Solution to Ukraine's gas issue

Ihor Orel
14:40, 28 November 2019
Economy
449 0
Opinion

Napoleonic plans Ukraine harbored to gain gas independence by 2020 have apparently failed. The reasons here are the backwardness of the industry, which had seen no reform over years, and corruption-mired officials. However, the government has taken a number of important steps, which in the future will allow the country to boost output and drop gas imports altogether.

Four years ago, Ukraine stopped purchasing gas from Russia. Since November 2015, our country has completely switched to importing from the EU, receiving from there about a third of gas consumed.

Over the years, Ukraine has created a gas market for industrial consumers, where the price is formed by the market – based on quotes on European exchanges, rather than on political agreements with the Kremlin. Starting January 1, 2020, households were also to set to receive market prices, which in the event of any EU price hike could inflict a major blow to Ukrainian wallets.

Strategically, our country was supposed to abandon gas imports as early as next year

To prevent this, the government offered consumers a guaranteed gas price from January 1, 2020 and until the end of the heating season, at around UAH 8,000 per 1,000 cubic meters, which would help avoid a price jump starting 2020. However, the decision was a forced one, because strategically our country was set to abandon gas imports as early as next year.

Back in 2016, the government approved the Concept for the gas industry development until 2020, which envisaged an increase in the country's total gas output to 27 billion cubic meters and a decrease in its consumption by the same value. According to the government’s plan, achieving the goals would enable Ukraine to restrain gas prices within the country, despite possible hikes in the EU. However, the Cabinet's plans failed.

According to the Ministry of Energy and Environmental Protection, in 2018, 21 billion cubic meters of gas was produced in Ukraine, which is only half a percent more than in 2017, and 4.5 percent more than in 2016, when the government adopted the Concept. At the same time, gas consumption amounted to 32 bcm (1.3 percent more against 2017).

No breakthrough took place in 2019. Over the nine months of this year, gas producers extracted 15.5 bcm of gas, which corresponds to the figures in the same period of last year.

Among the main reasons for the failure of the ambitious task is the delay in adopting laws important for the development of the industry. Experts agree that the actual start of the program was given only in 2018, when deputies passed the main legislative framework – rather than in 2016, as originally planned.

Now the country has found itself in a completely different political situation – a mono-coalition has been formed in Parliament, which has already demonstrated its readiness to pass laws important for the state in a short time. Therefore, it can be expected that delays in the consideration and adoption of the necessary legislative changes will no longer arise.

Another global problem in achieving gas independence was that in Ukraine there were practically no tenders for the sale of new gas production licenses. For example, the country's largest state-owned gas producing company, Ukrgazvydobuvannya, was supposed to receive eighty new licenses in 2016-2018, but only seventeen approvals were granted. At the same time, the company's fields, which produce 95 percent of gas in Ukraine, have been depleted by 87 percent. In such a situation, it is impossible to talk about increasing production without obtaining new licenses.

The body responsible for issuing licenses, the State Service for Geological and Mineral Resources of Ukraine, had been mired in corruption and scandals, which caused frustration among market participants and the country's leadership.

Only in 2019 did the situation change a bit. The first electronic biddings for the sale of licenses for oil and gas sites were held on March 3, where the State Geological Service sold three special permits for UAH 141 million, which was three times the total starting cost of the lots.

In early November of this year, Director of the Association of Gas Production Companies of Ukraine Roman Optimakh was appointed head of the State Geological Service. Prime Minister of Ukraine Oleksiy Honcharuk ordered that he cleanse the agency within two months. The prime minister made it clear that the new leadership would not tolerate corruption there, and also demanded to prepare the ultimate number of special permits for subsoil use for putting them up for auction in the near future.

The question of reducing energy consumption remains open. Indeed, for example, neighboring Poland with a larger economy consumes almost half as much gas as Ukraine. Such unacceptable squandering on the part of our state should go down in history, which will be facilitated by the Energy Efficiency Fund. It was supposed to be launched back in 2017, but actually started operating in September 2019.

Ukraine failed to fulfill the strategic tasks that had been set in 2016

Thus, Ukraine failed to fulfill the strategic tasks that had been set in 2016. However, throughout this period a solid foundation was laid, which, if the government maintains the course toward energy independence, will certainly bear fruit, albeit a little later than scheduled.

Moreover, Ukraine has formed a safety cushion with its record high gas reserves in case Russia starts harassing Ukraine again. This will allow the country to safely pass one of the most difficult winters in recent years.

But the country needs a new strategy to increase its own gas production and reduce consumption in the coming years; and this time it must be implemented.

Ihor Orel

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