Chevron has no plans to end fracking agreement with Ukraine

Last year, Chevron Corp. signed an agreement to bring the fracking revolution to Ukraine, hunting for natural gas trapped in shale rocks near the Polish border. Now the government that signed the agreement is gone, toppled by a popular uprising. And Russia’s abrupt annexation of Crimea has cast doubt on Ukraine’s future.

But Chevron isn’t pulling out. The San Ramon oil company still has employees in Ukraine, although they have not yet begun exploring for gas. And the current administration has every incentive to stick with the agreement. The country depends on Russia for more than 50 percent of its natural gas. And Ukraine also badly needs income, analysts say.

“That’s the best way for (Ukraine) to become financially solvent,” said Amy Myers Jaffe, executive director of energy and sustainability at UC Davis. “It’ll take a while. It doesn’t solve the immediate crisis. But it’s definitely the way forward.”

In fact, Chevron may be in a better position to weather the crisis than other Western oil companies interested in Ukraine. Royal Dutch Shell last year signed an agreement with the government of then-President Viktor Yanukovych to explore a shale formation in eastern Ukraine, an area with a large population of ethnic Russians. Although Russian President Vladimir Putin insists he has no intention of seizing eastern Ukraine, many Western officials don’t believe him.

“Shell is in the east, and there’s a security risk there, but there isn’t a security risk for Chevron,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics who has served as an adviser to the governments of both Russia and Ukraine. “They would not suffer from a Russian incursion. This (area) will be Ukraine no matter what.”

Ukrainian upheaval

In November, Chevron inked a deal to explore and develop western Ukraine’s Olesska shale formation, with Yanukovych himself attending the signing ceremony. If the formation’s potential pans out, Chevron could invest up to $10 billion in the project, Ukrainian officials said at the time.

But Yanukovych was forced from office in February, after months of protests against his decision not to seek closer ties with the European Union culminated in bloodshed. Yanukovych had been under intense pressure from Putin to reject stronger bonds with Europe and align Ukraine with Russia.

At the time of Yanukovich’s ouster, Chevron and the Ukrainian government had been negotiating an operating agreement for the shale development effort, with signing expected in March. The new administration is still pursing that agreement, Chevron spokesman Cameron Van Ast said in an e-mail.

“We are continuing to finalize our joint operating agreement and the government continues to be supportive,” Van Ast said. “We are looking forward to continuing our partnership with Ukraine for the exploration and development of energy resources.”

Talks suspended

Exxon Mobil Corp. suspended talks in March with the Ukrainian government to hunt for oil in the Black Sea, just west of the Crimean peninsula. America’s largest oil company, however, still holds exploration rights in Russian waters east of the peninsula, under an agreement with state-controlled oil company Rosneft.

Ukraine already produces enough conventional natural gas to meet about 38 percent of its own needs, according to the BP Statistical Review of World Energy. But its shale gas reserves are estimated to be the third-largest in Europe. Developing them could help turn the country into a natural gas exporter by 2020, according to some estimates.

“We’re still in the early stages of developing a presence in Ukraine, but as an energy company, we go where the geology leads us, and our geologists are optimistic that Ukraine holds potential,” Van Ast said.

Shale gas could also help break Ukraine’s dependence on Russia, which provides more than half of Ukraine’s natural gas. The energy source has played a pivotal – and, many analysts say, poisonous – role in the post-Soviet relationship between the two countries. Arguments over gas prices led Moscow to halt deliveries twice. Last week, the Russian state-controlled exporter Gazprom announced it was raising Ukraine’s gas prices 80 percent. The company has often been accused of using gas prices as a political weapon.

“Development of energy resources in Ukraine provides the potential for Ukraine to achieve greater energy security, stimulate economic growth and create jobs,” Van Ast said.

Chevron has been exploring shale formations in nearby Poland and Romania. But in both countries, opponents of hydraulic fracturing have tried to block the company’s plans. The oil and gas production process, which has unlocked shale formations across the United States, has been blamed for tainting groundwater supplies. Chevron and other oil companies insist it’s safe.

Despite environmental opposition to fracking, public opinion in Ukraine may be quite different, analysts say. Eager to escape Moscow’s economic grip, Ukrainians may welcome Chevron, Jaffe said.

“They’ll be heroes,” she said. “I think there’s going to be enthusiasm in Ukraine for developing this gas.”

SF Gate