Ukraine Looks To Texas For An Energy Path

KIEV, Ukraine -- This former Soviet state in Eastern Europe is betting that the path toward energy independence runs through Fort Worth.

A Ukraine field is analyzed seismically for natural and shale gas deposits.

By drilling in the scrubland and vacant lots in and around the city of Fort Worth, American energy companies have demonstrated that they can produce natural gas economically from shale — a form of sedimentary rock previously considered all but worthless.

Now, despite environmentalists’ opposition to the water-polluting potential of the shale-gas extraction method known as fracking, the technology’s proponents are heading abroad. And Ukraine, which sits atop tantalizingly large shale deposits, is eager to do business.

Already this year, Ukraine has opened talks with three Western energy giants — Exxon Mobil, Chevron and Shell — to search for shale gas.

Ukraine’s Parliament has also passed investor-friendly legislation aimed at opening its domestic natural gas market to shale gas producers.

Meanwhile, the nation’s president, Viktor F. Yanukovich, has signed a shale-gas exploration agreement with the United States and reached an accord with the European Union on energy transport that opens Ukraine’s pipeline system to Western companies.

Along with the energy companies courting it, Ukraine sees shale as potentially altering the geopolitics of natural gas, lessening global reliance on Russia and the Middle East.

Today, just three countries — Russia, Iran and Qatar — hold 54 percent of the world’s conventional gas reserves. But shale is found in many other places, including Eastern and Western Europe, India, China and Australia.

A 2009 study by the International Energy Agency estimated the world holds nearly as much gas recoverable through new techniques like shale gas, or another known as coal-bed methane, as through the traditional sort obtained by conventional drilling.

The agency estimated there might be 380 trillion cubic meters of natural gas that could be recovered through these new techniques, compared with 404 trillion cubic meters obtainable through traditional means.

The energy agency has also predicted that unconventionally produced gas will rise from 12 percent of the global total in 2008 to 19 percent in 2035.

Although Ukraine already produces some natural gas by conventional means, it remains highly dependent on imports from Russia’s state-owned gas monopoly, Gazprom, the world’s biggest producer.

Twice in the last five years, Gazprom has halted supplies to Ukraine in politically tinged pricing disputes.

And yet, as a legacy of the Soviet era, Ukraine controls the pipelines through which Gazprom transports its natural gas to its Europe. It is a mutual dependence that at times seems more like a standoff: Russia has the gas; Ukraine has the pipes.

Ukraine, by finding a greater source of its own natural gas, would be hoping to reduce Russia’s leverage in that relationship.

The shale gas industry, for its part, could erode Russia’s once seemingly untouchable monopoly pricing power on natural gas, if the industry can duplicate Fort Worth-scale results from a belt of shale deposits in Poland and Ukraine that in some cases lie right under the pipelines carrying Gazprom’s gas.

Right now, Russia produces about 40 percent of the natural gas imported into the European Union, selling it mostly under long-term contracts that are linked to the price of oil — which has been soaring lately.

Gazprom says its average wholesale price in Europe in the first quarter of 2011, the latest figures available, was $346 for 1,000 cubic meters. By comparison, the benchmark price for natural gas in the United States at the Henry Hub in Louisiana last month averaged $153.30 for the same volume.

Ukraine’s national energy company pays 30 percent less than the European rates, through an agreement Mr. Yanukovich signed last year to let Russia use a naval base on the Crimean Peninsula for 25 years. But that is still higher than the price in the United States.

“Unconventional gas will be a game-changer throughout Europe,” said James Hill, vice president at BNK Petroleum, one of the companies that pioneered the technology in the United States and is now expanding in Europe. “We’re the mouse that roared.”

Poland is three or so years ahead of Ukraine in its shale gas industry, with exploration wells already drilled. But it is less sensitive to Gazprom’s monopoly, because Poland consumes far less gas than Ukraine.

And Poland is geographically less critical for the transmission of natural gas to Western Europe than Ukraine, which transports about 80 percent of Gazprom’s exports to Europe.

Ukraine has four major, largely unexplored shale deposits, according to Valerii Berezhnoi, chief geologist for Vikoil, a Ukrainian seismic exploration company studying unconventional natural gas deposits.

Nobody pretends to know how much gas they might hold. But as energy companies speculate on Ukraine’s potential, they point to the deposits that lie under Fort Worth, called the Barnett Shale.

Production from Barnett has grown in a decade from almost nothing to 133 million cubic meters a day. That is more than the approximately 109 million cubic meters that Ukraine imports a day from Russia.

Signaling a shift toward support for shale gas development, Ukraine’s minister of energy and coal, Yuri A. Boiko, met with American shale gas executives in Houston this year and announced a once far-fetched sounding goal for Ukraine to become self-sufficient in natural gas.

“We understand that American science is rich in this field,” Mr. Boiko told an audience of mostly Western energy company executives at a conference on shale gas in Kiev last month — the first such gathering for the industry in Ukraine. “We would like to attract this technology, and we would like to attract partners,” he added.

Exxon Mobil, which bolstered its unconventional gas expertise with the purchase of the American shale developer XTO last June, signed a memorandum of understanding with the Ukrainian government earlier this year, formalizing negotiations to begin exploring or drilling. XTO was a pioneer of the Barnett shale play under Fort Worth. Ukrainian officials are now in similar talks with Chevron and Shell.

Shale, the ossified mud from the bed of ancient seas, is prized if it is stained dark gray or black from imbedded organic material. A shale gas strike has none of the drama of an oil gusher. Drilling teams pull core samples to the surface. If rich in gas, the rock will fizz gas in water, like an Alka-Seltzer.

Companies produce industrial volumes of shale gas through hydraulic fracturing — or fracking. The process releases natural gas from shale by blasting the rock with water, sand and chemicals to create cracks through which the gas flows.

Because fracking often produces wastewater laced with toxic substances, it has become a target of environmental protests worldwide. In France, the National Assembly next week will debate a proposal to ban the practice, as opposition heats up ahead of a presidential election next year.

So far in Poland, protests have been small. Because the industry is in its infancy in Ukraine, the public’s attitude there is still mostly unknown.

Jack P. Williams, the president of Exxon’s XTO Energy unit, told a conference last fall that realizing shale gas’s potential abroad will depend on addressing environmental concerns in the United States.

“Getting this right is vital not just to U.S. jobs and energy supply,” he said, “but also to our ability to pursue these same opportunities globally.”

Gazprom, meanwhile, has so far been silent on Ukraine’s negotiations with Exxon, Shell and Chevron. In fact the company’s officials rarely mention shale gas in public.

A Gazprom spokesman identified remarks made in a speech by the chief executive, Aleksei B. Miller, to a business convention in Cannes last year, as the most comprehensive so far.

In that talk, Mr. Miller dismissed the technology as environmentally unsound and expensive, and said that shale gas would affect only the margins of Gazprom’s business — characterizing shale as merely an appetizer to Gazprom’s main course.

“If you fell for foie gras,” he told the audience in France, “it does not mean that buttery soft tenderloin steaks grilled to your taste are made redundant.”

More recently, shale gas wildcatters at the Kiev conference said they could not be more pleased with Gazprom’s behavior.

By keeping natural gas prices in Ukraine and elsewhere in Europe higher than gas prices in the United States, they said, Gazprom is making shale exploration in Eastern Europe look all the more profitable.

Source: The New York Times