Ukraine Okays Foreign Investment in Offshore O&G Development

The Ukrainian government has decided to allow foreign companies to share production from a potentially oil-rich area in the Black Sea, the Energy and Fuel Ministry said late last week.

The move opens the way for the government to announce a tender for oil exploration and production in an area near Kerch. The area is part of a territory that has been at the center of a territorial dispute between Ukraine and Russia that emerged late last year. The two governments are still holding regular meetings to end the dispute, without any significant progress to date.

Privately-owned U.S. exploration and production company Hunt Oil is reportedly ready to invest up to $150 million in exploring the area over the next several years, according to its Ukrainian partner, ChornomorNaftoGaz. If the drilling discovers oil deposits in the area, Hunt Oil would invest up to $1 billion into the project, ChornomorNaftoGaz said.

Hunt Oil and ChornomorNaftoGaz signed a letter of intent in November 2003 that calls for joint efforts in prospecting for oil and gas in the area. The two companies are expected to sign an agreement by August before making any investment, ChornomorNaftoGaz said.

A spokeswoman for Hunt Oil in Dallas declined to comment.

The Ukrainian government estimates there are enough offshore deposits in the area to produce up to 20,000 barrels of oil a day and up to 4 billion cubic meters a year of natural gas.

Analysts say exploration in the area may prove to be a risky enterprise due to the on-going territorial dispute. Relations between Ukraine and Russia worsened in October 2003 after Russia claimed a tiny Ukrainian island of Kosa Tuzla in the Kerch Strait. Ukraine deployed special forces and border troops to pre-empt a perceived threat to the island from Russia, which had been building a flood barrier in the direction of Kosa Tuzla.

ChornomorNaftoGaz has long sought a foreign partner for investments in Black Sea projects. The company is Ukraine's sole producer of gas and oil from offshore fields, but lacks the technology for development of fields located below more than 70 meters of water. Specialists believe that most of the hydrocarbon deposits in the area are underneath a depth of 200-300 meters.