Russia’s Gazprom, and an affiliate natural gas trader, are steadily increasing their stronghold over Ukraine’s vast energy sector
Russia’s Gazprom, and an affiliate natural gas trader, are steadily increasing their stronghold over Ukraine’s vast energy sector, which already finds itself overwhelmingly dependent on its northern neighbor for supplies of hydrocarbons.
The upswing in activity in Ukraine by Gazprom and a Swiss-registered gas trader that the Russian gas giant co-owns with Ukrainian businessmen, comes at a sensitive time and could be raised as an issue in the upcoming Sept. 30 snap parliamentary elections.
After the Orange Revolution of 2004, Ukraine’s pro-Western president made an effort to open up the country’s energy sector to Western oil interests in a bid to counterbalance Russia’s vice-like grip over the country’s energy supplies.
But the governing coalition of Prime Minister Viktor Yanukovych, viewed by many as loyal to Kremlin interests, has in the past year opened the door for Russia to increase its position in the transit, storage and production of hydrocarbons in Ukraine.
This week, Ukrainian officials announced Gazprom would resume direct natural gas storage contracts and would soon, through a Ukrainian company, hold interests in developing a Black Sea hydrocarbon deposit.
A top Ukrainian official also said talks were underway over the possibility of yielding Ukraine hydrocarbon production rights in Russia in return for a stake in Ukraine’s gas transportation system.
The announcements are destined to be sharply criticized by the pro-presidential political camp and opposition leader Yulia Tymoshenko, both of whom have accused Yanukovych’s government of conceding strategic energy interests to the Kremlin.
Yushchenko upped the ante on several occasions this month, publicly slamming the Yanukovych government’s energy policy.
On Aug. 22, Yushchenko told top government energy officials to “stay out of politics” and to refrain from entering discussions that would yield a stake in Ukraine’s gas pipeline to Russia.
Flexing his political authority, Yushchenko said: “I did not give a mandate for such a format of talks.”
In a statement, Yushchenko’s administration singled out the policies of Fuel and Energy Minister Yuriy Boyko, who is close to RosUkrEnergo (RUE) shareholder Dmytro Firtash, as a serious threat to national security. Boyko has long been suspected of having close ties with Firtash, who owns 45 percent of RUE. Documents obtained by the Post indicate that Boyko served as a notarized representative of Firtash in a bitter divorce.
“The country has no hydrocarbon reserves of its own. What is currently stored in our underground terminals doesn’t belong to us. Gas traders and monopolists may set sky-high prices for gas. Due to the outright non-professionalism of the fuel ministry, the country risks facing a tough and exhausting price dictate during the winter,” said Presidential Chief of Staff Viktor Baloha.
In response, the management of Ukraine’s state oil and gas monopolist Naftogaz accused the president of trying to politicize the operations of the state energy company ahead of the election campaign.
On Aug. 22, the Our Ukraine-People’s Self-Defense political bloc loyal to Yushchenko accused Yanukovych’s government of attempting to yield Moscow control over Ukraine’s vast gas transit system in exchange for political backing on the eve of elections.
“Gazprom’s positions in Ukraine are very strong already. All these events are declarative in nature and tied to the election campaign. The price of natural gas for next year will be determined by Gazprom, which essentially means the Kremlin, only after the elections and a governing coalition is formed,” said Volodymyr Saprykin, Director of the Energy Program at the Razumkov Center think tank.
Gazprom has more than doubled the price Ukraine pays for natural gas, which currently stands at $130 per 1,000 cubic meters. Yanukovych government officials said this week that Ukraine, whose energy inefficiency leads to the consumption of a whopping 80 billion cubic meters (bcm) of gas annually, will likely pay about 10 percent more for gas next year.
Blitzkrieg
After a two-year boycott, Gazprom has resumed contracts for storing natural gas in Ukraine’s vast underground facilities, according to an Aug. 13 report in Russia’s respected Vedomosti daily.
Gazprom and RUE, which the Russian gas company owns on parity terms with two Ukrainian businessmen, confirmed that 2.5 bcm will be stored in Ukraine from October 2007 until March 2008. Gazprom stopped relying on Ukraine’s underground storage nearly two years ago after the Orange Revolution ruffled Moscow’s feathers.
The underground gas storage caverns were created during a century of natural gas extraction and can currently hold an estimated 32 bcm of the blue-burning fuel. Ukraine’s Fuel and Energy Ministry said the facilities are nearly full, with 26.5 bcm.
Russia’s total gas storage capacity is estimated at 65 bcm, but Gazprom will not reveal exact volumes. Media has speculated that Russia’s stores are full, as exports to Europe fell in the past year in connection with warm weather.
Through its stake in RUE, Gazprom will soon be involved in developing a promising natural gas deposit in the Black Sea off the coast of Odessa.
On Aug. 14, Naftogaz’s board approved formation of a new joint venture between Chornomornaftogaz, the state exploration and production company in the Black Sea region, and Ukrgazenergo, a 50-50 joint venture established in 2006 between state oil and gas company Naftogaz Ukrainy and RUE.
Ukrgazenergo was set up in 2006 as part of a compromise agreement that ended a price dispute between Kyiv and Moscow, which temporarily cut supplies to Ukraine and Europe. As part of the deal, Ukrgazenergo took over from Naftogaz control of the supply of natural gas to industrial consumers on the domestic market. The deal yielded Gazprom, which controls the supply of gas to Ukraine from its own supplies and Central Asia, its first interest on Ukraine’s domestic gas market.
On Aug. 21, Naftogaz chairman Yevheniy Bakulin announced that Ukrgazenergo, RUE and his company were ready to invest $400-500 million in the Odessa and Bezimyany sea deposits, with an estimated 22 bcm of retrievable reserves.
Earlier this year, Chornomornaftogaz had exited from an agreement to explore and exploit the fields in partnership with state-owned gas producer Ukrgazvydobuvanya.
On Aug. 21, Naftogaz chairman Bakulin told journalists that his company is in talks with Russia concerning its possible involvement in the transit of natural gas through Ukraine. The transit of gas through Ukraine’s pipelines, second only to Russia’s in terms of overall length and capacity, remains a state-controlled business. But Gazprom has lured Kyiv into selling the pipeline system or yielding management rights over it.
“We do not pass decisions, but we hold debates, as we believe that we must work out all variants most economically profitable for this country in the short and long terms,” Bakulin said.
“Today we are discussing the possible variants of Ukraine’s entry in the development of Russian natural reserves to make joint extraction possible,” according to a Ukrainian News report.
Bakulin did note that a law adopted earlier this year expressly forbids any changes to the ownership of Ukraine’s gas transportation system.
