The Ukrainian military’s
showdown with separatists in the industrial east has forced coal mines to
severely cut production or close down entirely. This has led to an electricity
crisis that can only be staunched by cutting domestic production along with
exports to Europe, Crimea, and Belarus – or worse, getting more imports from
Russia.
In the coal centers of
Ukraine’s industrial east—Luhansk and Donetsk—fighting has forced the full
closure of an estimated 50 percent of coal mines, while overall coal production
has fallen 22 percent over the same period last year.
Key industry sources say
they will potentially run out of coal in less than three weeks.
For Ukraine, the second
largest producer of coal in Europe, this will have a devastating impact on the
energy sector, which is in a state of emergency, unable to get coal to thermal
power plants that provide some 40 percent of the entire country’s electricity.
In the wider energy
picture, the halt of coal production sets Ukraine back a decade. The plan was
to rely more on coal in order to reduce dependence on Russian natural gas.
But the new reality has
insiders wondering how Ukraine will produce more of its own natural gas, after
the implementation earlier
this month of an amended tax code that targets private gas producers with a tax
so high that they will significantly reduce production through the end of the
year and beyond that is anyone’s guess. (Full disclosure: my firm, Pelicourt
LLC, is the majority shareholder of Ukraine’s third-largest gas producer, Cub
Energy, and I have advised the U.S. and Canadian governments on the potential
harm the new tax will cause.)
Economically, the
conflict in the east is a disaster for Ukraine, which has traditionally been a
net exporter of thermal coal for power generation. Now it will have to increase
imports of fuel to make up for the loss. But even then, the destruction of
supply routes makes this challenging.
Not only have coal supply
routes been destroyed in the conflict, but other critical infrastructure has
taken a hit as well, threatening other industries.
Across the board,
Ukraine’s industrial heartland is reeling from cut-off supply and shipping chains
that threaten to destroy as much as 5 percent of Ukraine’s gross domestic
product in the second half of this year.
In the meantime,
observers can be forgiven their confusion over various measures Kyiv has taken
since the intensification of the conflict. Indeed, the signals coming out of Kyiv
have been mixed, at best.
While parliament has
passed a bill allowing for sanctions against
Russia, the leadership of state-run oil and gas monopoly Naftogaz has been
quick to point out that we probably shouldn’t expect sanctions against Russian
gas giant Gazprom, and the new bill doesn’t implement sanctions of any kind—it
simply makes it legal to slap sanctions on Russian individuals should Kyiv decide
to do so. Another paper tiger.
Parliament has also
adopted a bill approving the joint-venture lease of
Ukraine’s gas-transit facilities with Western firms.
At the same time,
however, Kyiv passed a new amendment to the tax code that
doubles taxes for private gas producers and promises to keep Western investors
as far away from Ukraine as they can get.
Each move is designed to
negate the other. The economy is being destroyed, yet Kyiv is itself destroying
any chance of bringing in Western investment to prop it up. Western firms are
invited to invest in Ukraine, while at the same time Ukraine makes a mockery of
transparency and ensures that the investment climate is suddenly even less
attractive than it was two weeks ago. Lip service is paid to developing more
resources to build energy independence, but a new tax doubles costs for private
producers who will stop producing and pick up stakes.
It’s hard not to conclude
that Energy Minister Yuriy Prodan is working hard to discourage new investment
in the energy sector.
This Op-Ed first appeared on oilprice.com
and is published with the author’s permission.
Robert Bensh is an American energy and energy security expert
with over 13 years of experience leading oil and gas companies in Ukraine. He is
the managing director and partner with Pelicourt LLC, a private equity firm
focused on energy and natural resources in Ukraine.
