Now, like never before, it is important not to make a mistake

By boosting the production of its own gas, Ukraine will get more freedom in the formation of prices on the domestic market and be able to reduce dependence on the import of Russian gas. HIS CERA experts forecast that Ukraine may substitute imports with its own gas in the next 20 years on condition that sufficient investments are made. The exploitation of the Olesko and Yuzivka deposits alone can produce an estimated 5 to 50 million cu. m. of shale gas every year. The concrete figures will be available only after the prospecting and pilot drilling show their results, but it is obvious that this country has considerable reserves of shale gas.

Developing the gas sector will also allow the state budget to increase its revenues. Searching for the sources to make up the state budget deficit is one of the greatest problems in Ukraine’s economy. Ukraine expects to receive about 6 billion hryvnias as early as this year from the investors that will begin prospecting for gas in the Olesko and Yuzivka areas. If these and other investment projects are successfully carried out, the state will be able to expect an essential boost of budget revenues in the shape of taxes and joint-venture profits.

LACK OF INFORMATION IS THE RESULT OF THE FIRST BIDDING

It is now almost a month since Chevron and Shell were announced to win the right to explore and develop the Olesko and Yuzivka deposits. But Ukraine has not yet made public any exhaustive information about the results of this tender. Governmental officials have only noted that the chosen investors offered a minimal investment amount that exceeds twice the one set by the state and a twice as large share of the state in production sharing. The government is not revealing all the information on the details of the companies’ bids, the winner selection criteria, or the provisions in production sharing agreements (PSA). The practice of hiding information may also nullify the positive fact that well-known international companies took part in the first competition, as well as adversely affect the investment climate.

All the parties to this process would wish the government to show more transparency. On the one hand, the losing bidders (ENI, Exxon Mobil, and TNK-BP) obviously would like to make sure that the government made a fair decision and the two winning companies have really offered the best conditions as to the investment amount and the state’s share in production sharing. Should the government go on hiding this information, the companies may suspect foul play and lose interest in the future biddings. Ukraine has already invited bids for other projects, including the development of the Foros and Scythia areas of the Black Sea shelf.

If the interests of investors or communities are ignored, this will gravely endanger the next shale gas biddings. Ukraine cannot afford to allow another high-profile international scandal similar to the one around the company Vanco, when both parties in fact lost the legal battle. The government should guarantee a balance of all interests by way of transparent and fair tenders and agreements as well as through a wise energy policy.

BEING MORE “ROYAL” THAN THE KING

Without an exaggeration, Ukraine should become a model for the entire world, as far as attracting investments in shale gas production is concerned. In spite of being obviously interested in Ukraine, investors will not be vying for access to Ukraine’s mineral resources, as they would be doing for the richer resources of, say, Kazakhstan or Russia. Ukraine should apply the best experience of public-private partnership in the energy sector even if neither the investors nor the international commitments demand this. In other words, Ukraine should reach the level of Norway, the recognized leader in establishing transparent relations between the state and business in the extractive industry. Ukraine must get rid of the negative image it acquired during the privatization of large facilities.

Model competitions call for a minimal discrimination of the potential bidders. The illustration of this is the success of a transparent approach to the repeated sale of the Kryvorizhstal steel mill. At the same time, the very fact of a facility being re-privatized also illustrates the danger that a discriminatory tender may represent to its participants. If possible, Ukraine should heed the potential investors’ advice about the way bids are to be invited. For example, the government failed to take into account most of the proposals of four out of the five companies that competed for the Olesko and Yuzivka fields, which particularly asked the government to revise the conditions of partnership with state-run companies (Nadra Ukrainy and SPK-GeoService), as they considered these conditions potentially disadvantageous.

The agreement on production sharing between the government and the companies should include clear-cut commitment of the parties and be made public. The gas deal with Gazprom is a good illustration of the danger of concluding an opaque agreement. Transparency is also an important precondition for assessing the fairness of provisions. The government must make public the information about the tax load on the investor, his social commitments, requirements about employing local labor or equipment, and requirements about environmental protection, especially if these requirements are not duly set out by the country’s current legislation. This will allow the public to monitor the two sides’ observation of the commitments they have taken.

What will guarantee the predictability of Ukraine’s energy policy towards business is observation of the Energy Community Treaty by Ukraine. Under the treaty, Kyiv must implement a number of main European energy directives. For example, Ukraine must liberalize the gas market in compliance with the EU Third Energy Package, which is supposed to boost competition on the market because gas consumers will be able to choose between different suppliers, while gas suppliers will get free access to the gas grid and, eventually, to consumers.

Ildar Gazizullin is a senior economist at the International Center of Long-Term Studies