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Aug 15, 2012

Kiev to opt for ExxonMobil and Shell bid

Kyiv Post

Ukraine is betting that the world’s biggest energy companies will help it unlock oil and gas reserves deep under the Black Sea in an attempt to reduce its dependence on costly Russian fuel imports.

Kiev has approved a joint offshore exploration bid led by ExxonMobil and Royal Dutch Shell, according to three people familiar with the situation.

The grouping, which also includes Romania’s OMV Petrom and Ukraine’s state company Nadra, was chosen in a tender process over Russia’s Lukoil.

The tender, due to be announced on Wednesday, comes as Kiev steps up efforts to break its fuel-inefficient economy’s reliance on Russian energy.

“Big finds are expected in the Skifska field, attractive in being massive in size as well as adjacent and geologically similar to where ExxonMobil and OMV Petrom are exploring off Romania’s coast,” a Ukrainian government official said on condition of anonymity.

Jorge Zukoski, president of the American Chamber of Commerce in Ukraine, said: “Bringing in the energy majors is a paradigm shift for Ukraine’s energy security and investment climate. No deals of this magnitude have yet been inked in this country.”

It could take six to eight years to bring production to commercial levels, according to Dennis Sakva, energy analyst at Kiev-based investment bank Dragon Capital.

“But the government has clearly realised that there will be no easily attainable discounts on gas prices from [Russia’s] Gazprom,” Mr Sakva said. “So they decided to explore other opportunities to improve their negotiating position by allowing the oil and gas majors to participate in domestic oil and gas production.”

The winning bidders pledged to invest twice as much as the $200m minimum set for the initial phase of exploration of the 16,700 sq km Skifska area. They also agreed to pay more than $300m upfront to Ukraine’s cash-strapped government for the right to sign a production sharing agreement within the next year, the source said.

“The contract signing premiums being paid by the energy majors are an important [short-term] contribution for the Ukrainian budget,” Mr Sakva said.

The offshore tender comes months after Ukraine chose Chevron of the US and Royal Dutch Shell to pursue multibillion-dollar onshore exploration projects expected to use fracking and other unconventional technologies to unearth hydrocarbons. Ukraine is estimated to hold Europe’s fourth-largest shale gas reserves, but until this year no major energy company had been granted sizeable exploration or production rights.

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The change in policy comes amid repeated but failed attempts by Viktor Yanukovich, Ukraine’s president since 2010, to convince Russia’s Gazprom to lower gas import prices from levels he describes as unfairly high.

The government has estimated that annual production from the Skifska field alone could peak at 3bn-4bn cubic metres when commercial production levels are reached. Ukraine imports some 40bn cu m of Russian gas annually.

Experts have described the planned exploration projects as a game-changing shift for Ukraine, whose energy inefficient economy is being squeezed by high fuel import prices, and whose price disputes with Moscow have twice since 2006 triggered supply disruptions to Europe.

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