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What the Loss of Crimea Means for Ukrainian Energy

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Energy expert Robert Bensh discusses how Ukraine can maximize its shale development and partner with Turkey to bring LNG through the Bosphorus Strait.

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Ukraine's Crimean Peninsula is now Russia's. It was done with an impressively organized, nonviolent military operation and supported by the foregone conclusion of a referendum on independence from Ukraine. One Ukrainian soldier was reportedly killed on March 18 after Russian President Vladimir Putin signed the treaty to annex Crimea, and troops moved to take over a Ukrainian military facility in Simferopol. The US has imposed largely symbolic sanctions on Russian officials who have no American assets to freeze and would be fine giving up their trips to the US, but the game is over.

Ukrainian troops have been ordered to disengage entirely, and Russia will keep its tanks from rolling into Eastern Ukraine. We'll hear a lot of rhetoric for the next six months before Crimea is forgotten. From an energy perspective, Crimea isn't a major loss for Ukraine; now it's up to the new government to get real shale development in motion, and for Turkey to face up to its own strategic realities and join forces with Ukraine to harness LNG potential, according to Ukraine energy expert Robert Bensh.

Bensh is an energy and energy security expert who has led oil and gas companies in Ukraine for more than 13 years and served as an adviser to former Energy Minister and former Vice Prime Minister Yuriy Boyko on issues of Western capital markets and political systems.

In an exclusive interview with Oilprice.com from Kiev, Bensh discusses what Ukraine is losing from an energy perspective, why a lot rests on Ukraine's next move on shale, and why Turkey should be watching very closely.

James Stafford: Now that Russia has annexed Crimea, are there fears that it won't stop there and that we could see Russian tanks entering Eastern Ukraine?

Robert Bensh: The reality is that this game is over. Crimea is Russia's, and everyone's let it go. Ukrainian troops are actively disengaging with Russian troops, even with Russian speakers in general. They will not engage, and in return, Russia will not attempt to move further into Ukraine.

If Russia rolls into Eastern Ukraine -- even if they don't kill anyone -- we know that Poland, Romania, possibly Hungary, possibly Slovakia, and definitely the Baltic states will invoke Article 5 of the NATO agreement. And when that happens, General Martin Dempsey, chairman of the US Joint Chiefs of Staff, has already stated that if NATO were called in, the US would stand behind it and support it militarily. The rhetoric has been pretty high, but it's just that -- rhetoric.

Stafford: So the game is over and Crimea is gone. What does this mean for Ukraine from an energy perspective?

Bensh: With Crimea, Ukraine loses some prospective offshore oil and gas territory in the Black Sea, but it doesn't lose any shale. All the shale is in Ukraine's east and west.

But things are going to get tricky now. One of the bigger developments is likely to be the Russian nationalization of Chornomornaftogaz, Ukraine's state-run gas company in Crimea. This, in turn, would impact ExxonMobil's (NYSE:XOM) proposed agreement for offshore Black Sea exploration. Exxon never signed the agreement because the Maidan protest movement was blowing up and [it] didn't want to give anything to [now ousted] Ukrainian President Viktor Yanukovych, and rightfully so. But what happens next with that potential deal is up in the air.

Interestingly, I think we still have Ukrainian gas prices effective in Crimea, but they would fall under Russian law. This is all completely new territory. This isn't Africa, where something like this is par for the course. High-level government officials here have not been through this before, so it's a very unique, unwanted challenge. It's upsettingly interesting.

Stafford: What does this mean for Ukraine's pipeline system?

Bensh: Ukraine's pipeline system would continue to belong to Ukraine unless Russia took over all of Ukraine. To get control of the pipeline system, you have to roll up to the Ukrainian borders, side to side. And it's hard for me to believe that NATO wouldn't react to something like that. It's hard for me to believe that NATO wouldn't respond to Russia taking over the Donbass, Ukraine's heavy industry heartland.
The Russian annexation of Crimea isn't going to have a major effect on pipeline gas on either side. Gazprom executives aren't exactly losing sleep over what could add up to the gain of Crimea and the loss of Ukraine. Russia already ships almost half of its gas to Europe via pipelines that bypass Ukraine, and in 2015, if Gazprom's South Stream pipeline comes online as planned, it will be shipping a lot more gas to Europe without Ukraine.

Stafford: How critical, then, will Ukraine's development of its shale assets be to forging energy independence, and what needs to happen next?

Bensh: We could see some positive developments courtesy of the Russian maneuvering. There may be more impetus to invest in Ukraine's shale development once the dust settles on the Crimea debacle. We'll hear a lot of rhetoric for the next six months or so, but then the Crimea incident will be largely forgotten.

Ukraine is a great place to operate, and now it will be more transparent, so the sector should be opened up to more investment, which will happen as energy independence assumes a higher priority on the government's agenda. The country has 14 per Mcf gas prices, which is very attractive. But Ukraine has to take the first step -- and there's a lot to do.

Clearly, Ukraine cannot be happy with the progress made by Shell (NYSE:RDS.A) and Chevron (NYSE:CVS) in the shale development process. The process has been open and transparent, but only on two enormous blocks. To truly get shale development in the country, Ukraine needs to auction off multiple blocks of shale acreage, and the best way to do that would not be through a data-room process in Kiev, but in Houston or Denver, where a majority of the shale industry is located. Ukraine needs about 15 to 20 oil and gas companies developing shale, not just Shell and Chevron.

