Ukraine's energy policy

Whether Nord Stream 2 will go online or not, its emergence raises questions about the EU’s future relationship with Kyiv, as well as Ukraine’s role both as a transit and storage country for natural gas and as a potential alternative energy exporter. Russia sees the completion of the controversial pipeline not only as a commercial and technological achievement, but as a major geopolitical victory for Moscow.

On June 19, Ukrainian Foreign Minister Dmytro Kuleba, speaking at the Antalya Diplomacy Forum, in Antalya, Turkey, underscored that the use of alternative energy sources will have strategic meaning for Ukraine, helping the country to effectively address both current and future energy security challenges.

If the Ukrainian GTS went out of business, this would have far-reaching implications for the EU’s energy supply, Ukraine’s relations with Russia, and larger European security issues. Many in Ukraine fear that the elimination of Russia and the EU’s dependence on Ukrainian gas transit will allow the Kremlin to provoke further instability in Ukraine.  The Kremlin would feel more comfortable to intensifying its hybrid war with Ukraine once Russia is no longer dependent on Ukrainian gas transportation. This could escalate into a full-scale as well as open (and not merely covert, proxy, and paramilitary) interstate war against its Slavic neighbor.

Eine entschlossene Erschließung der bereits bekannten und zugänglichen ukrainischen Ressourcen könnte zu einer erheblichen Steigerung der ukrainischen Gasproduktion führen. Dies könnte das Land nicht nur in die Lage versetzen, seinen inländischen Gasbedarf vollständig selbst zu decken und das Land energiemäßig weitgehend autark zu machen. Im günstigsten Fall könnte die Ukraine in die Lage versetzt werden, auch mit eigenem Export von Erdgas in und über benachbarte EU-Staaten zu beginnen. Mit ihrem riesigen Gastransportsystem verfügt die Ukraine bereits über die notwendige Infrastruktur, um große Gasmengen in die EU zu transportieren.

Die Ukraine ist ein ener­gie­ab­hän­gi­ges Land. Sie impor­tiert Gas, Öl, Erd­öl­pro­dukte, Kern­brenn­stoffe und sogar Kohle. Dabei hätte das Land es nicht nötig zu impor­tie­ren, denn die Ukraine besitzt selber einiges an Ener­gie­res­sour­cen. Aber warum wird dieses Poten­tial nicht genutzt?

Resolute development of the already explored and accessible Ukrainian resources could result in a substantial increase of Ukrainian gas production. The boost would not only enable the country to fully cover its domestic gas needs, but also make Ukraine largely self-sufficient from an energy perspective. In a best-case scenario, increased production could even allow Ukraine to start exporting gas to or via neighboring European states. This would be feasible because Ukraine’s substantial gas transportation system means that the necessary infrastructure is already in place to bring large amounts of gas to the EU.

A five-year contract concerning Russian gas transit via Ukraine was signed after four days of negotiations on 30 December 2019. The previous contract expired on 1 January 2020. The EU-brokered talks between Moscow and Kyiv preceding the deal lasted many months and ended in the signing of a political protocol on 20 December which defined the terms of a package agreement. Gazprom has been obliged under the new transit contract to transport 65 bcm of gas in the first year and 40 bcm in the next years based on the ship-or-pay formula. Four other documents were also signed: (1) an agreement between Naftogaz and Gazprom waiving counterclaims linked to the gas contracts of 2009; (2) an interconnection agreement between Gazprom and a company named Operator of the Gas Transmission System of Ukraine (OGTSU); (3) a settlement between Gazprom and the Ministry of Justice of Ukraine; (4) a transport agreement between Naftogaz and OGTSU. The Russian company had to pay US$2.92 billion in damages under the Stockholm Arbitration Court’s ruling before the documents could be signed; it did this on 27 December. 

