This year the issue of the use of alternative energy sources in Ukraine has become highly popular. This past summer Naftogas Ukrainy commissioned the U.S. consulting company IHS CERA, which specializes in expert assessments and making recommendations to governments and private companies, to conduct an independent expert assessment of the state of Ukraine’s gas market.
The winner of the Pulitzer Prize and United States Energy Award for Lifetime Achievements in the Energy Sector and Fostering International Mutual Understanding, HIS Executive Vice President and HIS CERA Chairman of the Board Daniel Yergin told in an exclusive interview to “k:” about Ukraine’s prospects in terms of the production of alternative fuel
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KW: The Ukrainian government is actively involved in attracting investments into the production of shale gas and coal bed methane. What are the prospects of this sector in your opinion?
D.Y.: The Ukrainian government is clearly striving to ensure the attractiveness of legislative and commercial conditions in the country. In fact, this is the main issue in the Dialog on Ukraine’s Policy with respect to gas, which HIS CERA is participating in. Nevertheless, compared with other countries in the region Ukraine is at the early stage of assessing its potential reserves of shale gas and coal bed methane. Therefore, at this point it is too early to make assumptions about the results of such activity. Regardless of what Ukrainian natural gas reserves are, the country will still benefit from closer integration on the energy map of Eurasia and more effective use of energy.
KW: Based on different assessments, Ukraine’s reserves of non-conventional gas could be anywhere from one to several dozen trillion cubic meters. What is your assessment of alternative fuel reserves on the territory of Ukraine?
D.Y.: The analysis conducted by HIS CERA shows that Ukraine could have quite substantial reserves of alternative fuel. However, just as the quality of such reserves, this fact has not been established. The main questions that must be answered are: what are the potential volumes of production of such reserves and what is the cost? The experience of shale gas exploration in the U.S. points to the necessity of caution. It clearly shows that believing there are substantial resources without conducting a thorough inspection of this fact would have been a grave mistake. However, just as in the rest of the world, Ukraine needs to stimulate risky investments in determining potential reserves of alternative fuels.
KW: What are the most effective measures based on the experience of other countries that you would recommend Ukraine to take in order to stimulate the exploration of non-conventional gas?
D.Y.: Every country will find its own path taking into account geological, legislative and commercial conditions, as well as the internal industry structure. No country has been compared with the U.S. in terms of scale and the rate of production, though one can always learn some lessons from the experience of the U.S. First of all, exploration can be conducted much faster if the rights for such activity are privately owned and not leased by the government, because ownership rights allow investors to keep their profits if such a risky business becomes successful. Secondly, unregulated gas markets allowed prices to send out a signal of the forthcoming gas shortage and mobilize risky capital investments in exploration of new reserves.
KW: Ukraine and Russia are in talks on changing of the price of Russian gas supplied to Ukraine. How do you assess the measures taken by Ukraine to resolve this situation?
D.Y.: Diversification of supply sources, ways of transportation, markets and types of fuel are important constituents of the issue of energy security in any country. One must understand that it takes several decades to find new points of equilibrium. After all, the law of great expectations applies perfectly well to the energy sector. Amazingly enough, Ukraine and Russia both realize the importance of improving energy efficiency, particularly in heavy industry that was inherited from the Soviet planned economy. Indeed, the efficiency of energy consumption is the key issue for all markets and countries of the former Soviet Union have achieved great success over the past two decades, though there is lots of room for improvement.
KW: What are the prospects of attracting domestic and foreign investors to the exploration and production of non-conventional fuels?
D.Y.: Capital is usually drawn to the most attractive investment projects and the choice of such projects competing for investors is quite broad. Domestic investors may face a choice between different sectors of Ukraine’s economy, while foreign investors usually choose between different countries and regions. Ukraine has great potential to attract investments if it helps create internationally competitive conditions.
Among such conditions are the possibility of financial gains depending on the volumes and prices of produced gas, confidence in legal ownership rights and system of regulating bodies, the pace of potential investments (which is influenced by the effectiveness of the regulatory process) and the effectiveness of the decision making process.
Leaders of countries sometimes forget that in order to succeed in the exploration of non-conventional energy resources they must allow investors in. The experience of the U.S. shows that the first investors earned the highest profits from their risky capital investments. As the old saying goes, “No risk, no return”. The change of conditions in new lease agreements and the reduction of prices of natural gas due to a sharp increase om supply led to a decrease in the gains from future investments. Nonetheless, the drop in the prices of fuel, just like jobs guaranteed by the exploration of alternative fuel reserves became an important stimulus to the recovery of the U.S. economy. Evidently, the Ukrainian government is making huge and most likely unprecedented efforts to find an appropriate method of working with investors in the oil and gas sector and this is clearly reflected in the Dialog on Policy Issues of Ukraine.
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