Ukraine picks Western firms for offshore gas project

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Ukraine has selected ExxonMobil and Royal Dutch Shell to develop its Skifska hydrocarbon field in the Black Sea, choosing the American and Dutch companies over Russia's Lukoil for the €8.15-billion project. 

The Skifska offshore project is part of Ukraine’s plan to ease its dependence on gas imported from Russia, which amounted to some 40 billion cubic metres (bcm) last year and accounted for nearly two-thirds of the country's consumption.

"Thanks to state projects aimed at increasing domestic production, we will be able to produce at least 45 bcm," Eduard Stavitsky, the environment and natural resources minister, told Reuters after the announcement yesterday (15 August).

Skifska, predominantly a gas field, is estimated to hold reserves of 200 to 250 bcm of gas, he said, and is expected to eventually produce 5 bcm a year.

Stavitsky said the winning consortium, which also includes Romania's OMV Petrom and Ukrainian state company Nadra Ukrainy, would start work on the field this year.

Ukraine already has an extensive gas pipeline network which could transport gas from the Black Sea coast.

Ukraine's decision to go with non-Russian companies demonstrates that Kyiv wants to diversify its energy portfolio away from Russia, writes Stratfor, the Texas-based global intelligence company.

Because of geographic constraints and political manoeuvring from Moscow, Kyiv has few other sources than Russia for gas imports. Ukraine is exploring the development of its indigenous hydrocarbon reserves.

The Siksfa field alone could reduce the country's natural gas imports from Russia by 10%.

“Ukraine's deal with two of the largest, most technically capable energy companies in the world shows that Kyiv is aware of its rapidly closin window of opportunity to escape Moscow's grip,” Stratfor says in an analysis. “Should Ukraine and its new partners fail to develop significant indigenous hydrocarbon reserves, Russia will be one step closer to obtaining control over Naftogaz and consolidating its influence over the country.”

In May, the Ukrainian government picked Shell and US-based Chevron Corp as partners in projects to explore and develop two potentially large onshore shale gas fields.

Ukraine is dependent on Russia for its natural gas imports - Russian imports account for 64% of Ukraine's total annual consumption, and Kyiv pays some of the highest prices of all Russia's customers for natural gas.

Since Viktor Yanukovich was elected president of Ukraine in 2010, the country’s government has sought to negotiate a lower price on Russian gas but talks have produced no results so far.

Under a controversial 2009 deal negotiated by then-Prime Minister Yulia Tymoshenko, Kyiv is paying €340 per thousand cubic metres. Ukraine sees a fairer price at €200.

Ukraine's government says the high price of imported gas is a drag on the economy and state budget. Ukraine heavily subsidises gas supplies to households and heating companies.

Yanukovich is now under political pressure to deliver a solution to the gas issue as his Party of the Regions has been slipping in opinion polls ahead of the 28 October parliamentary elections.

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