Ukraine Could Become Europe’s Next Energy Hub

Ukraine Could Become Europe’s Next Energy Hub

As Ukraine seeks to become an energy hub in Europe, Kiev’s ambitious energy plans still face various hurdles.

During recent meetings between the EU Energy Commissioner Günther Oettinger and Ukraine’s energy minister Eduard Stavytsky, Stavytsky declared, “Ukraine is working to become an energy hub, producing its own gas, developing storage and importing from both the European Union and Russia.” While it would be highly desirable for both Ukraine and the EU, certain difficulties could hamper the realisation of such an ambitious goal.

Ukraine’s geographical location, halfway between the European Union and the Russian Federation, makes it a crossroads for natural gas transport. According to the European Commission, Russia provides 36% of the EU’s gas imports, and more than 60% of this volume passes through the Ukrainian territory. But far from being converted into a strategic source of power, this geopolitical position has resulted in difficulties and complex foreign policy choices for this little country vulnerable to its neighbours’ influence.

Moscow has long used its energy resources as an instrument of foreign policy towards its Commonwealth of Independent States (CIS) neighbours. During the first months of 2013, Russia’s traditional ally Belarus paid $160.5 per 1,000 cubic meters of gas, whereas Ukraine, trying to lessen its dependence towards Russia, had to pay $390. Moreover, the Russian energy giant Gazprom has required Ukraine to buy 52 billion cubic meters of gas per year, or pay for at least 80% of this volume, even though the country uses far less. Russian gas imports represent two thirds of Ukraine’s consumption needs. Ukraine is essentially dependent on imports from Russia without any bargaining power over prices set by Gazprom. In 2009, quarrels between Kyiv and Moscow over gas prices resulted in a ‘gas war’ and reduced imports, also hampering gas transport to Europe.

Ukraine natural gas net export/import

Ukraine’s natural gas net imports currently exceed net exports, but this could quickly change if Ukraine turns toward Europe

Ukraine has since worked towards limiting its dependence on Russian gas by diversifying its energy suppliers, turning to European partners and Turkmenistan. Recent technological improvements should make this easier by enabling Ukraine to reverse its gas supply – the flows will not only go from Ukraine to Europe but also from Europe to Ukraine. Ukraine has also been keen to develop its domestic energy resources, with a special emphasis on shale gas and renewable energy. According to U.S. estimates, Ukraine has Europe’s third largest shale gas reserves, totaling 1.2 trillion cubic meters. The government has planned to meet 11% of domestic energy needs with renewable energy sources by 2020. The idea of becoming an “energy hub” for Europe follows the same idea, incorporating the EU in this strategy of limiting the dependence on Russian imports.

Ukraine is one of the world’s most energy intensive economies and must work towards improving the country’s energy efficiency in order to diminish its domestic energy consumption in general. But as desirable as Ukraine’s domestic energy strategy may be, it is not without costs. According to the energy minister, it will cost at least €420 million to modernize the country’s ageing infrastructure.

The EU has shown support for Ukraine’s efforts to reduce its reliance on Russian gas, encouraging regular dialogue on proposed reforms and providing financial assistance. But Moscow could still hamper these efforts by proposing attractive alternatives to both Ukraine and the EU. Russia not only has enterprises interested in financing new infrastructure, but it also recently proposed lower gas prices in exchange for Gazprom taking control of Ukrainian pipelines.

At the same time, Russia and the EU are jointly developing a gas pipeline to circumvent Ukraine and lower the risks of gas cuts in the event of another dispute between Russia and Ukraine. According to Russian President Vladimir Putin, the South Stream project should “discipline Ukraine.”

Ukraine is at the center of a three way game with Russia and the EU. Each country holds a coveted resource – Europe has the attractive market, Ukraine the geographical position and Russia the gas supply – and each country wants reduce its dependency on the others’ resources. But reducing dependency on one neighbour means increasing dependency on another. To avoid this, the parties are pursuing several strategies at once. During meetings held in early May, European and Ukrainian leaders hinted at including Russia in a three-way negotiation on Ukraine’s gas transport system. Still, Ukraine will ultimately determine the strategy for construction within its borders.

Ukraine is at a crossroads, where its chosen policy will determine its future orientation towards Europe or Russia. Although Ukraine’s political leadership has indicated the EU is its preferred gas partner, its policies have suggested otherwise. Ukraine’s decision to privatise its pipelines provided Gazprom an entry into Ukraine’s domestic industry and gas transport. Still, Ukraine has continued to follow the EU’s reform recommendations. Russian economic and financial resources might be attractive to Ukraine in the short-term, but European integration – and the independence, modernisation and economic development that come with it – could be more rewarding in the long term.

Categories: Economics, Europe

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