As Ukraine struggles to persuade Russia to reduce the price for natural gas deliveries, officials in Kyiv have been scrambling to unlock alternative sources of supply.
Government officials have touted shale gas technology, liquefied natural gas and increasing domestic production through classic methods as ways to reduce Ukraine’s dependence on Russian imports, critical for the country’s gas-thirsty industry and households. Diversifying supplies will give Ukraine access to cheaper energy and reduce pressure on the country’s finances.
“Ukraine has significant potential and resources to meet much of its natural gas needs,” said Volodymyr Omelchenko, a prominent energy expert with think tank Razumkov Center. “It could cover 70 percent of its needs and double production to 40 billion cubic meters in 10-15 years.”
But critics say these sources need billions of dollars of foreign investment and will take years to bring on line, hindered by red tape, lack of commitment to expensive long-term projects and interests who want to maintain their profits from the lucrative Ukraine-Russia trade.
“For Ukraine to stop consuming Russian gas, it would take time, money and political will of the government. Theoretically it is possible, but not in one, two or three years. This task should be set for a decade. For example, by 2020, to reduce the consumption of imported Russian gas to almost zero or not import it at all,” said Mykhaylo Honchar, an energy analyst at the Nomos think tank.
Ukraine consumes about 65 billion cubic meters per year, about two-thirds of which comes from Russia. The rest is produced domestically. As the price for Russian supplies has risen to more than $400 per 1,000 cubic meters, Ukrainian officials have tried to renegotiate the contract, but have balked at Russian demands to cede control over the country’s gas transit pipelines.
Scrambling for alternatives, officials have talked up several different plans to diversify supplies, including opening doors to international energy majors to invest billions of dollars to unlock fresh gas and oil deposits through state-of-the-art technologies such as shale gas extraction.
Ukraine took the first bold step in this direction on Feb. 23 by launching the first of two auctions for shale gas exploration in two fields – eastern Kharkiv region and western Ukraine’s Lviv region.
Ukrainian officials say Royal Dutch Shell, which initiated these two auctions, has already drafted proposals and if selected in the competition during which other companies can also bid, it is ready to invest several billion dollars within the next three years.
ExxonMobil, Shell, Eni and Chevron have all recently expressed interest in developing shale gas in Ukraine. This marks the first time the country has opened doors for sizable multi-billion-dollar exploration hydrocarbon exploration and production projects. But experts caution that Ukraine will need major reforms to cut red tape and attract the major, long-term investments needed to actually get gas out of the ground.
If Ukraine is found to have sizable shale gas deposits, which are estimated at around 2 trillion cubic meters, unlocking them along with efforts to untapped bigger shale gas deposits in neighboring Poland could in the next decade or so change the energy balance in the region.
Experts on the ground say shale gas technology holds the potential to help Ukraine,
Gazprom’s single biggest customer, to sharply cut imports and possibly become an exporter along with Poland rather than Gazprom customers. The timing of this announcement was planned weeks ago, but could also be used by the government as leverage in talks with Gazprom on gas import prices.
Authorities have also touted plans to build a liquefied natural gas terminal on the Black Sea coast, hoping to bring in an additional 5 billion cubic meters of gas from sources such as Azerbaijan and Qatar. But the project is already suffering from delays. A Spanish company Socoin was selected last September to carry out a feasibility study. It has yet to be completed. The government agency responsible for the terminal – which was supposed to be finished in 2015 – said the project was already one year behind schedule. No contracts for gas deliveries have been signed yet.
Meanwhile, Energy Minister Yuriy Boiko said recently that Shell has agreed to construct three coal gasification plants in Ukraine, allowing Ukraine to produce natural gas from its abundant coal.
The investment, he said, could involve $800 million. But these plants would take years to build, and there is as yet no start date for their construction.
Officials say Ukraine could boost domestic gas production in coming years using traditional technology. But instead of bringing fresh energy to the market, current projects aimed at this seem to be clouded more by corruption allegations.
Take for example, Ukraine’s plans to boost exploration on the Black Sea shelf. A Ukrainian state company last year bought two boring rigs through a tender. Following the purchase, Dzerkalo Tyzhnya, an authoritative Ukrainian weekly newspaper, reported that the boring rigs, each costing Ukraine $400 million, were sold by an offshore company with a $150 million markup. The ministry denied wrongdoing.
Experts say the alleged $150 million markup for each of the two drilling rig could have been used more efficiently. Ivan Diak, one of the founders of the Kyiv International Energy Club “Q-club,” said the money could have been used to build a pipeline to the Odesa and Bezimenne gas field from the coastline, which is located almost 15 kilometers off Ukraine’s southern coast. This would immediately increase annual gas production by 1 billion cubic meters, he said.
In January, Ukraine’s Prime Minister Mykola Azarov said he wanted to encourage international investors to come to Ukraine and invest in exploration and production of natural gas.
“If proper policies and investment conditions were in place, domestic gas production can easily increase by 50 percent in a few short years,” said Edward Chow, energy analyst at the Washington-based Center for Strategic and International Studies think tank, in his testimony given to the U.S. Senate Foreign Relations Committee on Feb. 1.
But analysts contend that so far the Ukrainian government has not been convincing in its pursuit to convince foreign investors to come to the country. They put the slow speed with which Ukraine is diversifying away from Russian gas down to murky interests who benefit from the Russia-Ukraine gas trade.
If Ukraine were genuinely trying to bring more money into the country, it would have to put an end to rent-seeking in the energy sector, establish “transparent and fair rules of the game for investors in the sector that do not favor special and politically-connected interests, and above all energy
pricing reform,” Chow said.
Many experts say that increasing energy efficiency in Ukraine would bring quicker benefits. Such measures include introducing individual billing to households and modernizing gas-hungry steel and chemicals factories.
But critics say the key factor – political will – is still missing, despite all the talk. “They (the government) are declaring the right slogans of diversification, energy security, increase of domestic production of gas and oil. In reality this policy is not implemented. The authorities are imitating it,” said Honchar from the Nomos think tank. “The strategic horizon of any Ukrainian government is not beyond one or two years.”
Kyiv Post staff writer Yuriy Onyshkiv can be reached at [email protected].
Kyiv Post staff writer Mark Rachkevych contributed to this story. He can be reached [email protected].
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