Ukraine’s Effort to Cut Russian-Gas Reliance Sees Explorers Exit

Foreign explorers that are key to Ukraine’s future energy independence are fleeing the nation as a war against pro-Moscow insurgents in eastern regions sends the economy into freefall. Even government measures aimed at shrinking consumption of Russian gas have helped drive some international companies away.

 

JKX Oil & Gas Plc (JKX) halted investment last week, citing a 55 percent tax imposed on gas production and a government decision to secure supplies for households by imposing restrictions on sales to industrial customers. The company joined Chevron Corp., Royal Dutch Shell Plc, Exxon Mobil Corp. (XOM) and Eni SpA, which quit Ukraine or froze projects in the past year. Others are set to follow, according to Bloomberg Industries.

 

Putin's Pipeline Politics

 

“JKX’s decision to suspend its planned natural gas field development investments in Ukraine may be followed by peers also active in the country,” Philipp Chladek, an analyst at the London-based researcher, said on Jan. 7. With the state’s curb on sales to industry and gas production tax, “economic parameters appear insufficient to justify further drilling.”

 

The Parliament, sworn in six weeks ago, has passed a draconian budget to unlock the next tranche of a $17 billion International Monetary Fund-led bailout and prevent a default. At the same time, Ukraine is trying to reduce dependence on gas from Russia’s OAO Gazprom, which until last year supplied more than half of demand. A 48 percent slump in Ukraine’s currency against the dollar in 2014 also cut its ability to fund imports.

 

First Blow

 

“It’s very difficult for us but we’re repaying our foreign debts,” Prime Minister Arseniy Yatsenyuk said in Kiev on Jan. 9. “If the world sees that Ukraine is repaying debts, then investors will be back.” The government didn’t immediately respond to Bloomberg calls seeking comment.

 

The Russian annexation of Ukraine’s Crimea region in March dealt a first blow to hopes of energy self-sufficiency. Ukraine lost control of the potentially gas-rich offshore fields in the Black Sea it had planned to explore with Exxon and Eni.

 

The conflict that followed in eastern Donetsk and Luhansk provinces has claimed more than 4,700 lives, crippled transport infrastructure and prevented coal production. It forced Shell to recall all personnel from operations at the Yuzivska field in June and abandon plans to drill 15 exploratory wells.

 

“The government is in an impossible position,” Otilia Dhand, an analyst at political risk adviser Teneo Intelligence, said in Brussels. “It’s hard to convince investors that the economy will improve when you have a war raging.”

 

Shale Deposits

 

Even away from the violence, international producers have left. Chevron pulled out of an agreement to explore the Oleska field in western Ukraine, more than a thousand kilometers (620 miles) from the fighting as economic conditions worsened. The economy is expected to shrink 6 percent this year, according to Moody’s Investors Service, after tumbling 7.5 percent in 2014.

 

The withdrawals mean Ukraine will struggle to add to its 15 billion cubic meters a year of conventional gas output or benefit from shale deposits that the U.S. Energy Information Administration estimates may be Europe’s third largest.

 

While Ukraine is doing what the IMF and European Union asks of it by paying off bondholders and the country’s debts to Russia, its currency reserves are being depleted and capital flight is accelerating, Timothy Ash, chief emerging-market economist at Standard Bank Group Ltd., said by e-mail.

 

“You have to feel sorry for the Ukrainians,” Ash said. It’s “hardly joined up thinking by the West.”

 

 

January 15, 2015
Bloomberg