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Energy Insecurity
Can Ukraine Salvage Its Shale Hopes?

Natural gas has been at center of Ukraine’s fractious relationship with Russia these recent years, and it’s had to contend with price gouging, take-or-pay contracts, and even mid-winter shut-offs from its eastern supplier Gazprom. But Ukraine sits on its own bountiful gas reserves, many of which continue to lie untapped. Late last year Chevron announced it was pulling out of a previously agreed-upon $10 billion shale gas exploration project, and this June Royal Dutch Shell followed suit. So what happened?

Obviously the conflict with Russia is factoring in to these decisions to abandon Ukraine’s shale plays, which count among Europe’s most promising. Then too plunging crude prices have oil companies abandoning experimental and potentially high-cost projects in an attempt to stop the bleeding. But Kiev has had a hand in pushing companies out too, as the FT reports. In order to increase revenue the country’s government last year decided to raise “the subsoil use tax, or royalty, on gas production to a crippling 55 per cent for wells up to 5km deep, and 28 per cent for those that are deeper.” As the story points out, these taxes are usually somewhere between ten and 20 percent throughout the world.

Gouging foreign companies is a very good way to discourage investment, and Ukraine desperately needs to attract the interest of companies like Shell and Chevron. The good news is that the country’s finance minister seems to be acknowledging that need with her proposal to nearly halve the royalty rates on gas drilling. But the Ukrainian government also intends to levy an extra 30 percent tax on all profits from these wells, though discussions are underway about potentially postponing that decision.

On the whole, then, Kiev appears to be taking something like two steps forward and one step back in its bid to lure oil companies to return to its sizable shale reserves—but at least that’s progress. The conflict with Russia highlights just how important energy security is to the eastern European nation, and boosting domestic production is about the best way for the country to strengthen its position there.

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  • Jacksonian_Libertarian

    “Late last year Chevron announced it was pulling out of a previously agreed-upon $10 billion shale gas exploration project, and this June Royal Dutch Shell followed suit.”

    Chevron and Shell are NOT cutting edge Shale Oil Developers. They aren’t even in the top 10 in America, and so they likely have none of the proprietary knowledge and skills needed to develop shale oil. It looks to me like these companies and some other Big Oil companies have been running a scam on Eastern European countries and elsewhere. Probably using bribes to get government contracts to investigate and search for oil, with no intention of ever developing any shale deposits, just making a quick profit on gullible and corrupt countries.

    You get More of what you Pay for, and Less of what you Tax. With this in mind, we can see that nations like Ukraine which put outrageous taxes on specific industries, are NOT going to see any development in those industries. Why develop in the Ukraine with their insane taxes, when you can develop in the US, with just normal business taxes, and its fully developed pipeline and transportation infrastructure?

    You will notice that none of the basically unknown American Shale Oil Developers are looking to expand into Eastern Europe, Mexico, or China. These companies with the proprietary skills and knowledge developed over the last decade, don’t see any opportunities outside the US. These are small fast moving entrepreneurial companies, who are living extremely close to the “Feedback of Competition”. They will jump on any opportunity and they are all giving foreign countries the cold shoulder. In America they purchase the mineral rights from private parties, this is almost unknown in the rest of the world. This means anything they develop is theirs and the Government Monopoly and corrupt Politicians aren’t adding to their cost of doing business.

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