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The Real Reason Shell Halted Its Ukrainian Shale Operations

Igor Alexeev's picture
Route Magazine
  • Member since 2018
  • 17 items added with 9,313 views
  • Jun 25, 2014
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Royal Dutch Shell has blamed air strikes by the government in Kiev against its own citizens in southern Ukraine as the reason it decided to declare a halt to its shale oil projects in the troubled region. In reality, the truth may be closer to the fact that company is disappointed with the economic viability of what it once thought was a large shale deposit and is looking for a way out.

After a series of dramatic statements and the signing of a $410-million letter of intent, a veil of uncertainty is being drawn around the myth of Ukrainian shale. Royal Dutch Shell CFO Simon Henry said in an interview with Bloomberg TV that the decision was prompted by the need to protect the company’s business interests in Ukraine.

By walking away, Shell will be able to “freeze” its involvement in the failed initiative while simultaneously minimizing the damage to its reputation. In accordance with the contract, Shell’s Ukrainian counterparts will, in the end, have to wait another 50 years to get their hands on that long-awaited “freedom gas.”

Shell will also be able to demonstrate its concern for its employees who work in the region where a brutal civil war is on the verge of breaking out. “Shell is in the East, and there’s a security risk there,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics.

According to a recent statement by the former head of Royal Dutch Shell, Peter Voser, “the company is now analyzing its business in shale,” which, translated from the streamlined language of press releases, means: The project is not earning its keep and we need to do something (Read: write off expenses).

A little background: In January, 2013, Shell, along with Nadra Yuzivska, LLC and the Ukrainian government, signed a production-sharing agreement for the exploration, development, and extraction of hydrocarbons from the Yuzivska site (8,000 sq. km), a geological formation located in the Kharkiv and Donetsk regions.

By the middle of that same year, the company had lost $2.4 billion on shale gas deposits in the U.S. and was forced to document a very large drop in profits — 60 percent over the same period in 2012.

Shell’s first disappointment in the Ukrainian gas market turned out to be related to the quality of the metal in the pipes that Ukrainian post-Soviet industry was capable of providing. At the time, company spokesmen claimed, “We have repeatedly stated that we are prepared to use Ukrainian goods, provided that the price and quality can meet that of foreign equipment. 

But at this stage, those pipes do not yet exist in Ukraine. Shell lobbied Ukraine’s Interdepartmental Commission on International Trade to have seamless steel casing pipes and production tubings with an outside diameter of up to 406.4 mm. brought in from Japan. Of course it was impossible to avoid having all this reflected in the final price of the project.

In March of 2014, it became clear that the Belyaevskaya-400 well Shell had drilled in the Pervomaysk district of the Kharkiv region in search of shale gas was not going to return a profit. Not only were there no pipes, there was no gas. “Gas was not found in our district. Exploration work proved that it wasn’t there,” the head of the Pervomaisk district state administration of the Kharkiv region, Viktor Namchuk, admitted on Feb. 28, 2014.

As in many other Eastern European countries, optimistic predictions about the amount of recoverable shale gas turned out to be several times higher than the realistic assessment of the reserves.

Likewise, Ukraine’s neighbors – Lithuania, Bulgaria, and Poland – have also seen shale projects shut down because they turned out to be less than economically viable. By the spring of 2014, Total, Chevron and Eni had also abandoned many shale projects in Eastern Europe for various reasons.

The current heated situation in Ukraine means that politicians in the EU and U.S. cannot announce the suspension of exports from the “shale revolution” in the region, but the business community has already begun to head for the exits.

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