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7 September, 2011  ▪  Oleksandr Kramar

Just Do It!

Can the government complete the first practical energy source diversification project and reduce dependence on Russia?

In its current gas confrontation with Russia, Ukraine is again engaged in a lively discussion over ways to diversify gas supplies. The “national project” of building a terminal on the Black Sea coast is one of these priorities. Speaking at the World Economic Forum in Vienna in June, Ukrainian Prime Minister Mykola Azarov promised to launch a project of a “LNG[*] terminal for the regasification of 10 bn m3 of liquefied gas,” with an estimated price tag of about $2.5bn, before the year is out.

A few days ago Vitalii Demianiuk, deputy head of the State Agency for Investments and Management of National Projects, announced that in three or four weeks a company would be selected to conduct a feasibility study for a planned LNG terminal. So far, nine companies are reported to have bid on the tender. There are five potential sites for the future terminal: outside the Odesa Port Plant, near Pivdenny Port, Odesa Region; near the Ukrtransnafta oil terminal near Pivdenny Port; near Ochakiv, Mykolaiv Region; in the coastal zone of Berezansky, Mykolaiv Region; and an offshore LNG terminal in the open sea near Odesa.

The quest for alternative and cheap energy sources has led many nations to seek a solution in liquefied natural gas. It appears Ukraine intends to follow suit.

Compared to other kinds of energy, the global consumption of LNG is growing the fastest. Europe already has 10 operating LNG regasification terminals, and the share of LNG in total gas sales has risen to 17 percent. In some rapidly developing Asia-Pacific economies, LNG terminals allow states to fully supply their demand in natural gas.

For many countries, the advantages of LNG over pipeline gas are obvious. For example, in the US the price for the former is $150 per 1,000 m3, while in Ukraine the latter is priced over $300.

It should be mentioned, however, that Ukraine was the last of the maritime nations to start considering the construction of its own LNG terminal – and did so only when it became clear that Gazprom was not planning to lower gas prices for the Kharkiv Agreements alone. Furthermore, it is quite possible that this project — which is ultra-important in terms of energy security — may be shelved somewhere halfway under pressure from Gazprom.

This has often happened in Ukraine’s history. Such is the lot of the Odesa – Brody oil pipeline, which had been obstructed until the opening of the alternative Baku – Ceyhan project. The promising White Stream pipeline was intentionally put on the back burner as soon as Russia launched its South Stream project. The same concerns the construction of an up-to-date oil refinery complex meant for the deep cracking of high-quality Caspian crude. A series of “petrol crises” that shook Ukraine after 2005, when the idea of this facility was proposed, are a graphic example of the price the nation had to pay for its government’s incapability to conclude its initiatives to demonopolize and diversify its fuel and energy sector.

DISTANT TREASURES OF THE CASPIAN

As early as late April 2011, a Ukrainian Energy Ministry delegation held talks with its Azeri counterparts concerning the pumping of five billion cubic meters of Caspian gas into the future LNG terminal.

According to SOCAR (the State Oil Company of Azerbaijan), in 2011 Azerbaijan will produce 28 bn m3 gas (26.2 bn m3 in 2010), while the forecast consumption will not exceed 11 bn m3. Given current trends and plans, by 2015 Azerbaijan’s production will reach 35-40 bn m3, and by 2020 55 bn m3. Even if domestic consumption doubles, this will still allow the country to export at least 35 bn m3. These projects are quite feasible, given the country’s known gas reserves and its active development of new fields.

Although Gazprom is always demonstrating its willingness to purchase as much gas from new fields as possible, Azerbaijan has so far prudently declined its advances, preferring to diversify its export routes.

Should there be transportation facilities and markets available (especially in the Black Sea area), supplies of Caspian gas can sharply increase on account of Central Asian countries which at present totally depend on Russia for transit. In 2010, gas production in Turkmenistan grew from 64.4 to 75.1 bn m3, and in Kazakhstan, from 32 to 37 bn m3.

IS AGRI TO BECOME AGURI?

At the April talks in Baku, Ukraine suggested its services in completing the loading terminal at the Black Sea Georgian port of Kulevi. The terminal, built within the framework of the AGRI project (the Azerbaijan – Georgia – Romania Interconnector), can either compete with or complement Ukraine's own plans.

