Ukraine is on the verge of signing supply agreements with the European Union this month. However, the ever-present issues of payment and dues between Russia and Ukraine threaten the European gas supply. Previously, a gas war in 2009 between the two countries made it difficult for the EU to receive gas. Currently, Gazprom OAO (MCX:GAZP) (OTCMKTS:OGZPY) was demanding the repayment of overdue gas bills from Ukraine.

Ukraine offers potential for shale gas and oil

However, Ukraine is on to something bigger and is less interested in just being the transporter of Russian gas. The Lublin Basin, which lies under Poland and Ukraine, offers huge potential for shale gas and oil. Analysts claim that this basin could be ten to fifteen times bigger than the U.S. Barnett formation and have a pay zone close to 4,000 feet compared to just 200 to 300 feet for Barnett.

In early 2013, Shell decided to venture into Ukraine and invest in shale gas exploration. “Shell’s contract area covering the Yuzivska field in Kharkiv and Donestsk could contain as much as 4 trillion cubic feet of gas—almost as much as Algeria,” reports Oil Price. Current plans include development of shale gas resources for domestic consumption and exports to Western Europe by 2020.

Investment climate in Ukraine

The potential of this area is mind-boggling and has the international oil companies sitting up and taking notice. Ukraine offers a much friendlier investment climate than Russia. Furthermore, because of the lower population density in the area, horizontal drilling is more feasible than in the rest of Europe.

The Vice Prime Minister of Ukraine, Yuriy Boyko has been moving around the U.S. encouraging firms to invest in this area. Boyko, speaking in Houston, remains steadfast, and the emerging picture is one of a Ukrainian oil and gas industry that has everything it needs for independence forced from shale—except drillers. The drilling and service industry is virtually non-existent as an industry.  There has not been much in the way of new investment in the country because the new technology isn’t making its way to Ukraine. Still, you have a country bursting at the seams with expert engineers and geologists, none of whom have been introduced to Western technology that would catapult exploration and production to new levels. As a result, the focus is on keeping existing production steady – and nothing more, assesses the Oil Price.

Russian gas transportation

With the government support and the promising gas fields, investment in Ukraine seems more lucrative than ever. The government is working on energy related laws to make them even more corporation-friendly. Furthermore, due to Ukraine’s role as a transporter of Russian gas, there is already a strong domestic pipeline network. Furthermore, the country offers a gas price of about USD 12 per mmbtu (million British thermal units), way above the price offered by the U.S. of between USD3.50 and USD 4 per mmbtu.

“Ukrainian gas prices are now high enough to recoup the costs of shale and coal-bed gas development, and there is a local market for this to replace Russian imports, and easy access to European Union markets, not to mention voracious demand,” analyzes Oil Price.

Figure 1: Production of natural gas in Ukraine

Source: Energy Information Administration (EIA)

Ukraine’s proven natural gas reserves stand at 39 trillion cubic feet and rank twenty-forth in the world. Ukraine hopes that with the work in shale area, it can add up to 141 to 177 billion cubic feet of shale gas annually to its network. Ukraine currently produces about 684 billion cubic feet of gas annually.