Lukoil is planning to take part in developing the Ukrainian shelf. The subsidiary of the Russian oil company Lukoil Overseas Ukraine B.V. has filed an application for participation in the contest to conclude agreement for the division of products (ADP) of developing the Skif zone (deep-water gas-containing area in the Ukrainian shelf of the Black Sea with the territory of 10,000 sq. m). This was announced on Friday by the Minister of Environment and Natural Resources of Ukraine Eduard Stavytskyi.
The second application for the Skif zone was filed by the alliance consisting of American ExxonMobil, British-Dutch Shell, Austrian Petron and Nadra Ukrainy NCS. In case of victory the operator of the project will be Exxon.
The winner will be determined within a month. The Foros zone (shelf area) was also up for contest but it did not interest the investors. There were no applications filed.
Lukoil says that the company is interested in developing the Ukrainian shelf but did not provide any details. Currently Lukoil has one asset in Ukraine - Odessa oil-refining plant.
According to the conditions of the contest after signing the ADP on both zones the winner shall deposit at least 2.4 billion hryvnias ($300 million) royalty, the minimum volume of investments on both zones during the initial period of geologic exploration shall constitute at least 1.6 billion hryvnias ($200 million).
"It is not clear how it will be formalized, considering that nobody applied for the Foros zone (this asset is much less attractive that the Skif zone)", notes the chairman of the New Energy of Ukraine alliance Valeriy Borovik. "It must be clarified in the nearest future to avoid any variant readings".
Borovik forecasts that in the future investors will become interested in the Foros zone as well. "Now the companies are observing trying to evaluate how transparent and fair the contest will be", the expert explains. "If it will be unbiased and held without violations than investors may go further".
The total investments in the development of the Skif zone are planned around $10-12 billion, the forecasted annual volume of production - 3-4 billion cubic meters of gas. The agreement shall be concluded for 50 years if the parties do not set a different term. Thus, the total stock of the Skif zone is estimated to be 150-200 billion cubic meters.
In accordance with the ADP rules the product is considered to belong to the government until the moment of distribution. The compensating part of production in whose account the contest winner will be compensated for his expenses constitutes 70% of the total production volume. This share will be received by the investor up until the full reimbursement of expenses.
It has not been revealed whether there are conditions regarding the realization of the product but in 2006 when Ukraine tried to hold a contest on the Skif zone the conditions of the tender provided that the investor will sell no less than 20% of the product in the territory of Ukraine until the project compensates itself and no less than 40% after that.
Denis Borisov of Nomos Bank thinks that similar conditions will be set subsequently since Ukraine is interested in keeping the Black Sea gas in the country. "But detailed parameters will be clear only after some certainty occurs with the economics of the project", says the analyst. According to him, Lukoil has experience in shelf works in the Caspian Sea (Korchagin and Filanovskiy deposits) and intends to transfer this experience to the Black Sea, but the level of its geological exploration maturity is much lower than that of the Caspian.
In this regard there is a higher risk not to find the expected deposits, says the expert. Ukraine is trying to diversify the gas supply lowering the dependency on Russia. Kiev has been negotiating with Moscow for several years trying to review the conditions of the gas contracts which the Ukrainian prime-minister Nikolay Azarov called enslaving. As of now the negotiations have not yielded any results and Ukraine is forced to look for other gas sources. Kiev is planning to develop the production from the non-traditional sources, namely shist. Ukraine has invited Shell to develop its shist deposits with investments in the project possibly reaching $600 million.
According to Borisov, the gas produced at the Skif zone may turn out to be cheaper than the Russian one ($425 for 1 cubic meter in the second quarter) with the final price depending on the project parameters and production cost.
But the Skif zone will not have a substantial influence on the situation - Ukraine consumes around 50 billion cubic meters of gas a year.
Borovik notes that Western investors are "definitely preferable for Ukraine than Lukoil. On the one hand you need to expand the base of your foreign partners and the more there are the better. On the other hand - Lukoil carefully listens to the wishes of the Russian government and Ukraine does not want to depend on the political will of the Kremlin".