Natural Gas Europe
March 16, 2015
By Marina Zvonareva

The future of Ukraine was discussed at the Ukrainian Energy Forum in Kiev.  Despite the  fact that  the Ukrainian energy market is seasawed due to civil war in the east of the country, experts still put high hopes on reforming of the sector. Natural Gas Europe had the pleasure to talk about the current situation in the second largest European country with Ariel Cohen, Ph.D., Director, Center for Energy, Natural Resources and Geopolitics at the Institute for the Analysis of Global Security and Principal at International Market Analysis.

NGE: What chances do you see for a fundamental reform of the Ukrainian energy market in the light of the 55% royalty tax?

AC: First of all, the consensus of both Ukrainian and Western experts and business people is that the tax reform is taking a step in the wrong direction.  The royalty tax that the Rada passed for domestic oil and gas production is way too high. In addition, the Rada passed legislation without proper economic analysis, and the end result most likely is going to be a decline of Western investments into a local production of hydrocarbons.

NGE: What do you think about the idea of sending US shale gas to Ukraine to break the Russian dependence? Congressman Mike Turner was a big supporter of this project…

AC: I think that the US companies do not have a clear-cut pathway for imports of US natural gas, especially LNG, to Ukraine. There are three reasons for it. The first is that until very recent all the commitments for exports of American gas were to Asia, and when I talked with a leading American producer of natural gas, there was less than enthusiastic response to export to Ukraine.

The price range now dropped, and the spot price is attractive for Ukraine because it is below the price range offered by Gazprom for piped gas. However, the second problem is that there is no clear logistical pathway because Turkey is blocking the importation of LNG through the Bosporus. Therefore, the construction of LNG terminal in Odessa is not planned because of the current Turkish resistance. One can only hope that Turkey would change its position in the future.  Unfortunately for Ukraine, there is a very strong business connection between Russia and Turkey, and between Putin and Erdogan. Moreover, the US government did not really make the importation of LNG to Ukraine a strategic priority

Lastly, there is no other way, for example, through Europe as there are no interconnectors at the moment readily available to import LNG from the United States into Ukraine. This may change in the future.

 NGE: Since much of the eastern Ukraine shale formations are occupied by rebels in the Donbass region, how do you think Ukraine should adjust expectations for the possibility of never being able to access these reserves?

AC: I do believe that the occupation of the Eastern Ukraine by pro-Russian separatists is a temporary phenomenon and sooner or later there will be enough pressure to settle this with the restoration of Ukrainian sovereignty over the Donbas. At that point the issue of access to the gas reserves in Eastern Ukraine will be restored. As long as this is not the case, Ukraine should retain and pursue its legal rights to get compensation from those who are obstructing the access to these reserves – just like it should be seeking damages that seizure and occupation of the Crimea had caused to the companies like Vanco, which signed Production Sharing Agreements (PSAs) for the off-shore oil and gas in the Black Sea.

NGE: How far the European energy community rules are complied with in Ukraine and what are the prospects for change?

AC: I think we are in the beginning of the process of making Ukraine compatible with energy community rules. It will take several years. This is a part of integration of Ukraine with the EU acquis communautaire including the acquis on energy. While I am not optimistic on the immediate accession of Ukraine to the EU, there is a chance of making Ukrainian legislation and regulation compliant with different acquis including the energy one.

NGE: Do you think that Ukraine will be able to overcome its dependency on Russian gas diversifying supply sources?

AC: Ukraine on the declarative level wants to get rid of dependency on Russian gas. President Petro Poroshenko said that they can do it in two years, but if the tax reform of the energy sector causes a decline in Western investment, and if the bureaucracy is not transparent and continued to be as corrupt as it was for the last 23 years, I think chances of getting rid of this dependence are not very high.

 On the other hand, if the legislation makes Ukraine more transparent and attractive and if taxation goes down, then there is a chance of both producing local gas and building interconnectors through Slovakia and Poland and maybe eventually through Hungary and Romania. In that way more gas will be imported from the West — not from the East.

 I believe that the part of shedding this dependence will lead to better relationship with Russia. The historic experience demonstrates that being fully dependent on Russian gas undermines this relationship, makes it unequal and causes Russia to exercise its control in such ways that are destructive for the mutual ties.