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Ukraine signs $10 billion shale gas deal with Chevron

(L-R, front) Chevron Exploration and Production Europe Derek Magness, Ukraine's Energy Minister Eduard Stavytsky, Chairman of the National J
(L-R, front) Chevron Exploration and Production Europe Derek Magness, Ukraine's Energy Minister Eduard Stavytsky, Chairman of the National J

By Pavel Polityuk and Richard Balmforth

KIEV (Reuters) - Ukraine signed a $10 billion shale gas production-sharing agreement with U.S. Chevron on Tuesday, another step in a drive for more energy independence from Russia.

The deal to develop its western Olesska field followed a similar shale gas agreement with Royal Dutch Shell in January and boosts Ukraine's leadership at a time of fraught relations with Moscow over gas supplies.

"The agreements with Shell and Chevron ... will enable us to have full sufficiency in gas by 2020 and, under an optimistic scenario, even enable us to export energy," President Viktor Yanukovich told investors shortly before the signing.

The highest end of expectations for Olesska's potential reserves would match around three years of European Union gas demand, but similarly sunny hopes for shale reserves in neighboring Poland have been very sharply downsized.

Shale development in Europe is far behind the booming U.S. sector and progress is patchy. Chevron pulled out of a shale exploration tender in Lithuania and has suspended work at a Romanian shale well after local protests.

Ukraine Energy Minister Eduart Stavytsky, who signed the deal with Chevron executive Derek Magness, set it in the context of a high price Ukraine pays Russia for its gas.

"This is one more step towards achieving full energy independence for the state. This will bring cheaper gas prices and the sort of just prices which exist (elsewhere) in the world," he said.

Ukraine pays $400 per thousand cubic meters for Russian gas under a 2009 10-year agreement. Kiev has failed to re-negotiate its terms with Moscow.

The agreement with Chevron, to extend for 50 years, foresaw an initial investment of $350 million by the U.S. major in exploratory work over two or three years, Stavytsky said, aimed at establishing the commercial viability of shale reserves in the 5,260 square km (2,000 square miles) Olesska, part of a band of shale which stretches from the Baltic to the Black Sea.

Earlier government figures set total investments, including extraction after exploratory drilling, at around $10 billion.

FRICTION WITH RUSSIA

Stavytsky said the Ukrainian side hoped that exploratory work would yield more detailed information about reserves at Olesska in 2015.

It was expected that Olesska would produce 5 billion cubic meters per year - and possibly as much as 8-10 billion cubic meters, he said.

The deal with Shell, which is at a similar level of investment, is for exploration at Yuzivska in eastern Ukraine.

The two shale projects could provide Ukraine with an additional 11 to 16 billion cubic meters (bcm) of gas in five years' time, according to projections by the Kiev government.

With Ukraine also a transit route for Russian gas to Europe, rows in the past which have led to disruption for European consumers.

The two sides clashed over prices in the winters of 2006 and 2009, with Moscow halting deliveries not only to Ukraine but to the rest of Europe.

With Russia angered over Ukraine's plans to sign a landmark agreement with the European Union which will mark a shift away from Russia's sphere of influence, the issue has flared again.

Late last month, Russia's gas export monopoly Gazprom demanded Ukraine pay a $882 million overdue gas bill urgently.

Stavytsky said on Tuesday that Ukraine had already begun to settle the outstanding bill but gave no details.

Gazprom spokesman Sergei Kupriyanov said his company had recently received $9 million in payments from Naftogaz Ukraine. "It's just a drop in the ocean," he said.

Russian Prime Minister Dmitry Medvedev has since said he sees no reason for Moscow to cut gas supplies to Ukraine over the unpaid bill for now and has played down talk of an imminent "gas war" that might disrupt flows to Europe.

(Additional reporting by Denis Pinchuk in Moscow; Editing by William Hardy)

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