INTERVIEW The future of shale development in Ukraine Mykola Shlapak, Unconventional Gas Informational Project With Ukraine back in the spot-light, as the conflict with Gazprom flares up again, it is more important than ever for the country to strive for independence and self-sufficiency in terms of natural gas resources. In this week’s interview we discuss the future of Ukraine’s rich unconventional resources with Mykola Shlapak, a consultant at the Unconventional Gas Informational Project. Monica Thomas (Shale Gas International): To start with, can you tell us a little about the Unconventional Gas Informational Project you are consulting for? What are the aims of the project and how long has it been running? Mykola Shlapak (Unconventional Gas Informational Project): Our project was started by a consulting company in the field of environmental and energy issues back in 2013, so two years ago, and the aim of the project is to provide information on environmental and technical issues, and updates on project development with respect to unconventionals in Ukraine and worldwide. The major focus group for the project is the general Ukrainian public – to present information based on scientific studies on environmental aspects of unconventional gas and oil, but also for the international public with respect to developments in Ukraine.
MT: Okay, so moving towards the subject of oil and gas; according to the latest stats, Ukraine produces a little over 20 billion cubic metres of gas and consumes over 40 billion cubic metres of gas. How is that short-fall resolved? Clearly Ukraine is in the position of having to import gas. Can you tell us more about these imports? MS: Ukraine imports a great amount of natural gas and it is looking for every opportunity to diversify the natural gas supplies by importing gas from European suppliers and also by increasing the domestic natural gas production. However, during the recent years domestic natural gas production
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has not grown significantly and even slightly declined last year. This is a high-priority issue for the Ukrainian government – to increase the domestic gas production.
MT: What about imports? Around this time last year there was a debate about Gazprom holding off their supplies to Ukraine. Also there was a difference of opinions on the legality of obtaining natural gas through reverse-flow from Slovakia. Can you tell us more about how these disputes have been resolved – if they have been resolved. MS: In 2014 Ukraine imported 5.1 billion cubic meters of natural gas from Europe with the major volume coming through Slovakia, but also Poland and Hungary. Additionally, Ukraine imported 14.5 billion cubic meters of natural gas from Russia. The general trend is to introduce a change in major gas suppliers, so that Ukraine can reduce significantly the imports from Russia and significantly increase the imports from European suppliers. Currently, there are a number of companies – including Statoil, RWE Supply&Trading and Shell – supplying natural gas to Ukraine.
MT: Moving on to shale gas; Ukraine is believed to hold Europe’s 3rd largest shale gas reserves. Can you tell us more about where they are located and how big a percentage of the deposits are in areas that are currently under the separatist rule, or where fighting is taking place? How much of these reserves are accessible to the Ukrainian government? MS: There are several separate estimates of the unconventional gas potential in Ukraine. There are figures provided by the U.S. Energy Information Agency, which estimated the technically recoverable reserves as 3.6 trillion cubic metres. There are some national estimates, which are even more optimistic and some estimates reach 22 trillion cubic metres of technically recoverable reserves, but all these estimates are very preliminary because they are not based on the actual exploration-driven results.
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In the geographical sense there are two major In 2014 Ukraine imported 5.1 regions with unconventional gas production billion cubic meters of natural potential. One of them is located in the east gas from Europe with the of Ukraine and is partially on the territories major volume coming through currently not controlled by the Ukrainian government, where the armed conflict is taking Slovakia place. The second oil and gas region is located in the west of the country, close to the Ukrainian western border. In terms of unconventional gas potential – according to some national estimates – I would say that about 60-70 per cent of the reserves are located in the east of the country – in the Donetsk-Dnipro basin, as it is called.
In other words, the major areas of unconventional oil and gas potential are located close to the war zone in the east and, specifically, the Yuzivska licence area, which Shell had planned to develop, is
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located in that region. That was to reason Shell decided to postpone the work on the project, and to declare force majeure. MT: Is it true that there are some deposits offshore? MS: There are some estimates on unconventional gas reserves in the south of Ukraine offshore, which could be treated as unconventional deep-water natural gas reserves.
