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    Ukraine Moves to Escape Russia's Grip



Ukraine signs on with two non-Russian companies to develop its Black Sea offshore Skifska field. If successful, Urkaine will gain energy independence from Russia. If not, Russia's hold over Ukraine will only deepen.

by: Stratfor

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Natural Gas & LNG News, News By Country, Russia, Ukraine

Ukraine Moves to Escape Russia's Grip

On Wednesday, Ukraine selected multinational energy giants ExxonMobil and Royal Dutch Shell to develop its Black Sea offshore Skifska hydrocarbon field. The American and Dutch companies were chosen over Russia's Lukoil for the $10 billion project. Ukraine is entirely dependent on Russia for its natural gas imports -- Russian exports account for 64 percent of Ukraine's total annual consumption, and Kiev pays some of the highest prices of all Russia's customers for natural gas.

Ukraine's decision to go with non-Russian companies shows that Kiev wants to diversify its energy portfolio away from Russia, and the move should be viewed within the context of their relationship. The consolidation of Russian influence and control over Ukraine is an imperative for the economic and strategic security of a strong Russia. Moscow's aggressive reaction to the 2005 Western-backed Orange Revolution -- a catalyst for the 2008 invasion of Georgia -- exemplified Russia's willingness to pursue that imperative.

One of the few levers Ukraine has against excessive Russian influence is its privileged status as a transit state for Russian hydrocarbon exports to Western markets. More than 80 percent of Russian natural gas currently exported to Europe travels through Ukrainian pipelines before reaching redistribution networks in Central Europe. One of Russia's most pressing objectives has been to obtain control over Naftogaz, Ukraine's national natural gas transit company. Russia has been holding out on natural gas price discounts in the hopes that Kiev will acquiesce. Russia's overwhelming dependence on Ukraine's transit system has prevented Moscow from using Kiev's dependence on Russian natural gas to its own advantage.

Moscow suspended natural gas deliveries to Ukraine as a way to coerce Kiev in 2006 and then again in 2009. The resulting shortages impacted countries downstream and outraged Russia's customers in Central and Western Europe. These countries realized the extent of their own dependence on Russian natural gas, as well as Moscow's intent to use the commodity as a political tool.

Russia's own diversification efforts are now undermining Ukraine's transit state status. Following the energy crises of 2006 and 2009, Russia developed plans for alternative energy export routes that would bypass Ukraine. The Nord Stream pipeline crosses the Baltic Sea to bring natural gas directly to Germany, Russia's largest customer. Once the South Stream pipeline, which links Russia's Caspian reserves to Southern Europe, comes online around 2016, the transit of Russian natural gas through Ukraine will fall by as much as 60 percent.

There is little Ukraine can do to prevent this shift from occurring. It can attempt to diversify its own natural gas consumption. However, because of geographic constraints and political maneuvering from Moscow, Kiev can't really import natural gas from anyone other than Russia. Therefore, Ukraine is exploring the development of its indigenous hydrocarbon reserves. The Siksfa field alone, though it is technically difficult to exploit, could reduce the country's dependence on natural gas imports from Russia by 10 percent.

Ukraine's deal with two of the largest, most technically capable energy companies in the world shows that Kiev is aware of its rapidly closing window of opportunity to escape Moscow's grip. Should Ukraine and its new partners fail to develop significant indigenous hydrocarbon reserves, Russia will be one step closer to obtaining control over Naftogaz and consolidating its influence over the country.

Marc Lanthemann
Europe Analyst

Natural Gas Europe is pleased to provide this article in cooperation with Stratfor.  For more visit http://www.stratfor.com/