The statements of the Ukrainian and Russian parties to the gas negotiations that ended on Tuesday, January 17, in Moscow, failed to lift the veil of secrecy and opaqueness. Ukraine’s Prime Minister Mykola Azarov also failed to make things clearer on January 18 at the international conference “Ukrainian Dialogue on the Formation of Energy Policies.” “I still hope we will adopt the European pattern of price formation in the nearest future,” he said. “The goal is very simple: to reduce dependence on the rather expensive gas we are importing.”
On the same day, Volodymyr Makukha, Deputy Minister for Energy and Coal Production, said the Cabinet had discussed a draft agreement with the government of Azerbaijan on the supply of liquefied natural gas to Ukraine and authorized the minister, Yurii Boiko, to sign it. “We must solve a lot of problems,” Makukha noted. “There is a certain resource of gas which can be transported across Turkey through the existing main pipelines, or, depending on the quantities, a new pipeline may be built. Now that the feasibility report is being drawn up, it is too early to speak about any figures.”
These and other statements that Ukrainian officials have made the other day make it possible to suppose that this country is urgently mapping out an energy strategy that will at last save us from having to patch holes in the energy and financial balances. Should we say that work is going on over a new crucial document or that the government has failed to follow the president’s instruction to revise the current ineffective energy strategy until 2030?
Unfortunately, experts are inclined to choose the latter and affirm that one of the factors that cause the never-ending failures in the current gas talks is that the Ukrainian side has a vision of tactical steps but is entirely short of a strategy. Political scientist Vadym Karasiov even believes that, under these conditions, the Ukrainian government will have to opt for the establishment of a consortium or some other structure, when Russia will be able to control the entire Ukrainian gas market. The independent energy expert Oleksandr Narbut notes that the delay in implementing this model has only been caused by unwillingness of governmental officials to assume responsibility, as they fully realize what this may lead to in the political context. The expert emphasizes that it is just fear of responsibility that the absence of instructions for the Ukrainian delegation can be put down to. In his words, the negotiations now underway between the energy and coal minister and the Gazprom chief can be called nothing but consultations. The expert explains that only the president, the prime minister, and the foreign minister can conduct talks on behalf of Ukraine without having instructions or a mandate.
In Narbut’s opinion, Ukraine has a year or two at most to bring into play another scenario, the scenario of fast reforms that consist in an urgent withdrawal of the transportation infrastructure from Naftogaz Ukrainy. Narbut also stresses that “the government and, above all, the president must understand that it is extremely dangerous to discuss the concession of certain assets because, as is known, appetite comes with eating.” “By satisfying Russian appetites, Ukraine will in fact lose its national sovereignty,” Narbut continues. “Being unable to influence the energy market, any state is doomed to lose its independence. The use of our assets can only be discussed in isolation from the negotiations on 2009 gas contracts.”
Vadym Karasiov, director of the Institute of Global Strategy, compares the current situation in Ukraine with the time, when Bolshevik Russia had to sign the humiliating Treaty of Brest. He explains that Ukraine still has no effective energy strategy and cannot carry out reforms in the spirit of European Energy Community documents because this will “immediately kill the entire Ukrainian elite, including the government and the opposition, and invalidate the post-Soviet statehood – all those corrupt administrative morsels that are being strung on the gas pipeline, as if it were a skewer.” According to Karasiov, “over the past 20 years, the sense and mission of the Ukrainian state has been to do something with this pipeline. Whoever has been coming to power until now used rhetoric about democratic choice and European path in order to hide their true role – to be the manager of this fragment of Soviet legacy. As a result, Ukraine was turned into a fuel-transit state which is of need for Europe, which is interested in uninterrupted supply of gas, and for Russia because it pumps its gas across our territory and would otherwise find it difficult to hold Europe by the throat.” Karasiov explains that the real mission of the Ukrainian authorities is “to feed off, manage, and not to give away the pipeline, for it not only ensures budget revenues but also promotes corruption and gives money for politics.”
Asked by The Day about some elements of the offensive strategy displayed on the eve of the negotiations, January 17, such as the projected spot-on purchases of gas and gas-supply talks with Turkey, Karasiov called it bluff intended to change the course of the negotiations, while Narbut tried to show how realistic these plans are. He described them as “aspiration of the government to put on a brave face” and advised the president to change some of the negotiators.
Besides, Narbut privately told The Day on the “demonic mission” of Viktor Medvedchuk, the former chief of President Kuchma’s staff, who is now positioning himself as a confidential advisor to Putin. The expert emphasized that the two figures’ goals are very similar, if not identical. While Putin wants to restore the Soviet Union by privatizing the Ukrainian pipeline, Medvedchuk can in this case dream of the office of Ukraine overseer.
Yet some Ukrainian experts are taking quite seriously our government’s still-to-be-finalized gas strategies.
About some details… They show a positive tendency for Ukraine in the gas question. The upbeat point is that, after 20 years of feet-dragging, the government seems to be embarking on the road of distancing itself from such a gas hegemon as Gazprom. The proof of this is Yurii Boiko’s announcement that Ukraine is planning to begin, in midsummer, to purchase natural gas on Europe’s spot market and to start negotiations with Turkey on a new gas delivery route. Although the minister revealed no details of the plans, experts say that some conclusions can still be made from what Boiko said.
