More on shale gas: Ukraine's windfall offers freedom from Russia
Comment of the Day

May 15 2012

Commentary by David Fuller

More on shale gas: Ukraine's windfall offers freedom from Russia

My thanks to a subscriber for this informative article from The Washington Post. Here is the opening:
VIKTOR YANUKOVYCH deserves no reward for his heavy-handed rule as president of Ukraine. His term has brought increasing corruption, a concentration of power in the presidency and show trials of political opponents. The most worrying has been the case of Yulia Tymoshenko, a former prime minister who now languishes in prison on a seven-year sentence.

Yet those concerned about Ukraine's future have some reason for hope about a deal that will give Chevron and Royal Dutch Shell the rights to develop unconventional natural gas fields in the country. The arrangement could lead to $370 million in investment and result in Ukraine producing up to 10 percent of the gas it uses by 2020. If handled well, it could prove more impetus for good behavior than reward for bad.

True, the contract seems to undercut the West's recent approach toward Ukraine, which involves rebuking Mr. Yanukovych's regime following Ms. Tymoshenko's sentencing. The European Union has put wide-ranging trade talks on hold, and there is talk of European leaders boycotting a soccer tournament in Kiev this summer. For now, relations between the Russian government and Mr. Yanukovych are also cool, which, combined with the lure of lucrative future economic ties, gives the West some leverage to push Ukraine back from authoritarianism. The E.U. is right to use that leverage.

What's more, Anders Aslund, an expert on Eastern European economies, warns that Chevron and Shell's natural gas projects could very easily become ensnared in official corruption, benefiting a small circle of oligarchs surrounding Mr. Yanukovych and producing little fuel.

Yet by the same token, the new gas deal provides Ukraine an opportunity to demonstrate that its government can insulate critical economic affairs from that corruption, letting Chevron and Shell conduct their work free from unnecessary hindrance. Bringing Western corporate efficiency into Ukraine's energy sector would also help remove one of the largest long-term obstacles to the country's westernization: Russia. Ukraine's dependence on Russian natural gas has been the primary tool used by Russian President Vladimir Putin to manipulate Kiev. More freedom from Russia would enable Ukraine to chart its own course, including, potentially, liberalization that would allow deepening ties with the European Union. Much will depend on details of the relationship between the government and the companies yet to be spelled out.

David Fuller's view It has long been known that Ukraine and Poland have Europe's largest reserves of shale gas. The country which stands to lose the most from the development of these energy resources, in terms of pricing power for gas and political influence, is Russia.

By offering Chevron and Royal Dutch Shell - the biggest and most experienced players in gas - the rights to develop shale fields in Ukraine clearly indicates that Viktor Yanukovych is determined to exploit this valuable resource. He may be a ruthless authoritarian but shale gas could bring Ukraine closer to the west.

The alternative is to drive Yanukovych closer to Vladimir Putin. The last thing Europe needs, I suggest, is a Russia-Ukraine gas cartel. However, competition between the two suppliers would increase energy supplies for Europe and possibly lower the price.

Back to top