A New Oil Frontier

Economic News

22 Jul 2010
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Vanco International, a subsidiary of Vanco Energy Company, a private company based in Houston, has signed a landmark agreement to explore offshore hydrocarbon resources in Ukraine. The product sharing agreement, inked officially on October 19, raises Ukraine's profile as an untapped source for oil and hopes to ease imports from Russia, contributing to Kiev's energy security policy.

Vanco received the first green light from the Ukrainian government in April 2006 to draft a production-sharing agreement. The company beat out multinationals ExxonMobil, Shell and Türkiye Petrolleri, as well as Ukrainian state-owned Ukrnafta, in a tender to explore the 3.2m acre field. The landmark deal signals Ukraine's first offshore Black Sea product-sharing agreement.

But Vanco has not just sprung from the starting blocks in its endeavour to enter the Ukrainian market. Vanco experienced several years of delay from a series of uncooperative governments. Since assuming his post as minister of fuel and energy in August 2006, Yuri Boyko has asserted that domestic state-run companies should take the lead in hydrocarbons exploration in Ukraine. In the wake of the January 2006 Russian-Ukrainian gas crisis, both Prime Minister Viktor Yanukovych and President Viktor Yushchenko allowed opaque intermediary energy companies to flourish in spite of outside investors. Lacking the expertise necessary to drill in deepwater areas, energy exploration in the Black Sea was effectively stalled.

Speaking with the Financial Times last year, Gene Van Dyke, Vanco's president and CEO, said "There aren't any drillships operating in the Black Sea now. Drilling in deep water is now horribly tough."

Perhaps because it has the expertise and technical capacity to take on these challenges, Vanco was selected to proceed with the exploration. The company has promised investments of over $100m over the next three years to explore oil and natural gas potential in the 12,900 sq km Prykerchenska Block off the coast of the Crimean peninsula. Over the 30-year agreement period, the company will take on exploration activities in the deepwater area, collecting data from seismic equipment covering initially 3,000 sq km of ocean floor. Operations will begin after March 2008. If oil is struck in the area, over $20bn in additional investments will be required.

"The exploration immaturity makes the [Black Sea] area one of the last exploration frontiers in the world," the company reported. The deal also marks Vanco's first foray into Eurasian territories.

Vanco's presence in Ukraine is bolstered by strong political will in Kiev. President Viktor Yushchenko told local press on October 19 that exploration of the Prykerchenska Block "is a strategic project for Ukraine, and it sets a unique precedent primarily for the creation of a basis of a national energy strategy and, on the other hand, cooperation with leading international investors."

At present, the US Energy Information Agency estimates Ukraine's oil reserves at 395m barrels, while crude imports amount to 97.45m barrels per year, or 267,000 bpd. Vanco representatives estimate that 1bn barrels of oil could be discovered in the Prykerchenska Block. According to the presidential office, Ukraine is poised to benefit from $200bn in revenues during the 30-year production period.

The prospect of a government led by Yulia Tymoshenko, which appears more and more possible after the September 30 parliamentary elections, looks promising for a new energy regime. Tymoshenko has shown consistency in her energy policies and if she is awarded her previous job as prime minister, she is expected to investigate or revoke agreements signed during Yanukovych's tenure. Western energy investors should welcome her appointment. Tymoshenko is more likely to dismantle Gazprom-owned shadowy energy intermediaries operating in Ukraine than to stifle the activities of transparent and trusted foreign firms contributing to energy diversification.

The product-sharing agreement with Vanco arrives in tandem with recent major energy developments in the Black Sea region. On October 10 Azerbaijan, Georgia, Lithuania, Poland, and Ukraine inked an inter-governmental agreement to extend the Odessa-Brody Pipeline to the Baltic port of Gdansk. Under the revamped project, Caspian oil from Baku would fill the existing pipeline, which runs from the Pivdenny terminal in Odessa to western Ukraine. While the project is supported by strong political will in the Central and East European capitals, the proposed oil artery to Europe is dependent on supplies of Caspian crude, with Azerbaijan and Kazakhstan yet to commit.

Although private international energy cooperation seems to be moving apace, Ukraine will remain vulnerable to Moscow's tightening energy policies as a net importer of Russian oil and natural gas and key transit state to Europe. Russia supplies 80% of Ukraine's oil, and even if Vanco were to discover oil in the Prykercheska Block it would add only slightly to Ukraine's total energy mix.

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