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Ukrainian Energy at Crossroads


Major Russian Gas Pipelines to Europe
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Panel Discusses Challenges

July 1, 2014 - Ukraine must make short- and intermediate-term decisions about its energy profile, experts in energy diplomacy said Tuesday. But Russia's energy exporters are also facing major international factors that will determine that country's future, they added.

In particular, Ukraine must make a series of decisions in order to avoid gas shortages this winter, said Ambassador Carlos Pascual, the US State Department's special envoy for international energy affairs.

Ukraine has supplies and facilities that can reasonably be expected to meet demand until December, Pascual said at a panel discussion on energy and security at the Wilson Center in Washington DC.

Ukraine's Energy Decisions

However, to ensure continued supplies Ukraine must draw on "reverse flows" of natural gas from Europe and improved production at home, he said. "If there aren't already prepositioned supplies in Ukraine there will be gas shortages," he said.

However, by adding efficiency measures to its economy Ukraine can, within a decade, be able to decide how much natural gas to import from Russia, he said. Ukraine has been importing about 28 billion cubic meters of natural gas a year from Russia.

Jan Kalicki, scholar at the Wilson Center and editor of the book Energy and Security: Strategies for a World in Transition, said "Energy is not just a commodity, it is an economic life preserver."

Kalicki pointed to Ukraine's role as a transit route for natural gas and its present need to decide on a future energy course. "It could become a bridge rather than an 'orange' wedge," he said, referring to the Orange Revolution of the 2004-2005 winter, "a southern Finland, if you will."

"In the past corrupt middlemen siphoned off gas profits," he said. Russia began to build alternative pipelines such as the South Stream underwater route under the Black Sea.


Ukraine's provinces
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Now, Ukraine is in a position to replace overpriced Russian gas with other supplies. Kalicki said Ukraine can employ more efficient practices and could use more modern energy production techniques, replacing the Soviet-style technology that is prevalent in its energy sector.

It can also develop joint investment partnerships with other countries to build a new gas line. Kalicki noted that forgiveness of Ukrainian debt could be one way for other countries to acquire an equity stake in new Ukrainian infrastructure.

Ukraine Natural Gas Pricing

Ukraine must get natural gas pricing right, said David Goldwyn, co-editor of Energy and Security and Pascual's energy envoy predecessor under Secretary of State Hillary Clinton.

Presently natural gas is subsidized for all users. Until the country begins to remove subsidies for all but the poor there will be no economic incentives to make investments in efficiency, he said.

The IMF loan negotiations with Ukraine include provisions that would reduce the level of energy subsidies.

Russia Faces New Energy Forces

The panelists noted that even though Russia is a major oil and gas exporter, changes in world energy markets and policies are having a strong impact on the country. The new forces are motivations for Gazprom to negotiate more competitive deals in the world market, the panelists said. "It needs to be seen as a reliable gas supplier in the new market competition," Pascual said.

Europe has recently forbidden "destination clauses" in its natural gas contracts, Pascual said. These clauses once allowed exporters, such as Russia's Gazprom, to specify where the gas they supplied could be used. The practice prevented Gazprom's customers from selling or transporting Russian gas to others, effectively destroying some competition for Gazprom.

With the elimination of destination clauses, European countries are now able to provide gas to regional customers, such as Ukraine. There they are doing so through "reverse flows," meaning they are using the pipes that once shipped gas through Ukraine from Russia to instead ship natural gas back into Ukraine.

Central Asia's Baby Energy Giants

Bill Courtney, a former US ambassador to Georgia and Kazakhstan, said that three central Asian countries, Kazakhstan, Turkmenistan and Uzbekistan have begun selling natural gas to China. As such they are competition for Gazprom.

In May Russia and China signed a $400 billion, 30-year natural gas deal. However the price Russia will receive from China was kept a secret.

US Shale Gas as a Factor

The boom in unconventional shale gas production in the United State has as altered the international energy markets. Many terminals in the United States were designed to receive imports of liquified natural gas; instead now they are being used to export LNG to foreign markets from the US gas fields.

Ukraine has substantial deposits of shale gas. When asked about the environmental problems that could accompany increased shale gas production, Goldwyn said that protection of water should be an essential regulatory component of shale gas expansion.

"What we learned the hard way (from developing shale gas) needs to be the starting point for others," he said.

