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Jun 08, 2012

Ukraine seeks energy majors for Black Sea exploration

Kyiv Post

Ukraine has launched its second round of hydrocarbon exploration tenders of this year, stepping up efforts to cut down on expensive Russian natural gas imports.

To do that, the nation will have to boost domestic production with the investment and know-how of the world’s largest energy companies.

According to a June 2 announcement in the Uryadovy Kuryer government newspaper, an Aug. 2 deadline has been set for bids to explore for natural gas and oil in two vast offshore fields on Ukraine’s Black Sea coast.

The 16,700 square kilometers Skifska and 13,600 square kilometers Foroska fields are located off Ukraine’s Crimean peninsula.

Ukrainian officials and industry insiders said they expect bids from the world’s largest energy companies, the likes of Shell, ExxonMobil, China’s Sinopec, Italy’s Eni, Austria’s OMV, Brazil’s Petrobras and France’s Total.

The new tenders come weeks after Ukraine chose US-based Chevron and Royal Dutch Shell as winning bidders in two multibillion-dollar onshore exploration projects. Those deals are expected tap the nation’s shale gas reserves, believed to be the fourth largest in Europe.

The offshore exploration projects could also involve billions of dollars of investment.

The winning bidders are expected pay an upfront premium of at least $300 million to Ukraine’s government, an official source said. Should commercially viable hydrocarbons be found, Ukraine’s government seeks no less than a 20 percent share of it for domestic use.

Citing government estimates, Kyiv-based investment bank Dragon Capital said annual production from the Skifska and Foroska fields may “peak at 3-4 billion cubic meters and 2-3 billion cubic meters, respectively. With water depths in these areas reaching 1,500 meters, we think commercial development of these fields can realistically start in 7 to 8 years.”

Investors will not be required to sell their share of hydrocarbons on Ukrainian turf. But this option is likely to be attractive given the prices Ukraine is currently paying for Russian gas imports.

Ukrainian President Viktor Yanukovych has during his first two years in power repeatedly criticized import prices charged by Russia’s Gazprom as unfairly high. He has also pointed the blame at his bitter rival, jailed opposition leader Yulia Tymoshenko. As prime minister in 2009, she brokered the current supply agreement with Russia.

Unsuccessful in convincing Gazprom to renegotiate the gas supply contract, Yanukovych’s government has stepped up efforts to boost domestic hydrocarbon production by luring in investment from the world’s top energy companies.

Experts have described the planned exploration projects as a paradigm shift for Ukraine, whose price disputes with Moscow have twice since 2006 triggered supply disruptions to Europe.

The projects mark the first major attempts by Kyiv to break its heavy dependence on Russian fuel imports by luring major investors into a murky but promising energy sector which that has long been dominated by domestic and Russian groups.

The hope is that the new on- and off-shore exploration projects will help sharply cut down on roughly 40 billion cubic meters of annual gas imports from Russia at prices described by Ukraine as onerous.

Ukrainian officials have described the offshore and onshore exploration projects are part of a broader aim to achieve energy independence through 2020 by both boosting domestic production and improving energy efficiency.

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