Western oil majors including Chevron (CVX), Exxon Mobil (XOM) and Royal Dutch Shell (RDS.A, RDS.B) likely will reassess deals to drill in Ukraine, where the political crisis threatens a promising source of new profits and the country’s drive for energy independence.
Royal Dutch Shell plc (RDSA), which signed a $10 billion shale gas deal with the Ukrainian government this year, expects to start drilling in the Yuzivska field next year. Shell will need to drill as many as 15 wells to complete the initial exploration appraisal of the 8,000 square-kilometer (3,100 square-mile) Yuzivska field in the eastern part of the country, Graham Tiley, the country manager of Shell Ukraine, said in an interview in Kiev On Nov. 6, 2013.
Separately, the company has also completed drilling its first well in the Kharkiv region and is preparing to drill two more next year, he said. Ukraine, which depends on expensive Russian gas imports to cover more than 60 percent of its consumption, is pushing to develop its own reserves, both onshore and offshore, in the Black Sea . The government signed a production-sharing agreement with Chevron Corporation (CVX) for extraction of shale gas, and plans to complete negotiations by the end of this year with an Exxon Mobil Corp-led group, which includes Shell, to explore off Ukraine’s western Black Sea coast.
“If you look across all these different projects, and if you look at interests of not just Shell but major oil and gas companies, you would say Ukraine has a good chance to boost its output,” Tiley said. “The sector has been under-invested and I assume over time the domestic production will increase.”
The country could hold as much as 42 trillion cubic feet (1.2 trillion cubic meters) of shale gas, the third largest reserve in Europe, according to the U.S. Energy Information Administration estimate from 2011.
The use of hydraulic fracturing, or fracking, upended the U.S. gas industry, which overtook Russia as the biggest producer. “Until we get out there, drill some wells and test them, we simply won’t know how much of the area is going to be commercially productive,” the executive said. “Right now the testing phase will take some months before we have some results, and that will be only from one well.” When Shell and Ukraine signed the deal in January, Energy Minister Eduard Stavytsky said $10 billion would be invested if the geology met expectations, according to the Financial Times.
While the oil companies can always spend their money elsewhere, the potential $10B in investment [was] vital to Ukraine’s quest to pull away from Russian control and revive an economy on the verge of collapse.
– Exxon Mobil Chairman and CEO Rex Tillerson (left) and Russian President Vladimir Putin (right) attended the signing of an agreement between state-controlled Russian oil company Rosneft and Exxon Mobil at a port on the Black Sea in 2012.
It said in a statement its Lisichansk oil refinery was undergoing scheduled maintenance and would be back in action only after an examination of its economic viability.
“Rosneft has not rolled back and has no plans to make changes to the scale of its operations in Ukraine,” the company said.
Exxon is also pressing ahead with large-scale investments in Russia, as well as a Black Sea oil project just east of Crimea, they said.
Exxon Mobil senior vice president Andrew Swiger told an analysts in New York that the company was continuing its license in Skifska.
Rex Tillerson, Exxon Mobil’s chairman and CEO, said the company’s Russian projects were moving ahead.
“There’s been no impact on any activities or plans at this point, nor would we expect there to be any, barring governments taking steps beyond our control.”
“In terms of our view of country risk, geopolitical risk, other than things like sanctions, we don’t see any new challenges out of the current situation,” he said.
Exxon Mobil signed a giant joint venture agreement with Russia’s Rosneft in 2011 that opened the way for exploration in seven Russian Arctic Sea areas, parts of Western Siberia and a strip along the Russian Black Sea near Crimea.
Swiger said that drilling was expected to begin in the Russian Black Sea prospect either later this year or in 2015. He said the prospect was promising because of natural oil seeps and seismic work that showed several potential oil-bearing areas stacked on top of one another.
Ukrainian officials hope the Skifska offshore area will help it lessen dependence on Russian natural gas. Government estimates indicate the project would cost about $10 billion to $12 billion. So far, no drilling has taken place in the Skifska area, although Exxon Mobil has found natural gas in the Black Sea off the neighboring coast of Romania.
During a meeting with analysts, held at the New York Stock Exchange, Tillerson emphasized that Exxon Mobil’s holdings were spread across the world in such a way that it could withstand geopolitical or other disruptions in any one country.
“It is difficult to compete and be successful without the scale and capacities that organizations like us have, and to manage the risks,” he said in answering a question about whether the “supermajor” oil companies have grown too large.
Tillerson said Exxon Mobil is cutting back on capital investments this year and expects to keep below the 2013 level out to 2017. Even with that, the company plans to spend $39.8 billion in 2014.
Side Note –
World’s top oil producer
Russia retained the title of the world’s top oil producer with 2013 output reaching a post-Soviet high as rising exports to China and strong prices allow the Kremlin to maintain record spending from an overstretched budget.
Energy has been the engine of Russia’s growth during more than a decade of leadership by President Vladimir Putin, with oil and gas accounting for more than half of budget revenues.
A production ramp-up at Gazprom Neft and Surgutneftegaz brought Russia’s oil output, the world’s largest, to a new post-Soviet record high of 10.59 million barrels per day (bpd) in October, Energy Ministry data showed on Saturday.
Below are details of Russian oil output:
- Russia’s oil production peaked at 11.41 million bpd in 1988 when it was still part of the former Soviet Union, according to the International Energy Agency. Russia accounted for 90 percent of Soviet output.
- In 1991, in the final days of the Soviet Union, Russia’s output fell to 9.24 million bpd, down 10.5 percent from 10.32 million bpd in 1990 and off 19 percent from the 1988 peak. Many analysts say the slump in oil production and a drop in prices contributed to the fall of the 70-year-old Communist empire.
- In 1996, when Boris Yeltsin was re-elected as Russia’s president, oil production went into a three-year period of stagnation amid under-investment and slowing demand.
- Russian oil output grew by about 1.5 percent in 2009 to the then post-Soviet high of an average of 9.925 million bpd for the year and in September exceeded a monthly level of 10 million bpd for the first time since the collapse of the Soviet Union.
- In 2010 Russia overtook Saudi Arabia, which restrains its output when it deems it necessary, as the world’s largest producer as new fields were launched, including Vankor, Uvat and Talakan.
- In 2012, Russia’s oil output reached a post-Soviet yearly record high of 10.37 million bpd. – Reuters