Ukraine signs $10 bln shale gas deal with Chevron

Reuters

* Deal for Olesska field in western Ukraine

* Ukraine seeks energy independence from Russia

* Signing will boost Ukraine president

By Pavel Polityuk and Richard Balmforth

KIEV, Nov 5 (Reuters) - Ukraine signed a $10 billion shalegas production-sharing agreement with U.S. Chevron onTuesday, another step in a drive for more energy independencefrom Russia.

The deal to develop its western Olesska field followed asimilar shale gas agreement with Royal Dutch Shell inJanuary and boosts Ukraine's leadership at a time of fraughtrelations with Moscow over gas supplies.

"The agreements with Shell and Chevron ... will enable us tohave full sufficiency in gas by 2020 and, under an optimisticscenario, even enable us to export energy," President ViktorYanukovich told investors shortly before the signing.

The highest end of expectations for Olesska's potentialreserves would match around three years of European Union gasdemand, but similarly sunny hopes for shale reserves inneighbouring Poland have been very sharply downsized.

Shale development in Europe is far behind the booming U.S.sector and progress is patchy. Chevron pulled out of a shaleexploration tender in Lithuania and has suspended work at aRomanian shale well after local protests.

Ukraine Energy Minister Eduart Stavytsky, who signed thedeal with Chevron executive Derek Magness, set it in the contextof a high price Ukraine pays Russia for its gas.

"This is one more step towards achieving full energyindependence for the state. This will bring cheaper gas pricesand the sort of just prices which exist (elsewhere) in theworld," he said.

Ukraine pays $400 per thousand cubic metres for Russian gasunder a 2009 10-year agreement. Kiev has failed to re-negotiateits terms with Moscow.

The agreement with Chevron, to extend for 50 years, foresawan initial investment of $350 million by the U.S. major inexploratory work over two or three years, Stavytsky said, aimedat establishing the commercial viability of shale reserves inthe 5,260 square km (2,000 square miles) Olesska, part of a bandof shale which stretches from the Baltic to the Black Sea.

Earlier government figures set total investments, includingextraction after exploratory drilling, at around $10 billion.

FRICTION WITH RUSSIA

Stavytsky said the Ukrainian side hoped that exploratorywork would yield more detailed information about reserves atOlesska in 2015.

It was expected that Olesska would produce 5 billion cubicmetres per year - and possibly as much as 8-10 billion cubicmetres, he said.

The deal with Shell, which is at a similar level ofinvestment, is for exploration at Yuzivska in eastern Ukraine.

The two shale projects could provide Ukraine with anadditional 11 to 16 billion cubic metres (bcm) of gas in fiveyears' time, according to projections by the Kiev government.

With Ukraine also a transit route for Russian gas to Europe,rows in the past which have led to disruption for Europeanconsumers.

The two sides clashed over prices in the winters of 2006 and2009, with Moscow halting deliveries not only to Ukraine but tothe rest of Europe.

With Russia angered over Ukraine's plans to sign a landmarkagreement with the European Union which will mark a shift awayfrom Russia's sphere of influence, the issue has flared again.

Late last month, Russia's gas export monopoly Gazprom demanded Ukraine pay a $882 million overdue gas billurgently.

Stavytsky said on Tuesday that Ukraine had already begun tosettle the outstanding bill but gave no details.

Gazprom spokesman Sergei Kupriyanov said his company hadrecently received $9 million in payments from Naftogaz Ukraine."It's just a drop in the ocean," he said.

Russian Prime Minister Dmitry Medvedev has since said hesees no reason for Moscow to cut gas supplies to Ukraine overthe unpaid bill for now and has played down talk of an imminent"gas war" that might disrupt flows to Europe.

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