Ukraine Crisis: Gas Wars 2.0

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The military conflict in eastern Ukraine and energy-related tensions with Russia are provoking predictable concerns about possible power redistribution in the European energy market. The fighting is taking place in an area that potentially has significant reserves of nonconventional gas.

Shale gas production has been a point of controversy since 2012, when then-President Viktor Yanukovych’s government designated Royal Dutch Shell and Chevron as the winners of a tender for developing shale gas at the Yuzovska and Olesska sites. A number of ecological organizations united against Shell and formed an anti-fracking movement. However, since the cities in the Donetsk region have been seized by pro-Russian forces, the future of shale gas production remains uncertain. Could the potential shale gas supplies in eastern Ukraine explain the war? And did this conflict put the Ukrainian shale gas revolution on hold?

Shale Gas in Ukraine

Ukraine could follow in the footsteps of the U.S. shale gas revolution, which would mean its own “golden age” for gas production. The U.S. Energy Information Administration estimates that Ukraine has 39 trillion cubic feet of proven natural gas reserves and around 128 trillion cubic feet of unproven wet shale gas resources that are technically recoverable. Two major shale-gas-bearing basins are in Ukraine: the Lviv-Liublin basin in the West and the Dnipro-Donetsk basin in the East.

The Eastern Yuzivska site covers a P-shaped territory in the Donetsk and Kharkiv regions. After signing an agreement with the Ukrainian government and a local company, Nadra Yuzivska, in 2013, Shell planned to drill 15 wells for exploration purposes over a five-year period at the 3,100-square-mile Yuzivska field. The town of Slovyansk, which was recently liberated from pro-Russian gunmen, is located within the site’s borders.

Slovyansk was the first city in the Donetsk region to suffer from clashes between pro-Russian separatists and the Ukrainian army. The terrain around Slovyansk could have around 3.6 billion cubic meters of shale gas. People in the Donbas region were thrilled about foreigners coming to their land. But rumors about huge ecological threats to the region, with its 150-year history of coal mining, quickly spread among citizens. People were afraid that waters used for fracking would contaminate the soil and underground water. Shell negotiated over environmental conditions with activists during 2013. The company, which has planned to invest around $600 million (U.S.) in Ukraine’s shale gas development, had just begun drilling its first wells when the war began.

Slovyansk at the separatists crisis.

Photo courtesy of Sasha Maksymenko

Slovyansk at the separatists crisis.

In May, one of the separatists’ leaders, Denis Pushilin, announced that the “Donetsk People’s Republic” had prohibited shale gas exploration in its territory. Pushilin is known for organizing numerous anti-fracking rallies in the Donetsk region. Other than that, he has never appeared on Donetsk’s political scene.

In response to the military conflict, Shell has halted drilling for shale gas in eastern Ukraine, Bloomberg reported. The company took time out after drilling two wells to protect its employees, said Simon Henry, Shell’s chief financial officer.

To Drill or Not to Drill

KPMG estimates that with stable investment, Ukraine could start producing nontraditional gas in just three to four years. Estimates by the U.S. Energy Information Administration that Ukraine’s technically recoverable shale gas reserves could cover domestic consumption for approximately 22 years. This could undermine the economic dictatorship of Russian energy giant Gazprom, which is the main supplier of Ukrainian gas. Around 40 percent of gas for the country’s domestic needs comes from Russia, which uses it as a political weapon.

Legal boundaries and a poor business climate in Ukraine can be a serious obstacle for private investors interested in Ukrainian gas exploration. Nonconventional gas production in eastern Ukraine would require multimillion-dollar investments and the development of a whole new industry with its own infrastructure, service companies and human capital. “Could the potential five billion cubic meters of natural gas by 2030 at the price of 365 dollars per 1,000 cubic meters become a reason for the war? We think this question is rhetorical,” says a report by KT-Energy that has analyzed the situation in Ukraine.

On the other hand, Russia might see Ukraine as a potential competitor. During the Soviet era, Ukraine contributed around 25 percent to Russia’s total natural gas production. If a shale gas industry is established in Ukraine, the estimated rise in production could put pressure on the price of Russian gas by reducing imports and creating competition, as a PECOB business report indicates.

As there is no smoke without fire, economic interests are an important part of any military conflict. “If we look at the territories affected by wars, we’ll see all of it happens because of the energy resources,” says Andriy Konechenkov, head of the Ukrainian Wind Energy Association. And Ukraine might not be an exception.

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