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Ukraine’s Lonely Hearts Club – Energy Relations with Neighbours

“Energy Community is about investments, economic development, security of energy supply and social stability; but – more than this – the Energy Community is also about solidarity, mutual trust and peace”, reads the declaration on the website of the organization. The situation of Ukraine, a member of the Community since 2010, perfectly epitomizes how the practice of upholding these values is followed in reality.

Ukraina, autor: Theeuro, źródło:

Ukraine, author: Theeuro, source:

The energy security of Europe in the field of gas supplies is one of the major issues the Energy Community, formed in 2005, addresses. The organization – under the name of European Energy Community since 2010 – aims at diversifying import routes of gas to Europe. In Ukraine, 80 percent of the supply comes from Russia. Dependence on the neighbour regularly resulted in energy crises, causing repercussions on the supplies flowing to the European Union. Building of the Gas Ring – the inherent concept of the Community – would prevent such a situation in the future: creating an internal gas transit system through connecting all European gas networks would secure supplies for European consumers in case of a shut-off by an external provider. It would appear that Ukraine’s joining the community brings benefits to both sides of the deal by reducing the threat of Russia turning off its gas supply flowing towards the West.

Ukrainian problem

Under the agreement signed in 2009, the gas price for Ukraine is set quarterly upon price calculation of mazut and burning oil in the world markets. The base price is USD 450 for 1,000 cubic meters. Thus far, Ukraine has been entitled to a discount of USD 100 for 1,000 cubic meters in case the price is higher than 330 or of 30 percent if it is lower. The latter was introduced as a result of a deal regarding extending the period of the Black Sea Fleet stationing in Sevastopol until 2037 (read). According to data from 2011, Ukraine paid USD 246 for gas in the first quarter, USD 296 – in the next, USD 350 – in the third, and above USD 400 in the last.

News that Ukrainians wanted to renegotiate the prices went out for the first time in September 2011 when, while talking with President Dmitry Medvedev, President Yanukovych proposed creating a joint owner-controlled gas consortium managed by Ukraine, Russian and EU companies (read President Yanukovych Not To Tolerate Humiliation Act of Russia). According to the concept, the EU was to be a consumer, Ukraine (Naftogaz) – the operator, and Russia remained to be a sole supplier. Kyiv would retain the golden share and 34 percent of shares in total, while other partners were to get 33 percent each. In exchange, Russians would have lowered gas price to ca. USD 200 for 1,000 cubic meters.

Russia agreed, but demanded control over the transit infrastructure in Ukraine. PM Mykola Azarov remained determined: he ordered analyses of a “black scenario” in which Ukrainians would be forced to pay USD 400 for 1,000 cubic meters and declared that his country was ready to switch over to coal energy basing on its own resources. It was a rhetorical trick. Russians were fast to include the issue of building the South Stream pipeline in the negotiations. The costs, in the opinion of Moscow, were lower than modernization of Ukrainian GTS (Gas Transit System) – one of conditions set out by Ukrainians. Moreover, Russia lowers the amount of gas transported via Ukraine – by 19 percent in the first quarter of 2012 – as an additional element of a pressure tactic, for Kyiv earns quite big money through the transit. This year, according to Ukrainian experts, the reduction will cost the Ukrainian budget up to USD 12 billion.

Mapa przebiegu South Stream, źródło:

Map of the South Stream route, source:

Yet Ukraine does not give up, counting on buying gas on spot markets in Western Europe through a gas reverse flow (for instance from RWE AG) and energy cooperation with Azerbaijan depending on a future possibility of buying LNG from Trans-Caspian Pipeline and using a gas terminal located near Odessa. Trilateral negations on concrete projects among Ukraine, Azerbaijan and Turkey are already underway. Ukraine and Azerbaijan plan on signing two documents regarding supplying a future LNG terminal and establishing a company controlling the building process of the facility – the cost has been lowered from USD 1.5 billion to USD 1 billion. Kyiv and Baku have also agreed on transporting Azerbaijani oil through Ukrainian pipeline system. Furthermore, during the visit of Turkish delegation headed by Energy Minister Taner Yildiz in Kyiv on 15 February, Ukraine and Turkey signed a pact regulating mutual cooperation within the framework of three strategic energy projects. The details, however, remain classified.

