U.S. CO. VANCO WINS UKRAINE GOV'T FAVOR FOR OIL DEAL Ukraine has finally allowed a serious Western energy player to explore and develop what could be billions of barrels of oil buried beneath its Black Sea shelf.

John Marone, Staff Writer, Kyiv Post, Kyiv, Ukraine, Thu, Oct 11, 2007

Ukraine has finally allowed a serious Western energy player to explore and develop what could be billions of barrels of oil buried beneath its Black Sea shelf.

The outgoing government of Prime Minister Viktor Yanukovych approved a Production Sharing Agreement (PSA) with US Vanco Energy on Oct. 3, ending more than a year-and-a-half of tough negotiations.

Although the PSA still has to be signed by Deputy Prime Minister Andriy Kluyev, it marks the latest in a recent series of breakthroughs by Western oil companies onto Ukraine's promising production market, and the first onto the country's Black Sea shelf.

If significant hydrocarbon deposits are found in Ukraine's so-called Prykerchenska field, a 12,900-square-kilometer swathe of territory that comprises about 17 percent of all expected reserves in the Black and Azov Sea shelves, the country could ease Russia's stranglehold on its energy supplies.

Due to the technical difficulty of the deep-water drilling involved, Ukraine has been unable to develop the Black Sea shelf on its own.

"Vanco is very pleased to have concluded successfully with the government of Ukraine the negotiations on the Prykerchenska Production Sharing Agreement.
Although the discussions were long and intensive, they were always conducted in a positive and constructive atmosphere," reads a statement released by Vanco on Oct. 9.

Vanco International Ltd., a subsidiary of Houston-based Vanco Energy Company, won the exclusive right to present a PSA agreement to the Ukrainian government in a tender held on April 19 of last year.

Vanco competed in the tender on a 50-50 basis with UK-based JNR Eastern Investments Limited, part of the JNR group of companies, which represent the interests of Nathaniel Rothschild and his family in the former Soviet Union and Eastern Europe.

Also taking part in the tender were multinational heavyweights like Shell and ExxonMobile, which submitted a joint bid; Ukrnafta, Ukraine's largest oil producer; Turkish state-owned oil company TPAO; and US company Hunt Oil.

Vanco, whose profile of operations has focused on deepwater offshore projects in West Africa, first submitted its PSA proposal to the Ukrainian government in July 2006.

But the government rejected the proposal and started compiling a counterproposal in October, leading some observers to question whether other proposals might be considered.

In April of this year, just weeks before the signing deadline, the government submitted its counterproposal to Vanco, which requested a six-month deferral to consider the new terms.

The government explained the delays in finalizing a deal by the scope of the PSA, which is for 30 years, and the fact that Ukraine had never signed such a deal before.

Another major hitch was determining which side would get what percentage of the oil produced and at which stage of production.

Vanco representatives told the Post that their company came to an agreement with the government last month, but declined to disclose the breakdown of the production sharing.

"The agreement approved by the Cabinet of Ministers satisfies Vanco's three key criteria of fairness, openness and durability, and provides an effective framework for the major investments needed to complete what is undoubtedly a very risky deep water exploration and production project.

"The PSA also ensures that the state of Ukraine will receive the major share of the benefits arising from any hydrocarbon discoveries within the Prykerchenska area," Vanco's Oct. 9 statement reads.

The government did not respond to the Post's requests for further information in time for the publication of this article.

Dr. Jim Bown, Vanco's Representative in Ukraine said, "Vanco looks forward now to the completion of formalities and the signing of the agreement within the next seven to ten days so that work can begin immediately on the implementation of the exploration program."

Vanco has said it is prepared to invest "a minimum" of $100 million for the first three years of exploration, and has already spent well over $6 million in preparation for receiving the PSA.

"If there are hydrocarbons in the Prykerchenska area the geology even at this early stage suggests that the resources could be very large indeed. So Vanco's job now is to find the hydrocarbons and produce them.

The Government's approval of the Production Sharing Agreement is the first step on the road that we all hope will lead towards Ukraine's energy independence," Bown said.

Ukraine currently imports the lion's share of its hydrocarbon needs from Russia. But developing the field will take several years, leaving Ukraine reliant on Russia for most of its energy needs in the near term.

Ivan Poltavets, a Ukrainian energy analyst, said the Vanco deal would not be a radical breakthrough in solving Ukraine's energy needs, but it could help the country fulfill its goal of producing 25 percent more gas within the next 20 years.

Having unexpectedly doubled the price Ukraine pays for gas at the border in
2006 and then raising it again by a third this year, the Kremlin looks prepared to keep putting pressure on Kyiv to pay more for its energy needs.

Poltavets said that by bringing in a Western company, the government will get the necessary technical expertise needed to develop the shelf and send a positive signal to other international energy investors.

Critics of Vanco's development of the shelf have argued that more than one company should have been selected, given the size of the shelf zone and the fact that Vanco is expected to contract out the exploration and drilling anyway.

But Ukraine has in recent years opened the gates to large hydrocarbon exploration and production rights to Western companies, hoping their expertise and financial muscle could help tap into deep or hard-to-reach reserves.

Ukraine's state-owned oil and gas company Naftogaz Ukrainy and a subsidiary of the US-based Marathon Oil Corporation inked a cooperation agreement in June 5 to explore for hydrocarbon deposits in the country's Dnipro-Donets Basin, which supplies Ukraine with 80 percent of its hydrocarbons and is believed to contain natural gas deposits deep below those being exploited.

The Marathon deal follows on the heels of a 2005 cooperation agreement between Ukraine and Anglo-Dutch energy giant Shell, which has committed to invest $100 million into the country.

Shell has already obtained development licenses in the Dnipro-Donets Basin and recently landed an interest in a Ukrainian filling station network through a joint venture with Moscow-based Alliance Group.

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