NEW YORK (The Deal) -- Chevron (CVX - Get Report) will next week commit as much as $10 billion to a Ukrainian shale gas exploration and production project, matching the previous record for investment in the European shale gas sector, a Ukrainian government minister said Wednesday.
Under the terms of a production sharing agreement, Chevron Ukraine BV will agree to invest an initial $350 million to fund exploratory drilling, with the remainder of the investment dependent on the results from the test wells.
The Ukrainian unit of San Ramon, Calif.-based Chevron will share the project with Ukraine state-owned Nadra Oleska Ltd., with revenue also due to accrue directly to the Ukrainian state. The agreement includes a 50-year lease on sites in the Oleska region of western Ukraine, considered to be one of the most promising shale gas regions in Europe.
"The government has approved the draft agreement, which will be signed ... on November 5, in Kiev," Ecology Minister Oleg Proskuryakov was quoted saying by Russian news agency Interfax.
The project is expected to produce between 2.7 billion and 11 billion cubic meters of gas a year when it reaches peak production in about 2030. Commercial extraction is expected to commence in about 2019.
The agreement mirrors a January deal between Ukraine and Royal Dutch Shell. Shell also agreed to invest as much as $10 billion, though its agreement relates to the vast Yuzivska field in eastern Ukraine.
Chevron's agreement will be the latest in a series of investments by large energy companies in European shale gas, where exploration has often been led by smaller independent operators. Earlier this month France's No. 2 energy company, GDF Suez SA, agreed to pay as much as $29 million for a 25% stake in 13 U.K. shale gas license owned by Dart Energy Ltd. In June Centrica plc, which owns British Gas, paid 40 million U.K. pounds ($65 million) for a 25% stake in a single U.K. license owned by Cuadrilla Resources Ltd.
Ukraine is thought to have Europe's third largest reserve behind Poland and France, where shale gas production is banned.
Ukraine's uneasy dependence on Russian gas, and friction with its neighbor caused by Kiev's desire to integrate more closely with the European Union, means the government is among Europe's most pro-shale gas administrations. Russia's OAO Gazprom earlier this week accused Ukraine of failing to settle an $882 million bill for August gas deliveries, raising fears that Moscow could cut gas supplies to Ukraine as it did in 2006 and 2009.
Chevron spokespeople did not respond to requests for comment.
Written by Paul Whitfield