Three New Trends in Russian Relations with the West

John R. Beyrle, US Ambassador to Russia from 2008 t0 2012, said cooperating with Russia over energy matters is a critical step in resolving differences, but that he noted that three factors have emerged in recent years that have complicated relations between Russia and the West.

"To me this current crisis feels quite a bit different than the ones I experienced previously during my time working in the Soviet Union," Beyrle said.

Russian Economic Ties to the West

"The first is the scale of the economic ties between Russia and the United States, between Russia and Europe," he said, "and, more importantly, the willingness of the American and Europeans to threaten or use economic sanctions.

This is more salient now than it was five years ago during a crisis in the relationship over Georgia, he continued.

"The US-Russia trade relationship hit a high watermark in 2012 of about $40 billion, but that's only one-tenth on an annual basis of what the Russians trade with the Europeans. "I think we have to look at that in a different way now, because the size of the economic relationship makes the economic relationship, in a way, more of a hostage to political ups and downs than maybe we thought before," he said.

Political Misunderstandings Between Russia and the West

Beyrle said the second factor is the complex political context in the relation between the West and Russia. Once, he said, Washington would more readily arrive at a consensus about foreign policy. "That has been gone for so long that it is hard for some us older hands to remember that it ever existed or for some of the younger people in the room to even imagine that it existed," he said.

"I've never known the level of misunderstanding of the complex realities in Russia to be as low, as bad as it is, in Congress as it is right now," he said. "And I would say that the situation is worse in Russia with the Duma and the Federation Council and their views on the US.

"Meanwhile in Brussels, as we all know, the ability of the Europeans to form a consensus inside the European Union and the commission leads to lowest common denominator solutions," he said. "None of this engenders respect in Russia."

Russian Nationalist Ideas

"The third factor that makes this crisis feel to me less like a cyclical downturn and more like signal a fundamental divergence is the growing strength in russia of this persuasive national idea that questions the utility of partnership with the west and rejects western values and institutions as any kind of a model for Russia," he said. "It's' discouraging for me to see how much ot that new national idea is founded on a mythology that the West and the United States want to weaken Russia," he said. "A weak Russia is our worst nightmare.

"But working with Russia and make it stronger and to find, especially through energy cooperation, a way to have Russia prosper and become more integrated into the world economy is really the name of the game," Beyrle said.


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Ukraine Crisis Timeline

2013
Nov 21
Ukraine government said it would not sign EU agreement and would work for closer ties with Russia. Protests against the government begin.
Nov 25
European Council statement about Ukraine withdrawal includes criticism about Russia's efforts to influence Ukraine away from the EU's Eastern Partnership trade agreement.
Nov 26
Ukraine President Viktor Yanukovych tells Ukraine television that the EU has been offering candy in a nice wrapper if they would sign an IMF deal
Nov 28
Eastern Partnership summit begins in Vilnius, Lithuania. European Parliament President Martin Schultz says Yanukovych should listen to his people. Thousands of Ukrainians continue to demonstrate for closer ties to Europe.
Nov 29
Ukraine declines to sign EU Eastern Partnership trade agreement at Vilnius summit ends.
Nov 30
In the early morning hours police chase thousands of protesters from Independence Square in Kiev. But later in the day, thousands more protesters took to the streets throughout Kiev to denounce Yanukovych's refusal to sign the EU agreement.
Dec 01
About 100,000 protesters chased police out of Independence Square in Kiev. Police allowed a peaceful demonstration there, but when some protesters tried to break into a government building with a front-end loader police responded with tear gas.
Dec 11
Police attack barricades of protesters in Kiev's Independence Square.
Dec 15
The EU said it was suspending its attempt to revive the Eastern Partnership deal with Ukraine and at least 200,000 protesters merged on Independence Square.
Dec 15
Journalist Tetyana Chornovol was forced from her car and beaten. Her beating added to a list of violent incidents against protesters and journalists.
Dec 17
Yanukovych visits Putin in Moscow. Russia agrees to buy $15 billion worth of Ukraine government bonds and cut natural gas prices by one-third.
Dec 22
About 100,000 protesters at Independence Square call for the ouster of Yanukovych's government.
Dec 29
Arseny Yatsenyuk, the leader of the opposition Batkivshchyna (Fatherland) party told protesters his party was looking to win the 2015 presidential elections.

