Few know that Ukraine is technically already in the European Union, at least its energy sector. It joined the European Energy Community in February 2011, thus becoming a full-fledged member of a single energy market based on the acquis communitaire, roughly speaking, the EU’s rule book on engagement.
Apart from
having the lofty goal of establishing a stable rules-based energy environment
that cares equally about consumers and providers alike, the energy community
aims to attract investment by opening up markets. This requires clearly
separating energy production, distribution and sales, something Ukraine’s
market has failed to fully carry out thus far. By failing to move on breaking
up the state-owned Naftogaz Ukrainy, Ukraine has left billions of euros untapped
from the European Investment Bank, European Bank for Reconstruction and
Development, as well as private lenders to modernize its pipeline system and
vast gas storage facilities.
European
financiers would rather invest in commercial projects, like they did in
Russia’s Nord Stream pipeline project, and would prefer to upgrade Ukraine’s
pipeline system once it is unbundled from Naftogaz, rather than enter an
ownership consortium dependent on geopolitics.
With
regulation weak and competition low, energy prices in Ukraine are artificially
high for some products and subsidized for others, notably household gas and
heating bills.
Despite the
lack of legal harmonization, this is the farthest Ukraine has come toward
European integration.
Yet on Feb.
6, President Viktor Yanukovych balked. He accused the EU of not supporting
Ukraine in its energy relations with Russia. Almost entirely dependent on
Russia for gas, Ukraine received a $7 billion gas bill from its neighbor under
a “take or pay” clause in January this year. Yanukovych also accused the EU of
doing little to halt Russia’s South Stream gas pipeline project, which could
severely diminish Ukraine’s geopolitical importance in the region as a gas
transit country.
Janez
Kopac, director of the Energy Community Secretariat was quick to remind
Yanukovych in a letter that he never received official communication regarding
the Russian gas bill and reminded him that South Stream isn’t an EU
project.
The following is a
breakdown of Europe’s, Russia’s and Ukraine’s energy interests vis-à-vis the EU
Energy Community:
UKRAINE
Ukraine could raise money from institutional
and private European investors if it follows through on its commitments to
recalibrate regulation and pass crucial legislative packages to free up its energy
market. Its gas transport system is in dire need of upgrading. The nation wants
to maintain its geopolitical significance as a transporter of gas. It could
make money by storing European gas in its vast underground facilities and would
like re-import cheaper gas from Europe, diversifying energy supplies and
reducing dependence on Russia. And as
the EU energy market widens, Ukrainian electric power businesses like DTEK are
ready to export electricity to Europe. Meanwhile Ukrainian consumers of gas would
enjoy a liberalized, more flexible inner gas market. In total, energy market
reforms along EU requirements give Kyiv a unique chance to have closer economic
and even political ties with the EU. “We are a de-facto and de-jure
full-fledged member of the European Union in the energy sphere and it will
depend on us whether everyone respects us,” said president of the international
consulting company Grant Thornton Ukraine Oleksandr Chaly.
EU
The
European Union is interested in stable, secure and diversified supplies of
energy, mainly gas. Seeing Ukraine for years not doing anything to upgrade its
aging gas transport system, the EU let Nord Stream happen as it was mostly
financed by European banks. Europe also doesn’t mind South Stream as it
diversifies gas supplies further. But Brussels doesn’t want to rely solely on
Russia and would like to retain Ukraine as another source of gas supply. The EU
would like to see a European energy company in a three-way consortium with Kyiv
and Moscow to manage Ukraine’s GTS that is most often seen as a compromise that
could cover the interests of all sides, although it would rather finance its
modernization than get involved in geopolitics. Ukraine’s government repeatedly
declared its interest in European participation in the consortium. “There were just certain declarations about a
trilateral
consortium and Europe said it’s open to propositions. Still, no progress has
been made in the sense of the negotiations,” says Dmytro Marunych, director of
the Energy Studies Institute in Kyiv.
However, the EU won’t tolerate a bilateral consortium
between Ukraine and Russia since the EU Energy Charter stipulates that energy
supplies and transit must be separated.
RUSSIA
Russia would like to control the
supply of gas to Europe. It supports the idea of building trust with Ukraine
but, at the same time, insists on Kyiv’s fulfilling an unfavorable 2009 gas
deal. Moscow looks askew at Ukraine’s deepening cooperation within the Energy
Community. It will seek to find a way to transfer Gazprom’s own energy assets
on all liberalized markets in order to meet the requirements of changing the
European energy legislation. Russia has
pursued South Stream more for political, rather than economic reasons because it’s much cheaper to
upgrade Ukraine’s GTS than build a new one. It’s a price Russia is willing to
pay to reduce Ukraine’s strategic importance as a large gas transit nation –
roughly 70 percent of Russia’s gas to Europe goes through Ukraine.
Kyiv
Post editor Mark Rachkevych can be reached at [email protected], Kyiv Post staff writer Denis
Rafalsky can be reached at [email protected]
