You're reading: New gas talks set for Jan. 17

Interminable talks between Ukraine and Russia over natural gas supplies will resume Jan. 17 amid increasingly sharp rhetoric that suggests a new deal is still eluding both sides.

Officials in Kyiv say the country’s stretched finances can barely cope with the current price for gas.

They hope to persuade Russia to reduce the cost of deliveries by offering a stake in Ukraine’s gas pipelines that carry around three-quarters of Russian gas supplies to Europe.

Moscow, however, is pushing for further concessions, and Russian Prime Minister Vladimir Putin ordered officials to speed up construction of the South Stream pipeline, which upon completion would bypass Ukraine’s gas transportation network.

Ukrainian Prime Minister Mykola Azarov countered by raising the prospect of a lawsuit to cancel a 2009 deal that became grounds for ex-Prime Minister Yulia Tymoshenko’s imprisonment.

Ukraine says the current $416 per 1,000 cubic meter price is unacceptably high, in a nation that spends between $400 million and $1.2 billion monthly. Russia says Ukraine is contracted to buy more than 52 billion cubic meters of gas this year, but Kyiv says it wants to buy much less – only 27 billion cubic meters.

“Our Russian partners do not want to change the terms of the gas deal. They are happy with them,” Azarov said recently. “But we are telling the Russian leadership: If we plan to be strategic partners, we should cooperate like strategic partners.”

Instead of tapping an International Monetary Fund loan and ending price subsidies by raising household gas prices ahead of the Oct. 28 parliamentary elections, Kyiv has desperately turned to its neighbor and former ruler for cheaper gas.

Russia has indicated it may oblige, but for a stiff price. It wants Kyiv to sell to Gazprom its strategically important gas transit network and vast oil-and-gas storage capacity. Russia values the pipeline at about $4 billion, Ukrainian sources said, while pointing out that they put a price tag on it of more than $15 billion.

Should Russia gain control over the pipeline, it would add to its Europe-bound gas transit network, increasing the power of Kremlin-controlled gas giant Gazprom. Ukrainian officials said they would not sell the pipeline but would rather bring Russian and European companies into a consortium that manages and modernizes it.

We are telling the Russian leadership: If we plan to be strategic partners, we should cooperate like strategic partners.

– Ukrainian Prime Minister Mykola Azarov

Under Viktor Yanukovych’s presidency, Ukraine has extended the lease of Russia’s Black Sea fleet in Sevastopol, has actively promoted the Russian language and has elevated the profile of the Russian Orthodox Church, among other concessions that the administration says haven’t been reciprocated.

Ukraine is a leading global gas guzzler, despite having a population of less than 46 million people and a smaller economy than other leading consumers. Its wasteful metallurgy and chemical plants are heavily reliant on gas.

The inefficient home-and-business heating system is heavily subsidized by government, leaving Ukraine’s state-owned Naftogaz perpetually in the red. The budget has to cough up around $500 million monthly to subsidize the company, officials have said. Other sources said murky inside gas dealings that benefit privileged businessmen, not subsidies, cost the state even more.

Whatever the case, Ukraine imports more than three-quarters of oil and gas almost exclusively from Russia, according to the Institute of Energy Research, a non-profit based in Kyiv. Ukraine’s energy dependence on Russia doesn’t stop there.

Russia is also heavily invested in its neighbor’s oil refineries, oil retailing and gas distribution. Furthermore, Russia is the dominant supplier of Ukraine’s nuclear power industry, which accounts for around half of the nation’s electricity generation.

Ukraine has, meanwhile, watched as Russia pursued alternative pipeline routes while it did little to improve energy efficiency, create a market-based energy system or aggressively pursue alternative energy sources.

“The situation is heavily politicized,” said Jonathan Stern, chairman of gas research at the Oxford Institute for Energy Studies. “Ukraine has to realize that this is no longer the 1990s when Russia had no other transit options. The equation has changed fundamentally. Ukraine’s ability to maneuver is narrowing rapidly as time goes on. Ukraine has achieved nothing.”

Last year, the Russia-backed Nord Stream pipeline system under the Baltic Sea from northern Russia to Germany went online and is scheduled to double its capacity to 55 billion cubic meters by the end of 2012. South Stream, which would run under the Black Sea, could account for up to 40 percent of what Ukraine moves to Europe, experts say.

The prospect of alternative pipelines increases chances that Ukraine will accept tough concessions to preserve usage of its pipeline for transit of supplies to Europe.

“Ukraine can’t trick Russia with promises of preferential privatization of state assets or other concessions,” said Ildar Gazizullin, senior economist at the International Center for Policy Studies. “Russia has all the good cards. Gazprom wants the gas transit system.”

Ukraine forecasts it needs 61.3 billion cubic meters of gas in 2012, of which domestic production will cover 21.6 billion cubic meters, imports 33.9 billion cubic meters and off-take from storage 5.8 billion cubic meters.

Energy Minister Yuriy Boyko also said recently that Ukraine plans to cut gas imports to 12 billion cubic meters within five years with improved energy efficiency, increased domestic production and coal substitution compensating for the rest.

Many experts doubt whether this is possible and whether top Ukrainian officials are negotiating for the nation’s best interests rather than seeking to bolster private gas traders, such as billionaire Dmytro Firtash, with whom they have close ties.

Kyiv Post staff writer Mark Rachkevych can be reached [email protected].