Gazprom and Ukraine - natural gas and the shale gas potential

Well now that is interesting. Quietly, while everyone’s attention was, increasingly focused either on the British Election or the oil spill in the Gulf (this was before the attempted bombing in NY) Russian Prime Minister made one of those almost un-noticed Friday announcements. He suggested that Gazprom, the Russian gas company, merge with the Ukrainian natural gas company Naftogaz.

In February the election in Ukraine switched the country from a Westward leaning Administration to one that favored Russia This could be one result of that, and it has a couple of implications. Firstly it ties the country much more tightly to Russian energy strings. Secondly it stops the embarrassing headlines that have occurred in recent winters as Ukraine and Russia have quarreled over the price Ukraine will pay for its natural gas.

The statement has apparently caught many Ukrainian administrators a little off guard. They might perhaps want to take the hint.

“It’s no secret that Russia continues work on its two pipelines by-passing Ukraine, specifically the South Stream project, which is soon to take off the ground. We’ve finished preparing all legal documents. What will this project mean for Ukraine? Serious losses,” Peskov explained. 


“Ukraine is interested to have a co-owner, Gazprom, for its Naftogaz. On the other hand, Gazprom is interested in Ukraine’s pipelines undergoing modernization and operating at full transit capacity,” the Russian official argued. 
Gazprom wants to merge with Naftogaz as it will provide a guaranteed route for meeting Gazprom’s obligations with regard to clients in Western Europe, the official said.

The first paragraph is, I suspect, just to ensure that Ukraine understands the underlying ground rules. And it is reported that this was no sudden whim, but rather has been under consideration for some time.

"We have talked about integration in the nuclear field. We are prepared to do the same in the gas field," Putin said. "I propose merging Gazprom and Naftogaz."

Although a spokesman for Azarov described Putin's comments as "impromptu," Putin's spokesman, Dmitry Peskov, said the proposal was in fact "a thought-out, calculated proposal."

Such a merger would allow Moscow to control its own gas transit to Europe, 20 percent of whose gas imports flow through Naftogaz's pipelines.

One point that is perhaps adding a little momentum to the discussion is the growing interest in gas shale and other resources. Gas shale may make Poland independent in energy and there is Western interest in providing some support.

EuroGas, Inc. today announced that through its subsidiary, EuroGas Polska sp.z o.o., it has entered into a confidentiality agreement with Total E&P Activites Petrolieres (Total), a wholly owned subsidiary of Total S.A., one of the world’s largest oil companies. The agreement was entered into in connection with the evaluation and possible acquisition by Total of certain rights held by EuroGas Polska’s wholly-owned West Ukrainian subsidiary in an onshore region in Western Ukraine. Total has also been evaluating the Bieszczady concession in Poland, in which EuroGas owns a 24% interest.

These properties are, however, coal bed methane related, and thus more readily accessible.

But at the same time there is a potential to break the dependence on Russian natural gas.

The International Energy Agency has estimated that Europe, which gets 25 percent of its gas from Russia, has around 35 trillion cubic meters of unconventional gas reserves – half of which is in shale. That’s around six times its remaining conventional gas reserves.

Energy giants such as ExxonMobil and ConocoPhilips are parked in Ukraine’s backyard. ExxonMobil is already drilling in Germany, ConocoPhillips is exploring in Poland and Austria’s OMV is test drilling at home.

The new technology requires work in wide-open spaces, making it more suitable to a country like Ukraine, which could possess some of the most promising shale deposits, than densely-populated Europe.

Russia had already agreed to lower the price it charged Ukraine for natural gas by 30%, provided it extended the lease for the Russian Black Sea Fleet.

As for Poland, it was at the end of last year that the energy advisor suggested that they could be self-sufficient in 4-5 years.

We already know ConocoPhillips, Exxon Mobil and Marathon among big players (and there are plenty of independents: Aurelian, San Carlo, BNK, 3 Legs etc)are investing in Poland. December 9 saw what should be the story of the month, where the energy adviser to the Polish Prime Minister predicted enough gas to export in 4 to 5 years.

The whole of Europe is undergoing a geological re-evaluation to determine the potential for natural gas from shale, and with the high cost of developing some of the larger deposits in Russia, thinking particularly of Yamal and Shtokman, shale may also be attractive to Gazprom.

Shale gas has even fueled interest up in New Brunswick

North of the border, oil and gas companies are beginning to pour money into surveying, drilling and producing gas from land in British Columbia, Alberta, Saskatchewan, Quebec and the Maritimes in the hopes they'll discover the next jackpot.

In March, New Brunswick issued its largest tender to date for oil and gas exploration - more than one million hectares of land - to Southwestern Energy Co. (NYSE:SW), a Texas firm known for pioneering exploitation of the Fayetteville shale in Arkansas for natural gas.

The Canadian division of Houston oil and gas major Apache Corp. (NYSE:APA) is interested, too, and plans on drilling two wells this summer for shale gas near Elgin.

But this international move to indigenous resources does not install confidence in the Kremlin that they can sustain the markets which they need to generate the funds to support their budgets. And so, in the hope perhaps that the change in Administration in Ukraine will help them, they have begun to possibly look at other ways of keeping themselves in business.