Friday, November 5, 2010

Ukrainian Tightrope

The Ukraine is engaged in an extremely difficult high wire act: balancing a desire to remain on friendly terms with its neighbor, Russia, while trying to maintain energy independence by developing alternative sources for its natural gas.

Our story begins in January 2009 when the Russian government-owned company, Gazprom, cut off all gas supplies to Ukraine. Gazprom claimed there was a price dispute; Ukrainian nationalists claimed it was an attempt to influence upcoming presidential elections. Regardless of the reasons, Ukraine's then-Prime Minister, Yulia Tymoshenko, ordered the seizure of Russian gas that was in the pipeline traversing the country. In June 2010, an arbitration commission in Sweden ruled that the seizure had been illegal, and ordered Ukraine to pay $192 million, and return 12.1 bcm of gas to the Russians. The Ukrainian government is negotiating how to pay back the money and gas, without running short this heating season ("Ukraine Returns Disputed Gas to RosUkrEnergo", Eurasia Daily Monitor 7/156, August 12, 2010).

Ukraine feels embattled between the court case, and the possibility that the Russians will launch the South Stream pipeline project, which would bypass Ukrainian territory. If South Stream were completed, then Ukrainian Energy Minister Yuriy Boyko believes Russia might halve the amount of gas transiting the Ukraine. (, 02 September 2009). Ukrainian President Yanukovych promised that price disputes with Russia would never result in cutting off supplies to Europe (, 14 September 2009), an assertion clearly not true given the events of January 2009.

To keep South Stream from becoming a reality, the government in Kyiv has begun a public relations campaign against the project. They argue that the cost of the project ($20-30 billion) will be passed on to Europe through higher gas prices, that the source of the gas would remain Gazprom and is therefore not a diversification, that the acidity of the Black Sea could eat through the pipeline and cause explosions, and that the Ukraine can be a better route if the current pipeline were upgraded with European support. ("Ukrainian Government Can Call the Bluff On Gazporm's South Stream Project," Eurasia Daily Monitor 7/169, 21 September 2010).

In late October, Russian President Vladimir Putin visited Ukraine for discussions about a possible merger of Ukrainian pipeline company Naftogaz with Gazprom. The Ukraine had previously ruled out such a merger, but had left open the possibility of a joint venture. ("Kiev to Talk Gas Venture During Putin Visit", The Moscow Times, 26 October 2010). The two sides failed to reach an agreement.

In the event of another Russian gas shutdown, Ukraine is looking for alternative sources of energy. First Deputy Prime Minister Andrey Klyuyev issued a press release stating that the country would construct a regasification terminal over the next 12-18 months. The price tag would be $1 billion (, 04 October 2010). Construction will begin in 2015,and the terminal will have a capacity of 5 billion cubmic meters, rising to 10 bcm in late 2016. This would represent 20% of Ukraine's gas imports. Project head Petro Moroshnikov said construction was designed to reduce dependence on Russian gas imports. Moroshnikov added that the most attractive source for the gas appeared to be Azerbaijan. In addition, the Russian-US consortium, TNK-BP, will invest another $1-2 billion over 25 years to discover gas trapped in Ukrainian shale, according to German Khan. (Reuters: "Ukraine Plans LNG Terminal to Diversify," The Moscow Times, 03 November 2010).

Ukraine is also trying to solidify its position as a reliable transportation link for Central Asian oil. Kazakhstan had been pumping 6 million tons of oil a year through Ukraine, but they discontinued using the country in January 2010 over a tariff dispute. In September, however, President Yanukovych announced a new agreement whereby Kazakhstan would pump 8 million tons a year to Europe (, 16 September 2010). The government has also approved a test-pumping of Venezuelan oil through the Odessa-Brody pipeline. If Venezuela were to become a steady supplier, it would mean reversing the flow of the pipeline to the original South-North orientation--contrary to the wishes of the Russians.

Venezuela's supplies would be mingled with Central Asian. President Ilham Aliyev said that in the future, oil from states situated on the eastern coast of the Caspian Sea could be supplied to Ukraine, via Azerbaijan. Aliyev said this would create another reliable energy corridor connecting the Caspian with Europe. Aliyev added that Azerbaijan was already providing the Ukraine with a million tons of oil per year ("Azerbaijan to increase Oil Supplies to Ukraine," Hurriyet Daily News, 28 October 2010).

The threat of Venezuelan and Azeri oil deliveries appears to be having an effect on Russia. During Prime Minister Vladimir Putin's late October 2010 visit to Kyiv, the two sides initialed an agreement in which Russia would ship 25 million tons of oil over 5 years. ("Moscow, Kiev in Oil Deal," The Moscow times, 28 October 2010). In addition, Iran is interested in becoming an oil supplier to Ukraine (

Ukraine remains vulnerable to Russian manipulation, and will become even more so with the construction of South Stream. Independent suppliers, such as Azerbaijan and the countries of the eastern Caspian, offers Ukraine the best hope of remaining energy neutral in the years to come.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at