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1 March, 2011

Terminal stumbling block

Ukraine’s Government is using the idea of a liquid gas terminal as a powerful geopolitical card—one that it may not have the courage to play

For more than a year, the idea of building a liquid gas terminal has been hotly debated: how feasible it is, what Ukraine will gain from it, and what impact it might have on geopolitical relations with Ukraine’s neighbors, both near and far.

In fact, the terminal has emerged as a new move towards greater energy independence and a major contribution to Ukraine’s security. Strategically, this will allow Ukraine to diversify energy supplies, as the country now hugely depends on supplies of all fuels from Russia, extracting only a tiny portion itself. In economic terms, this strategy is right, as it will increase the country’s security. The appearance of this new terminal could offer Ukraine’s Government a nice bargaining chip when time comes to negotiate gas prices with Russia, following the suit of EU countries: they started dealing with Qatar several years ago and were able to get significant discounts from Moscow.

But first, a number of questions need to be answered: how much capacity will be used at the terminal? Will Ukraine find enough gas for it? This kind of project is much more complicated than your basic business plan. To launch a terminal, the Government must promote it on all markets, and then find the fuel for it to process and the markets for it to sell to. So far, it’s just talk. And if talk does not become action soon, all available supplies could be taken. After all, it’s not just Ukraine that is thinking about liquid gas terminals, but also some of its regional neighbors.

Another issue that arises is relations with countries in the Caspian basin. When the terminal goes on line, it will not change the situation dramatically – its planned capacity is not a strategic amount for Azerbaijan. During his visit to Kyiv, President Ilkham Aliyev mentioned that Azerbaijan could increase volumes to Ukraine severalfold, meaning that Azerbaijan had no problem with the concept, i.e., “You build the terminal, we’ll work with you.”

For Caspian basin countries this project is relatively minor. They will not place serious stakes on it or to view their role in it from a geopolitical context in the same way as they would with major trunk lines like Nabucco or new Russian projects to transit gas to Europe. But without changing anything globally, the terminal could have enough local impact to change the relations between Ukraine and Azerbaijan, as well as between Ukraine and Russia. After all, it will give the country access to regional energy resources that had been unattainable earlier. This, in turn, should improve and reinforcerelations with countries of the region.

Still, there is the possibility that no one really needs such a terminal. Ukraine has to talk it up so as to have a bargaining chip in negotiations with Russia. But this only confirms that there are no contracts in place yet, only memoranda, announcements and other unplanned decisions. Even the deals at Davos have few details. So far, there is only a Memorandum of Understanding indicating that Azerbaijan could provide the fuel to fill in the terminal. Still, there is no actual agreement, a futures contract specifying a price and liability for carrying it out or failing to do so. There has been no feasibility study although promises of one have been in the air for some time. Indeed, the site for the future terminal has not even been chosen. Meanwhile, the new Government has been talking about it since the last year and its predecessors were talking about it before that. This has been going on for nearly five years now. For these officials, the important thing is to keep saying that the terminal is on the way. They don’t have to do anything, just to talk it up enough to gain something to trade with.

What will Ukraine actually gain? Essentially, it can demand whatever it wants if it plays this game in a few fields at a time. But does the current Government have enough skill and perseverance to substitute a terminal that the country really needs with something else of equal value? Everyone saw the way the Government agreed to extend the lease of the Black Sea Fleet for 25 years in return for some conditional discounts on gas that ultimately brought no benefits at all: the price of gas continues to grow in Ukraine because the previous Government pegged it to oil prices and the price of oil is on the rise again. With gas getting more expensive, too, any possible discount is ultimately offset.

Some other examples include deals in the aircraft industry; the virtual giving away to Russian colleagues of the monopoly in the atomic energy industry; a decision to allow Russians to extract hydrocarbons in the Black Sea shelf without any tender; or the joint venture to extract shale gas with Russians who have no more expertise in this industry than do Ukrainians. Moreover, this was done, not in exchange for something, but for free. It’s hard to understand what kind of national strategy lies behind giving away strategic assets in exchange for marginal tactical dividends. 

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