London (Platts)--16Nov2012/854 am EST/1354 GMT

Ever since the collapse of the Soviet Union and Ukraine's subsequent independence in 1991, Kiev has lived in the energy shadow of its much larger neighbor to the east.

Its dependence on Russia was almost complete, especially in the thorny area of natural gas imports, and the relationship between the two has been fraught for years because of pricing and transit disputes.

Ukraine has pledged its ambitions of energy independence before, but these repeatedly turned out to be empty promises and dismissed by many as rhetoric in its battle with Moscow for cheaper energy.

Now, though, it seems like Ukraine is getting serious about diversifying away from Russia, and maybe Russia will have to take notice this time.

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Kiev's strategy is made up of a number of different elements, which combined could see Ukraine reduce its dependence on Russia to almost zero.

The start of construction on Ukraine's first LNG import terminal is imminent, it has finally -- after years of dilly-dallying -- started a proper drilling campaign in the deepwater of its sector of the gas-rich Black Sea, it has brought in international majors to develop shale gas and it has appealed for gas from countries in the Caspian region and even Germany.

As Ukraine's energy minister Yuriy Boyko put it Friday, quoted by news agency Ukrinform as saying at a conference in Istanbul: "Ukraine has ambitious plans to achieve energy independence in the next decade."

LNG PLANT

The energy ministry said earlier this week that Ukraine is within days of breaking ground on building its much-touted $1 billion LNG terminal on the Black Sea.

Boyko said this week Ukraine was beginning the "practical stage of implementing the important project, which will allow us to diversify supplies of gas to Ukraine."

After construction of the terminal begins, UkrTransGaz, the gas shipping arm of national energy company Naftogaz Ukrayiny, will start building a gas pipeline to link the terminal with the country's massive gas pipeline network.

The gas pipeline will allow the terminal to be connected with the country's gas transportation system as soon as it is completed, Boyko said.

The first stage of the project calls for building a floating regasification and storage facility that is expected to be completed in 2015. The facility will be able to handle imports of 5 billion cubic meters of gas annually, Boyko said.

"This will allow Ukraine to buy 5 Bcm of gas/year at prices that are considerably lower then we pay for imported gas right now," Boyko said.

The second stage of the project will double the capacity to 10 Bcm of gas and is expected to be completed in 2018.

IMPORT DIVERSITY

Ukraine is also seeking to diversify its gas imports. Boyko said Friday that Ukraine could join other countries in Europe looking to bring gas from the Caspian, and Azerbaijan in particular.

"Our partners from Azerbaijan and other countries bring new energy resources to Europe, and we are ready to participate in this process," he said.

And while those imports may be several years away yet, Kiev has already signed up to import gas from the west.

A spokeswoman for Germany's RWE said Friday the company expects to supply a total of 56 million cu m of gas to Naftogaz through November and December, with any further supplies being subject to additional talks.

"We can confirm, that on November 1 RWE Supply and Trading (RWEST) started to supply gas to Naftogaz under a framework agreement signed by the two companies in May," the spokeswoman said.

"The current transaction contract under this framework agreement extends from November 1 to January 1, 2013 and provides for the maximum supply volume of 56 million cu m. That is the concrete transaction that has been agreed until now," she said.

The supplies are shipped via Poland.

The framework agreement envisages that RWE could sell or buy up to 5 Bcm of natural gas and covers a one-year period, but there are no binding agreements on supplies in 2013 for the time being, she told Platts.

DOMESTIC EXPLORATION

Also part of Ukraine's strategy is to boost domestic production.

It has awarded licenses to a host of international companies to drill in the Black Sea where resources are considered vast.

"We are increasing our own production, mainly in the Black Sea region, attracting the latest technology, new drilling rigs, and we will continue this progress," Boyko said in Istanbul.

ChornomorNaftogaz, another Naftogaz subsidiary, last year purchased two oil and gas rigs each costing $400 million to be deployed in the area.

And just this week, Naftogaz said it had selected Keppel FELS of Singapore as the winner of a tender to supply two new semi-submersible floating offshore drilling rigs at a cost of $1.2 billion.

These are scheduled to be delivered by the end of 2014.

Ukraine wants to become the largest producer of gas from the Black Sea by 2015 and has targeted output of at least 3 Bcm/year by then.

Ukraine has also moved fast to bring in international majors to develop its vast shale gas resources.

"The state launched a program for the extraction of shale gas, involving companies from the US and Europe," Boyko said Friday.

Chevron was awarded in May the license for the Olesska block in the western Lviv region, while Shell emerged victorious in an auction for the Yuzivska license. Both blocks are considered as two of Europe?s most prospective shale gas areas.

Ukraine has Europe's fourth-largest shale gas reserves, estimated at 1.2 trillion cubic meters, according to the US Energy Information Administration, trailing Poland, France and Norway.

Shell beat ExxonMobil and TNK-BP with bids for the Yuzivska license, while Chevron's bid was deemed better than Eni's for Olesska.

Ukraine, unlike some of its neighbors, has no strong green movement that could put real pressure on the government over the issue, so Kiev could move to the top of the list of future European shale gas producers.

Only time will tell if Ukraine can achieve its goals of becoming energy-independent. And with talks over gas import price with Russia still stalled, the prospect of new disputes with Moscow will continue to hang over Kiev's head.

--Stuart Elliott, stuart_elliott@platts.com
--Nadia Rodova, nadia_rodova@platts.com
--Alexander Bor, newsdesk@platts.com

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