At the level of intentions and consultations, AGRI was conceived in the first half of 2009. And only a year after the start of the negotiations, on April 13, 2010, the first multilateral agreement was signed, a Memorandum among Azerbaijan, Romania, and Georgia “On Cooperation in Gas Supplies.” The latter envisaged setting up joint ventures for the construction of project-related facilities, while Romania undertook to search for EU support for AGRI as one of the routes for the diversification of energy supplies to Europe.

The pool of participants is expanding, including both potential consumers and suppliers of gas. In September 2010, Hungary officially joined the project (formally MVM, the Hungarian company, became a party to a joint venture in March 2011). The project itself was declared an important part of the Eastern Partnership initiatives. Early in November of the same year, the prime minister of Bulgaria announced his country’s intention to join the project and purchase up to 2 bn m3 of Azerbaijani gas. At the beginning of May 2011, the president of Turkmenistan Gurbanguly Berdymuhamedow declared a similar desire. He promised to increase gas exports — contingent upon sufficient export infrastructure — to 125 bn m3 in the near future (Gazprom’s total export to the EU only slightly exceeds this figure).

Today, AGRI is planning to build the following facilities: a gas pipeline with a minimum capacity of 20 bn m3 from Sangachal terminal on Azerbaijan’s Caspian coast to the Georgian port of Kulevi on the Black Sea; a cooling terminal in Kulevi (completion expected in 2013); a receiving LNG terminal in Romania's Constanța port, with a maximum capacity of 8 bn m3 gas; connecting pipeline systems for transporting the Azerbaijani gas to inland Romania (to 2 bn m3) and to the Hungarian GTS (Arad – Szeged segment) and potentially to other EU countries. Four parties have created a joint venture headquartered in Budapest. Each partner (ROMGAZ, Romania; GOGC, Georgia; SOCAR, Azerbaijan; and MVM, Hungary) owns 25 percent in stock.

If this project proves successful, Russia could lose its monopoly in the energy markets of Central and South-Eastern Europe.

Ukrainestill has not formally joined AGRI. However, the proposed construction of an LNG terminal makes it an attractive partner. By joining AGRI and expanding its energy transportation projects, together with more active participation in the GUAM/ Eastern Partnership and the involvement of EU members of AGRI (Bulgaria, Romania, and Hungary) and the support of Ukraine’s conventional friends in the EU, Ukraine could feasibly revive its regional and even European prospects. Of course, this depends on Kyiv's political will.

On June 14, Vladyslav Kaskiv, head of the State Agency for Investments and Management of National Projects, stated that the construction of an LNG receiving terminal is “a matter of national security, now that Russia has for no reason refused to lower gas prices.” And this is where the threat lurks: the timely construction of the LNG terminal is indeed a matter of national security, which will remain under threat if such projects are never implemented. Ukraine can use it as leverage in gas negotiations with Russia. And our government will make a fatal mistake if, in return for a temporary price settlement with Gazprom, it will for the umpteenth time give up a project of strategic national importance.

Good intentions

According to Ukraine’s Energy and Coal Minister, Yuriy Boyko, Ukraine is planning to reduce the purchase of Russian gas in the next five years, from the current 40 bn m3 to 12 bn m3 per year, at the expense of “expansion of domestic gas production, implementation of efficient energy conservation technologies, and the substitution of expensive imported gas with domestic coal.”

AN EXPENSIVE ALTERNATIVE

Since early 2011, the average market price for liquefied gas in Ukraine has grown by 28 percent, from 5.32 to 6.82 hryvnias a liter (as of mid-August). The price for propane-butane (a mixture used as vehicle fuel) rocketed in the summer, in particular in July (+12 percent) and August (+8 percent).  Experts ascribe this tendency to the growing demand for alternative fuel due to the rise in petrol prices (+26 percent since the beginning of the year). This tendency was triggered by a considerable decrease in offer caused by growing excise duty rates (which have been lifted from €0 to €40 per ton since January 1, 2011).

Another factor for higher retail LNG prices is the amendments to the action sales rules, which were passed to promote the interests of certain wholesale traders. The situation was exacerbated when the Lysychansk Oil Refinery exported 80 percent of the fuel it produced to Russia in May and June.

 



[*]Liquefied gas is produced by cooling natural gas to -162 °С, as a result of which it is reduced to 1/600th of its original volume. After transportation, it is again warmed up and pumped into the pipeline

 


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