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17 August 2017
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Ukraine’s gas problems and how to resolve them

 

Ukraine continues to discuss prices for gas and the volume that should be purchased from Russia, which in turn, through the state-run Gazprom, makes demands on its neighbor, while threatening to divert more supplies to its Nord Stream line, with the prospect of the South Stream starting up in the near future. The impasse poses a serious energy dilemma for the Ukrainian government, which imported up to 70% of its gas and 65% of its oil requirements in 2011. Ukraine is by far the biggest consumer of gas in the central European region, but it has been unable to resolve a problem that started with independence and reached an acute level in 2006 and 2009 (see, for example, Jonathan Stern, “Natural Gas Security Problems in Europe: the Russian-Ukrainian Crisis of 2006,” Asia Pacific Review, Vol. 13, No. 1 (2006): 32-59) .

There are a number of issues at stake. First, there is the economic and political relationship between Ukraine and Russia. The latter country is adamant that Ukraine should join its Eurasian Economic Community and that in order for the price of gas to be lowered, it must make some concessions, such as the sale to Russia of Naftohaz, Ukraine’s national oil and gas company. For its part, the Yanukovych administration has a dual complaint: Ukraine agreed to pay $388 per thousand cubic meters of gas (tcm) under the agreement made by former Prime Minister Yulia Tymoshenko in 2009, but this level is extraordinarily high for a neighboring state; and it also wishes to reduce obligatory gas imports from Russia to 27 billion cubic meters (bcm) from the 52 bcm stipulated in the contract (RIA Novosti, Feb 1).

Second, Russia has put pressure on Ukraine in other areas too. In early February it instigated a so-called “cheese war,” by prohibiting imports of cheese produced in Ukraine. According to one account, there was more at stake than dairy products—Russia began a similar dispute with Belarus in the summer of 2009 after that country declined to privatize its dairy industry—and the dispute was linked to Russian territorial claims on Crimea. It cites a statement by Stanislav Govorukhin, a Duma deputy who is the head of Vladimir Putin’s electoral headquarters, reportedly commented that Crimea and Sevastopol should be returned to Russia by means of the economic integration of Ukraine with its neighbor, as well as into its religious and cultural-historical space (Glavred, Feb 13, at: link1).

Govorukhin’s needlessly provocative statement may have been a means to divert attention from the anti-Putin protests taking place prior to the March 2012 presidential elections in Russia. But they nonetheless put further pressure on Ukraine. The same applies to the construction of Nord Stream, which was officially launched in early November last year, and should account for the transport of about one-sixth of Russian gas exports in 2012 through a pipeline from Vyborg, near St. Petersburg, under the Baltic Sea, to Greifswald in eastern Germany. The anticipated capacity of the pipeline, which may be attained by 2015, is 55 bcm, and would allow Russia to transport about one-third of its gas to the countries of the European Union for the next fifty years (Nord-stream.com, Nov 8, 2011). South Stream, a pipeline that is planned between Russia’s Black Sea coast from the Pochinki compressor station south of Novorossiysk to the Romanian coast just north of Varna is anticipated to start construction in 2012 and to be transporting gas by 2015 (link2).

Ukraine’s energy situation was discussed recently at a round-table of the Kyiv-based Gorshenin Institute under the title “Is Gazprom monopolizing the European gas market?” Anatoly Kinakh, former Prime Minister and Minister of the Economy of Ukraine, and the head of the Party of Industrialists and Entrepreneurs, began somewhat predictably by attacking the 2009 agreement by Tymoshenko, and maintained that the contract needs to be renegotiated with Russia without confrontation because the latter country is Ukraine’s “strategic partner.” He perceived the need to balance the interests of suppliers (Russia and Central Asia), the transit region (Ukraine), and the consumers (countries of the European Union). Ukraine also in his view needs to improve its energy policy by developing energy-saving technology and increasing the consumption of domestic energy resources (Levyi Bereg, Feb 7, and ff., at: link3).

Ivan Plachkov, former Minister of Fuel and Energy, and a board trustee member of Kyivenergo, is much in agreement with Kinakh, and he asks how Ukraine might lower its dependence on Gazprom. First, he believes, Ukraine can reduce its consumption, which is 4-5 times more gas per unit of GDP than the average in Europe. The situation would stabilize if Ukraine could cut consumption by 50%. He suggests also reforming Naftohaz, and allowing more gas traders access to the Ukrainian market. There should also be more exploration of shale gas in the Black Sea region as well as reliance on existing energy resources of coal, oil, and nuclear power. His comments, however, raise the issue of whether Ukraine would be permitted to reduce the amount of gas it purchases from Gazprom. Another speaker, Volodymyr Saprykin, who is Director of Energy Programs as the Razumkov Center, notes that the Kharkiv Accords, while not a favorable agreement, at least allowed for a reduction of $100 in the price of gas and elimination of penalties for not purchasing the minimum volume. He also advocates increasing the strategic reserves of oil and gas.

