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Shell, Ukraine Said Close on Shale Development Deal

Royal Dutch Shell plc and Ukraine's state-owned oil company Naftogaz Ukrainy appear poised to clinch a deal to develop and explore shale gas in the eastern European country, with Shell initially investing about $800 million for exploration and production (E&P), according to a top Ukrainian official.

Shell is expected to sign an investment agreement with Naftogaz as soon as Thursday, said Serhii Liovochkin, chief of staff for Ukraine President Viktor Yanukovych. The president has been meeting this week with Shell's management team, he told reporters during a public briefing.

"The agreement envisages $200 million for exploration and merely $600 million for gas production," said Liovochkin.

Shell, like many of the oil majors, has had a presence in Ukraine for several years. Earlier this year Shell apparently had preliminary plans on the table to develop shale gas in Ukraine's Yuzovska gas field, which is in the Donetsk and Kharkiv regions. Shell requested documents to study shale gas deposits there in June, according to Ukrainian officials.

Two years ago subsidiary Shell Ukraine E&P announced that it planned to drill a well at the Shebelinka gas field in the Dnepr-Donetsk Basin once seismic testing and a 3-D survey were completed. The survey was expected to take about a year to complete. Shebelinka is the largest discovered gas field to date in Ukraine and the second largest in Europe. Shell also this year signed a memorandum of cooperation to work with Naftogaz to develop gas reserves on the Black Sea shelf.

Ukraine, whose economy now is highly dependent on Russian gas imports, has been working to change that scenario. In February U.S. and Ukrainian officials signed a memorandum of cooperation to deploy the U.S. Geological Survey (USGS) to assess potential energy resources in the country, which is to include an appraisal of shale gas resources. A month later the Ministry of Environment and Natural Resources of Ukraine estimated that the country's shale gas reserves totaled at least 30 trillion cubic meters but said the number could double once a resource assessment is completed.

Less than two weeks ago the country's energy ministry announced plans to auction rights to tap into Ukraine's shale gas deposits. Officials at Naftogaz said development could start as early as 2012 once contracts were in place. And several producers appear to be lining up in the queue.

Earlier this year ExxonMobil Corp. signed a preliminary cooperation agreement with Naftogaz to explore for shale gas, coalbed methane (CBM) and other alternative gas sources. Chevron Corp. earlier this year sat down to discuss shale development, asking for some guarantee of political stability and a firm agreement about taxes it would be charged for working in Ukraine. Russian oil giants TNK-BP and Gazprom also have expressed interests in exploring for unconventional resources in the country.

Unconventional gas reserves are believed to be abundant throughout most of Ukraine, but the interest to date has centered on the Dnepr-Donetsk Basin, which is home to the country's large CBM developments. Prior to the advent of new shale drilling technology, the USGS had estimated that the one basin alone contained about 11.5 billion boe.

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