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    Ukraine – 5 Years to Energy Independence?



In five years, Ukraine's Minister of Energy and Coal Industry, Volodymyr Demchyshyn, contends that his country will become energy independent

by: Drew S. Leifheit

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Top Stories, Security of Supply, News By Country, Ukraine

Ukraine – 5 Years to Energy Independence?

In five years, Ukraine's Minister of Energy and Coal Industry, Volodymyr Demchyshyn, contends that his country will become energy independent--an interesting statement in the context of Russia's halting of natural gas supplies to Ukraine given a reported lack of payment.

Minister Demchyshyn made his remarks in the context of a document entitled “Black Sea Energy Security Report”, which was rolled out on 19 November at the Atlantic Council Energy & Economics Summit in Istanbul, Turkey. One part of the report points out that Ukrainian gas reserves are so significant that Ukraine could become a net exporter of gas to Europe over time. While energy has been a source of vulnerability for Kiev due to corruption and dependency on Russia, the landscape could change drastically in the future.

He stated, “Now, we import 50% of gas that we consume, but because we have resources–we produce 20 BCM/year, and have resources of 1 TCM [trillion cubic metres] that are conventional, accessible, etc. We just need to lower royalties [and] change the investment climate, which is difficult having a war in the country.”

Still, Minister Demchyshyn said it is possible to make new rules for issuing approvals for drilling, production and access to the pipeline network. “We are making those easier,” he commented, “so newcomers will be pleased with new rules–transparent rules.”

He also pointed to the fact that after Ukraine adopted its Gas Market Law very recently, which is compliant with the Third Energy Package, new players had come to the market within one month, capturing 30% of the premium market of gas supplied to industry.

Competition, he said, will change the situation for Ukraine's Naftogaz.

“I hope very soon that European traders will buy gas, not at the western border, but at the eastern border of Ukraine, from Russia, and transport this gas through Ukraine, [and] store it in our storage system, which is 30 BCM in size–25% of Europe's entire storage system,” he said, which could help cover peak usage.

He continued, “Having large capacity and a short distance to European off-takers, you can use these assets fairly cheaply and, hopefully, transparently. I'm sure that more and more players will come to Ukraine.”

Minister Demchyshyn reported that more recently Ukraine had initiated talks with various parties interested in managing the gas transportation system. “We are looking for a partner for operating it. If Eni, E.ON or others would come to Ukraine, there would be confidence in the system, that it works, that it's not a black hole where gas disappears,” he opined, adding that this would result in a focus upon available assets instead of trying to build new projects.

Of investment into diversification, he said there should be balance. “Because you can over-invest: every dollar invested into spare capacities that are not utilized is a cost to the gas that you will consume,” he commented.

Energy, he pointed out, is diverse. “It's not just gas or oil, at a time when we are switching more to electricity, and hopefully Tesla will prove it right with battery power. The entire structure of the energy sector can change very quickly, where people may reconsider the technology for transportation, etc."

Ukraine, said Minister Demchyshyn, relies heavily on nuclear power.

“We have inherited this asset from Soviet times and so now we are utilizing it at only 70%. There is huge incentive to improve capacity utilisation,” he reported.

While he noted that everyone knows Ukraine as a gas transporting country, he said that few people know of the country's good electricity distribution system which allows delivery from nuclear plants and allows for export to countries like Poland, Slovakia and others to the tune of 6-700 megawatts of capacity. “We can do more,” he added.

Moreover, he recalled that Ukraine used to transport 50 million tons of Russian oil into Slovakia and farther on to other European countries, but that had also gone down, mirroring the case of natural gas. “We transport now only 60 BCM compared to the capacity available of 160-180, so we can do more. The question is, why do we need to invest more when the capacity is there? You may say we were not a reliable partner; 'you were interrupting supplies, always involved in strange stories with Gazprom, stopping supplies, etc.'”

As soon as Ukraine begins discussions with Gazprom on the price of gas, explained Minister Demchyshyn, the company unveils a new plan like Nord Stream II, South Stream, Turkish Stream, etc. “But as soon as this discussion is over, the situation changes,” he observed.

-Drew Leifheit