On a geostrategic attempt to isolate Ukraine from Europe

Sandra Oudkirk, Deputy Assistant Secretary for Energy Diplomacy at the US State Department’s Bureau of Energy Resources, first visited Ukraine the other day to discuss energy security of Europe as a whole and Ukraine in particular. With the help of the US Embassy, The Day managed to speak to Ms. Oudkirk early on the second day of her stay in Kyiv. The conversation began with discussing the aim of her visit and messages of the Ukrainian side.

“This is my first visit to Ukraine in any capacity. In particular, it’s my first visit to Ukraine as a representative of the State Department’s Energy and Natural Resources Bureau. So, I am delighted to be able to have the opportunity to be here, to consult the government officials, to meet Naftohaz, and learn more about the energy situation here in Ukraine.

“We have multilevel messages when it comes to Ukraine. The first is support for ongoing energy sector reforms. We do believe that Ukraine has made enormous progress over the last several years, improving energy efficiency, improving operations in its upstream development, improving governance and professional practices within state-owned energy enterprises. And we are very supportive of these reforms, we have spent a fair amount of US taxpayer dollars on directly supporting these reforms..

“And we also talk about issues related to Ukraine’s energy security. I had the privilege of meeting several members of the Rada, we talked about the issues that the parliament is focused on with regard to energy security, and also energy security via-a-vis neighbors.”

Yes, we know that the US strongly supports Ukraine’s energy security. What do you think your country can do to achieve this goal?

“Well, I think we have done a lot in terms of technical assistance and helping Ukraine, making Ukraine better able to manage and utilize the energy resources that are here in Ukraine. Energy independence is a very difficult term. Even countries like the United States that export energy, it’s hard to say it’s energy independent, it’s an interdependent world, but I think that Ukraine has done a lot, in particular with gas, in the upstreams, producing domestic gas, but I would like to highlight one thing, one area where I think Ukraine can do more, and that’s the issue of harnessing energy efficiency. So Ukraine has a very inefficient utilization of power, in particular heating, and introducing a better price mechanism for consumers could help to incentivize energy savings and really change the minds of individual consumers to focus on efficiency and avoiding waste as a domestic resource. I think this is an important step that Ukraine needs to take.”

I know that five or even more years ago the US evinced a keen interest in the development and extraction of gas in Ukraine and, lately, there has even been talk about developing the deposits of shale gas in Ukraine. Could you explain what is going on in this field?

“I can pronounce companies names very, very badly. So, upstreams subsidiary of Naftohaz, UGV, we have actually a technical assistance program with UGV, I, unfortunately, don’t have a lot of details about what the specifics of technical assistance are, I am not an engineer, but if you would like to know more about the work we do with UGV, we can put you in touch with the people who work more specifically on that program. The US is a technology leader on gas exploitation, and those practices and technologies are something that we are very happy to share with countries like Ukraine.”

What can you say about the supply of American liquefied natural gas to Ukraine? When can this be done?

“That’s really up to Ukraine. So, the United States began exporting LNG two years ago, in the late winter – early spring 2016, and the LNG market globally is really expanding. So, it is not only the United States, but also Australia soon coming on line with very large quantities. And we believe that LNG is an excellent way of diversifying sources. Energy security in our mind comes from the diversification of three things: sources, routes, and types.

“So, Ukraine is already fairly well diversified with regard to types, with large-scale hydro, nuclear, gas- and coal-fired power for the base load, as well as intermittent renewables. The real challenge here is, I think, diversifying route and source, and LNG is a good way of doing that with regard to natural gas.”.

So we can’t expect Ukraine to receive LNG from the US in the near future, but is it perhaps possible to get it via Poland?

“Well, it would have to come from a pipeline or from an LNG import terminal somewhere.”

In the fall of the last year we received the first batch of American coal. Is there any news in this matter?.