Stafford: What are the prospects for getting liquefied natural gas (LNG) to Ukraine?

Bensh: If you can get it through the Turkish-controlled Bosphorus Strait, you would have an endless supply of LNG going to Ukraine. The US now is pushing very hard to open up new LNG facilities in the US to get US shale gas/LNG shipped to Ukraine -- but that won't happen for five years, if it happens at all. Ukraine can't wait for that.

But the moment you have access to the Bosphorus, you have LNG delivery in Ukraine approximately a year after that. There has been a lot of conversation between the Ukrainian and Turkish governments. It's all rhetoric on both sides, from my point of view. Until the Turks are shown that LNG is a safe commodity to pass through the Bosphorus (which it is), until they're shown undeniably from a third party -- that's when they will sign off.

LNG is safe, and we have a study to show that. At present, LPG (liquid petroleum gas) passes through the Bosphorus, and LPG is significantly more dangerous. From an environmental standpoint, oil is significantly more dangerous than gas. Let's not forget that naval warships also pass through the Bosphorus, which is by far the most dangerous thing that is ever going to pass through this strait.

One thing the study shows is that LNG passes through the Houston ship channel, Rotterdam port, Chesapeake Bay, ports of New Jersey -- all without incident. I'm very respectful of those who are wary of LNG passing through the Bosphorus, but this fear isn't based on fact. It's based on what they believe, and we have facts that prove otherwise; at that point, we would hope that the larger potential here for all involved would outweigh these erroneous beliefs.

Stafford: How would Ukraine receive gas coming through the Bosphorus?

Bensh: Given that Crimea no longer exists -- at least from a Ukrainian perspective -- an FSRU (floating storage and regasification unit) would sit off the coast of Odessa, most likely, or around that region, which would still remain in the Ukrainian Black Sea. That's where you would gasify the LNG and put it into the Ukrainian pipeline system.

Stafford: Does Ukraine have this capability yet?

Bensh: Ukraine already has an FSRU, for all intents and purposes. The only thing we're waiting on is access to the Turkish-controlled Bosphorus. At that moment, Ukraine purchases the FSRU and then we're only about a year away from LNG gas sales. It's that close. This was all done under former Energy Minister and former Vice Prime Minister Yuriy Boyko. The only thing Boyko was missing was access to the Bosphorus. The barge is ready. The facility exists and is waiting to be purchased from a Houston-based company. There are traders with LNG just waiting for an order.

Stafford: Should Turkey be taking notes here on what's happening in Ukraine with Russia?

Bensh: Ultimately, I think Turkey has to look at Ukraine and realize that it is in the same strategic position with regard to energy independence. Turkey should be using Ukraine as a very real example as to why it needs energy independence. It should focus on crude oil from Iraqi Kurdistan, development of Turkish shale assets, a complete breakup of the state-run oil company, TPAO, and transshipment of LNG through the Bosphorus.

Stafford: You've talked before about the possibility of Russia's actions actually facilitating Ukraine's move toward signing a trade agreement with the European Union. Is there any room for more optimism over this, and possibly other internal political matters for Ukraine?

Bensh: Yes. Russia's actions have given Ukraine significant resolve to sign the trade agreement with Europe. Prior to Russia's occupation of Ukraine, there were a lot of Ukrainians in government and business who were willing to sit on the fence -- or even gear themselves more toward Russia, with whom they felt more comfortable, especially in eastern Ukraine. However, the violation of Ukraine's sovereignty, the threat of recession, and the complete halt of work being done in the country has pushed even the most cynical businessperson or politician toward signing an association agreement.

I don't meet many Ukrainians who think Ukraine should be part of NATO, but that could change with the annexation of Crimea. The Maidan protest movement was effective in giving the public a voice toward removing what they believed to be a corrupt and unjust government. What's happening now is that the Russian move is further escalating Ukrainian patriotism. Indeed, it is creating fervent Ukrainian patriotism. I've been here for some 15 years, and I've never seen anything like it. I've never seen the country so united before. For me, this seems to be the birth of a new Ukrainian nation at this point.

I've never seen so many 22- to 40-year-olds completely charged and excited about their country and wanting to be a part of their government. I'm an American -- we're extremely patriotic. Canadians are patriotic, Russians are patriotic. Ukrainians weren't, and I've never seen Ukrainian patriotism higher than right now. As a visitor to this country, I find it quite heartening.

Stafford: How would you measure the Obama administration's response to this crisis?

Bensh: Well, I'm not a politician. I'm a businessman on the ground. For 14 years, I've been very critical of how the US has handled relations with Ukraine. We've had good ambassadors here, some better than others. While I think the US was slow to respond to the Maidan protest movement, and at points in time didn't approve of how the administration was handling the situation in Maidan, I am exceedingly proud of this current US ambassador, Geoffrey Pyatt, and how he's handling himself. Even the Ukrainians on both sides of the fence respect him, which is really hard.

I believe that Obama has been quite measured in his response. Maybe not the way I would have responded, but I'm very proud of how my country is dealing with the situation. I think we all have to recognize that Putin is a very unique world leader. Even other world leaders, such as German Chancellor Angela Merkel, are having a hard time discussing this current situation with Putin. I respect that.

This article was written by James Stafford of Oilprice.com.
No positions in stocks mentioned.
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