One speaker in the round-table was more sanguine about the prospect of developing domestic resources of gas. Yurii Korol’chuk of the Institute of Energy Research maintains it is impractical to produce shale gas, construct a liquefied natural gas terminal, or carry out explorations of the Black Sea littoral because Ukraine lacks money for such projects. Preferable in his opinion is to raise energy efficiency. Valery Borovyk of the “New Energy of Ukraine” alliance thinks that the issue is not only the fact that Gazprom can influence European officials, but also that it has clout among Ukrainian officials, especially those in the energy sector and government, who have no interest in lowering domestic gas consumption. However, people should not be alarmed by the construction of the Nord Stream and the South Stream (carrying Russian gas under the Black Sea to Romania and thence to other European countries). He believes that Nord Stream can divert a maximum of 15% of gas supplies from Ukraine, whereas the South Stream project is likely to collapse because gas consumption worldwide will fall in the wake of the economic crisis.

Are there any other alternatives for Ukraine? One analyst notes that the year 2011 was important for keeping the country on course for integration into European structures. Ukraine also joined the European Energy Committee and made progress on the issue of liberalizing the EU visa regime. But despite such progress and what she describes as “titanic efforts of several ministries,” the goal of integration is more distant than it was at the start of 2011. Western leaders are very concerned about the increasing authoritarianism in Ukraine, the imprisonment and ill treatment of Tymoshenko, and President Viktor Yanukovych’s defiant refusal to take seriously the criticisms of his European counterparts. As a result Ukraine has frittered its first year in the Energy Community, and the dialogue on visa issues has stalled and will not be resolved by the time Euro-2012 begins in June. Perhaps most significantly, Ukraine is strategically dependent on Russia, a country that has long forgotten Kyiv’s past concessions made against its national interests, as demonstrated by the “cheese war.” Yet there are few alternative openings: the United States is losing interest in Ukraine and few practical steps have been taken toward deepening relations with China. In Silina’s view, Ukraine does not have a foreign policy doctrine (Tatyana Silina, Zerkalo Nedeli, Feb 10, at: link4).

Her article raises another key question: that of Ukraine’s failure, vis-à-vis Russia, to gain more publicity for its part in past gas wars. Part of the problem is the close relationship between Gazprom and local companies and influential statespersons in the EU, particularly in Germany and France. The Europeans prioritize gas supplies over regional squabbles, and in such situations tend to side with the supplier rather than the country providing the conduit. They are also in favor of the development of alternative paths such as Nord Stream and South Stream that will cut into Ukraine’s role as the dominant pipeline provider. Thus Ukraine needs not only to build up its domestic resources, but also to cut back significantly on the amount of energy it uses. Added to that, the Yanukovych leadership needs to boost its public image, and could make a significant start by releasing political opponents such as Tymoshenko and former Minister of Interior Yurii Lutsenko. To add to its embarrassment, the European Court of Human Rights is likely to announce its decision on the Tymoshenko case on the eve of or during the forthcoming parliamentary election campaign (Glavcom.ua, Feb 13, at link5 ).

There is little indication, however, that such steps will be taken or even that they are being considered. Morally, and in terms of human rights, there is little to distinguish between the current leaderships of Ukraine and Russia and accordingly neither Brussels nor Washington are likely to endanger their relationship with Moscow by offering strong support for Ukraine’s position in its energy battles with Russia. The problems are not new. They were evident as soon as Ukraine began its independent existence in late 1991, as illustrated by the problems faced by its first president Leonid Kravchuk. That they remain even more acute twenty years later is a sad reflection of the failure of all the administrations to date to devise a viable energy policy, let alone a solution to dependence on Russia. It signifies that Ukraine enters every discussion as the weaker partner in what is essentially a power struggle on several levels and with few clear rules.

By David Marples

David R. Marples

Distinguished University Professor and Director,

Stasiuk Program for the Study of Contemporary Ukraine

Originally posted at

http://ukraineanalysis.wordpress.com/ (Current politics in Ukraine; Opinion and analysis on current events in Ukraine)

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