“US coal, like US LNG, is sold by private companies on the global market. So, we definitely encourage companies to export commodities as well as manufactured goods and technologies, but it’s not government-directed. So this is something the government generally encourages in support of increasing US exports broadly, but that is not a specific direction where the market would lead. It’s a market-driven transaction. But we were happy to see that Ukraine purchased US coal, we are a major coal exporter.”.

Could you tell us when Secretary of Energy Rick Perry will arrive in Ukraine? As is known, his visit was scheduled for last summer but then postponed due to floods in the southern US.

“That I do not know, but I do know that Secretary Perry’s staff has been very interested in his travel schedule, and they have been looking very seriously at a trip to Ukraine.”

Let us broach the subject of diversification again. You told the US Atlantic Council on March 12 that “the success of the Nord Stream 2 project will mean large-scale geostrategic consequences for the EU and the US,” and blocking it will have no impact on US policies but will support Ukraine. My question is: why do you think that blocking this project will not affect Russia’s energy policy?

“I think that quote is a little bit out of the context, I think Russia’s energy exports, and not a policy, but export, but volume of export, that Nord Stream 2 pipeline is very clearly designed not to add new Russian volumes to Europe, but to take the Russian volumes of gas that currently transit Ukraine and move them to Europe through a different route. So that’s what that means.”

And why do Europeans, including Germans, not understand this?.

“You would have to ask them! But I do think, the Russian government and Gazprom have been very, very clear that Nord Stream 2 is not an effort to bring additional volumes of gas to the market. It’s an effort to divert the route away from Ukraine.”

Yes, it is clear to Ukraine. But does the US have a lever to pressure Europeans not to take part in this project?

“We have been working to convince our European allies and partners not to do this project. The US government has been opposed to the project from very conception.”

I spoke to European diplomats about buying American LNG, and the ambassador of Hungary to Ukraine said his country would do this willingly if it were cheaper than Russian gas. So when can we expect the American “blue fuel” to be price-competitive with or even cheaper than Russian gas, and this would take the problem of building Nord Stream 2 off the agenda?

“I think LNG is a market-driven option, and whether it’s US LNG versus LNG from some other source, that’s really up to the market to decide. US LNG exports can be price-competitive, we have a lot of natural gas in the United States, more and more are coming onto the market, and our LNG exporters have become very efficient at both liquefaction and transportation. So for LNG cost, unlike pipeline costs, it’s usually a reference price, sort of the market price at origin, plus the cost of liquefaction, plus the cost of transportation. So really, it’s a price issue.”.

Steven Pifer, ex-US ambassador to Ukraine, said in a comment on this question that American gas is mostly bought by Asian countries which are poor in comparison to European states. Why does this occur?.

“Well, right now, there is no one global market for natural gas, because natural gas, unlike oil, requires a lot of infrastructure, to move it and to gasify and liquefy. So, the markets are divided, that Asian prices tend to be higher than European prices which tend to be higher than prices in North America. And that really has to do with market fundamentals, like supply and demand. So, there is a lot of demand in Asia for natural gas, there is not a lot of local, locally-produced natural gas, so all gas has to be imported to the big importing economies – China, Japan and Korea don’t produce gas at all, really, and there is a lot of demand, and there is not a lot of infrastructure there for pipelines. So, Europe is connected by pipeline both to Russia and to North Africa. Because Japan is an island, it’s not connected by a pipeline too much. So, I think, that really is driving the market price.”

Ms. Oudkirk, you also watch Turkey’s energy policy. Do you think the Turkish stream will also be taking gas away from Ukrainian transit?.

“Yes, we are equally opposed to the second stream of Turkish stream, as we are to Nord Stream 2, and for exactly the reason you mentioned, because it is clearly an effort to divert volumes away from transit through Ukraine.”

Incidentally, Ukraine signed a memorandum on modernizing the Ukrainian gas transportation system in Brussels as far back as 2008. Can US companies be interested in modernizing the Ukrainian GTS with a capacity of 142 billion cubic meters?.

