You're reading: Ukraine shows signs of opening energy sector to investors

Some analysts have described the current state of affairs a golden opportunity.

While Ukraine has made some progress in recent years in encouraging alternative energy production through wind and solar projects, experts say the only way to wean the country off expensive energy supplies from Russia is to attract foreign investment and expertise.

There are signs that Ukraine’s government is finally starting to listen and may be prepared to open up the energy sector, long monopolized by powerful oligarchic groups, to major international energy giants.

Those foreign companies that haven’t been deterred from facing years of barriers from operating in Ukraine may finally find more luck in developing unconventional gas resources, such as shale and methane gas, or investing in the country’s first liquefied natural gas (LNG) terminal.

At the moment, none of the potential deals have progressed further than preliminary discussions, indications of interest and the signing of non-legally binding memorandums of understanding. But such unexpected activity in the energy sector has prompted many experts in Ukraine and abroad to claim that the government has finally seen the light.

“Our government seems to have finally realized that Ukraine’s economy will have a bleak future if it continues to neglect the development of the country’s own [untapped alternative energy] power and primarily oil and gas base,” said Olexander Martinenko, senior partner at the Kyiv office of international law firm CMS Cameron McKenna.

For more than a decade, Martinenko has represented the interests of a leading international oil and gas company eyeing opportunities in Ukraine.

Analysts from Wood Mackenzie, an Edinburgh-based research and consulting firm specializing in energy and metals industries, went even further in a recent report, calling the current state of affairs in Ukraine’s energy sector “a golden opportunity for a renaissance in the country’s upstream industry.”

Our government seems to have finally realized that Ukraine’s economy will have a bleak future if it continues to neglect the development of the country’s own power and primarily oil and gas base.

– Olexander Martinenko, senior partner at Kyiv office of CMS Cameron McKenna.

As Niall Rowantree, an unconventional gas analyst with Wood Mackenzie points out, such optimism in Ukraine’s assessment, first and foremost, is explained by the fact that in the past, foreign investors simply couldn’t get any access to Ukraine, while the current government says it’s open to negotiations.

“What we are seeing is that things are moving positively in Ukraine,” said Rowantree.

He added that even though they are not moving as fast as they could, there is very strong evidence that Ukraine is being seriously considered by the global energy giants as the place to be.

Major international players such as Shell, TNK-BP, ExxonMobil, Chevron, Total and Eni have recently expressed their strong interest in entering Ukraine’s energy sector.

While in most cases the companies remain tight-lipped about their negotiations with the government, TNK-BP went as far as to pledge $1.8 billion of investment over the next 6-7 years into Ukraine’s shale deposits in the eastern Donetsk Oblast.

The British-Russian company is targeting six licenses that could potentially produce up to 3 billion cubic meters of gas annually. Citing data from the US Geological Survey, Ukrainian officials say their nation’s shale gas reserves could be 1.5-2.5 trillion cubic meters, enough to cover consumption at the current rate for more than 30 years.

Another potential project that government officials hope will help lure foreign investment into the country is the billion-dollar construction of a liquefied natural gas (LNG) terminal intended to help the country diversify its gas supplies.

Currently, most of Ukraine’s gas imports flow in from Russia, which accounts for nearly two-thirds of the 50 billion cubic meters Ukraine annually consumes.

Currently, most of Ukraine’s gas imports flow in from Russia, which accounts for nearly two-thirds of the 50 billion cubic meters Ukraine annually consumes.

Vitaliy Demianiuk, deputy head of the State Agency for Investment and National Projects Management, said that nearly 50 major international companies have expressed their interest to take part in the tender to perform a feasibility study of the LNG project and come up with a business plan.

According to Demianiuk, the winning bid will be determined in August, and by early next year they hope to form a consortium of potential investors, expected to put from $1.5 billion to $2 billion into construction of the terminal. Demianiuk hopes that it will start receiving gas, primarily from Azerbaijan, as early as 2014.

Once up and running at full capacity, it will be able to receive up to 10 billion cubic meters of liquefied gas, or nearly 20 percent of the country’s annual needs.

It is also hoped that having its own LNG gas terminal would help the country in its tough negotiations with Russian state gas company Gazprom.

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Demianiuk said his agency has already been contacted by the Belarus government, inquiring if they could tap in into some of the Caspian gas that the terminal will be receiving. Belarus is even more dependent on Russian gas than Ukraine, the source of frequent conflicts with Moscow.

So far, so positive. But skeptics see talk of opening up Ukraine’s energy sector as nothing but lip service and doubt projects will materialize.

Dmytro Marunych, head of Kyiv-based Energy Studies Institute and former long-time spokesperson for state gas company Naftogaz Ukrainy, said the current agreement with Gazprom, which stipulates fines for consuming less gas than agreed, could scupper the LNG project.

In addition, Marunych questioned who will have access to the cheaper gas from the terminal once it’s up and running, as the government may choose to hand this to oligarch-controlled industrial groups, which might become the project’s investors.

“It’s crucial, that by the time the terminal is ready the gas market is liberalized and Ukraine starts playing according to European standards,” Marunych said. “But honestly I don’t see any real desire by the government to change the way things are done on the energy market, as the interests of powerful groups are involved.”

Likewise, Marunych doubts that Ukraine’s energy sector will be opened up to large amounts of foreign investment. Real contracts and licenses, not more declarative memorandums of understanding, will be the only sign that the government is ready to put its words into action.

Alan Riley, a professor at the City University in London who specializes in energy issues, said Ukraine needs to move fast, or otherwise it risks losing the opportunity to attract any foreign investment in its energy sector.

“It used to be the case that there were limited resources and huge amounts of capital chasing them, so the government would have some leverage,” Riley said.

“But today there are huge amounts of [both conventional and unconventional] gas resources and limited funds due to the financial crisis. So, the government can’t play this game anymore. If the government in Ukraine doesn’t follow through [on their promises], the capital will go away,” Riley added.


Kyiv Post staff writer Vlad Lavrov can be reached via [email protected].

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