Ukraine needs new energy partners and Turkey appears to be an ideal one. Turkish investors invested $400 million in Ukraine in 2020, making Turkey the country’s top foreign investor last year.
Ukrainian officials and Turkish diplomats even set out a blueprint in late July to develop a bilateral partnership in the energy sector between Ukraine and Turkey. The plans outlined cooperation in the fields of oil, gas, nuclear, electricity and renewable energy.
And Ukraine is in critical need of new energy investment. Russia completed its controversial Nord Stream 2 pipeline in September, which will allow the Kremlin to send gas to Europe through the Baltic Sea and Germany instead of Ukraine, causing at least $1.5 billion in lost transit fees per year.
However, Ilya Kusa, an international relations expert at the think tank Ukrainian Institute for Future, told the Kyiv Post he doubts that this energy partnership will ever materialize.
Deep-rooted corruption in Ukraine, strategic differences and unsolved queries hamper closer cooperation that Ukraine needs to ensure its energy independence from Russia.
“Our partnership is limited, it is confined to really small investments,” Kusa said.
Unlikely gas investment
On paper, Ukraine has a strategic interest for Turkey.
Sharing access with Turkey to the Black Sea, Ukraine could be the perfect location for a liquified natural gas (LNG) terminal, connecting Turkish gas supplies with European infrastructure and Ukrainian underground storage.
These terminals could receive LNG, return it to its gas form, and send it through Ukraine’s pipelines. The July meeting envisaged connecting Ukraine to a liquid gas highway, shipping and transporting gas through the Black Sea terminals in Ukraine to destinations across the world.
Ukraine almost built an LNG terminal. In 2012, investors drew up plans to construct a terminal near Odesa, a city located 475 kilometers south of Kyiv on the Black Sea coast, with construction projected to cost over $1.1 billion.
It did not end well. According to Reuters, the project was a fraud attempt by a former ski instructor posing as a Spanish energy executive, embarrassing Ukraine and pushing the project off the agenda.
Nine years later, Ukraine has no LNG terminal, and Kusa is still doubtful that Turkey is willing to invest in such a project.
“It’s not that bad of an idea, but the problem is that it is political,” Kusa said. “Politically, Turkey is not ready to invest in LNG in Ukraine.”
According to Kusa, the prospects of Turkish investment are too reliant on the country’s internal politics. Ukraine would have to get the approval of the Turkish government to use Ukrainian ports as a significant part of Turkey’s LNG infrastructure, which Kusa also believes to be unlikely.
The Istanbul Canal project could open up the Bosphorus to more cargo traffic, including LNG tankers to Ukraine.
The new waterway would stretch for 45 kilometers, turn the city’s European side into an island, and cost at least $15 billion.
But the project is encountering fierce public resistance due to its environmental risks and its costs. It’s also reliant on Erdogan’s own tenure in power. Turkey will vote for a new president in 2023, which might lead to a new strategy for the country, according to Kusa.
“There are elections in 2023 that could affect the project and, as a result, prospects of Ukraine building LNG infrastructure,” Kusa said.
Minimal gas transit
Ukraine is also discussing further utilization of the Trans-Balkan pipeline, which stretches from the Ukrainian border to Greece and connects to the Balkans.
This route is underutilized by Russian state-owned company Gazprom. The Trans-Balkan pipeline has been almost entirely abandoned in favor of the newer TurkStream and Bluestream pipelines, both carrying gas from Russia to Turkey.
The Trans-Balkan currently carries as little as 1 billion cubic meters of gas a year.
In August 2020, the Gas Transmission System Operator of Ukraine (GTSOU) requested that Turkey and the Baltic countries begin to reverse gas flow north to provide Ukraine with gas originating from Turkey.
Andrian Prokip, an energy expert for the Ukrainian Institute for the Future, told the Kyiv Post that these plans are possible, but unlikely to amount to any significant volumes.
“This route is not competitive,” Prokip said.
Instead, Ukraine could present itself as a gas storage partner for Turkey, using its large underground facilities to store Turkish gas.
Prokip said that this proposal was more feasible and would be of strategic importance to Turkey, because Ukraine can store 30 billion cubic meters. It’s a massive amount compared to Turkey’s 4 billion cubic meters.
“So this may work,” Prokip said, but it won’t help alleviate Ukraine’s lost transit fees from Russia over Nord Stream 2.
Renewable energy
Turkish investors are mostly interested in Ukraine’s renewable energy potential, according to Burak Pehlivan, chairman of the TurkishUkrainian Business Association.
Pehlivan said the recent Turkish investment boom in Ukraine was driven by investment in renewable energy. According to Kusa, Turkey’s investment in the Ukrainian renewable energy sector comes from a desire to be a part of Europe’s green transition.
“In the last few years, green energy became one of Turkey’s top priorities because they also want investments from the West,” Kusa said.
However, Enis Fakioglu, a partner in Turkish energy investment company Atlas Global, said he was attracted to Ukraine in 2016 because of its feed-in-tariffs for renewable energy power plants.
“Back then, Ukraine was the only country offering such attractive feed-in-tariffs,” Fakioglu said.
Atlas Global Energy began the development of 75 megawatts of solar projects in Ukraine, as well as a 60 megawatts wind farm in Lviv Oblast.
But Fakioglu said that he was now focusing on smaller, rooftop solar projects rather than large projects since the government reduced its feed-in-tariffs.
The tariff was originally introduced in 2008 to encourage renewable energy investment.
International investors flocked to Ukraine due to its generous green tariff which allowed electricity producers to sell their green electricity at a premium rate through the Ukrainian guaranteed buyer system.
Ukraine’s goal was initially to have 25% of its energy production come from renewable sources by 2035.
However, the amount of new renewable projects introduced in 2019 exceeded the amount for which the government budgeted.
This tariff heavily indebted the Ukrainian government, leading to several reductions in the tariffs.
The state has accrued roughly $600 million (Hr 16 billion) in debt for 2020, but has paid $238 million (Hr 6.4 billion) since the beginning of 2021, according to energy expert Yuriy Kubrushko.
The government has struggled to pay the renewable feed-in tariffs for close to two years, attracting criticism from investors and Western partners.
The crisis may cripple further Turkish investment in the renewable energy market — an expected outcome, according to experts.
“We will have much smaller volumes of investments in renewables in the next few years,” Prokip said
