Ukraine Losing in Shell Game

Fighting has picked up near the Russian border again (albeit not to the extent that everybody warned it would). The shelling has cut off the gas to Mariupol and the surrounding area in the southeastern part of the country.

Sadly, that’s not even today’s worst news for Ukraine. That distinction goes to the decision by Royal Dutch Shell to pull out of a huge gas exploration project in eastern Ukraine that held out the promise of billions of dollars of investment. According to Roman Olearchyk at the FT, “insiders said the company’s decision follows heightened geopolitical risk and a sharp plunge in global oil prices, which has made costly shale gas exploration projects less attractive.”

This is just the latest chapter in the tale of the Ukrainian gas boom that wasn’t; it follows a prior decision by Shell to halt work at one shale site, called Yuzivska. The slow death of the Ukraine’s shale gas hopes is a sort of double blow. The economic hit itself is huge. With the country’s industrial capacity crippled because it, too, is centered in the war-torn east, gas looked like the top item on a very short list of hopeful prospects for the Ukrainian economy. If the two cancelled gas exploration projects had really brought in $10 billion dollars each, that would have represented a substantial win for an economy that was only worth about $17o billion before the Maidan revolution. (To use an imperfect analogy: that would be proportional to a $3.354 trillion investment in the U.S., or roughly three times as much as the total amount of U.S. debt held by China.)

The other reason Ukraine hoped for a shale gas boom is strategic. For now, Kiev still buys most of its gas from Russia, and that’s been one of Ukraine’s most onerous strategic liabilities. This presents Kiev with a cruel catch-22: it’s wounded economy desperately needs gas, but the need gas wounds its economy. Regular readers will recall Moscow’s gas ransoming as winter approached this past year. Meanwhile, the economy is continuing to plunge downward, and Kiev has been forced to beg the West for money to hand over to Moscow to keep the gas flowing. And especially in light of Ukraine’s struggles with reform, the West’s patience for this arrangement is wearing thin.

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