Although the exact wording of the agreements has not been revealed to the general public, their key provisions are known because they were included in the protocol signed on 20 December. Both parties have recognised the gas package deal as a compromise, while most of its provisions can be viewed as a success for Ukraine. Gazprom had to make concessions because it was Moscow which most needed a new transit agreement; without one it would not have been able to meet its contractual obligations with regard to European clients. The European Commission-mediated talks were long and tough, due to the fundamentally different interests of the two parties. Ukraine wants to maintain its status of a major transit state, while Russia has been making consistent efforts to rely less and less on Ukrainian gas pipelines, such as pushing through the construction of Nord Stream 2 and the finalisation of the TurkStream project in 2018. Obstacles to compromise included: a de facto military conflict between the two countries, legal disputes between Naftogaz and Gazprom, the ongoing reform of the Ukrainian gas sector and the presidential and parliamentary elections in Ukraine. The compromise will entail a new model of transit co-operation between the parties, which should ensure stability in this area until 2024. It is also possible that a contract covering direct supplies of Russian gas to Ukraine will be signed in the near future, since they were stopped in November 2015.

For a number of months now the Ukrainian gas production sector has been undergoing a major overhaul to improve the conditions in which it operates, with a view to significantly increasing production. The most important reforms include lowering tax rates and deregulation. These changes are a result of the government's gas sector development plan for Ukraine, approved in 2016. Under this programme, the amount of gas extracted is to increase from the current 20 bcm to 27 bcm by as soon as 2020. Combined with greater energy efficiency, this would enable Ukraine to become self-sufficient in terms of its gas supply, and even to export gas in subsequent years.

Od kilku miesięcy w ukraińskim sektorze wydobycia gazu zachodzą istotne zmiany, których celem jest poprawa warunków jego działalności, co ma doprowadzić do znaczącego wzrostu produkcji. Wiele wskazuje na to, że w ciągu kilku kolejnych lat Ukraina mogłaby zwiększyć produkcję do poziomu umożliwiającego uniezależnienie się od importu. Pozwalają na to znaczne ukraińskie zasoby gazu (trzecie pod względem wielkości w Europie), których potencjał pozostaje niewykorzystany. Będzie to jednak uzależnione od kontynuacji reformy sektora wydobywczego, zmniejszenia poziomu korupcji, napływu inwestycji zagranicznych oraz stabilności politycznej.

Available free at: https://www.oxfordenergy.org/authors/jack-sharples/
                                         
Abstract: With European gas import demand having risen substantially since 2014, Gazprom has dramatically increased its sales on the European market. In Q1 2018, Gazprom reported record daily gas exports to Europe in late February and early March. This Comment addresses the question of how those volumes were delivered to the market, and the extent to which the infrastructure for delivery of those volumes was used,  highlighting that, in times of peak European gas import demand, full utilisation of the Nord Stream and Yamal-Europe pipelines left Ukraine as the only transit route with spare capacity. Until Nord Stream 2 and Turkish Stream are built, Gazprom will remain dependent on gas transit via Ukraine throughout the year, with Ukraine providing substantial flows in summer as European gas storage facilities are refilled, and a combination of significant flows and additional spare capacity in the winter peak demand period.

In September 2017, three out of five members of the supervisory board of Naftogaz, Ukraine's largest gas company, announced their resignation and accused the government of stepping up political interference in the company's activity and blocking measures aimed at reforming the company. This represents yet another instance of the fight for control over Naftogaz and its profit-making subsidiaries, Ukrgazvydobuvannya (which extracts over 70% of Ukraine's gas) and Ukrtransgaz (the transit pipeline and gas storage facilities operator). It seems that the government's goal is to regain control over Naftogaz, including over financial flows between its subsidiaries. The mounting conflict has resulted in a cessation of the gas sector reform, which has been ongoing for over a year. Reforming the gas market had hitherto been viewed as one of the biggest successes of the state modernisation programme that was launched after the Maidan Revolution. Moreover, this halting of the reform process poses the risk that it may subsequently be abandoned entirely.

The study, based on a field trip to two coal power plants and communities in Western Ukraine, highlights some of the pollution challenges of energy generation from coal in Ukraine, explains the urgent need for reform in Ukraine’s energy sector and the opportunities that the Energy Community membership brings to the country.