Shale gas revolution may open Ukraine’s integration into Europe

BALTIMORE, Md. — For more than two decades, Ukraine has been unable to conduct an independent foreign policy because of its closely integrated and highly corrupt energy ties to Russia. Ukraine’s poorly coined “multi-vector foreign policy” was the outcome of Russian blackmail blocking the country’s long declared strategic objective of integration into Europe.

Large windfall profits from the gas trade were too lucrative for every political force in Ukraine to ignore, especially prior to 2004 when Russian and Central Asian gas prices were a mere fraction of the world price. As Ukrainian gas trader Ihor Bakay famously remarked, the majority of Ukraine’s elites made their initial capital on the re-export of Russian and Eurasian gas.

Since the early 1990s, gas intermediaries have changed their names many times over from Respublika, Interhaz, United Energy Systems (YESU), Eural Trans Gas (ETG), RosUkrEnergo (RUE) and the most recent Ostchem. Although these opaque gas intermediaries tied Ukraine to Russia and blocked European integration, the paradox is that they were largely organized by Western Ukrainians who are traditionally touted as “anti-Russian” or Eastern Ukrainians such as Yulia Tymoshenko.

It is even more of a paradox that it is now the Viktor Yanukovych administration, which has traditionally been viewed as “pro-Russian,” that is engineering a strategic breakthrough in Ukraine’s energy independence.

The shale gas revolution will boost the energy independence and national security of both the United States and Ukraine. Indeed, it is US companies that have been encouraged to sign PSAs with the Ukrainian government and Ukrainian partners. The International Energy Agency estimates there to be 1.2 trillion cu.m of shale gas in Ukraine in the Donetsk-Prydniprovskyy and Lyublinskyy basins, or the third largest deposit of shale gas in Europe.

Since last year, Shell, Chevron and Exxon Mobil have signed, or are in the process of signing, PSAs for shale gas production in Ukraine. In May 2012, Shell won a tender for the development of shale gas at the Yuzivska field in the Donetsk-Prydniprovskyy basin.

Chevron has won a tender for the development of shale gas in the Olesska field in the Lyublinskyy basin. In January, Shell signed a PSA for the development of shale gas in the Yuzivska basin with the Nadra-Yuzivska private company and the Ukrainian government.

A tender for Chevron to develop shale gas in the Oleska basin has been thwarted by the nationalist Svoboda-controlled councils in Galicia showing to what degree nationalists continue to follow Yushchenko’s steps in not supporting Ukraine’s energy independence from Russia.

Shale gas extraction from the Yuzivska and Oleska basins is due to begin in 2017. Estimated production from these basins would be in the region of 15 to 50 bn cu.m of shale gas each year which would dramatically reduce the need to import 30 bn. cu m of Russian gas each year.

Within a decade Ukraine could return to a time prior to the early 1970s when its demand for energy was satisfied by domestic production. The rapid expansion of shale gas production, coupled with expansion of domestic gas with the assistance of Canadian-US companies such as Cub Energy, and energy conservation will contribute towards removing Russia’s energy noose around Ukraine’s neck. Prime Minister Nikolai Azarov has complained that Russia is "strangling" Ukraine with high gas prices.

President Yanukovych has three strategic objectives in the pursuit of the shale gas revolution.

First, to escape from the disastrous long-term 2009 gas contract signed by prime ministers Yulia Tymoshenko and Vladimr Putin. In 2012, Ukraine paid $432 for1000 cu.m. or 40 percent more than what Italy pays and 20 percent more than Germany. In addition, Ukraine receives two times lower fees for the transit of Russian gas than Slovakia and Hungary.

Second, Kiev believes it will become more geopolitically important in the eyes of Washington and Brussels. Danylo Nesterov wrote in a recent edition of “Ekonomichna Pravda” that “The Americans and “The Family” (the group around President Yanukovych from his home town in the Donetsk region) have never been as close to one another as they are today.”

Third, energy independence and breaking free of Russia’s gas stranglehold could improve the chances of Ukraine’s integration into Europe.

The shale gas revolution represents a strategic milestone in Ukraine’s new drive for energy independence. Yanukovych’s economic nationalism may yet prove to be more constructive than ethno-cultural nationalism promoted so avidly by his predecessor Yushchenko.

Taras Kuzio heads the Ukraine Policy Forum at the Center for Transatlantic Relations in the School of Advanced International Relations, Johns Hopkins University. His book Commissars into Oligarchs. A Contemporary History of Ukraine which will be published by the University of Toronto Press later this year.