MT: Are there any plans to access these reserves? Because obviously it will be more expensive to explore the area if it’s based offshore. MS: There were plans to explore these deep-water reserves – near the Crimea Peninsula. There were licences obtained for a few large areas and there were negotiations with western oil and gas companies about the development of these areas, but after the annexation of the Crimea Peninsula by the Russian Federation last year, these zones fell mostly within the conflict zone within Crimea. Currently there is no chance to develop them by companies working with the Ukrainian government.
MT: This is very unfortunate, isn’t it? MS: Yes, because the reserves on the Black Sea were estimated to be very significant and some preliminary results obtained in Romania in the blocks close to the Ukrainian licence areas prove the chances of success when it comes to developing these areas are pretty high. MT: So far several oil and gas majors have decided to enter Ukraine in search for shale gas and oil. These include Chevron, Royal Dutch Shell, and ENI. We all have read recently about Shell’s announced intention to leave Ukraine. Can you tell us what the situation is with other foreign exploration companies in Ukraine? MS: Chevron did not reach the operational agreement with the Ukrainian government with respect to the Oleska area and exited this project. The future of the Oleska area is unclear for now. As for Shell, they are still negotiating the future of the Yuzivska project and these discussions could result in the termination of the project even before any exploration has begun. However, so far there hasn’t been any official confirmation about the outcomes of these negotiations and it’s still unclear whether Shell is going to leave the project or wait for a chance to explore the area.
MT: So, in terms of major oil and gas companies, who is still left in Ukraine? Are there still some foreign companies operating in Ukraine or have they all abandoned their licences? MS: Actually, both Shell and Chevron are still present in Ukraine, and so is ENI. ENI has some licence
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areas in the west of Ukraine and, according to the latest information available, the company is still in the preparatory phase of these activities in Ukraine. At the end of last year they confirmed plans to drill their first exploration well. However, there is no information about exact time-frames with regard to this project. It could be expected next year if the project will be ongoing. Overall Ukraine is experiencing a slowdown in natural gas exploration activities – both in terms of conventional and unconventional deposits. This is predominantly due to increased taxes and the overall economic and political situation in the country.
MT: Just to follow-up on the topic of the foreign companies. In February Poland’s Exalo Drilling – a subsidiary of PGNiG – signed a memorandum of cooperation with Nadra Ukrayny. Can you tell us more about it? This kind of cooperation, what is it that the Ukrainian companies need from the foreign companies? Is it the technological know-how or is it just purely the finance? MS: I would say both. The investment in drilling and exploration activities and also the technological know-how and expertise; especially when it comes to unconventional oil and gas development. There have been some fracking operations in Ukraine in the past, but their size cannot compare to the large hydraulic fracturing operations necessary to explore shale oil and gas. You mentioned Nadra Ukrayny, but there are also other Ukrainian companies which share the licences for areas with unconventional gas potential but these are idle licences which are currently not being developed.
MT: In terms of the legal structure, what is the basis for operations of foreign companies in Ukraine? Do they just apply for a licence, or do they have to enter into a joint venture with a domestic company? MS: A typical structure for the latest projects is an operation based on a production sharing agreement. These are signed by a foreign company, the government, and typically also a Ukrainian partner. But even with the production sharing agreement, the company still needs to obtain the special permit for oil and gas development. There could also be other types of cooperation – joint ventures, joint operations agreements, etc.
MT: Staying with the legal structure. What are the major issues when it comes to legislation that needs to be addressed?
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MS: Probably the biggest and the most difficult issue is the tax regime, because last year Ukraine significantly raised their tax for natural gas production. Currently, the tax regime is actively discussed among the Ukrainian gas experts, oil and gas companies, and the government and there are some plans to reduce the taxes, but it’s still in the negotiation phase and it could take another six months or so, to reach an agreement and amend the legislation. Another problem is the overall regulatory situation in Ukraine. Nowadays it could take up to two years – and sometimes even more – from an operator’s decision to start a project to the actual start of the drilling operations. It takes 24 months or so to obtain all the necessary permits and documents. So the objective is to streamline this process, to reduce the number of permits and documents and to reduce the time needed to commence the project. The third issue is more specific to unconventional gas exploration – shale and tight gas activities – and it’s the lack of specific environmental requirements for these projects. We’ve analysed the international experience and the legal environment in Ukraine and we have found that Ukraine needs to regulate specific issues such as: baseline environmental studies, specific environmental requirements for There are plans to reduce the tax fracking fluids, wastewater treatment, rate from 55 to 35 per cent for and some other environmental aspects of wells up to 5 kilometres deep unconventional oil and gas projects.