European Energy “Community”

Ukrainian politicians and experts emphasize the lack of engagement on the side of Brussels, who remains passive towards the Dnieper events. Answering the question of MEP Paweł Kowal, the Chairman of Delegation to the EU-Ukraine Parliamentary Cooperation Committee, who asked about real actions taken by the European Commission in order to provide Ukraine, one of signatories of the Energy Treaty, with energy security, the Commission stated that it would have gladly joined negotiations if both sides had agreed. Moscow, however, blocks Brussels’ participation from the start, politically pressuring Kyiv to sell its gas transit system.

Ukraine signed the accession protocol and joined the Energy Community – gathering EU stats, seven Balkan countries and Moldova – in Skopje, 2010. As EU Commissioner for Energy Gunther Oettinger underlined, “This is a major step both for the Energy Community and for Ukraine. Ukraine will have access to a pan-European energy market, based on the principles of solidarity and transparency. For the Community, Ukraine is an important new member and security of supply further improved”. Among conditions of joining the Community, there is an adoption of the “third energy package” including reforms of country’s gas sector till January 2015. The aim is to separate subjects managing extraction, transport and selling of resources. On 13 April, Verkhovna Rada of Ukraine passed a bill in the second reading, allowing the government to split Naftogaz into trade and transport sections, in accordance with EU regulations. The bill also forbids privatization of the Ukrainian GTL.

Wspólnota Energetyczna, autor: Ssolbergj, źródło:

European Energy Community, author: Ssolbergj, source:

Meanwhile, Russia attempts to keep the high gas price for Ukraine. Naftogaz is one of the biggest wholesale clients of Gazprom, which directly influences profits of Russian economy, dependent on oil and gas export. Moscow cares for becoming the monopolist of the Ukrainian transit and distribution gas market. This way, Russians are to block any projects of Kyiv aimed at diversification of gas sources and to eliminate Naftogaz as a transit agent for the EU. Launching the Nord Stream in November 2011 and the Turkish agreement on building the South Stream in December the same year are arguments used by Russia to lower the worth of Naftogaz assets and taking them over by Gazprom. In relation to Moscow’s pressuring actions connecting lower gas prices with Kyiv’s participation in Russian-centred integration projects (the Customs Union and the Eurasian Union), Ukraine has placed high hopes on the full membership in the Energy Community. For Kyiv, the key issue is blocking the rout of gas pipelines bypassing Ukraine, Unfortunately, solidarity of the Community’s members has appeared to be an empty phrase, leaving Kyiv alone in negotiations with Moscow. It is understandable that, when the European Union did not even muster up the courage to comment on the launching of the Nord Stream, Ukraine no longer sees the point in being the ECs member. Another source of bitterness on the Ukrainian side is the fact that the Russian project is backed up by European politicians and countries-signatories of the EC – the chairman of the company South Stream Transport AG, supervising works on the pipeline – is Henning Voscherau, SPD member and former President of Bundesrat. In case of Nord Stream and the role of Gerhard Schroeder, the situation is similar.

Tymoshenko’s shadow

The current situation of Ukraine is difficult. The gas price in the internal market is artificially kept at a low level for industry as well as individual customers, which generates costs for the state budget. Due to subsidizing the price, Ukraine gains advantage in supplying chemistry and metallurgical sectors of industry, focused on export and being the base of local economy. On the other hand, maintaining low prices for individual consumers and communal companies (ca. 50 percent of demand) is dictated by the short perspective preceding the upcoming parliamentary elections (28 October 2012). State subsidies and a growing debt of Naftogaz caused by additional charge for Russian gas render the dialogue between Ukrainian authorities and the International Monetary Fund much more difficult, for the IMF makes another tranche of the credit granted in 2008 dependent on reparation of public finance.

In the mentioned answer to Paweł Kowal’s question, the European Commission admitted that the verdict in the case of Yulia Tymoshenko was a disappointment. Furthermore, the EC stated that the crucial issue for political association and economic integration with the EU is observance of the law. In this unambiguous way, it was suggested that the decision on reforming the Ukrainian gas system – and the energy security of EU states – is influenced by the future fate of the former PM. Considering the engagement of European politicians in Russian energy projects, it is hard not to have an impression that Tymoshenko became a perfect pretext to block out the Ukrainian appeal for European solidarity written in the EC declaration. The proverbial key to solving problems of Ukraine has transformed into a real thing – right now in possession of the director of the Kachanivska penal colony No 54 in Kharkiv.

Wojciech Jakóbik, Krzysztof Nieczypor

Read more:

[Energy Sector] Gazprom Sails Out Into The Dnieper






Gas Illusions of Ukraine







Translated by KD

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