How Will ‘Fracking’ Impact Ukraine’s Choice between Russia and the E.U.?

March 29, 2013
James George Jatras
Deputy Director, AIU

The questions of Ukraine’s energy policy, and of the price Ukraine pays for energy, have always been bound up with broader issues of Ukraine’s relationship with (and energy dependence on) Russia. These in turn influence Kiev’s stark choices with respect to the Russian-led Customs Union (CU) and an Association Agreement and Deep and Comprehensive Free Trade Agreement (AA/DCFTA) with the European Union.

All indications are that Kiev’s dilemma recently has become sharper during this crucial period leading up to the May deadline Ukraine has been given for meeting Brussels’ conditions for the AA/DCFTA. On the other side, Moscow has set its own conditions, suggesting Kiev would have no influence on the CU as only an “observer,” and that in light of Ukraine’s declining importance as a transit country Moscow would consider participation in a gas consortium with Ukraine only if Kiev quits the EU’s Energy Community. As Paul Goble, a prominent American commentator known for his anti-Russian views has put it, Moscow in effect “is demanding that Ukraine break with the West as the price of good relations with the Russian Federation.”

Fracking a ‘game-changer’ for Ukraine?

In this context, the suggestion that shale gas hydraulic fracturing (“fracking”) could be a “game-changer” for Ukraine assumes added importance. As detailed in reports of the January agreement signed by President Viktor Yanukovych with Royal Dutch Shell on the sidelines of the World Economic Forum in Davos, Ukraine is believed to have an estimated 1.2 trillion cubic meters of shale-gas reserves, the third-largest such deposits in Europe. Ukrainian officials say Shell’s investments would likely be around $10 billion but could go as high as $50 billion. In May 2012, Shell and Chevron won tenders for the development of shale gas at the Yuzivska and Olesko fields respectfully. In August 2012, ExxonMobil (main operator), Shell, OMV Petron (Romania) and state-owned Nadra Ukrainy won the tender for production of shale gas on the Skifska oil and gas field on the Black Sea shelf. Shell and ExxonMobil are exploring the development of shale gas reserves in the Lvov and Donetsk basins.

As Ukraine moves forward with plans for shale gas development, the competing claims of advocates hailing expected economic gains and opponents warning of environmental dangers will intensify. Fracking of course is controversial everywhere, both with respect to environmental issues and economic impact. In the United States, the technology has led to a boom in certain areas (notably in North Dakota) and already contributed to a dramatic decrease in gas prices (the lowest in the past 35 years), as well as reduction in some emissions due to displacement of coal use. In other areas, environmental concerns prevail. For example, in New York state (as many people outside the United States may not appreciate, “New York” means not just the city but a state with a larger land area than Greece or Bulgaria) a moratorium in effect since 2008 has farmers watching their neighbors across the line in Pennsylvania collect hefty fees, while they are not permitted to allow fracking on their land. (In the U.S., in contrast to many countries, private landowners own the mineral rights below-ground, ensuring that the wealth generated doesn’t go just to the government and energy companies.) The same drama plays out in Europe, for example with French environmentalists fearing the end of a decade-old fracking ban, with anti-fracking forces still having the upper hand. Even in Ukraine’s neighbor Poland, which had been considered among the most promising areas for use of the technology, there have been setbacks from disappointing initial exploration results and accusations that the government is trying to muzzle critics.

Fracking sharpens Ukraine’s domestic political divide, geopolitical choices

Characteristically, the fracking options for Ukraine have become politically contentious, but in a somewhat unexpected way. As noted by Taras Kuzio, a prominent observer of Ukrainian issues:

“The normally pro-Russian and pro-Yanukovych Communist Party of Ukraine (KPU) and two out of three opposition parties (Svoboda [Freedom] and Batkivshchina [Fatherland]) are opposing the production of shale gas. Prime Minister [Mykola] Azarov said to U.S. Under Secretary of State Wendy Sherman in Kyiv on March 19, ‘Let them explain to you whose interests they protect. On the one hand, they say they are against Russia, on the other hand, in fact, they are the agents of the Russian Federation.’ Meanwhile, the Yanukovych administration – often considered “pro-Russian” in the west – supports what is hoped may be Ukraine’s best bet for lessening its dependence on Moscow.”

[NOTE: Among the Opposition, UDAR has declined to join anti-fracking protests led by Svoboda and Batkivshchina.]

In short, for Ukraine the politics of fracking reflect not only the complex mix of economic and environmental factors found in other countries but the dysfunctional, all-or-nothing attitudes that apply to almost every issue, from the prosecution of Yulia Tymoshenko to parliamentary fistfights triggered by use of the Russian language. For example, even if fracking does fulfill its economic promise, Alexander Motyl, a critic of the Yanukovich government, predicts that “the profoundly corrupt and increasingly authoritarian Yanukovych regime will use the easy money from shale gas to become even more profoundly corrupt and authoritarian, coming to rely even more on the forces of coercion to stay in power. Ukraine’s already uncompetitive economy will become even less competitive, and its population poorer. With growing popular anger at an illegitimate and repressive regime, the potential for a huge popular explosion will rise.”

With Ukraine’s politics as fractured as the rocks subjected to the new technology, we can expect the debate to take the most extreme form, with proponents applauding shale gas as a silver bullet that will transform Ukraine into an energy “superpower” and opponents sounding an alarm of environmental “genocide.” But based on the experience of other countries, there’s a lot of room between the two poles of a “technological Nabucco” or a “chemical Chernobyl.” As Ukraine wrestles with the future of fracking’s potential, it will be necessary to tone down the rhetoric and hear from all the impacted stakeholders, not just from contentious politicians, on all the intertwined issues. These include the magnitude of the resources that can be accessed (and the impact on Ukraine’s gas prices and energy independence), and in turn relations with Russia and Europe, the likely environmental and consumer impact on Ukrainians, and how to make best use of expected revenues.

This will require a full and thorough airing from all viewpoints, including fracking advocates and opponents from industry, environmental, and consumer perspectives, in a constructive and open-minded atmosphere of mutual respect. This would be a tall order in any country, and in Ukraine even taller.