Methane proposal

Now that Ukraine appears to have settled its gas dispute with Russia’s Gazprom, it is high time to accelerate the development of Ukraine’s own natural gas resources.

One place to start is in the coal beds of the Donbas region of eastern Ukraine, which are rich in methane gas that can be captured and delivered right into the natural gas distribution system. Coal-bed methane gas is a proven natural resource in the United States, where it now accounts for eight percent of natural gas production, in contrast to Ukraine where it accounts for less than one percent. Yet Ukraine has the world’s tenth largest coal-bed methane reserves, which by conservative estimates are 1.7 trillion cubic meters.

Capturing and commercializing the methane gas would enhance Ukraine’s energy security. Ukraine depends on increasingly expensive imports for 74 percent of its natural gas consumption, which in 2006 is expected to totaled 76 billion cubic meters, 53 percent of which is to be supplied from Turkmenistan and another 21 percent from Russia. Ukraine’s coal-bed methane reserves could cover at least 22 years of Ukraine’s gas consumption at its current level.

Capturing methane gas from coal beds before they are mined can also save lives. Since Ukraine’s independence in 1991, nearly 4300 coal miners have lost their lives in Ukraine’s coal mines, due mainly to methane gas explosions, an average of over three miners per million tons of coal produced, making the coal mines of the Donbas among the world’s most treacherous. These tragedies could be averted.

Capturing the methane gas will nonetheless prove challenging in the Donbas coal mines, which average 585 meters in depth. The geological conditions of these coal mines complicate the hydraulic fracturing process that creates a production stream of methane gas, increasing the risk for prospective investors.

Yet investors have a new financial incentive: coal-bed methane projects in Ukraine may now qualify for revenue from carbon credits under the Kyoto Protocol of the United Nations Framework Convention on Climate Change. Projects that capture methane gas, which would otherwise be released into the environment through coal mining, can receive revenue of over 50 U.S. dollars per thousand cubic meters of gas through carbon credits, on top of the revenue that may be gained from commercializing the gas. Total methane emissions from Ukraine’s coal mines are about 2.0 billion cubic meters a year, of which only seven percent are captured and put to use. Coal bed methane operations that would capture these emissions could generate revenue and help clean up the environment too.

What needs to be done to make this happen? The Government of Ukraine must finalize the domestic regulatory and legal mechanism for project sponsors to cash in on carbon credits under the Kyoto Protocol, a western government or institution must commit to funding those carbon credits, and about 20 million U.S. dollars of investment commitments must be secured to get the first project up and running.

It is a superb opportunity to unite Ukrainian and western expertise in finance, technology and management, to enhance Ukraine’s energy security, save lives and improve the world’s environment.

Geoffrey BERLIN is managing director for Ukraine of GlobalNet Financial Solutions, an investment banking firm based in Washington, DC. Raymond ALBRIGHT is former senior vice president of the Export-Import Bank of the U.S. and a managing director of GlobalNet Financial Solutions.