Fra 2015: Russia’s silent shale gas victory in Ukraine

The vast shale gas reserves in the separatist-held Ukrainian regions of Donetsk and Lugansk regions are an important element not to be overlooked when analysing the Ukraine crisis, writes Szilvia Batkov.

Szilvia Batkov is an international journalist, running the English language website of Bulgaria’s daily Standart.

Despite the truce, fighting in Ukraine’s Donetsk is still ongoing – and however surprising this may sound, one of the main winners of the situation may be Russia’s Gazprom. While the Russian energy giant keeps complaining about its deteriorating supply security through Ukraine and fights a debt repayment battle with its neighbour’s new government, in reality the armed turmoil in the breakaway regions is helping Moscow in a way that hardly anyone would expect: shale gas.

At first this statement does not make much sense, since shale gas is mainly America’s focus. However, by taking a deeper look it turns out that Ukraine – one of the few European countries that has not banned fracking – is presumed to have Europe’s third-largest shale gas reserves at 1.2 trillion cubic metres.

In addition, if we put the map of the conflict on the one of Ukraine’s shale gas fields, the Donetsk region is an obvious overlap.  Besides sitting on an allegedly huge deposit of shale gas known as Yuzivska, perhaps not surprisingly, it is also the hotbed of the fiercest fighting between the government’s armed forces and pro-Russian separatists.

Yuzivska is believed to contain up to four trillion cubic meters of shale gas, according to the Ukrainian government. To tap this, energy giant Shell signed a production sharing agreement in January 2013, opening way for a potential $10 billion investment in the field. In an optimistic scenario before the armed conflict, Yuzivska alone was supposed to produce up to 20 billion cubic meters of gas annually (bcm/y) by 2030, which equals Ukraine’s 2011 overall gas output.

It is not hard to see why this would be a quite a scary scenario for Moscow. An energy independent Ukraine, let alone if it decides to export its gas to Europe, would mean enormous losses for Gazprom.

So what better way is there to scare away a profit-oriented energy company from a project, than putting its potential investment into danger by an armed conflict? Could it be that Russia’s desire to stifle in the bud the shale gas production in Ukraine as an alternative to Russian gas is one of the main causes of Moscow’s help of the separatists? 

Foreign Policy reported in June 2014 that the Russian president and his inner circle have been covertly backing European movements that demonise fracking, in order to maintain the Russian stranglehold on European gas imports. FP notes that strong environmental opposition to fracking is present in countries like Bulgaria and Ukraine, which are heavily dependent on Russia for energy supplies.

According to Russia’s TASS, the residents of Slavyansk, which is the centre of the Yuzivska deposit, organised several protests against development of the deposit. They even planned to have a referendum on the issue.

Another TASS report even allegedly cited Pavel Gubarev, the self-proclaimed leader of pro-Russian separatists in Donetsk, admitting in an interview with Russian television Rossiya 24 on 19 May that one of the key reasons for the fighting is Kyiv’s push to “continue development of shale gas on the territory of Ukraine”.

If this is indeed the case, Russia managed to accomplish its mission – at least for now. Both Shell and Chevron decided to freeze and pull out from their shale projects in the region. 

Before the civil war, Ukraine had agreements with the energy giants to explore and tap its shale gas fields in hope to reduce the country’s heavy dependency on Russian gas imports. In the Donetsk Region Shell had a 50-year profit sharing deal with the government of Ukraine to explore and drill for natural gas in shale rock formations.

US energy giant Chevron also signed a similar deal for $10 billion, but it was focusing on developing shale gas reserves in the West of Ukraine. However, one year into the Russia-backed conflict, both decided to freeze or postpone their shale-exploring activities in Ukraine. Probably also driven by the low gas prices, the profit-oriented energy giants simply shied away from their shale projects in the conflict-ridden country, citing the lack of security for their investments and worsening extraction prospects as their main reasons.

