Shelton’s Well-Oiled Venture

Canadian company is drilling for gas in the Azov Sea

Zenon Potichnyj is the CEO of Shelton Canada Corporation, which is currently drilling for natural gas in the Azov Sea in Ukraine, along with its Ukrainian partner company, the state-owned Chornomornaftohaz.  Founded in 1995, Shelton Canada has offices in Toronto and Kyiv and is listed on the Toronto Venture Stock Exchange, under the symbol STO. Potichnyj speaks to New Pathway’s Olena Wawryshyn about his Ukrainian venture and the prospects and potential for doing business in Ukraine.

How was Shelton founded?

Z.P.: We–my father-in-law, the late Myroslaw Iwasykyiw, I, two partners from Ukraine and two Canadians from Alberta: Bruce Hirsche, a lawyer, and Richard Edgar, a geologist–started from scratch.  Later Victor Tkachenko (an expert on venture development and special situations financings) joined us on the Board.

We got involved in purchasing properties in Alberta and BC.  Those were our initial oil and gas fields…We listed it [the company] at that time in Alberta. Then the Alberta stock exchange was bought out by TSE, so now we’re a Toronto Venture Exchange company.

How did you get into the oil and gas business?

Z.P.: I started working for the Department of Energy, Mines and Resources, Canada in Alberta because my university studies in Toronto in Engineering were in Tar Sands and Heavy Oils. But, after working with different oil companies I noticed they were not so much interested in research work as in the business aspect – how much your innovation or technology will save them or affect the bottom line. So, I decided to do an MBA at the University of Toronto and then got into business afterwards.

How did you get involved in the Sea of Azov project?

 Z.P.: Still under the Soviet Union, Ukraine was never considered as having a huge oil and gas potential. They found big reserves in Siberia and Russia and the Far East so Ukraine was almost left alone. They did a little bit of drilling but not in a major way so we thought it was a nice niche market, that if we come in with some Western technology and know-how, with a bit of financing, and get involved with some projects in Ukraine that could be a good business.

We were offered this [Azov Sea] project as an initial one. We met with the Ministry of Natural Resources of Ukraine and with an umbrella [state-controlled] company called Naftohaz Ukrainy. It has a few other companies underneath it [including Ukrnafta, Ukrhazvydobuvania, and Chornomornaftohaz]. We met with pretty well all of them and talked about the possibilities. We chose to work with Chornomornaftohaz because they have most of their project offshore in the Azov and Black Sea area.  Only 5-10 per cent of the area is explored. That’s why we thought it might be interesting.

How long did the process take?

Z.P.: About five years. For a lot of businessmen that’s way too long to get things going….We kept on pushing and trying to get to a stage where it’s a normal business. It was very tough at the beginning to make the arrangements, agree on the structure of the agreement itself. It was a very time-consuming, and long process.

What form does the cooperation with Chornomornaftohaz take?

Z.P.: We have a joint cooperation agreement on a 50/50 per cent basis.  It’s managed by a committee that consists of six people: three from Chornomornaftohaz and three from Shelton Canada, and we have a chairman of the committee that rotates every 6 months, so everything is democratic and open.

What’s your advice to individuals who want to do business in Ukraine?

Z.P.: You have to be very, very patient. And, you have to have very good partners on the Ukrainian side. You can’t just try to do it on your own. As you go through the process of making the agreement or certain deals you can see who is cooperating…who wants to work and involve foreign companies in the investment. If you start feeling they don’t want to cooperate, get out of there and look for a partner who wants to work on an equal basis.

Check with other people who have done business in Ukraine before and know these companies, about their reputation and business ethics.

The legal system is still being developed, so make sure that your agreement with your Ukrainian partner is drawn up by a Canadian lawyer or Canadian law firm that knows the aspects of the different problems that can develop in Ukraine.

What are common mistakes made by Canadians doing business in Ukraine?

Z.P.: The main one is that everybody thinks that you can go into Ukraine and the people there don’t really know much about business so you can do whatever you want. It’s not true. In the last 10-15 years, they have been learning very quickly. I would say that they are very sophisticated businessmen.

A lot of the younger generation in Ukraine have finished their education somewhere else in the world—either in the United States, England or Canada at some of the best universities, so these people are well trained and know what’s going on. Don’t think you can go in there and tell them “you know nothing, and let me show you how to do business.” That will not work.

In the oil and gas business I have heard people tell Ukrainians: “you don’t know what you’re doing, let our Canadian geologists and engineers run everything.” That’s also a mistake. Their geologists and engineers don’t work with fancy software that exists in the West but it doesn’t mean that they don’t know their stuff.  They still do a lot of work with a pencil and ruler but they do get, eventually, the last number the right way….they definitely know what they’re doing.

What’s the potential for doing business in Ukraine?

Z.P.: There are a lot of niche markets in all kinds of areas. In the oil and gas area Ukraine is a net importer of natural gas and oil.  Ukraine produces about 20-30 per cent of its requirements. The rest is imported from Russia, Turkmenistan and other places, so there is a huge potential for oil and gas companies in Ukraine…If Ukraine finds enough for their own requirements, and some for export to the EU, the EU will also be also happy as they don’t want to be dependent on Russia as a supplier.

There are not too many places in the world where such large areas have not been explored. The opportunities are huge. One good example is the auction of tender for licences on the Black Sea in the Kerch area where 13 large companies–major players in the world–have participated.

What other areas have potential?

Z.P.: There’s a huge market in real estate development and the construction of housing condominiums and townhouses. In larger cities, the majority of people still live in old huge apartment buildings and everybody is looking for their own little place. [Other areas are] the development of tourism hotels, water parks, and even, manufacturing. From Western Europe a lot of manufacturing is moving into Ukraine because the labour is still fairly cheap compared to Western Europe. People are well educated; you don‘t have to teach them long. You show them once and they know what to do.

In your business dealings do you speak Ukrainian?

Z.P.: In Crimea, they will speak to me in Russian, and I speak to them in Ukrainian…They don’t tell me “we don’t understand.” And, when I persistently keep on speaking in Ukrainian and they’re talking in Russian, a lot of them eventually do switch to a broken Ukrainian-Russian because they start feeling that “I’m actually in Ukraine, I should be speaking Ukrainian.”

What are your thoughts now that you’re only two weeks from learning whether there is indeed natural gas in the location that you’re drilling in?

Z.P.: It really hits home. We have been working on this for a very long time and there have been many struggles, even after we signed the agreement. Trying to get the licence was another long period of time.

Then, we had to find money, which is also very difficult in Canada because the business community in Canada does not really understand Ukraine or what is happening there. For them, it is too far, too complicated, too far-fetched. I would say 70 per cent of the 2.2 million that we raised for drilling came from Europe: investors from Sweden, from England, and a little bit from Ukraine.

A month ago, when Richard Edgar and I finally flew in a helicopter onto the rig, knowing that it was our well, our project, it felt good. Unfortunately we couldn’t drink anything on the rig as it is illegal. [laughs]