By Simon Pirani
Ukraine's crises-ravaged government risks losing much needed revenue if it fails to implement a new gas transit plan, as Russia moves to diversify energy transport routes
Ukraine is still far from securing desperately needed investment to upgrade its gas transport infrastructure, despite optimistic political declarations on the subject at a conference hosted by the European Commission in Brussels.
Ukraine’s crisis-ridden government will struggle to meet conditions laid down in a joint declaration made at the conference, on March 23, and signed by prime minister Yulia Timoshenko. The declaration was also signed by European commissioners and representatives of the EBRD, World Bank and EIB – from which Brussels is hoping funding might be secured.
The declaration commits Ukraine to: ensure that the gas pipeline operator Ukrtransgaz operates “on a commercial basis” over the long term, which implies a big shake-up of Naftogaz Ukrainy, the national oil and gas company; guarantee the “transparency and openness” of any borrower under the agreement, that Ukrtransgaz is independent in terms of accounting if not ownership, and that it derives benefit from income earned from transporting Russian gas to Europe, i.e. an end to cross-subsidization of other Naftogaz divisions by Ukrtransgaz; secure third-party access to Ukraine’s gigantic gas storage system, which is larger than all the rest of central Europe’s combined; and develop a reform programme for the domestic gas sector by the year end.
Implementing even part of this programme will require a consistency of action that the Ukrainian government has struggled to achieve in recent years. Failing to do so will risk losing valuable gas transit revenues, as Russia pushes forward with projects to diversify transport of its gas away from Ukraine.
Ukraine, through which four-fifths of Russian gas sold to Europe is transported, last year earned about $2.2 billion in transit revenues, while it paid a gas import bill estimated at $8.4 billion.
After the Russo-Ukrainian gas dispute in January – which resulted in an unprecedented two-week cut-off of Russian gas supplies to 17 other countries – Moscow redoubled its efforts to launch construction of pipelines through which it can get gas supplies to European customers avoiding both Ukraine and Belarus.
The furthest advanced of these is the North Stream pipeline project, a joint venture between the Russian gas giant Gazprom and German and Dutch energy companies, that would take Russian gas under the Baltic Sea directly to Germany. It is being delayed by objections raised on environmental and other grounds by Scandinavian and Baltic states.
Moscow’s favourite solution to the Ukrainian transit dilemma has been for Gazprom to take an ownership stake in Ukraine’s pipeline system. Successive Ukrainian governments have flatly refused, seeing that as an unacceptable concession of sovereignty.
Remembering Europe
But the Brussels conference was a reminder that Ukraine also faces difficulties in getting help from Europe. While politicians in Brussels are keen to support an investment that they believe would help disarm Russia’s “energy weapon”, the European energy companies that buy Russian gas are wary. They not only support such diversification schemes as North Stream, but also prior to the Brussels meeting skewered a proposal by Ukrainian president Viktor Yushchenko that they should buy gas from Russia on Ukraine’s eastern border, effectively taking over the Ukrainian transit headache from their Russian partner.
Jean-Arnold Vinois, head of energy policy and supply security at the EC, told a closed energy seminar in Brussels just before the investment conference that Yushchenko had made the suggestion in a letter to the EC. “But I don’t believe that that is realistic. The [European] energy companies fear becoming hostages in the Russian-Ukrainian relationship,” he said.
After the Brussels conference, both Russian prime minister Vladimir Putin and Russia’s ambassador to Ukraine, former prime minister and former Gazprom boss Viktor Chernomyrdin, warned the EC against believing it could solve the Ukrainian transit problem without involving Moscow.
But those statements did not necessarily indicate a Russian refusal to negotiate about the issue, industry sources insisted. At the Brussels event itself, a high-level Russian delegation headed by energy minister Sergei Shmatko delivered a keynote statement that implied a crucial compromise, referring to the need for Russian participation in the “management” of the Ukrainian system, but not “ownership”.
An energy industry executive who attended the event said: “That’s a really key distinction. The Russians are serious about this process.”