2014
Jan 17
Ukraine parliament passes laws aimed at stopping public demostrations.
Jan 19
Large protests turn violent in response to anti-demonstration legislation.
Jan 26
Anti-government protests have spread to other parts of Ukraine, with opposition groups seizing government buildings.
Jan 28
Prime Minister Mykola Azarov and his government resign.
Feb 18
Protesters march on Parliament asking that the country's constitution be restored to the form it held before Yanuikovych took power.
Feb 19
Tatyana Yermakova, leader of pro-Russian group in Crimea, sends appeal to Moscow for protection from demonstrators.
Feb 20
Interior Ministry gives orders to use live ammunition and armed street fighting begins
Feb 21
Russia suspends its economic aid to Ukraine.
Feb 22
Protesters take control of Kiev and Yanukovych flees the city. The parliament votes 328-0 to impeach Yanukovych. Arseny Yatsenyuk named acting prime minister. Yulia Tymoshenko released from prison. Pro-Russian factions in eastern and southern Ukraine hold a congress.
Feb 27
Armed, pro-Russian militants seize the provincial parliament building in Simferopol, Crimea.
Mar 01
Russian troops fly to Crimea.
Mar 01
The Russian Parliament gives Putin authority to deploy Russian troops in the Ukraine. Russian troops are effectively in control of Crimea. OAO Gazprom, Russia's gas exporter, says it will end a discount deal on natural gas unless Ukraine pays a $1.55 billion natural gas bill.
Mar 02
Ukraine calls up its military reserves and acting Yatsenyuk, speaking about Russian troop movements in Crimea, “This is a declaration of war to my country.” US Secretary of State John Kerry, who is planning a visit to the region, said that Russia could be expelled from the G-8.
Mar 03
International condemnation of Russia's troops movements in Crimea mounts as the UK foreign secretary William Hague visits Kiev.
Mar 04
US Secretary of State John Kerry visits Kiev and offers $1 billion in loan guarantees to Ukraine along with offers of technical assistance. Russian President Vladimir Putin called the regime change in Ukraine an "unconstitutional coup." He said Russia would reserve the right to use force in Ukraine.
Mar 05
The European Union offered Ukraine a $15 billion (11 billion Euro) in aid over the next two years.
Mar 15
Russia troops take control of a natural gas terminal near the east Crimean village of Strilkove.
Mar 16
Crimean voters in a referendum approve a measure to secede from Ukraine and join Russia. The vote is declared invalid by Western governments.
Mar 18
Russian Vladimir Putin signs a treaty annexing Crimea two days after a referendum in the region called for its succession from Ukraine.
Mar 19
Igor Sechin, head of Russian energy firm Rosneft, turned his attention to Asian markets by visiting a Japanese investment forum while that country imposed mild sanctions for the Crimean action. Sechin called for more integrated energy investment and tighter energy contracts between the two countries.
Mar 20
Ukrainian Energy Minister Yuriy Prodan met with with EU energy commissioner Gunther Oettinger and asked for help from Europe for his country's energy sector. Meanwhile US President Obama added more Russia officials to the list of people under sanctions resulting from the Crimean crisis.
Mar 21
Ukraine signs a trade deal with the European Union that former Ukraine President Viktor Yanukovich had rejected in November. The EU is extending 500 million Euros worth of trade credits to Ukraine now. After presidential elections are held May 25, Ukraine can enter into a free-trade agreement with the EU.
Mar 24
Russian Prime Minister Dmitry Medvedev says that Russia is considering running an electricity transmission line from the Russian mainland to Crimea and building a natural gas electricity generating plant on the peninsula. Reports said that electricity service had beens seriously curtailed due to mishaps in the electric transmission system from mainland Ukraine.
Mar 27
The IMF announced an agreement with Ukraine in which it pledged at least $14 billion of aid to Ukraine. One provision would have Ukraine ending energy subsidies.
Apr 01
Gazprom raised its price of natural gas to Ukraine 44 percent, from $268 per 1,000 cubic meters to $385. Gazprom said it was ending a discount to Ukraine due to unpaid bills for natural gas shipped in the past.
Apr 03
Russia signs law ending discounts granted Ukraine in exchange for a basing Russian ships in Crimean ports on the Black Sea. Russia had terminated those agreements, saying that their annexation of Crimea as Russia territory put the bases under Russian sovereignty.
Apr 07
Pro-Russian protestors seized a government office in Donetsk and declared themselves the "Republican People's Soviet of Donetsk." Russian supporters in other eastern cities of Ukraine seized buildings and called for a referendum on the issue of joining Russia.
Apr 08
Gazprom announces that Ukraine had failed to make a $2.2 billion debt payment on its natural gas at the 20:00 GMT deadline the night before. Gazprom has threatened to curtail gas shipments for non-payment; Ukraine has disputed the April 1 44 percent price increase.
Apr 10
Russian President Vladimir Putin warned European leaders that natural gas shipments to and through Ukraine could be halted if Ukraine does not pay its natural gas debts. Europe receives 15% of its natural gas via Russia exports transited through Ukraine.
Apr 12
Outside Slovyansk, about 150 miles from Russia, a Ukrainian Security Service officer was shot and killed by pro-Russian gunmen who fired upon Ukrainian security forces. Pro-Russian militants had seized the police station within that town.
Apr 15
German energy provider RWE reversed the flow of gas to Ukraine under terms of a 2012. RWE could supply up to 10 billion cubic meters of gas a year based on European wholesale prices plus delivery costs.
Apr 17
In Geneva on Thursday, April 17, Ukraine, Russia, the United States and the UE signed an agreement that: called for an end to fighting; the laying down of arms by insurgents and the surrender of occupied buildings; and amnesty for those protesters. It also designated the OSCE to monitor the agreement.
Apr 22
US Vice President Joe Biden unveils energy assistance package to Ukraine. The US would provide technical assistance to reverse the flow of natural gas from Europe, increase efficiency and increase natural gas consumption in Ukraine.
Apr 24
Russia sent Ukraine an $11 billion bill for natural gas as Ukraine prepared for discussions with the EU. Ukraine and the EU are working to reverse the flow of gas to Ukraine. Russia has invited Ukraine to Moscow for meetings next week.
May 02
Ukraine launches a major assault in its eastern provinces. Two helicopters are shot down. Putin calls it a violation of the April 17 Geneva agreement.
May 11
Separatist groups in Ukraine's eastern provinces stage elections for secession from Ukraine. The elections are considered invalid by the international community and the results are not recognized by the Kiev government.
May 25
Petro Poroshenko wins the presidency of Ukraine with 54 percent of the vote. Turnout is low in the eastern provinces.
Jun 20
The battle occurred overnight near the village of Yampil.

