Year of the Russian Fuel and Energy Complex in Ukraine
Much to Ukraine’s annoyance, today Russia determines how Ukraine’s fuel and energy complex should develop. The former knows what it wants from Ukraine’s power engineering industry, while the latter still lacks a clear strategy for the development of its own fuel and energy sector. Hence the unanswered questions as to which way we should pump oil through our idle pipeline, who we should include in the gas transport consortium and what powers it should be given, and who gets no piece of the privatization pie. As a result, the questions remain open as before, while the Ukrainian leadership is distracted from the two problems that are pressing for the nation’s fuel and energy complex.
Without doubt, we should above all think about Ukraine’s energy security and ways to ensure it. Put simply, this means reducing the dependence of the nation’s economy on Russian fuel imports. As we know, a 25% share in imports from any one country signals a critical level of dependence. Meanwhile, Russian fuel accounts for over 20% of all Ukrainian imports.
Of course, Ukraine is struggling to diversify its sources of hydrocarbons, increasing imports from Kazakhstan and Turkmenistan. Yet oil and gas from these countries pass through Russian territory. Thus, our northern neighbor in fact controls these supply routes as well, which carries certain political risks. However, Ukraine plans to explore oil deposits in Libya and build a transit pipeline to take Iranian gas to Europe. But these projects require several years of intensive work and significant investments.
Another major problem is the poor condition of the nation’s pipelines. Most of the currently used gas and oil routes were built in the latter half of the 1970s. Their service life without major overhaul is between 25 and 30 years, but quality standards were not always observed then. Thus, the pipelines need to be repaired and upgraded or even replaced. In this case we face a few options: either to build a new pipeline to replace the existing one or complement it, or perform major repairs involving comprehensive diagnostics and subsequent replacement of the weakest sections of the pipeline. The third option is to reduce the pipeline operating pressure, which will prolong its service life but reduce its capacity. Finally, one can limit oneself to plugging leaks when and where they occur.
Ukraine must increase the capacity of its existing gas transport system, for which reason the first option is the most acceptable. It is to this end that the gas transport consortium is being created. It is expected that after Ukraine’s gas transport system has been conceded to the consortium, it will attract investment from Germany and perhaps France along with other European countries to upgrade the pipelines. However, Russia’s Gazprom, being a cofounder of the consortium, will be directly involved in attracting investment. The Europeans will not refuse to fund the upgrading of our gas transport system, since they want their Russian gas imports without interruptions, while 90% of it passes through Ukraine’s territory. A question prompts itself in this connection: considering that Gazprom’s financial contribution to the upgrading of Ukraine’s gas transport system will be comparatively negligible, why not try to obtain the required funds from the Europeans without Russia’s patronage and instead concede the pipeline to them?
Unfortunately, Gazprom is a popular brand name in Europe, while Europe is not too eager to deal with Ukraine and would rather deal with a reliable partner of many years. Moreover, the success or failure of the consortium will decide the fate of the Novopskov-Uzhhorod gas pipeline, which is strategically important to both sides and is to be built as part of the Oleksandrov Hay-Novopskov-Uzhhorod route designed to carry Turkmenistan and Russian gas to Ukraine and Europe. This will increase the throughput of Ukraine’s gas transport system by 15%. The project has been already set afoot. Construction will begin in Western Ukraine from the Uzhhorod- Bohorodchany leg of the pipeline. Whether or not the consortium is created will determine whether Russia will continue to view Ukraine as a priority route for transit of its fuel or opt for projects to build gas pipelines bypassing Ukraine. This will in turn jeopardize Ukraine’s energy security and cause economic losses.
Yet one should not disregard the fact that in creating the consortium Russia is pursuing its own ends. It seeks to preserve the current gas transit tariffs on Ukrainian territory and prevent them from increasing to international levels. After all, this would increase prices for Russian gas in Europe, which is something neither Russia nor Europe wants. Russia has solved this problem in part when it signed agreements last year, under which transit tariffs will remain unchanged until 2013. Moreover, it is possible that with the concession of a part of Ukraine’s gas transport system the consortium cofounders could share the gas transit bill, in which case Ukraine would receive only a part of the amount it is paid now.
