Chevron (ticker: CVX) has terminated its contract with Ukraine to extract shale gas in the western part of the country. The world’s third largest oil company by market cap spent more than a year to get the government to simplify taxation for development, reports local media.
“We have just terminated that PSA (production sharing agreement),” said Peter Clark, Chevron’s country manager. “When it was signed, things had to be done, but not all of them got done.”
Andrei Korneyev, Head of the Center for Energy Security at the Institute for the U.S. and Canadian Studies, told Sputnik News Agency that Ukraine’s tax regime was “excessive.”
“By an initiative of the Ukrainian Finance Ministry in August 2014, the fee for the use of [Ukraine’s] subsoil for oil and gas exploration was increased twice and extended for all projects, including PSA’s.” The deadline for changes to the tax code was November 18.
Ukraine signed a deal with Chevron on November 5 to extract shale gas in Lviv and Ivano-Frankivsk oblasts, about 335 miles west of Kiev. Under the agreement, Chevron was obliged to invest $350 million into exploration under the production sharing agreement. Altogether, the company’s investment could have amounted to $10 billion over the 50 leased years in the Oleska field.
Clark said that despite the termination of the contract, the “dialogue with the government is ongoing.” He said the company was still looking for business opportunities in Ukraine, and held a number of meetings with the government on December 12. Included in the meetings was the ecology ministry, which oversees the process of licensing for gas companies.
A blow to energy independence for Ukraine
Ukraine’s energy deal with Chevron was the second of its kind, the first being with Royal Dutch Shell (ticker: RDSA) in January, 2013. At the time the Chevron deal was signed, then-President Viktor Yanukovich said, “The agreements with Shell and Chevron … will enable us to have full sufficiency in gas by 2020 and, under an optimistic scenario, even enable us to export energy,” reported Reuters.
Shell had hoped to extract gas from tight rock in eastern Ukraine, but most business operations are frozen in that area as conflict continues in the region. ExxonMobil (ticker: XOM) also suspended its operations in the country, which included participation in a consortium of companies to explore offshore gas in the Black Sea close to the Crimean coast, after Russia annexed the peninsula.
In 2012, Ukraine imported 63% of its 1.8 trillion cubic feet (Tcf) of natural gas needs from Russia, reports the Energy Information Administration (EIA). Most of Ukraine’s primary energy consumption is fueled by natural gas (about 40%), with coal being the second largest contributor (about 28%).
With such high levels of dependence on Russian gas and increasingly tense relations between the two countries, Ukraine continues to look for ways to exploit its own natural gas reserves. Ukraine has 39 Tcf of natural gas reserves, according to the EIA, giving it the 25th largest reserves in the world. The Oleska field was hoped to produce 5 billion cubic meters (176.6 billion cubic feet) per year, and possibly increase to as much as 10 billion cubic meters (353.2 billion cubic feet) per year, reports Reuters.
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