Yuzgas B.V., a company set up by investment fund Emerstone Energy, has won a contract for shale gas exploration in the Donetsk region, Ukraine. The production sharing agreement between Yuzgas and Nadra Yuzivska – a subsidiary of Nadra Ukrainy – will pick up where Royal Dutch Shell left when it withdrew from the Yuzivska field on 8th September 2015, citing force majeure.
At the time, Shell issued a statement to the effect that the company “has been prevented from performing its commitments under Yuzivska [production sharing agreement] for an extensive period of time due to force majeure, i.e. circumstances beyond Shell’s control”.
The Yuzivska field was discovered in 2010 and was expected to begin production in 2017. The initial assessment indicated that the field holds around 70.8 trillion cubic feet of natural gas and the production was expected to yield around 960 million cubic feet of gas per day.
However, despite these optimistic estimates, the actual exploratory drilling work carried out so far has not confirmed the presence of abundant shale resources in this part of the country.
Energy independence that shale resources can offer is of paramount importance to Ukraine, which is still in conflict with Russia over the annexation of Crimea and the country’s eastern territories. Despite the hostilities, Ukraine is still reliant on gas imports from The Russian Federation.
When it comes to domestic production, Ukraine in 2015 produced about 20 billion cubic meters of gas, while importing 16.5 billion, but if the Yuzivska field project is successful, gas production in Ukraine is expected to double.
From the start, the Ukrainian side was clear that what it needed was injection of funding into the abandoned project.
“Because of a decline in world prices of crude oil, Ukraine has considerably reduced hydrocarbons prospecting. Therefore, it is important that the winner of the tender invest several dozen million dollars in the program for prospecting the Yuzivska field (close to the amount offered for drilling by Royal Dutch Shell in 2012) and pay commercial discovery and production bonuses to the national budget,” Nadra Ukrainy declared.
Nadra Yuzivska is an entity created specifically for the purpose of this production sharing agreement. As Ukrainian Independent Information Agency informed, Nadra Yuzivska is owned in 90 percent by the country’s leading geological prospecting operator Nadra Ukrainy, while 10 percent belongs to a little known SPK-Geoservice, which is allegedly connected with the Yanukovych family.
Similarly, Yuzgas B.V. was set up specifically for the tender by Emerstone Energy, owned by Emerstone Capital Partners. As Reuters reports, the latter was in turn founded by Jaroslav Kinach, head of a private Canadian company Iskander Energy Corp and a former Ukraine country head of the European Bank for Reconstruction and Development (EBRD).
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