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MT: Coming back to the first issue you mentioned – the tax regime. How much tax would a shale operator pay under current conditions? MS: Ukraine doesn’t have a specific tax regime for unconventional oil and gas exploration, so the tax rate is the same as for conventional projects. Currently the tax rate is 55 per cent for the well up to five kilometres deep, and 28 per cent for wells deeper than five kilometres. MT: So what do you think the tax should be for the shale industry to pick up? MS: I don’t have a personal opinion on this as I am not an expert in this field, but according to the latest reports on what has been discussed by the industry and the government, there are plans to reduce the tax rate from 55 to 35 per cent for wells up to 5 kilometres deep. And from 28 to 14 for deeper wells. So according to these discussions the tax rate should be reduced significantly – almost by half.
MT: I wanted to ask you about baseline monitoring, and other environmental laws. In the UK baseline monitoring is a requirement and it would be carried out for 12 months. This is essentially what the industry says, that if you want to get reliable results, you need
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to monitor methane emissions for the whole year. So what is the proposal for baseline monitoring in Ukraine? Is there anything specific that is being proposed? MS: Currently in the Ukrainian legislation there are no specific requirements for baseline monitoring for shale gas activities at all. There is an environmental impact assessment procedure for all oil and gas projects, which supposes some description of existing environmental conditions, but there are no specific requirements in terms of which parameters should be monitored and which contaminants should be analysed during and prior to shale exploration. So there is a gap in legislation in this area in Ukraine.
MT: If there are no specific regulations at the moment, is there anything that is being proposed? MS: There are a number of ongoing reforms happening now in Ukraine – both concerning the environmental impact assessment procedures, the development of new Sub-soil Code of Ukraine, which will be the major regulatory act for oil and gas activities, and I think these legal gaps will be closed at least partly in the near future. Ukraine should undergo this legislative development process and provide clear conditions both for the investors and also for the local public to make sure that the operations are transparent, the environmental risks are known and there are some strategies to minimise and control these risks.
MT: While we are on this subject: in the UK and in western Europe the anti-fracking lobby is quite strong, while in places like Poland there is quite a lot of support for shale gas. What is the situation in Ukraine? Do the Ukrainian people support shale gas or are they generally against it? What is the general sentiment among the population? MS: I have not seen any exact figures or poll results, but I should think that the majority of people are still undecided on shale gas. There are some anti-fracking campaigns – both initiated by the local population in the regions where shale projects are being developed, and also run by some major environmental NGOs in Ukraine, but there are also organisations that actively support these kinds of activities. But taking into account that there have only been a few wells drilled, and only few a fracking operations performed, there is still quite a considerable lack of information in this regard and people are still not very aware of shale, in a broader sense.
MT: What, in your view, is the future of shale exploration in Ukraine? The majors seem to have all but moved out, but there are domestic companies still interested in shale. You said that the Ukrainian people are yet undecided. If you were to say what is going to happen within the next five to ten years in terms of unconventionals in Ukraine – where do you think it is likely to go?
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MS: I’m not expecting any sort of shale gas boom in Ukraine, during the next five years. Probably there will be a few exploration wells drilled, but I do not expect any significant increase in interest in shale gas activities in Ukraine because during the next five years, the priority in the country will be to significantly increase the conventional natural gas production. This is because there are technologies, there are resources, and the potential for a significant increase in production from the conventional deposits. Probably there will be some exploration wells drilled – at least to assess the actual potential of unconventional gas fields and to reach an understanding in terms of technically recoverable volumes of unconventional gas, but I doubt if there is going to be any production in the mid-term perspective.
MT: Who do you think will drill those wells? Will that be Ukrainian companies? MS: No, I actually think that if there is going to be any exploration wells drilled, they would be drilled by major international oil and gas companies. Published: 7th July, 2015
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