One of them is in the interview with Viacheslav Kniazhnytsky, advisor for energy, nuclear safety and environmental protection at Ukraine’s EC Representation (2004-2009), special envoy for energy security at the Foreign Ministry of Ukraine (August 2009 – May 2011). He says that, in all probability, Ukraine will be buying gas on Europe’s spot market and further pump it to the industrial regions across the border with Poland, Hungary, or Slovakia. Technically, this presents no problem because the Ukrainian pipeline has several inlets and outlets.
As he explained to The Day, a spot market is one that sells the really available goods, without concluding long-term contracts. In other words, this market deals in surplus products – in this case, it is natural gas (the liquefied gas that comes from Algeria and Qatar, the shale gas from the US, etc.). The price of this gas is formed by demand and supply, i.e., everything depends on the number of gas buyers and sellers at a specific moment. According to Kniazhnytsky, the price difference between the pipeline-delivered and liquefied gas was 130 dollars at the beginning of 2012. Mykhailo Honchar, energy program manager at the Nomos Center, says the spot market of Europe expects a 40 billion cubic meters surplus of gas this year. A coveted piece, isn’t it?
It is liquefied gas that once helped France secure more favorable terms from Gazprom. As a result, the latter had to sell this energy resource to France at a far lower price than, say, to Germany because the French had begun to buy the cheaper Algerian gas. So the monopolist should be knocked out by competition, Kniazhnytsky says. “This crushing argument will help neutralize the Gazprom monopoly without [resorting to] politics,” he adds. “Should Ukraine be offered gas at 250-260 dollars, there will surely be the businesspeople who will buy it.”
It looks like the strategy of de-linking from Moscow will also include the Turkish direction, Honchar says. In his view, Boiko’s statement suggests two likely scenarios of the development of Ukrainian-Turkish relations. But both of them will only work if Turkey agrees to sell a part of the gas contracted with Gazprom (it is surplus because it is not used by Turkish businesses) to the Ukrainian company Naftogaz. It will be recalled that Russian gas is now delivered to Turkey and the Balkan states across Ukraine (Dnipropetrovsk, Kryvy Rih, Izmail), Moldova, Rumania, and Bulgaria. The first option is that Ukraine will make a deal with these countries on the reverse pumping of the surplus gas from Turkey. It is technically possible because, after the 2009 gas crisis, the EU has been actively resorting to the reverse operation of the existing pipelines to deliver gas from west to east (for instance, from Germany to the Czech Republic, from the Czech Republic to Slovakia), Honchar says. But the gas Ukraine is going to receive from Turkey may be not only Russian but also Turkmenian and Iranian (see the likely gas supply options in the table below). But, in any case, for this scenario to work, we must, first of all, make a deal with Turkey and other European countries involved in this reverse scheme. At being difficult to make a deal with all of them, another variant of Ukrainian-Turkish cooperation looks more realistic. It calls for Turkey’s consent to sell the surplus gas that Ukraine is getting during its transportation on its territory. In this case we do need to negotiate the reverse pumping with anybody.
Yet, according to the experts The Day interviewed, buying gas in Europe and Turkey is just a short-term maneuver. To reinforce its energy independence, Ukraine needs to seek out other ways to diversify fuel supplies.
Building a liquefied gas terminal on the Black Sea coast and increasing the production of its own gas are serious arguments which will protect Ukraine from Gazprom’s arbitrary ways in the future, Kniazhnytsky says. “As far as I remember, Ukraine produced over 70 billion cubic meters of gas in the 1960s-1970s. And the first gas pipelines to Central Europe ran from Ukraine, not Russia. It is quite possible to increase the production of gas in Ukraine to 10 billion cubic meters within five to seven years. And if we take energy-saving measures and develop ‘green’ energy generation, we will be able to produce 15-29 billion cubic meters of gas in a matter of 10 years,” Kniazhnytsky says, giving a good piece of advice for improving Ukraine’s energy strategy.
The next step, in his opinion, should be reforming this country’s energy market. To do so, we need to modernize the gas transportation system in compliance with the 2009 Brussels Declaration and meet the commitments under the Energy Community Treaty. These documents pave the way to the integrated system of EU energy security, says the diplomat who is experienced in energy matters. “And we should hurry up to do so because the EU will open an integrated market of electric power and gas in 2015… The Ukrainian leadership must do its utmost for Ukraine to be part of Europe’s integrated energy market from 2015 onwards. Otherwise, we will run the risk of falling into the tight embraces of one oil and gas monopolist,” he says.
A successful energy strategy is impossible without two more factors: energy conservation and energy efficiency, says Pavlo Kachur, ex-minister for construction, architecture, and the public utilities. In his words, the year 2010 saw the smallest amount of money allocated for energy efficiency in the previous five years, and it is still unknown how much was made available in 2011, for there are no statistical data. “And one should not economize on this article, for its possibilities are fantastic indeed. If the government takes serious steps towards energy efficiency and alternative energy sources, the consumption of gas can be cut by 25 billion cubic meters a year! So we should think now about reducing the price of Russian gas and, at the same time, about how to stop heating the air,” he says.
