Ukraine’s untapped energy potential remains attractive to foreign investors despite the sector’s lack of transparency and related risks.
According to an October 2012 report by the International Energy Agency, an intergovernmental energy adviser, in spite of Ukraine’s inefficient infrastructure and heavy reliance on expensive imports of fossil fuels, there is “potential for Ukraine to experience an energy revolution, one that could boost employment, lift economic growth and enhance energy security.”
The report also noted Ukraine is taking steps in the right direction: “Energy policy in Ukraine is showing signs of a shift to foster the further development of domestic resources and to strengthen the energy market framework to European Union levels.”
The government triggered investor action when it introduced green tariffs for a number of renewable energy sources, and enacted much touted production sharing agreement legislation that brought energy majors on board.
Some warn it is too soon for optimism, as large flows of investment are held back by a poor business climate and weak property rights, among others. “There are too many investment risks,” says Volodymyr Omelchenko, an energy analyst at the Kyiv-based Razumkov Center think tank. Moreover, the economy’s instability makes forecasting demand difficult, he adds.
Nonetheless, many see the rewards as being worth the risk, including a number of global energy giants that trying their luck in natural shale gas exploration. Ukraine is estimated to have among the biggest shale gas reserves in Europe.
Last May Royal Dutch Shell won a bid to develop a shale gas field that spreads across Kharkiv and Donetsk oblasts in the east of the country. Chevron got the right to explore a shale gas field that stretches through the Lviv and Ivano-Frankivsk oblasts in Western Ukraine.
The majors will jointly explore the fields with local partners, bringing investments expected to run into the hundreds of millions of dollars.
Separately, a consortium of companies, including ExxonMobil and Shell, will explore gas reserves on Ukraine’s Black Sea shelf.
Razumkov’s Omelchenko says that the major energy companies are big enough to take risks, using their clout to stave off potential threats and proceeding incrementally. Indeed, delays are already appearing, as with the production sharing agreement, which was supposed to be signed by the end of last year, but still hasn’t been.
On the conventional electricity front, U.S.-based AES gained a big advantage when it purchased two state-owned electricity distribution companies in 2001. According to Interfax reports, the two companies have been profitable each year starting in 2002.
Headquartered in Washington, DC, AES owns Kyiv Oblenergo and Rivne Oblenergo. The company reported that Kyiv Oblenergo alone had a net profit of $6.1 million in 2011, an 81 percent increase over 2010.
As for greenfield investments, the renewable energy sector has started to take off in recent years after parliament introduced special tariffs in 2009 for electricity generated from renewable sources.
“If we talk about renewables, there is quite a big interest from foreign investors, mainly small and middle-sized companies, which are willing to take more risks than large international energy companies or investment funds,” said Yuri Kubrushko, co-chair of Wind Working Group of the European Ukrainian Energy Agency, which represents numerous foreign investors in the sector.
Ukraine’s solar energy sector already has Ekotechnic Praha, SunElectra, and Fonroche among the most active foreign developers.
But Kubrushko says it is too early to assess the amount of success foreign investors have in this area since “it takes time to develop renewable projects and many of them are at the development stage.”
Kubrushko recommends foreigners invest in small and middle-size projects, mainly solar, biogas and small hydro stations. He noted that wind and biomass are too complicated in the given environment.
Wind energy developers, for example, face a 50 percent local content requirement, meaning the volume of goods and services used to construct a renewable energy facility must be sourced locally in order to qualify for high green tariffs. This upset foreign investors who are currently developing wind farm projects in Ukraine, but are still starting or have not yet either finished them.
Their concern is that the local production market isn’t sufficiently developed to meet the growing demand of developers.
Thus, Kubrushko said: “I would also recommend buying existing projects from current owners or entering some joint ventures rather than trying to develop projects from the beginning, as it always takes a lot of time.”
Yet this hasn’t kept investors at bay.
The West Crimean Wind Energy Station, which is jointly owned by Belgium-registered GreenWorx and Turkish Guris Insaat, is scheduled to start the construction of its 250-megawatt wind power generating facility in February.
EuroCape Ukraine, which belongs to Monaco-based EuroCape New Energy, plans to construct a 500-megawatt wind power plant in Zaporizhya oblast by 2015.
And France’s Filasa International has one of the most ambitious wind projects with five plants in the pipeline for a total capacity of 1,100 megawatts – with construction on 600-megawatts capacity in total to begin this year.
Filasa’s chief representative in Ukraine, Alexandre Vanguely, says they “continue to believe Ukraine’s wind market is interesting.” That’s mostly because of the country’s size, high tariffs, and growing economy. Heavy consumption coupled with a dependence on energy imports and international commitments to boost the share of renewables also play a role.
However, Vangeuly cautioned that “we are concerned about the limitations and lack of transparency of legislation, which significantly reduces the investment attractiveness of such projects and limits its debt financing.”
Kyiv Post staff writer Yuriy Onyshkiv can be reached at [email protected]
