London (Platts)--30Jan2013/506 am EST/1006 GMT

Ukraine sees the development of its vast shale gas resources as one answer to its dependence on Russian gas imports, and last week's $10 billion agreement with Shell to develop the Yuzivska shale gas reserves in eastern Ukraine is evidence of the pulling power of the country's potential.

Ukraine's energy minister Eduard Stavytskiy has said the project could produce up to 20 billion cubic meters/year of gas within a decade -- just about equal to the country's current imports of Russian gas.

Add to that the other shale gas projects underway in Ukraine -- with the likes of Chevron and Italy's Eni at the helm -- and a move away from Russian dependence seems a distinct possibility.

And there are also other unconventional gas projects being developed in Ukraine -- earlier this week the UK's Hutton Energy said its first well drilled to target tight gas at its block in the Donets Basin in eastern Ukraine had confirmed the presence of hydrocarbons.

But obstacles remain in a country notorious for failing to get new upstream projects off the ground.

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LEGAL CHALLENGES

Legal action is being prepared to challenge the Shell deal, both on technical and environmental grounds.

On January 25, Ukraine's second political party mounted a legal challenge against the approval of the Yuzivska project.

The Front for Change party filed a lawsuit seeking to cancel the January 16 approval by the Donetsk council of the Yuzivska project, arguing that it had not been properly debated within the community and could be corrupt.

"The Donetsk council has violated the rules by making a hasty secret decision to approve the project that has signs of corruption," a Front for Change statement said. "The council deprived the people of access to all the information."

The Front for Change -- part of the biggest opposition group in parliament, jailed Yulia Tymoshenko's Batkivshchyna (Fatherland) party -- is the second major party to oppose the shale gas project after similar concerns were recently raised by Svoboda, the nationalist party.

Svoboda said earlier in the month it would look to challenge the approval of the project by the Kharkiv council, citing corruption and environmental concerns.

The parties, both of which are represented in parliament, pose a growing political challenge to President Viktor Yanukovych and his government, which hopes the Shell project will boost economic growth and improve energy security.

In fact, the stakes couldn't be higher, as illustrated by comments made last week by Ukraine President Yanukovych on signing the agreement with Shell in Davos, Switzerland.

"Now, we have a joint responsibility because we gave birth to a new business," Yanukovych said.

"This project is beneficial because due to these investments we will increase our own output of gas," Yanukovych said. "We will create new jobs, boost the economy and will increase revenue to the budget."

Shell is to work with Nadra Yuzivska, a joint venture in which the state-owned resources company Nadra Ukrayiny owns 90%. SPK-Geoservice, a small private company, owns the remaining 10% in Nadra Yuzivska.

SHELL WORK

Shell is expected to invest $410 million to drill the first 15 wells, Oleh Proskuriakov, the environment and natural resources minister, said earlier in January.

The total area of the Yuzivska field is 7,886 sq km. The deposit could hold 4.05 Tcm of gas, according to the government.

Proskuriakov has also projected output from Yuzivska could hit 10 Bcm/year in 10 years and 20 Bcm/year in 15.

Ukraine's Stavytskiy characterized the latter figure as representing the "optimistic scenario."

"We can project that in an optimistic scenario, the project will produce 20 Bcm/year of gas, while under a pessimistic scenario, 7-8 Bcm/year," Stavytskiy said.

"If we reach the optimistic scenario, this will completely eliminate the deficit of gas that we have and we will move to a surplus," Stavytskiy said.

Adjacent to the Shell block is Hutton's tight gas block in the Donets Basin.

Hutton started drilling the KRA-1 well late last year as part of a new joint venture with Canadian explorer Iskander Energy.

Hutton, a small explorer focused on eastern Europe, was originally awarded the license for the block in January 2010.

"The preliminary results from the first well were encouraging with interpreted pay in three potential intervals," Hutton said.

Hutton said previously it had targeted the region due to its relatively deep coals containing significant tight sand potential, independently estimated at some 1.05 Tcf (30 Bcm).

The new joint venture -- 49% Hutton and 51% Iskander -- will test the tight sands in the Donets Basin.

Once the results of the first two wells are analyzed, decisions will be made about a third well and potentially a pilot production program in 2013, the company said.

--Stuart Elliott, stuart_elliott@platts.com
--Edited by Maurice Geller, maurice_geller@platts.com

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