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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