Ukraine is heading into winter without access to Russian gas and much of Donbas coal. It's a perilous state of affairs for a financially ailing nation that guzzles energy inefficiently.
Vitaliy Radchenko, 31, is a man with much-needed skills these days. He is a legal expert on Ukraine’s energy market, a fluent English-language speaker and partner at the international law firm CMS Cameron McKenna. And he knows the energy challenges Ukraine is facing.
Since the Ukrainian crisis started last November, the nation has lost access to Russian gas, much of Donbas coal and Black Sea gas reserves off the coast of Crimea. With winter coming, Ukraine is struggling to balance its energy books. The effects of that balancing act are starting to hit home.
“These days when you have a war raging in eastern Ukraine you now understand how important the simple things are in the energy sector that we usually take for granted: hot water, electricity 24/7 and heating,” Radchenko said.
With Ukrainians increasingly finding their centrally heated water lukewarm and with plans for rolling blackouts, how to maximize energy reserves and production is anything but an abstract prospect for Ukrainian officials.
“The war has done quite significant damage to infrastructure,” he said, adding that the nation is scrambling to secure coal imports while saving on gas and electricity consumption.
Energy efficiency has never been a major tenet of the Ukrainian economy. The Soviet Union tried to make up for inefficient production by providing cheap energy. Those inefficiencies continued, initially through cheap gas from Russia with the burden of subsidizing energy increasingly being borne by the bankrupt Ukrainian state.
The immediate task for Ukraine is to increase and diversify energy imports, and in particular gas imports, from its western neighbors to make up for what it has lost in the east.
“Because Ukraine is being cut off from Russian gas, there is lot of demand to import gas from the European Union. That’s what we are now working on. (There are) a number of projects that would allow Ukraine to bring more gas into storage and be able to live through the winter,” he said.
A major part of the challenge is finding companies that can transport gas to Ukraine, and connecting foreign companies with Ukraine’s energy market is something in which Radchenko specializes.
Having worked to bring Shell into the Ukrainian energy market, he knows what it takes, but also thinks there is a lot more the government could do to alleviate the growing energy crisis.
He considers a recent hike of the extraction tax, in particular, counterproductive.
“If you increase the gas production tax two-fold, you either have to revisit your exploration program and cut something out, or you have to stop doing something else,” he said, adding “you have a pile of cash allocated to drilling something and suddenly half of that cash will just go towards taxes. That is obviously not how stimulation of gas productions should work.”
The government is under pressure to raise funds to support its military as the economy contracts, but what really concerns Radchenko is a lack of communication between politicians and industry experts.
In seeking to reform the gas industry in Ukraine, however, he says there are three key reforms he would try push through.
The first would be to create incentives for companies in Ukraine to increase production. As Ukraine struggles to meet its gas quotas needed for winter, Radchenko sees little being done to encourage greater domestic production. That, he says, coupled with assurances that the tax code would not be suddenly changed could spur more Ukrainian gas going to Ukrainian homes.
The second would be to increase the money state-owned Ukrainian gas companies receive for their gas. He says that state-mandated prices have kept rates artificially low, which don’t allow companies to spend money on modernization and exploration.
Third, he would want firm structures put in place to make the price, volume and consumption of gas clear. The ownership of Ukraine’s regional gas companies is often unclear. And their monopoly positions allow them to manipulate the market to their benefit. That situation hurts consumers and makes it difficult to attract outside investment. According to him, “everything to achieve transparency in the market would be better.”
For now, both Ukraine’s gas and wider energy market remain complex problems to solve, but Radchenko says that is what he likes about his work.
“It is (about) getting to the bottom of difficult or complex questions. It is the mystery and then the solution that drives me,” he said.