The UN Commissioner for Human Rights issued a report describing the increase in internally displaced persons in Ukraine and the tactics of intimidation and fear used by the fighters. The UN also said 356 people, including 257 civilians, have died in Eastern Ukraine since May 7.
Jun 24
A MI-8 Hinde helicopter carrying technicians near Sloviansk was shot down. Nine people were killed.
Jun 27
The European Union signed the economic partnership with Ukraine that had been rejected in November, initiating riots and a change in government. Georgia and Moldova also signed.
Jul 01
Ukrainian forces ended a 10-day ceasefire, retaking a checkpoint from pro-Russian rebels and fighting for other positions in eastern Ukraine.
Jul 05
Ukrainian forces reestablished control over the eastern city of Slovyansk in Donetsk province. Slovyansk had been a rebel bastion for much of the insurgency in eastern Ukraine.
Jul 17
A passenger jet carrying nearly 300 people was shot down north near the village of Torez, north of Donetsk, in east Ukraine.
Aug 25
About 10 Russian tanks, two armored vehicles and trucks entered Ukraine near the Sea of Azov, Ukraine said.
Aug 25
Russian Mi24 helicopters shot at a Ukrainian border post at Krasnatalovka in the Luhansk region of east Ukraine. Ukraine said four guards were killed and three injured.
Aug 26
Russian and Ukrainian Presidents Vladmir Putin and Petro Poroshenko met in Moscow to discuss the fighting in east Ukraine.
Aug 27
Ukraine said Russia troops entered Ukraine at Amvrosiyivka. Ukraine also issued a warning of a Russian natural gas cut-off to Europe. Russia denied both claims.
Aug 27
Pro-Russian fighters entered and quickly took Novoazovsk in southeastern Ukraine. Ukraine had said Russian troops were in the area.
Aug 30
Russian tanks destroyed the eastern city of Novosvitlivka. The European Union is considering sanctions against Russia.

2015
Apr 05
Four Ukrainian soldiers were killed by gunfire in Schastye near Luhansk and two died from a land mine explosion near Mariupol close to the Black Sea.
Apr 06
Ukraine's President Petro O. Poroshenko told a constitutional reform convention that Ukraine should remain a unitary country. Poroshenko said a more decentralized government might be in order, but Russia's suggestion that the country be 'federalized" stretches too far into a break-up of the East European nation.