On 8th November 2011, Nord Stream initiated gas transport from Russia to Germany, and the European market as a whole. The concept behind the project of building this gas delivery infrastructure was bypassing transit countries such as Ukraine and Belarus. The mainly offshore pipeline seems to be another instrument employed by Russia to discipline unruly neighbours in accordance with this country’s foreign policy: using gas delivery as a political lever.
Thus far, the yearly amount of gas transported from Russia via territories of Ukraine and Belarus to the European Union is 143 billion cubic meters: Ukraine – 36 billion cubic meters, Belarus – 107 billion cubic meters. The first of the two pipelines, recently completed, is to transport 27.5 billion cubic meters. The entire Baltic project is scheduled to be ready in 2012: both pipelines are to have capacity of 55 billion cubic meters. Ukraine and Belarus are to remain important transit countries, however, it is quite possible that the amount eventually transported through their territories will decrease.
The project will be a cause of disadvantage mainly to Ukraine – 70 percent of Russian gas flowing to Europe is currently transported through this country. Kommersant Ukraine predicts that Kiev’s income in relation to transport charges might drop by 700 million USD per year. Last year, Ukrainian transport infrastructure pumped 95.4 billion cubic meters of gas to Europe. From this transit, state owned company Naftogaz earned 1.3 billion USD in 2010. The change of profit will influence in a negative way Ukrainian company’s status during negotiations with Russia’s Gazprom – right now those two companies are conducting talks regarding conditions of gas delivery to Ukraine and possible takeover of Ukrainian gas transit network by the Russian giant. Gazprom’s CEO has already talked about reducing the Ukrainian transit amount by 20 billion cubic meters (less than in data presented by Kommersant). According to information of Centre for Eastern Studies, Warsaw, in the protocol signed in 2009, by 2019 Gazprom is declaring yearly transit of 110 billion cubic meters. Yet the document does not include any cross default penalties. A possibility of alteration of the protocol in the near future – which would result in an actual gas transit cutback – cannot be excluded.
Ukrainian transit networks threatened
From Ukrainian perspective, the vital issue is to retain the ownership of gas transit system. Gazprom’s actions, such as building a pipeline bypassing Ukrainian territory and manipulating gas prices, does not give a lot of leeway. The Russian monopolist wants to purchase Naftogaz, facing objections of Kiev, which is aware how dangerous for state energy security this move would be. Therefore, for some time the concept of the company’s restructurization is under debate. “After all necessary formalities are taken care of, entirely new companies will begin to operate on the market. As a result, all existing agreements will be revised,” announced Ukrainian PM Mykola Azarov. The alterations regarding ownership will result in necessary renegotiation of unfavourable deals made by former Prime Minister Yulia Tymoshienko, recently convicted after a politically motivated trial. In 2008, Ukraine was paying between 130 USD and 179.5 USD for 1000 cubic meters of gas. Subsequently, in effect of a gas conflict from 2008, the price raised to 450 USD. Today Kiev is seeking a way to change the conditions, and one of the solutions is to split Naftogaz into smaller listed companies and to privatize.
Sovereignty on sale
Gazprom is opposing renegotiations of contracts and is pushing through a concept of a merger. In fact, joining the companies would lead to incorporation of Naftogaz into the Russian system. The CEO of Gazprom Alexey Miller sees the positive side: “From the moment of signing a merger contract [between Naftogaz and Gazprom], gas delivery to Ukrainian territory would be priced according to Russian domestic rates. It would apply to individual consumers as well as industrial sector and energy companies”. He emphasized the fact that gas price for industrial customers in Russia is several times lower than for those in Ukraine. According to Miller, the merger would mean a huge financial support for Ukraine, which could aid the country with its development. The whole vision is both attractive and dangerous. Theoretically, results are the same – renegotiation also results in decreasing the gas price for Ukrainian customers. Yet, in practice, costs are higher: the union would lead to losing energy independence. Such a scenario would have been unthinkable, had it been for other events regarding Ukraine trading its sovereignty, for instance signing a renewal treaty on Russian Black Sea Fleet stationing in the Crimea for the next 25 years. Joining energy infrastructures would mean taking a step forward towards making Kiev once more highly dependent on Moscow.
A way out of this situation could be a gradual integration process with the European Union. In case of signing an association agreement, Ukraine would adopt 80 percent of EU legislation procedures used in member countries. A part of it regards energy sector, foremost the “third energy package”. It offers an important proposal: full ownership unbundling, meaning separating control of gas pipelines and electricity networks from control of business concerning providing gas or generating power – companies such as Naftogaz could not be owners of a gas network and energy producers at the same time. It converges with reforms planned by Ukrainian authorities, but does not, however, change the fact that the substantial part of energy consumed in this country is generated from Russian resources.
It’s the energy intensity, stupid!
The key problem of Ukrainian economy is its high energy intensity. To produce 1 USD of GDP, Ukraine uses 0.9 kg of any fuel; as it is – 2.6 times more than world average. In gas case, Kiev uses 74 billion cubic meters – 75 percent of German amount, taking into account that Germany’s GDP is 28 times higher. EU solutions influence also this field – Brussels is attaching huge importance to efficiency of energy sector.
The best solution for Ukraine is to, simultaneously, lower its energy intensity and increase local extraction. It requires massive financial expenditure, hard to find in the state budget. Russia is investing tremendous amounts of money in order to bypass Ukraine’s territory. But who is willing and able to invests billions in the country which imprisons its former PM for 7 years after a politically motivated trial?