JOHN MARONE, KYIV
A HAND FULL OF GAS
It’s a new year, and Ukraine has a new government headed by a fiery reformer with a penchant for making high-stake gambles. Prime Minister Yulia Tymoshenko is known as the gas queen – more for how she earned her money back in the 1990’s than for how she has tried to clean up her country’s gas sector in more recent years. But clean it up she has tried, against highly formidable of opponents at home and abroad.
Ukraine has the most energy intensive economy in the world. Its choice of fuel is natural gas, three fourths of which it gets via Russia. Ukraine is also responsible for transiting the lion’s share of gas that Europe buys from Russia and Central Asia. Thus, gas for Ukraine, as well as its neighbors, is a serious geopolitical and economic issue.
On the one end of the pipeline is Russian gas giant Gazprom, which holds a firm grip on the Eurasian gas tap. Gazprom represents the new power of Vladimir Putin’s Russia, which is trying to reassert its international influence following the humiliation of the Soviet Union’s collapse. In between Russia and the West is Ukraine, a former Russian colony still trying to consolidate its independence.
Ukraine produces only about a quarter of its gas needs, but it controls most of the gas pipelines that connect Russia to the EU. If Ukrainian authorities were united in their efforts to improve the standing of their country and its citizens, rather than enrich themselves through various corrupt schemes, the country could use the cards it’s been dealt.
First, Ukrainian industry has to continue its recent efforts at energy efficiency. Ever since the days of the Soviet Union, the country’s gas guzzling steel mills and chemical plants have turned a profit due to energy subsidies determined in Moscow.
The wake-up call came when Gazprom unexpectedly doubled the price of gas bought at the Ukrainian border in January 2006 to $95 per thousand cubic meters. The Europeans, who had their supplies temporarily disrupted over the 2006 Christmas holidays, began to openly accuse Moscow of using its energy supplies to bully its neighbors.
As the price was raised further to $130 then $180 per thousand cubic meters, Ukrainian industrialists started introducing new energy-saving technology, financed by Western investors eager to offer their services. A side benefit of this has been greater transparency in Ukrainian industry overall, as oligarchs began to open their books to public scrutiny.
Another card that Ukraine has at its disposal is further development of its own resources. It’s only a matter of time before Moscow raises the prices of its energy exports again. Yet, the government in Kyiv has been less than welcoming to Western investors offering to find new sources of gas and oil in Ukraine. American Vanco finally clinched a production sharing agreement to explore the Black Sea shelf, and international heavyweights like Shell have made inroads towards development of the Ukrainian mainland, but the country’s path to energy independence is a mine field of opaque and discriminatory regulations and laws favoring insiders.
London-based Independent Cardinal Resources was forced off the market last year due to a rule that forced it to sell its gas at below-market prices. In the mean time, Gazprom has extended its control over distribution and sales in Ukraine through a chain of curious middleman companies.
Starting in January 2006, RosUkrEnergo, which is half owned by Gazprom and half-owned by two otherwise unknown Ukrainian businessmen, became the monopoly importer of largely Central Asian gas to Ukraine.
RosUkrEnergo neither produces nor transports the gas it sells. Yet Gazprom reported that RosUkrEnergo made profits of $70 million in the first quarter of last year alone.
In addition, another company called UkrGazEnergo was set up to sell gas to Ukrainian consumers. It is half owned by RosUkrEnergo and half by Ukraine’s state oil and gas company Naftogaz. UkrGazEnergo not only represented another unnecessary link in the chain of gas sales between Ukraine and its eastern suppliers, but the company was soon given the control over sales of gas to commercial Ukrainian customers, leaving Naftogas to collect money from deadbeat state enterprises and households.
The net result of all this has been that Naftogaz is now on the verge of bankruptcy. Prime Minister Tymoshenko pledged to keep Naftogaz afloat.
After replacing RosUkrEnergo-connected Yury Boyko as energy minister, the fiery reformer promised Western lenders to Naftogaz that their investments were safe.
At the same time Tymoshenko assured Europeans that their gas supplies wouldn’t be compromised.
“We won’t allow any wavering. We will do everything for stability to be felt in Europe and Ukraine,” she said last week in Kyiv.
Facing an increasingly imperialistic Kremlin and an opposition at home that has shown itself capable of every dirty trick in the book, Tymoshenko needs all the support from the West that she can get.
With presidential elections just around the corner, she is determined to consolidate her position as the champion of the people and enemy of corruption.
This gives Tymoshenko yet another possible enemy – President Viktor Yushchenko, who together with Tymoshenko promised Ukrainians honest government European democracy during the country’s 2004 Orange Revolution.
Unlike Yushchenko, however, Tymoshenko has backed up her words with action, promising to investigate corruption in the gas industry as soon as she took office.
Her right hand man in this endeavor, Deputy Prime Minister Oleksander Turchynov, once accused Yushchenko of ordering him to stop an investigation into RosUkrEnergo, which Tymoshenko has openly accused of corruption.
Tymoshenko has been accused by her opponents of populism and may have a few gas-related skeletons in her own closet, but she is also the only Ukrainian politician willing to challenge the present system of corruption and kickbacks which threatens Ukraine’s energy security and, indeed, its sovereignty.
Despite all denials from Moscow, there can be no doubts about its use of energy exports to control former Soviet republics and more greatly influence Europe. The Kremlin’s own rhetoric is the most damning evidence of all.
Not only does the price Gazprom charges for its gas vary from country to country with little economic justification, the energy giant has made every effort to make its customers dependent on it. In order to keep Ukraine from buying gas directly from Central Asia, Gazprom has succeeded in buying up it all up in advance. Of the 55 billion cubic meters that Ukraine gets through Russia, seven billion comes from Uzbekistan, six from Kazakhstan and 42 from Turkmenistan.
Russia only supplies the pipes.
This brings up the third card that Ukraine has at its disposal – its gas pipelines. If Russia can keep raising the price that Ukraine pays for Central Asian gas, Ukraine can raise the price it charges for the use of its pipelines.
Instead, Ukrainian negotiators have given Gazprom favorable transit terms, even as Moscow tightens the grip around Ukraine’s energy lifeline. In addition, some Ukrainian officials such as outgoing energy minister Mr. Boyko have suggested giving Russia more control over Ukraine’s gas lines – the strongest card in Ukraine’s deck.
Thankfully, Tymoshenko’s initiative to legislatively prevent such an outcome was supported largely by Ukraine’s parliament, including the lawmakers from factions opposed to Tymoshenko.
But the card game is still in progress, and the stakes are higher than ever. Instead of keeping her hand close, Tymoshenko has taken on the role of dealer, with all other players out to break her bank. Since that bank represents Ukraine’s energy security and its viability as an independent nation, the main thing for now is that the gas queen stays in the game.
John Marone, a columnist of Eurasian Home website, Kyiv, Ukraine
January 11, 2008
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