In Search of a Scam for Two

2 February 2012, 12:30

The history of relations between Ukraine and Russia over the years of independence has proved that there is no such thing as cheap gas. Under President Kuchma, Ukraine offered joint corruption scams and low transit fees in exchange for cheap gas. Under Mr. Yushchenko – corruption schemes to end gas wars, resulting in the emergence of RosUkrEnergo on the Ukrainian market and significant damage to Ukraine’s international image as a reliable transit partner. Under President Yanukovych, the cost of cheap gas so far has been the extension of the the lease of the naval base to the RF’s Black Sea Fleet in Crimea. Hopes for Russian generousity and a few dozen extra billion of gas dollars granted to Ukraine’s government by the Kremlin are misplaced, especially today.  

Those Ukrainian officials who have spent years in government offices running the energy sector cannot but realize this. After all, for many years now, Yuriy Boyko, the Minister for Energy and the Coal Industry; Andriy Kliuyev, First Vice Premier and Premier Mykola Azarov have been participating in gas talks, hearing what Gazprom has to say and outlining a cooperation strategy for the next year. Their earlier victories in the amicable resolution of gas issues with Russia resulted from agreeing to adapt to the scenarios created by Moscow, rather than their diplomatic skills or effective economic policy. Officials have never refuted news in the media regarding the extended stay of Russia’s Black Sea Fleet in Crimea or the government’s readiness to hand over control of Ukraine’s gas transit system to Russia. On the contrary, such information was confirmed by official sources.


Traditional approaches no longer work in the present situation. The current gas deal is more beneficial to Russia compared to petty scams. Moreover, the latter have caught the critical eye of the European Union. Moscow is not rushing to change the terms of cooperation with Ukraine and the price it wants for the change is unaffordable, even for Ukrainian officials. The Kremlin is only prepared to sit down at the negotiation table if Ukraine hands over facilities that are strategic for both Russia and Ukraine; it’s gas transit system, underground gas storage facilities and gas distribution networks. What’s more, Moscow wants them all at once as a complex, not individually. It is well known, that he who controls the infrastructure, controls the territory. The Russians have made it clear that they are not interested in Ukraine’s pipeline without Ukraine as well. Thus, the of negotiations on various aspects of cooperation, focus on involving Kyiv in integration projects, with Moscow at their head.

The Ukrainian government is not happy with the terms offered by Russia, and it is doubtful that this is due to its high national consciousness. It is more likely that Gazprom is prepared to offer only short-term discounts, while, having given up the pipeline, when the price of gas skyrockets again within a year or two, Ukrainian officials will have nothing to bargain with, other than their own enterprises. However, no one in Ukraine is willing to share their business. Thus, they look for other means to interest Russians in cutting the price of gas.

The task of cutting the amount of Russian gas imported to Ukraine, as declared by Azarov’s Cabinet, is nothing new. This is what all EU member-states do for their own security. The EU’s long-standing law bans the buying of more than one third of all gas consumed from one supplier. This leaves some room for maneuver in case of emergencies or gas wars. In addition, Europe is developing a market for liquid gas that does not rely on pipes and can be delivered in tanks from any corner of the world. It is also implementing its own extraction development programs. Using American experience, they are exploring their territories for shale gas that would free them from the influence of foreign suppliers in a few years.


The strategic objective declared by the Ukrainian government has had nothing to do with reality so far. The Energy Ministry spent the whole of the previous year promising to increase the extraction of gas in Ukraine. This resulted in a mere 0.4% increase in extraction in 2011 compared to 2010, and even this breakthrough in statistics occurred in December, compared to the declining extraction rates over the previous 11 months. Oil extraction has decreased by 6.3%. Ukraine bought two overpriced drilling rigs which, at best, will be put into operation in late 2012.

Foreign investment in the extraction of energy resources, such as alternative gas, was close to zero. Neighboring Poland, which has vigorously undertaken the development of shale gas extraction, has already issued more than 100 exploration licenses and is planning to launch shale gas extraction in 2014. The Ukrainian government is still stuck at the stage of convincing foreign partners that their investment in Ukraine could be profitable. In the meantime, Kyiv has stubbornly refused to listen to the companies themselves, which have demanded the creation of an improved business environment. Even before it joined the EU, Poland established guarantees for stable playing rules, while in Ukraine, these rules can often change, based on the whims of politicians. In September 2010, the government proudly announced the signing of cooperation agreements with a series of Western companies for the extraction of shale gas. Yet, all of the latter are still assessing underlying risks.

The same applies to the construction of the NLG terminal. Neighboring Poland, which also embarked on a similar project, has already begun construction and is planning to receive liquid gas from Qatar in two years. Ukraine announced this idea back in 2010 and wasted 2011 on tenders for the development of a feasibility study, the selection of the Spanish company, Socoin, as the winner and the organization of international road shows, lasting several months, to search for foreign investors (is not known whether any investors were found). Meanwhile, Mykola Azarov promised that actual construction would begin in January 2012.  

On 1 February, it will be a year since Ukraine became a member of the European Energy Community.  The government had pledged to conduct a range of reforms that would bring Ukraine’s energy sector closer to European gas, electricity and renewable fuel standards in 2011. However, there is little to be proud of as yet: relevant documents have either not been drafted or are still “being finalized” which has no specific meaning. Fulfilling commitments within the Community framework would, in fact, be the best starting point for negotiations with international companies regarding the extraction of shale gas or building the NLG terminal, since the abovementioned actions are the best way for a country to show that it has chosen the course of European development.

With these unrealized plans in mind, official declarations about the search for alternative gas suppliers or its purchase on spot markets look ever more unrealistic. Firstly, these initiatives could have been implemented two years ago, if only there was the will to do so. Secondly, what can Ukraine offer Turkey, for instance, to get a quota for its tankers to pass through the congested Bosporus? This task is no easier than all the previous ones. Moreover, there is currently no way to transport gas from Turkey to Ukraine since it can only be transported in a liquid state, which in turn requires the construction of an NLG terminal in the Ukrainian port. As we well know, this will take several more years.

Realizing that the price of Russian gas will continue to grow year after year, the government has had enough time to prepare for decreasing Ukraine’s dependence on Russian gas supplies.  Still, it has not rushed to implement specific reforms, tying them directly to the outcome of negotiations between Ukraine and Russia. In other words, if the government comes to terms with “big brother,” changes can wait; if not – we’ll implement reforms to show our strength. It appears that the way to energy independence is not the objective of those in power wishing to strengthen the country, but rather a bargaining chip and a tool of pressure to once more force the Russian partners to come to the negotiating table and find yet another “scam for two.”

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