result of the disputes was greater Ukrainian and European attention to ensuring that their energy supply is neither dependent on one supplier nor one route. Diversification to prevent further crises in supply is therefore the new goal of Ukrainian and European energy policy. An abundance of domestic shale gas resources in Ukraine may go some way to providing a solution. 

The Opportunity
Shale gas resources in Ukraine hold great potential to resolve concerns about supply. Production from the Oleske and Yuzivske fields is due in 2017, and with 1.18 tcm estimated to be technically recoverable this resource could cover domestic gas consumption for 22 years. The Ukrainian government has embraced the opportunity by joining the Global Shale Gas Initiative in February 2011 and offering tenders to investors. Estimates suggest that the market value of Ukraine's shale resources are between $10.3 billion and $1.5 trillion. If Ukraine produced only 1-5% of its shale potential it would create added value of $500 to $750 million due to reduced imports costs from Russia.

In addition to the economic benefits, if Ukraine can decrease its energy intensive industries and increase its energy efficiency alongside producing shale gas, the country could gain greater independence from Russian supply with the knock-on effect of boosting supply to its EU neighbour.

Indeed, the EU is also set to gain if Ukraine develops its domestic resources to large-scale production within the next 10 to 15 years.  The EU and Ukraine have committed to enhancing their security of supply and transit of hydrocarbons through a memorandum of understanding signed in 2005. Furthermore, with the integration of EU and Ukrainian gas and electricity markets and increased economic and political cooperation the benefits of Ukrainian shale gas production for the EU could be considerable.

Coming to Reality
Shale gas holds clear benefits for Ukraine and the EU, and the opportunity is slowly becoming a reality. In May 2012 the Ukrainian government signed agreements with Chevron and Royal Dutch Shell to explore Ukraine’s shale gas resources. This commits the firms to invest $370m in Ukraine over the coming years and may see production commencing in 5 to 10 years. This development was followed by the International Energy Agency’s recent in-depth review of the energy sector in Ukraine. The review argued that Ukraine could achieve import independence in the longer term via shale gas production and also boosts its gas transmission system to Central Europe.

By developing its shale gas resources, Ukraine is seizing an opportunity to change its energy prospects and security. Ukraine has been blighted by energy supply crises, but may now jump ahead of the EU in developing shale gas. Fortunately, Ukraine’s endeavour to reinvigorate its energy sector and strengthen its domestic supply through shale gas development will also be to the benefit of the EU.  

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Wednesday, April 16, 2014
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