It appears that the creation of the consortium will place Ukraine’s policy in the gas business within quite strict boundaries that will be determined by its partners. Ukraine’s former Vice Premier for the Fuel and Energy Complex Vitaly Haiduk understood this only too well. Yet there are no realistic alternatives to the consortium, which would solve some of the pressing problems of the fuel and energy complex and guarantee reliable supplies of Russian fuel to Ukraine. Thus, it is only natural that the new Vice Premier for the Fuel and Energy Complex Andriy Kliuyev has declared his intent to defend the nation’s interests. It only remains to state clearly what those interests are.
The last year was also dominated by negotiations on the pricing policy in the sphere of gas supplies. Russia is not going to pay Ukraine for gas transit at international tariffs neither will it reduce prices for fuel supplied to Ukraine. When the SES documents were signed last September, the partners tried to talk Russia into selling its fuel to the remaining SES members at its domestic prices. However, Russian Ambassador Viktor Chernomyrdin said that “Russia will not reduce fuel prices for Ukraine as part of the SES.” Also relevant is the question of export duties for oil and gas. Now Ukraine pays $600-700 million annually, while Russia has not only refused to lift these duties, but is gradually increasing them. While in September 2003 the export duty for oil was $25.1 per ton and $22.6 for oil products, as of February 1 they will be $30.5 and 33.9 respectively.
Ukraine’s oil and financial stability could improve significantly with the launch of the Odesa-Brody pipeline. The delay of the launch, much like the debate on which way to operate this Ukrainian pipeline, has been caused among other things by the proposal by the Russo-British TNK-BP Company to operate the pipeline in the reverse mode. The final decision of the government has not yet been announced. However, considering the expert estimates, backpumping is definitely not in Ukraine’s interests. It was clear from the outset that Ukraine would go for it only as a last resort. Moreover, backpumping would not benefit TNK-BP either, since behind its proposal was an attempt to block the transit of Caspian oil to Europe via Ukraine.
It appears that TNK has succeeded only in delaying the launch of the pipeline but lost in strategic terms. It will be recalled that after backpumping was proposed, official Brussels, Poland (which will become a full EU member five months from now), the US, Turkey, and Kazakhstan unanimously supported the forward operation of the pipeline. Preparations for the construction of the Brody-Plock leg of the pipeline have been given fresh impetus. It will take about three years to design and build it. Until then it is important to organize supplies of oil from Brody to Poland using rail transport. And this goal should be also viewed as one of the components of Ukraine’s energy security. The threat comes from fact that Russia might somehow use the political situation occasioned by the forthcoming presidential elections to yet again attempt to disrupt this project, which it finds disadvantageous. In particular, so-called temporary backpumping could be used here, its feasibility study prepared by the Energy Solution Company.
Another equation with many unknowns that Ukraine was treated to on the New Year’s Eve was an attempt by Russia’s Unified Energy Systems to participate in the privatization of several Ukrainian oblenerho electricity distributors. This attempt can be viewed as a false start, but this will not prevent the Unified Energy Systems from achieving its goal in the future. Even if this company is prevented from directly participating in the privatization, it could become a cofounder of some consortium that would buy Ukraine’s oblenerhos for it.
Unfortunately, the year 2003 showed that Ukraine is not ready for a dialog with its Russian partners. In the coming years we will be unable to isolate ourselves from Russia in the energy sector, and it is time to face this. But the success of cooperation will in fact depend on whether Ukraine can pose as an equal partner in this dialog and prove this to the other side, which has not yet parted with its imperial — even if painted in more liberal hues — ambitions. Shaping one’s own strategy and stance should be the main goal for the Ukrainian leadership. If we fail to achieve this goal in the immediate future, our Russian colleagues will readily help us, but, of course, to their own advantage.
