Energy is what keeps the economic engine of every industrialized nation running. And it is a small wonder that most governments, which have navigated through supply interruptions or price shocks, have proclaimed energy independence as a strategic priority, of course, where the natural resource endowments allowed for it.
Some 45 years ago, in response to an oil embargo by Arab petroleum exporters, U.S. President Richard Nixon promised self-sufficiency on the energy front to the American people. The shale gas revolution has brought the United States very close to this goal in the second decade of the 21st century.
But where does energy independence come from?
It isn’t just about what’s below the ground; it is the regulatory environment, the market forces, and the ingenuity of the private enterprise that could help convert a strategic objective into reality.
Energy independence, for Ukraine, is a matter of sovereignty and national security.
Not only did we have to deal with Kremlin’s corrupt influence that arrived via gas pipelines, the price manipulation by Gazprom, disruption of flow in the middle of winter, our principal energy supplier – Russia – has annexed our territory and since then has been overtly hostile towards Ukraine. This new geopolitical reality has finally focused the minds of policymakers and the general public alike, and we’ve made great strides in recent years towards reforming our energy sector.
While our regulatory landscape is far from perfect, I would argue that is it sufficiently robust.
We have passed every law that our leading lawmakers, civil society and international partners recognized as pivotal in transforming Ukraine’s energy sector.
As the deputy chair of the Energy Committee in the parliament, I have sponsored several bills and I’m proud to say that they have all been passed into law: the natural gas market law, energy regulator law, laws changing regulation for the natural gas extraction, including the fiscal side of it and other bills liberalizing energy markets.
It is now time we work with our international partners on action-taking rather than rulemaking. It is both possible and necessary that in the year 2019, we deliver on the two strategic priorities: increasing gas production in Ukraine and jointly operating Ukraine’s transmission system.
Priority #1: Scale up domestic production.
Market pricing is the first precondition in this realm, but we must enshrine it not just in law but in practice. And for that we need many companies, global and local alike, playing by the rules, producing and trading gas in Ukraine. Passing legislation is the first step, but the culture of transparency and fair competition will fail to take root unless private sector shows leadership, reputable int’l companies enter Ukrainian market and bring along best practices, newest technologies, and solid corporate governance.
Such development, in my view, is the only sure way to lock-in our legislative gains and deter politicians who might dare to reverse the rules and try to bring back energy subsidies for inefficient companies instead of vulnerable customers. Prior to Euromaidan, the corruption in the energy sector was anchored in the opaque, monopolized market, where a few darlings of the political elites were controlling and manipulating it for private gain. Spectacular political careers and incredible fortunes were made and lost as a result of shady deals with the SOEs.
A new round of auctions for production licenses and production sharing agreements was recently announced. This is a big deal, to say the least.
The State Geological Service of Ukraine released 30 onshore petroleum blocks for sale in online auctions at the public procurement platform ProZorro.Sale, which has been widely recognized as a major victory against corruption in Government tenders.
The concession blocks will be auctioned in a series of licensing rounds in a process that guarantees a whole new level of transparency and accountability. We welcome bids by global energy companies, and I’m personally convinced that a successful tendering of new permits will be a major stepping stone towards Ukraine’s energy independence, which I believe is achievable within a decade.
This new approach promises to end the decades of non-transparent distribution of the access to natural resources in Ukraine. We need more gas, more companies to compete with each other for the right to develop natural resources and most importantly, new technologies to boost production. In total, Ukraine has opened the 2019 licensing rounds offering 42 onshore blocks with acreage of nearly 12 000 sq. miles.
More information could be downloaded here www.GOukraineNOW.com
Another major opportunity lies in the redevelopment of legacy fields. The state-owned UGV had signed agreements with several leading oil-field service companies – Schlumberger, Halliburton, and Baker Hughes – and it is seeking a further partnership for cooperation under the Production Enhancement Contracts (PEC) for development of its depleted mature brownfields and unconventional formations. The PEC tenders have already been launched by UGV, and the results are expected to be announced in March 2019 in line with pre-qualification procedure.
Priority #2: Joint operation of Ukraine’s gas transit system (GTS).
The synergy in this realm is blatantly apparent.
Our GTS is truly unique with 145 billion cubic meters of annual transportation capacity and 30 billion cubic meters of storage.
In 2017, the Ukrainian gas transit system moved 94 billion cubic meters from east to west with plenty of spare capacity left. Importantly, in one transit corridor, Ukraine’s GTS is comprised of several pipelines. That allows for uninterrupted transmission even in the event of malfunction or routine maintenance. The additional advantage of the existing land infrastructure is that it is much easier to monitor performance and diagnose issues as opposed to undersea pipelines such as Nord Stream.
The costs of transit, too, could be most lucrative for both suppliers and consumers of natural gas, especially with long-term contracting of 10+ years.
It is an irrefutable win-win for Europe and Ukraine to operate this vital geostrategic infrastructure together. Kremlin, on the other hand, continues to push for Nord Stream II, a project that is designed to divide Europe and has been recognized even by Russia’s own analysts as commercially unsound. It is truly encouraging to see that the newly elected leader of Germany’s Christian Democratic Union (CDU), Annegret Kramp-Karrenbauer, has recognized the threat this pipeline poses to Europe’s security.
The current estimates of maintenance and investment needs for Ukraine’s GST stand at the range of $100-300 million per year to ensure the system can transmit up to 110 billion cubic members of gas. The annual operating cash flows of several billion dollars easily cover these needs. To keep the Ukrainian system fully operational is to ensure it is sufficiently utilized and generates revenues.
The best way to secure Ukraine’s sovereignty, independence, and energy security is to integrate it fully into EU markets. Partnership with global energy companies is the antidote to Russian aggression towards Ukraine and its other neighbors, where energy is often the weapon of choice.
Even though I am a parliamentarian, I think 2019 should come under the banner of implementation rather than legislation.
With the elections looming, our international friends and partners, as well as all of us in Ukraine, should focus on locking in the reforms and leveraging the laws already on the books. Competitive energy market with many international players, new technologies and best practices in corporate governance is what I believe will be the best guarantee that the energy reforms become irreversible.
