Ukraine’s Natural Gas Offers New Chances for Economic and Diplomatic Progress

Ukraine has awarded development rights to Chevron and Royal Dutch Shell to develop two shale gas fields.  The deal is an economic boon for Ukraine and its people—as much as $370 million in investment and large-scale energy production in less than a decade. 

Moreover, as Matthew Lina points out, by reducing pressure to subsidize Ukrainian consumers the additional natural gas will aid domestic economic reform.  New production also will strengthen Kiev’s international position by reducing reliance on supplies from Russia. 

Observed Jorge Zukoski, President of the American Chamber of Commerce in Ukraine:  “If Ukraine plays this right, the energy majors will help Ukraine tangibly through their know-how and money to move down the path towards energy independence.”

The diplomatic benefits of the development could prove to be equally great.  The agreement was reached at a time when Ukraine’s relations with the West are at a nadir.  The prosecution of opposition leader Yulia Tymoshenko, led the Europeans to cancel talks and boycott events involving Ukraine.

However, the large role about to be undertaken by two Western energy companies offers an alternative path.  Editorialized the Washington Post:  “the new gas deal provides Ukraine an opportunity to demonstrate that its government can insulate critical economic affairs from that corruption, letting Chevron and Shell conduct their work free from unnecessary hindrance.”

Ukraine’s relative isolation increases the importance of responsible handling of its new energy development.  The Yanukovych government has an opportunity to visibly reinforce the rule of law and combat corruption.

Indeed, the natural gas contract comes shortly after Kiev opened up its natural gas distribution and storage system to foreign investment.  This step helps satisfy a 2010 agreement with the EU to modernize Ukraine’s natural gas pipeline.  (The new policy also prevents Russia’s Gazprom from winning a distribution monopoly.)

Responsible management will be particularly important in persuading Europe to reengage Kiev.  Brussels may come to reluctantly accept that it cannot dictate policy in Ukraine.  But European leaders are unlikely to expand trade opportunities and accelerate potential EU accession for Ukraine without some signs of internal progress.  The Chevron-Shell deal gives Kiev the chance to demonstrate just that.

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