The future of shale development in Ukraine – Interview with Mykola Shlapak

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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 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.

In the geographical sense there are two major regions with unconventional gas production potential. One of them is located in the east of Ukraine and is partially on the territories currently not controlled by the Ukrainian government, where the armed conflict is taking 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 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 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.