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20 August, 2014  ▪  Olha Vorozhbyt

Alan Riley: Ukraine has enough potential to turn itself into the center of gas trading for Central Eastern Europe and Baltic States

The Ukrainian Week speaks to Alan Riley, Professor of Law at the City Law School, City University of London, about Ukraine’s energy potential, its weak spots and the prospects of the South Stream

The original center of the Soviet gas industry was Ukraine. In the 1970s, Ukraine itself produced most of the gas consumed in the Soviet Union (70bcm). Then, the USSR authorities moved this industry to Western Siberia, partly for security reasons. They feared that the Ukrainian gas fields would be endangered in any conflict with NATO. In addition, Western Siberia has rich giant gas fields. What was overlooked in both Ukraine and Siberia was that Soviet geologists had access to antiquated technology for assessing how much gas was truly available. Soviet era geologists did not estimate how much gas was available in Ukraine. They decided to simply cap many of the existing Ukrainian gas fields and move the industry to Western Siberia. Many of the Ukrainian gas fields were badly managed but they would not qualify as exhausted with modern technology.  Potentially, therefore, there is a huge amount of conventional gas available in Ukraine. One of the major issues in the debate on Ukrainian energy security is that many Ukrainians do not realize that they actually have a huge base of conventional gas. In addition, they also have shale gas and offshore gas in the Black Sea, to which the access is problematic at the moment as the Russians are controlling Crimea. Still, its potential is very, very significant.

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Ukrainians have ‘gas advantages’ that are unique to the whole of Europe. With these, Ukraine could transform it economic and political position. Firstly, you have the largest transit network in the world. It can take approximately 120bcm per year at the moment. If completely refurbished, it can take approximately 260bcm. This creates huge capacity. Secondly, you have storage capacity of 32bcm in Western Ukraine that could be upgraded to 52bcm. That makes it the world’s largest transit and storage system! This means that Ukraine can potentially get more value, more benefit out of liberalizing its energy market and linking it to the Western European market than any other state eastward from the Alps.

The real gas advantage is that with its own resources, the transit system and storage capacity, Ukraine can turn itself into center of gas trading for the whole Central Eastern Europe and Baltic States. Thus, the Kyiv price will become the dominant one in which all contracts will be set in the whole region. And that is about enormous potential. This is actually possible thanks to your own readily available resources, transit and storage systems. I do not know whether it has been appreciated at all. One of my arguments about the current system is why do you put up with oligarchs, special deals with Gazprom? Ukraine would get so much more value out of a liberalized energy market. There advantages it could offer everyone, from Ukraine as a state to consumers, businesses, and, indeed, oligarchs are enormous.

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Ukrainian consumption of gas has shrunk because of the economic crisis. Originally, it imported 50bcm from Russia. This figure has decreased to approximately 30bcm. That is actually much more manageable in the sense that you can probably get 10-15bcm through reverse flow. By doing that, you are pushing the consumption of Russian gas down because the gas you are getting from the West is cheaper. And then, if you start using more coal instead of gas, you are pushing Russians to a relatively small coefficient.

Energy efficiency is another thing to embark on. Ukraine has been four times less efficient than the world on average and 2.5 times less efficient than Europe. There was a European program called EP5 which offered European financial support to help Ukraine deal with energy inefficiency. Its representatives could not make [ex-president] Yanukovych to do the deal for several reasons – one of them was that they could not trace where money would go. Now, you could do something on energy efficiency with Brussels.

DONALD TUSK’S ENERGY UNION

There are real problems with this Energy Union, because it is very difficult to make that work. I think the simplest thing for Ukraine is to join the European single gas market. The right way how to do that is via Energy Community Treaty. It is currently being reviewed.  What I would recommend is that we should upgrade the Energy Community Treaty to a pan-European System. At the moment, the Western Balkans, Moldova and Ukraine are its members in addition to the EU member-states. It has its energy secretariat at Vienna, but the problem is its very weak enforcement system. I have argued that we should turn the Energy Community into a mini-EU, so that not merely all the rules apply to its members, but the enforcement and surveillance powers of the energy secretariat are strengthened turning it into a mini-commission with an energy court. That would ensure full enforcement of liberalization which would help Ukraine tremendously to move along this path. It would link everything together. It would reinforce all reverse flow systems; it would apply a common competition regime for the whole region. Once you start getting these things together, you will have an impact. Ukraine would be linked into the European single gas market, become part of it, and have a major role in developing the gas market in Central and Eastern Europe. Gazprom would essentially become another player - a major one still, but not dominant as it is now in much of the region. With an interconnected market, Gazprom cannot do special deals and isolate Ukraine. That is why I support the plugging of Ukraine’s gas system into the European one. Common rules with the EU and operation within the common enforcement systems would be very good news for Ukraine.

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THE FUTURE OF SOUTH STREAM

The South Stream is not going to be built. Essentially the US government has imposed a wide range of sanctions on Russian businesses and individuals, some of whom are linked to the South Stream project. I therefore cannot see how it can get Western financing and Western partnership. I am sure that people will go on talking about that in different ways, but the truth is that the South Stream is now dead. I cannot see how it can proceed. For example, if you are a Western bank or an energy company and you are listed on the New York Stock exchange, it would be extremely dangerous for you to get involved in the South Stream. You would risk facing a visit from the US Securities and Exchange Commission and the Department of Justice based on the existing sanctions or potential future ones.  The reality is that no one wants to be involved in investigations by either the SEC or US Department of Justice, with the prospect of heavy civil or even criminal penalties. Another question (which can only make the situation of the South Stream even worse) is that, according to the buzz in the Russian blogosphere, Russia can actually build the pipeline through Crimea. Building a pipeline through illegally occupied territory makes it even more impossible. No one can get involved. Ukraine can probably seize all the gas which comes through the pipeline and the US Government would redouble its efforts against any Western participants in the project.

RELATED ARTICLE: Gazprom's Nightmare: Shale gas extraction could turn Ukraine into an influential player on the European gas market

SHALE GAS POTENTIAL

There is huge mess with shale gas in Ukraine. Of course, there is a problem with Shell’s licensed area in Eastern Ukraine. But what I would advise the Ukrainian government to encourage Chevron to get on with it in Western Ukraine. I think the issue there is to create a regulatory and environment regime which is robust, but streamlined, which allows you to speed up, move on and develop the resource. All experts say that the amount of shale gas is very significant in Ukraine.

BIO

Alan Riley is a lawyer, Professor of Law at the City University of London, and Associate Research Fellow of the Centre for European Policy Studies, Brussels. He is one of the UK’s leading experts in competition law. His other fields of interest include energy law and policies, particularly liberalization of the EU energy market. Mr. Riley holds a PhD in competition law from the Europa Institute at the Edinburg University. He is also solicitor of the Supreme Court of the UK 


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