London (Platts)--18Feb2011/729 am EST/1229 GMT

The rush by international majors to secure unconventional gas acreage in Ukraine is hotting up, with ExxonMobil the latest company to sign up to explore in the gas-rich east of the country.

ExxonMobil signed Wednesday in Houston a memorandum of understanding with Ukraine's state-owned Naftogaz Ukrayiny "to establish a basis for evaluating unconventional hydrocarbon resource potential in areas of Ukraine where Naftogaz holds rights," the company said Friday.

"ExxonMobil has global unconventional hydrocarbon experience and we welcome the cooperation with Naftogaz as it brings local technical and operations expertise with its highly talented workforce," spokesman Patrick McGinn said.

The Ukraine government expanded on the content of the MOU, saying its purpose was to establish "mutually beneficial cooperation between the companies in the analysis of potential reserves of coalbed methane, shale gas, tight gas from rocks and other hydrocarbons at alternative sites in Ukraine."

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Ukraine's energy minister Yuriy Boyko said the agreement would further strengthen the energy security of Ukraine.

"This agreement is another step toward the real energy security, strengthening our country because it involves the cooperation of the leading company in our country -- Naftogaz Ukrayiny -- and the largest company in America -- ExxonMobil," he said.

During his trip to the US, Boyko also met with officials at Chevron, which is also touted to explore for unconventional gas in Ukraine.

Ukraine Prime Minister Mykola Azarov said earlier this month Chevron was ready to make investments in the country if the company could be assured of political stability and that the current taxation structure would not change.

"These are very difficult deposits to develop and we need very large investments," Azarov said.

TAX CHALLENGES

Companies have though balked at starting new projects in Ukraine until the impact of new tax legislation is clarified.

As of January 1 this year, the rate of taxation on oil and gas production has risen substantially, and although a lower rate of corporation tax has been introduced to offset partially the production tax rise, the effect has been damaging to Ukraine's investment climate.

UK-listed JKX Oil and Gas said last month the overall impact of the tax changes would be that its tax rate is now some 50% compared with 30% previously.

Despite the tax changes, Ukraine is still adamant it wants to attract international players to help it develop its oil and gas sector.

According to Ukraine's First Deputy Prime Minister Andrey Kliuyev, gas production in Ukraine can double if all potential projects are realized.

Ukraine lacks the technology needed to access the gas so it is looking to international companies to kick-start the nascent industry.

Boyko highlighted that cooperation with US companies would be the boost Kiev needs to develop its gas shale sector.

"The use of investment and experience of US energy companies, bringing US technical assistance and new technologies in oil and gas sector, would greatly improve energy security not only in Ukraine but also on the European continent as a whole," Boyko said.

The ExxonMobil deal came just a day before the US Secretary of State Hillary Clinton and Ukrainian Foreign Minister Kostyantyn Gryshchenko signed an agreement assigning the US Geological Survey to assess potential energy resources in Ukraine, primarily shale gas reserves.

OTHER EXPLORERS

Other companies interested in investing in Ukraine's unconventional gas sector are Russia's TNK-BP, which has been issued permits to develop coalbed methane, Poland's PKN Orlen and Shell.

Shell said this month it expects to take part in a licensing tender for unconventional gas acreage in Ukraine when and if the tender is launched, as the company renews its interest in upstream projects in the former Soviet Union country.

Shell in October last year suggested to the Ukrainian government a number of areas in Ukraine that it thought should be made available for unconventional gas exploration.

A company spokesman told Platts Ukraine approved the recommendation last month just before the World Economic Forum in Davos, Switzerland.

"This area is to be put up for tender, and depending on a number of certain factors, we will be happy to consider [taking part]," he said.

Ukraine's energy ministry has estimated coal gas reserves in the Donetsk and Luhansk regions alone could be as much as 100 Tcf, while total gas recoverable resources in the eastern Donets Basin could be as high as 400 Tcf.

--Stuart Elliott, stuart_elliott@platts.com