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What Putin's Chess Game Means for Energy in Europe

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Ukraine recently signed a deal where Russia agreed to purchase $15 billion in Ukrainian debt and lower the price of natural gas by one third. Under the terms of the new deal, Gazprom (NASDAQOTH: OGZPY  ) , Russia's national natural gas champion, agreed to provide natural gas for $268.50 per thousand cubic meters versus the previous $400 per thousand cubic meters. 

While the deal comes with no strings attached, the bailout ensures Russia's continued influence over Ukraine. It delays the dream of a unified European continent. 

The saber-rattling before the deal may also give more incentive for Ukraine and Eastern European countries to aggressively develop their shale resources. 

The shale advantage
According to the Energy Information Agency, Ukraine has around 39 trillion cubic feet of proven natural gas, or about 20 years of Ukraine's current natural gas consumption of  2 trillion cubic feet per year. 

Developing domestic shale resources will give Ukraine more energy security. Because it is selling Ukraine natural gas at below-market prices, Russia has enormous leverage over Ukraine. If Ukraine does anything that Putin doesn't like, Russia can charge the market price for its natural gas and cause great domestic instability for Ukraine. Having domestic energy sources buys Ukraine greater independence.

Also, if it develops its domestic shale gas resources, Ukraine can earn royalties from drilling and pay down its considerable debt. Drilling for natural gas and building the necessary infrastructure to transport it to consumption centers also creates jobs and generates revenues for government.

Companies that will benefit
Several multinational super-majors have recently signed deals with Ukraine.

Royal Dutch Shell (NYSE: RDS-B  ) recently signed a 50-year deal to develop the Yuzivska field in Kharkiv and Donestsk regions of Ukraine.  

The project could potentially produce between 8 and 11 billion cubic meters of gas a year, or around 20% of Ukraine's consumption. 

Chevron (NYSE: CVX  ) has also signed a 50-year deal to explore the Oleska Block. Under the terms of the deal, Chevron will initially spend at least $350 million in the exploratory stage and may spend up to $10 billion total.

The bottom line
Drilling wells is no guarantee of success. In many parts of Europe, natural gas and oil is located in hard-to-extract geological formations.

In 2012, ExxonMobil explored part of Poland and gave up after drilling just two wells. Marathon Oil and Talisman also withdrew from Poland after having no luck.

The initial difficulty does not mean that Europe will not develop its shale resources. While many Western European countries remain adamantly opposed to shale development due to environmental and pollution concerns, Eastern European countries such as Ukraine, Poland, and Romania are eagerly adopting it. Experts estimate that Europe is just 5 to 10 years behind United States in shale gas development. 

The U.S. has benefited greatly from the fracking revolution. Since 2007, U.S. emissions have fallen 13%.

The unconventional oil revolution supports 1.7 million jobs. 

Many U.S. refiners and chemical producers now have a competitive advantage over global competition due to lower domestic natural gas prices. Half a decade ago, everyone expected the U.S. to import a large amount of LNG. Because of the fracking revolution, the U.S. is now considering exporting LNG in the future. 

Europe has a great deal of shale gas but has been hesitant to pursue it. With Russia playing geopolitical chess, Europe is now more inclined to develop its domestic shale resources. This can only benefit international companies such as Royal Dutch Shell and Chevron. 

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Jay Yao

Jay is an energy and materials writer. He reports on oil and gas fundamentals and macro trends in the industry.

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