beyondbrics

Ukraine on Wednesday made a serious move towards cutting its energy dependence on Russia by formally inviting potential investors to prepare studies on building the country’s first LNG (liquefied natural gas) plant.

Located on the Black Sea, it would be a gateway for gas from the Black Sea region and beyond. But, as with many projects in Ukraine, the path from announcement to completion may be long and complicated.

Vladyslav Kaskiv, head of Ukraine’s state agency for investment and national projects, said an investor would be chosen by the year-end. He estimated the cost of the LNG plant to be at least $1.5bn.

One influential business obligarch rumoured to have an interest in the LNG plant being built is Ukrainian billionaire Dmytro Firtash. He is leading the race to privatise the Odessa Portside plant, a gas guzzling chemical plant which stands near the site where the LNG plant could be built.

But the Odessa chemicals group’s privatisation has been repeatedly delayed amid political arguments. If it were again held up, it’s easy to see how the LNG plant plan might also run into the Black Sea sands.

However, there’s no doubting Kiev’s new-found determination to finally implement long-discussed proposals for energy diversification – even at the cost of dropping longstanding and informal barriers that have long kept out multinational oil majors.

Ukraine has decided that it needs western capital and technology to develop its potentially large shale gas reserves. Royal Dutch Shell, Chevron, ExxonMobil and TNK-BP are among companies said to be eyeing exploration and production licenses.

Late last month, Vadim Chuprun, deputy energy minister, said “ExxonMobil, Halliburton, ConocoPhillips, Shell and other companies” have “responded to our proposals.”

Parliament late last month adopted legislation on production sharing agreements set by potential investors as a precondition.

“According to US Geological Survey studies, we have at least 1.5-2.5 trillion cubic meters of shale gas. This number is approximate and will obviously grow,” Mr Chuprun added.

The reserves are believed to be located in two major pockets: one close Ukraine’s border with Poland; another in the east.

They, along with offshore prospects on Ukraine’s Black Sea coast, could significantly diversify Ukraine’s supplies, cutting into the sales export sales of Russia’s Gazprom. Importing 40bn-50 billion cubic meters of gas in recent years, Ukraine is currently Gazprom’s largest customer.

Russia has long covered the majority of Ukraine’s gas needs, but Ukraine is seeking new supplies after its northern neighbour has quadrupled prices since 2004.

Referring to the LNG project and the potential of shale schemes, Kaskiv said: “These projects could help Europe at large diversify energy supplies and get energy at more competitive prices.”

The world’s largest energy companies have long fancied opportunities in Ukraine, but local officials have largely kept them out, preserving control over the domestic energy sector in the hands of oligarchs and Russian groups.

But Jorge Zukoski, President of the American Chamber of Commerce in Ukraine says Ukraine is now expressing a “clear intention to open up the energy sector to reputable international companies.”

“We are talking about multibillion investments,”  Zukoski says. Late last month, TNK-BP said it alone planned to invest $1.8bn in Ukraine shale gas exploration. “We hope to see the first tender announcement by the end of this year,” Zukoski said.

As well as the clear commercial advantages of energy diversification, Ukraine could boost its public revenues (by taxing the new enterprises) and broaden its international political ties by working more closely with companies from the US and the European Union.

But to do that, these schemes must come to fruition. And for that to happen Kiev needs to deliver a consistent energy policy and to implement it – something it has struggle to do in the past.

Related reading:
A Russian charm offensive in the pipeline wars, FT
Investment key to global food role, Black Sea region told, FT
Ukraine file, beyondbrics