For decades now, the relationship between Russia and Ukraine has been akin to parent and child, the latter being heavily dependent on the former to meet its needs.

The Ukraine currently depends on Russia to supply about 60% of its energy despite its domestic gas production potential. This reliance on Russia has put Ukraine at its mercy, and disputes over prices and supplies have caused national distress in the past when Russia turned off the taps, indifferent to Ukraine’s importance in gas transit.

Now Ukraine is seeking change in its energy sector. A recent spate of activity that has brought billion-dollar deals from global oil and gas giants – including ExxonMobil and Shell – has given hope to Yuriy Boyko, Ukraine’s vice prime minister for ecology and natural resources. He is counting on this activity to intensify, one day allowing his country to find “energy independence.”

“We have a clear policy on how to receive energy independence in the near future,” Boyko told E&P during a 2013 visit to Houston. This policy, he said, includes increasing domestic production, diversifying energy sources, improving energy efficiency efforts, and taking steps to become more attractive to international companies – especially the American ones.

Touting potential

If approximately US $10 billion annually were pumped into Ukraine’s gas sector, the country could more than triple its gas production, jumping to 70 Bcm (2 Tcf) per year, according to a 2012 report by IHS CERA.

In the report, “Natural Gas and Ukraine’s Energy Future,” IHS recommended Ukraine unbundle its gas sector by creating upstream, downstream, and midstream segments. With a goal of streamlining procedures, the report suggested upstream changes in the Ukraine include offering combined permits for E&P, offering more acreage and longer licensing periods, giving companies more time to submit bid-related documents for licensing rounds, creating another set of rules for unconventional gas E&P, and lowering customs duties on new E&P technology.

The IHS report “gave a good signal, and many companies today are coming to our country and doing business with us,” Boyko said. “We have ambitious plans, clear positions, clear policies, and we are working to achieve energy independence as fast as possible because it is a key element of independence for any country.”

Tapping shale gas deposits could be crucial to helping the country diversify its resources and reduce its reliance on Russia.

Ukraine could have 7 Tcm (247 Tcf) of shale gas resources based on estimates released by the Ukraine State Service of Geology and Mineral Resources, but the US Energy Information Administration said “the basis for the estimate has not been released,” and shale gas studies are anticipated from a newly formed Geological Research and Production Center, which also will monitor water quality where drilling occurs.

Attracting companies

Like Shell and Chevron, which already have received licenses, Boyko said Ukraine is attracting major oil and gas companies interested in its shale gas resources, which are approximately three times that of the Barnett Shale in the US.

The Black Sea has captured the attention of Eni, which announced in November that it inked a production-sharing agreement with the Ukrainian government concerning an area in the eastern part of the Crimean peninsula covering about 1,400 sq km (541 sq miles). The area includes a license for Subbotina, where an oil discovery of the same name was made, along with licenses for Abiha, Mayachna, and Kavkazka (collectively known as Pry Kerch block, the site of several oil and gas prospects).

Shell has a $10 billion shale gas deal with the Ukraine to drill in the 8,000-sq-km (3,100-sq-mile) Yuzivska field this year. Citing Graham Tiley, the country manager of Shell Ukraine, Bloomberg reported the company needs to drill up to 15 wells to finish initial exploration appraisal of the field. Working with state-owned DK Ukrhazvydobuvannya, Shell also plans to drill additional wells in the Kharkiv region this year.

“Investors who came to our country to produce gas have very good profits,” Boyko said. “Gas prices today in our country are three times higher than in America.”

He added that further steps are being taken to improve services. Most of the drilling work in Ukraine is being done by state companies, while only about 11% of natural gas is produced by private companies. However, the percentage is increasing quickly – about 3% to 5% annually.

“Usually they have government companies for this role, but they have old equipment and they need the new technology,” Boyko said of the Ukrainian government.

Looking forward

Ukraine produces approximately 52 Bcm (1.8 Tcf) of gas and approximately 26.6 MMbbl of crude oil, but Boyko said an additional 73.2 MMbbl of oil and 50 Bcm (1.76 Tcf) of gas are needed. The country has about 10,000 old drilling wells that became inactive in the 1970s, but he said new technology could make the wells active again.

“Texas was the father of the oil industry in America,” he continued. “Ukraine was the mother of the gas industry in the former Soviet Union.”

However, passing time took the two on separate paths. While Texas has helped steer the US into the shale revolution and decrease reliance on foreign countries to meet its domestic energy demand, Ukraine still stands at the mercy of Russia. It was in the 1970s that Siberia became the central gas industry in the Soviet Union, Boyko said, “but the heart was Ukraine.”

“In an open market, we begin to receive gas from Europe,” Boyko said. “We begin saving gas. We begin increasing domestic production. All of these steps lead to a lower and lower amount of gas we must purchase from Russian Gazprom.”

The country’s strategy also includes generating more electricity via solar, wind, and nuclear sources.

“For us, [having alternative energy sources] is very important because the prices [for oil and gas] are very high,” Boyko said. “For example, they sell gas to us for three times more than its cost in America [$11.50 per Btu]. So it’s very expensive and it kills our economy. For us, it’s principal to produce more gas and to buy less from [Russia].”

These words from Boyko came several months before the two countries struck a deal in December 2013 in which Russia agreed to purchase $15 billion in Ukrainian Eurobonds and give the Ukraine a 30% discount on the gas price, dropping it from more than $400 per 100 cm to $268.50. The move could benefit the Ukrainian economy and improve relations between the two countries. But as companies continue to roll out plans for the Ukraine, it’s clear the country has not lost sight of its goal to be less energy-dependent.

“Texas was the father of the oil industry in America. Ukraine was the mother of the gas industry in the former Soviet Union.”

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