Ukrainian Energy Dependence: Kicking the Habit
It’s not exactly a drug addiction, but for Ukraine curing itself of its energy dependence on a big neighbor won’t be an easy task. But it looks like that’s what will eventually happen.
In a talk entitled The Financial and Strategic Implications of the Shale Trail for CEE Countries in the case of Ukraine, Oleksii Leshchenko, Vice President at the Ukrainian Gorshenin Institute portrayed Ukraine’s dependence on one energy source at the CEE Unconventional & Shale Gas Development Forum in Budapest, Hungary.
He said of Ukraine: “We import 60% of our energy from Russia and this figure has not changed since we gained independence from the Soviet Union. Ukraine pays about USD 10 billion a year to Russia and in the near future this situation will not change.”
Mr. Leshchenko explained that the Ukrainian economy was very energy intensive, that crucial sectors like chemicals and metallurgy depended on natural gas. “We could say that Russia controls the competitive advantage as it provides gas for the most competitive industries,” he commented.
Considering that the country had 30-40 bcm/year of imports, Ukraine couldn’t afford to import 60% of its energy. Only Russia and Kazakhstan used more energy he showed, but they were exporting countries.
He said, “All of these factors demonstrate why Ukraine is interested in alternative energy sources.
“Many experts say that Russia also depends on Ukraine,” said Mr. Leshchenko, who showed the country’s energy pipeline trunks, a majority of them going through Ukrainian territory.
Russian gas accounts for 40% of Europe’s imports and 75% of all exported gas from Russia to Europe goes through Ukrainian territory, showing how crucial the country is for the transport of Russian gas.
He said Ukraine was the biggest consumer of Russian gas. Transit tariffs, he said, were the lowest in Europe. “Ukraine pays European prices for natural gas from Russia, above USD 400/1000 cubic meters.
“Now Ukraine is concerned and is doing its best to block the South Stream project,” he said, explaining that gas through Ukraine would be cut from 75% to around 25%.
Mr. Leshchenko noted that Russian suppliers and European consumers used Ukrainian gas storage.
He went on to provide facts about Ukrainian assets and vulnerabilities. While he said the country had direct access to four EU countries, because it had no common gas market, it meant nothing.
According to Gazprom representatives the Ukrainian gas transportation system will be “scrap metal” if not used by the Russian gas monopoly.
Leshchenko contended that it would be critical for Ukraine to find alternative energy sources, and that perhaps shale gas could make for a shale gas revolution in Ukraine.
He showed the shale gas basins in Eastern Europe, and specifically those in Ukraine: the Dnieper and Lublin basins. He said Ukraine had the fourth largest in risked GIP reserves of shale gas in Europe, with 1.4 TCM in the Dnieper Donets basin and 4.2 TCM of gas in place in the Lublin basin. “Of this 1.2 TCM could be ultimately technically recoverable,” he said.
Today, Ukraine produced about 20 bcm annually, according to him.
Ukraine’s geographic proximity to Poland, he said, meant that the Lublin basin could be 10-15 times as large as the Barnett formation in the US.
“Ukraine is more suitable for horizontal drilling, because of the area, water and chemicals used,” he opined, noting that the latter aspect had come under extra scrutiny in heavily populated areas.
According to Mr. Leshchenko, about one year ago five memorandums of understanding (MOU) were signed with oil and gas E&Ps Shell, ExxonMobil, Chevron, Eni and Eurogas.
“The Ministry of Natural Resources has plans to receive independent assessments,” he said. “PSA tenders were announced this February, and new applications will be made this month.”
The first wells could be drilled by next year, he said, adding that at a price of USD 270-340 per 1000 cubic meters, shale gas in Ukraine could be at the break-even price range.
But while the Ukrainian government was very interested in exploiting the opportunity and regularly showed it to foreign investors, real investment in Ukrainian unconventional gas would require changing the rules of the game in the country.
Mr. Leshchenko outlined some of the production sharing agreement (PSA) tenders for shale gas in Ukraine. According to the terms, a state-owned company would be entitled to 50% of the investors’ rights and obligations, with 50-year terms for the PSA.
He admitted huge political risks were an impediment to natural gas investments in Ukraine, commenting: “The bureaucracy is not easy to navigate. It’s a convoluted process involving several ministries and departments.
“The state enterprise sets a price ceiling for all the gas produced in Ukraine, no matter how much it cost the producer to produce the gas,” he added. “This issue should be addressed in the nearest future.”
Moreover, the market, he said, was a monopoly. “One hundred percent of the transit pipelines are controlled by Naftogaz, a big impediment for foreign investors because they can’t get access to the infrastructure but have to compete with the state-run company.”
Mr. Leshchenko recalled that a year earlier, Ukraine had become a party to the European Energy Community. According to the Third Energy Package, production of gas needed to be unbundled from transport and distribution, which meant Ukraine would not have a monopoly in the future.
Political risks, however, were the main impediments according to him: “Licenses may be cancelled when the Government changes. Now that the Ukrainian government is being urged to look for new sources and foreign investments, these political risks will be left in the past for the Ukrainian energy sector.”
Finally, in terms of technical issues for unconventional gas, Mr. Leshchenko named water supply as a potential challenge.