According to Unconventional Gas Information Project expert Mykola Shlapak, it was indeed the fighting that scared Shell away from the Yuzivska project. “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% 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”, he said in an interview.

At first, the withdrawal of Shell and Exxon seemed to be strictly Ukraine’s problem. However, if we zoom out and look at Europe’s energy map, the case is quite different. Besides Russia, the future of Ukraine’s shale gas -if confirmed- could be of enormous importance for both the European Union and the US. In addition to its own independence, Ukraine also had ambitious plans to become an exporter of shale gas to Europe – with the active contribution of the America and its business interests.

Eduard Stavytskiy, then Ukrainian energy and coal industry minister, said in April 2013 that with the help of shale gas and Crimean offshore gas projects, Ukraine could start exports of gas to Europe in four to five years and to become a net energy exporter by 2020. As we know, by now, both of these areas are not under Kyiv’s control anymore.

“The question of Ukraine is a question of EU’s future, EU’s safety, and a correction of EU’s energy policy. We will not be able to efficiently fend off potential aggressive steps by Russia in the future, if so many European countries are dependent on Russian gas deliveries or wade into such dependence,” the then Prime Minister of Poland Donald Tusk said back in 2012.

Indeed, Gazprom accounted for 39% of the European Union’s natural gas imports in 2013 and the union’s dependency is still a big problem for Brussels, especially in the light of its cooling relations with Moscow. As such the union is busy seeking diversification. It even asked US President Obama for increased shale gas imports.

It is hard to miss the massive American interest in Europe’s desire to cut dependency of Russia and simultaneously Ukraine’s promising shale gas prospects. Besides the obvious profit-oriented business interests of American companies in tapping the shale gas of Ukraine, as usually, politics and strategic foreign political interests are also at play in the war for Ukraine’s new gas potential.

The EU and the US are currently negotiating the Transatlantic Trade and Investment partnership (TTIP), which, if agreed, could be very advantageous for the multinational fracking lobby. When President Obama attended an EU-US summit in Brussels in 2014 to discuss the Ukraine crisis, he said the new trans-Atlantic trade agreement would make it easier for his administration to approve American LNG exports to the EU.

However, as long as TTIP is not signed and with significant problems in Poland, Ukraine seems to be the only way for the US shale gas lobby to set its feet in CEE. Vice President Joe Biden announced that the United States would bring in technical experts to speed up Ukraine’s shale gas development.

In fact, the Biden family was so interested in Ukraine, that his son Hunter was appointed to the board of directors of Ukraine’s largest private gas producer, Burisma Holdings. This has put Ukraine’s shale gas question into a new perspective – at least from the American viewpoint. 

Burisma holds licenses covering the Dnieper-Donets basin in the eastern Ukraine and Biden Jr. is not the only American with political ties to have recently joined the company’s board.  Devon Archer, a former senior advisor to current Secretary of State John Kerry’s 2004 presidential campaign and a college roommate of Kerry’s stepson, signed up with Burisma in April 2014.

“Kyiv is fighting in Ukraine’s east for the gas reserves. Germany says the reserves make 5,578 bcm. [the US reserves are 8,976 bcm]. Control will be from the US,” Russian State Duma’s international affairs committee head Aleksey Pushkov tweeted in August 2014.

If the explorations indeed confirm Ukraine’s estimated shale reserves, these would become a significant danger to Russia’s monopoly over the multi-billion euros gas supplies to Europe.  By continuing its officially denied support of the separatists in keeping Ukraine’s shale gas untapped, Moscow has also averted another crisis; American shale gas interests setting foot right at its doorsteps at the Ukrainian border and the European gas markets.

In Russia’s silent shale gas victory in Ukraine, the Russian-backed rebels fighting in the Donetsk and Luhansk regions ensured that at least for the near future, Ukraine’s shale gas potential will not be able to challenge Gazprom’s gas monopoly in the region.