“I think the Russian efforts to diversify pipeline transit away from Ukraine are driven not by technical issues, not by technical concerns with the pipeline equipment itself, but more sort of a geostrategic effort to isolate Ukraine and to separate Ukraine from Europe. Of course, we would love to see US technology companies and US pipeline services companies involved in the Ukrainian market.

“And I think the issue of the new pipeline will be very expensive. It’s an undersea pipeline, it runs through very congested route, it touches on waters of the variety of different countries, so the question I always have for European investors and European consumers of this pipeline is, ‘Why build a new and very expensive piece of infrastructure when you already have an operating perfectly effectively piece of infrastructure that runs through Ukraine?’ And that’s really the question.”

Let’s speak again about the influence of the US, particularly the Trump administration which warned European companies against cooperating with Iran after Washington had withdrawn from the Iran nuclear deal and imposed new sanctions against Tehran. I read that many European countries are afraid to fall under US sanctions. Can a similar thing happen in the case of Nord Stream 2, and European companies will think twice before taking part in this project?

“I would like to remind you that last summer, President Trump signed a bill that our Congress passed, called the Countering America’s Adversaries through Sanctions Act, CAATSA. And that bill included what we call ‘permissive sanctions’ related to Russian energy export pipelines, in Section 232. So, I would say that any company engaged in the Russian energy export pipeline business is now engaging in an industry that is an elevated sanction risk.

“This is the authority that we call permissive, so it’s not mandatory, it’s up to discretion of the administration whether or not to utilize this sanction, but it has certainly added an elevated level of risk, that wasn’t there on August 1.”

Having decided that the 300-billion-dollar-worth US market is more important to them than the 20-billion-dollar-worth Iranian one, these European companies may say: “Oh, we can’t possibly oppose the US” and abandon Nord Stream 2.

“You know, I will certainly hope that they will bear in mind all the implications of these various sanction policies when they make their business decisions.”

I want to quote Minister Omelian who made the following statement after Ukraine had received the first shipment of American coal in the fall of the last year: “I dream that the next ships from the US will be delivering Tesla and other electric cars and we will be supplying electric batteries and high-tech components to the US, and, as a result, this cooperation will be closer and more promising.” What do you think of this dream?

“I think those should not be dreams, those should be aspirations, because, like I said before, that really is a matter of the market. So, when US companies, whether it’s Tesla or any other sort of manufacturer, when they are looking for overseas investment partners, they are looking at the investment climate, they are looking at the availability of a skilled workforce, various costs, for real estate for industrial inputs, and so all of the potential overseas investment locations kind of compete with one another worldwide. And I think that is something that is important to bear in mind when countries look to attract US investment. They are competing not just with themselves or with their neighbors, they are competing with the whole world.”

In this case, I’d like to hear your opinion about whether the climate in this country is favorable for inviting US companies to extract gas and, in general, cooperate intensively with Ukraine?

“I think there is a lot of US interest in Ukraine, there is a lot of US corporate interest in Ukraine, but I am not steeped in the details of individual industries to be able to know which ones are the most competitive.”

In conclusion, do you think it will be easy for Ukraine to achieve energy security and independence?

“I think it is challenging. You know, Ukraine lives in a neighborhood with certain geographic realities, who your neighbors are. You also have certain geological realities, what’s in the subsurface. But I think that Ukraine and the Ukrainian people, and the Ukrainian government have shown that they are able to make hard decisions and live up to them, and implement them. I think we saw it in March, when Gazprom shut off gas deliveries when it was so very cold, and people of Ukraine responded to the calls to sort of cut gas usage. People around the world really noticed that, and it was very impressive. I think that I would encourage your readers to take that same sort of strong commitment to do the right thing, to focus on making some of these difficult reforms that are necessary to continue the IMF program, to move forward with the reform effort: transparency, good governance, balancing budgets. All of that’s important.”