Speeches and Interviews
Remarks by Ambassador John Tefft at the Unconventional Gas Workshop in Lviv, Ukraine
November 3, 2011
It is a pleasure to be here today.
A question on many minds might be: what does the U.S. Ambassador have to do with shale gas exploration in Western Ukraine?
Our interest goes beyond supporting Chevron or other U.S companies involved in oil and gas. The United States is fundamentally committed to helping Ukraine achieve energy security and sovereignty. We want to see an open, transparent energy sector develop, one that provides jobs and energy to the people of Ukraine. And we think shale gas exploration, done properly with the right regulatory framework, the right environmental protections, and a competitive tender process could be an important part of Ukraine’s path to energy security.
I’m here today because I think it’s important that people in Western Ukraine, where actual drilling and development will take place, have an opportunity to understand what’s involved with shale gas exploration. Regardless of the legal and business decisions made at the national level, you are the people who will be living and working alongside these projects. I appreciate Chevron’s willingness to create a forum where everyone -- government officials, private business, civil society, environmental NGOs – can discuss what this could mean for your communities and region.
Shale gas has changed the game in terms of energy security in the United States and may have the same effect in Ukraine. Preliminary data shows that Ukraine may have heavy deposits of shale in the Oleska basin here in the West. Poland has already made great steps towards developing this resource and the United States would like to see Ukraine develop its shale gas potential in a way that maximizes benefits for everyone.
This workshop is an important step towards bringing together all the groups who will be involved with developing shale gas here in the west and is an opportunity to build relationships and trust and think strategically about the best way to develop this new resource.
I’d like to say a few words about the current energy situation in Ukraine, steps that we think the Ukrainian government needs to take to move along the right path and share with you what the United States is doing to support Ukraine’s energy independence.
Where we are today:
Ukraine is one of the least energy efficient countries in the world. Ukraine uses energy three times less efficiently than the EU average, and consumes 50 to 60% more gas than it should. This is not economically sustainable and it narrows Ukraine’s economic options. It also makes the country heavily dependent on imports of energy resources, which is a challenge to the country’s sovereignty.
This means that there is a long road ahead before Ukraine has the kind of energy security its people and leaders want.
This summer, the government took important steps by amending the tax code and the Production Sharing Agreement (PSA) law to include stability clause language. Harmonized stability clauses in the Tax Code and PSA are indispensable for large scale energy projects. These projects require huge investments over long periods of time, so investors must have legislative assurance that the deals they made will be honored throughout the life of the project.
However, much remains to be done.
The Ukrainian government needs to take even more steps to develop the energy sector in a way that benefits the entire country.
Most importantly for shale gas exploration in the west, the government should facilitate an open and transparent tender process for awarding blocks for exploration. This will allow national and local governments to get the highest possible price for using their resources. At a time when the state budget is severely in need of revenue, Ukraine cannot afford to allow its resources to be sold for less than top value. A critical element of this is ensuring that the integrity of PSA-nominated blocks is preserved during the entire period of tender preparation and execution.
The Government must quickly develop the legal and environmental regulatory framework that would ensure that best practices and lessons learned for shale gas are included in Ukraine’s shale gas program. The U.S. is actively involved in this process, and I will address that in a minute.
Many have concerns about the environmental impact of shale gas, and those concerns are real. Shale gas is a new technology.
In its early days in the U.S., there were times when companies got ahead of the regulatory framework. We’ve learned a lot since then about how to do this right. We want to make sure that you have a chance to benefit from our learning curve.
An important part of that is working with experienced and reputable companies, and the best way to ensure that goes back to my first point: facilitating an open and transparent tender process.
There are other steps the government could take towards energy security. It could
- Modernize the GTS (Gas Transit System): We have and will continue to encourage the Ukrainian government to make the most of EBRD/World Bank/EU offers to assist in the modernization of the Gas Transit System, which would encourage investment in the energy sector.
- Unbundle Naftohaz: The GOU has pledged to undertake gas sector reform as a condition of its IMF program. It is time for the government to make good on this pledge and separate this company into its transit, market and production functions. This will create a more transparent environment within the state-owned company, and is also in line with the EU gas and electricity directives. Pricing reform to ensure that consumers pay the full cost of what they consume is also important. Without that vital signal, Ukrainians that do not have to pay full price for what they use will not see the value in improving energy efficiency.
- Improve the general business climate through legal and regulatory reform. Our business community tells us that much remains to be done to make Ukraine more attractive to investors, including increased transparency, greater rule of law, and serious action against corruption.
What the U.S. is doing to support Ukraine:
Our chief area of cooperation and support, and what brings me here today is the U.S. Ukraine Unconventional Gas MOU signed in February. This memorandum, which falls under the larger umbrella of the U.S.-Ukraine Strategic Partnership Commission, provides a framework for mutual cooperation between our two governments in the exchange of knowledge and expertise on unconventional gas resources characterization and assessment.
The U.S., in a spirit of cooperation with the Ukrainian government, is bringing expertise to the agreement in two parts.
U.S. Geological Survey: The Department of State is funding a USGS assessment on Ukraine’s unconventional gas resource potential. USGS is cooperating with the State Geological Survey of Ukraine on geological mapping of basins which are believed to have the potential for shale gas resources.
USGS measurements are considered to be among the most accurate in the world. Energy companies will be able to more confidently make investment decisions with the most accurate data available in hand. But to benefit from this cooperation we need a few more steps from our Ukrainian government partners.
The GOU must lift current restrictions on sharing of data that would assist USGS assessment of shale potential. Without this data, international oil companies will find it difficult to make investment decisions
USAID is working with the Ministry of Ecology and Natural Resources to develop an environmental and regulatory framework through which development of this area may proceed.
As I mentioned, shale gas extraction requires new technology and equipment which has not been used in Ukraine before. Current environmental regulations and laws governing extraction of gas do not fully address the challenges that shale gas extraction brings. We want to help do this right from the beginning, so that Ukraine learns from the experience of others.
We have Don Gautier, a representative from USGS and Matthew Saur, a contractor from the University of Colorado who is cooperating with USAID here, and they will explain more about their respective positions later in the program.
We support Ukraine’s quest for energy security in other ways.
In terms of energy efficiency, the United States is helping with a three-year program designed to increase energy conservation and efficiency of the municipal heating sector. Pricing reform is needed not only to encourage energy savings but also to spur investment in the energy sector.
The U.S. Ukraine Bilateral Energy Security Working group is a forum that allows our countries to discuss energy policy and ways in which we can cooperate.