Shell to Explore Ukraine

One of the largest oil and gas companies, Royal Dutch Shell plc (RDS.A - Analyst Report) is on track to enter into a production sharing agreement with Ukraine. The deal was approved by local authorities in the eastern Donetsk region. Shell will invest about $10–$50 billion to extract shale gas in Yuzivska field.

After France and Norway, Ukraine has Europe's third-largest shale gas reserves of 42 trillion cubic feet as per the U.S. Energy Information Administration.

Ukraine pays about $430 per thousand cubic meters for Russian gas – a considerably high sum. To end its dependence on Russian natural gas supplies, Ukraine assigned Shell last year in May, to develop the Yuzivska shale gas field.

The latest production sharing agreement is one of the biggest projects in Ukraine. It is likely to lead to about 8–10 billion cubic meters (bcm) of gas generation in 10 years. The deal is expected to be finalized in the first quarter of 2013.

Royal Dutch Shell has outlined plans to focus on the more lucrative and well performing exploration and production end of the business. The group expects annual worldwide production to increase some 25% by 2017-2018 (from 2011 levels), driven by a new wave of project start-ups. Shell’s targeted output will be achieved primarily by new projects coming on-stream in Qatar, Australia and North America. The company is currently assessing more than 60 new projects and options that should guarantee upstream growth till at least 2020.

In terms of assets, Royal Dutch Shell owns a strong and diversified portfolio of global energy businesses that offer attractive long-term growth opportunities. The group’s strong inventory of development projects and increased capital expenditures should help volume growth in the long run.

However, Royal Dutch Shell projects investment of some $30 billion in 2012, quite high by industry standards. This is expected to substantially increase the group’s leverage and deteriorate its credit metrics in the current downturn. Additionally, the increasing capital intensity of its operations may result in reduced returns going forward.

Royal Dutch Shell currently carries a Zacks Rank #3 (Hold). Other oil biggies, which are expected to perform in-line with the company, include BP plc (BP - Analyst Report), Chevron Corporation (CVX - Analyst Report) and Statoil ASA (STO - Analyst Report).