Mutual benefit - The most reliable relationship or Azerbaijani gas supplies to Ukraine

Ukraineis one of the largest consumers of gas ranking the fifth place amongst the European countries and the fifteenth in the world, according to BP data for 2009. The share of natural gas in total energy consumption in Ukraine is about 45 percent. A significant part accounts for industry - the locomotive of the Ukrainian economy.

The sharp decline in gas consumption in Ukraine in 2008 was caused primarily by the global economic crisis and directly by the reduced consumption of the industrial sector. Thus, the consumption in energy dropped from 8.4 billion cubic meters in 2007 to 3.7 billion in 2009, in metallurgy, respectively, from 9.6 to 5.0, in the chemical industry from 8.5 to 4.7 billion.

Own gas of Ukraine is small, its annual production is about 25 percent of total gas consumption (average indicator for the previous five years).

Accordingly, the import accounts for 75 percent of total consumption (average indicator for the previous five years) and is provided by supplies of Russian gas, part of which is purchased, and part is transferred as payment for transit in supply to European countries through the gas transportation system (GTS) of Ukraine.

According to Ukrainian media reports, citing to official data from the Ministry of Energy, the natural gas production in 2010 totaled 20 billion cubic meters, consumption - 57.6 billion cubic meters, import - 36.4 billion cubic meters (data from Ukrainian and international sources for previous years are different).

Ukrainian economy's dependence on Russian gas supply is obvious. As a bridge between Russia and Europe, and pumping about 90 percent of Russian gas exports to Europe (first half of 2010) through its territory, Ukraine today can ensure its energy security due to having the ability to technically implement the uninterrupted transit of gas. For this, it needs to upgrade worn-out GTS, which is still a basic infrastructure for transit of Russian gas to Europe. According to the Programme of socio-economic reforms for 2010-2014, this process is scheduled to begin in 2013.

But to upgrade the entire system requires substantial funding and guarantee of supplies. According to Ukrainian Prime Minister Mykola Azarov, without Russia's consent and EU's participation, the modernization of the national transportation system and its existence has no prospects. Unfortunately, today, it is failed to reach a trilateral agreement, the Prime Minister said at a meeting with representatives of business circles of Germany in January.

In September 2010, Ukraine joined the European Energy Commonwealth, which gave it an advantage to act as a partner in Europe, having a vote in decision-making, and not to sell gas on the border, but to end users. However, this did not affect the continued tensions in the question of concern for Ukraine - Russia's intentions to devise alternative routes for gas supplies beyond Ukraine. Already 1,000 km (80 percent) of the first leg of the White Stream has been constructed, the South Stream project is in an advanced stage of development and exploration work in the marine section of pipeline will start in 2011. All these threaten the status of Ukraine as a transit country for Russian gas supplies to Europe, since the capacity of the two pipelines will be sufficient to meet European demand (120 billion cu. m), and the modernization of Ukraine's GTS will be out of date.

Vice-Speaker of Russian State Duma Valery Yazev stated in November last year: "we support expanding cooperation with Ukraine, based on long-reasonable basis, but it absolutely does not negate the construction of South Stream. However, he also referred to the fact that by 2020, gas imports into the EU will increase to 200 billion cubic meters per year.

Recently making a speech in Brussels at the European Policy Center, the EU Energy Commissioner Guenter Otinger made a few statements on this issue that have even brought greater uncertainty to the situation with the EU position on this issue. He said that it is unreasonable to modernize Ukraine's gas transportation system if it has no gas and the gas comes from Russia."

Later, however, a spokesman for European Commissioner said that the statement was misunderstood, but judging by comments in the press, many saw it as a hint that if Ukraine would lose its status as a transit country (in particular, if South Stream is built), the EU has no reason to invest $2.5 billion in system modernization. "If Russia's South Stream project is implemented, the issue of modernizing Ukraine's gas transportation system will remain open," Ukrinform quoted to Otinger. He further added that is still cheaper to use an existing system, to upgrade it than to build new infrastructure.

Responding to questions, Otinger said that Europe is interested in the reliable operation of the Ukrainian gas transport system as an important structure for the supply of gas to EU member countries. However, he said because of its poor technical condition, it loses a lot of gas. Therefore, the European Commission, together with partners and the IMF, will continue to provide financial support to projects on modernization of Ukraine's gas transport system.

At the same time, Ukraine is seeking alternative sources of hydrocarbon supplies, and in this respect, the views were fixed on the Caspian Sea basin as the most appropriate route of supply.

Following the talks of the presidents of Azerbaijan and Ukraine in Davos in late January, the Cabinet of Ministers of Ukraine and the Government of Azerbaijan signed a memorandum on cooperation in organizing the supply of liquefied natural gas to Ukraine. krainian Energy Minister Yuriy Boyko said that the contract envisages delivery of 2 billion cubic meters of liquefied gas in 2014, and 5 billion cubic meters of liquefied natural gas from Azerbaijan in 2015.

Delivery of liquefied Azerbaijani gas to Ukraine is possible within the project Azerbaijan-Georgia-Romanian Interconnector (AGRI), which involves the supply of liquefied gas from Azerbaijan via Georgia and the Black Sea to Romania. Currently, Ukraine is working on creating its own terminal in Odessa to receive liquefied natural gas, which is considered one of the priority national projects. Signing of contracts to supply LNG to the Ukrainian terminal is planned for the last three quarters of 2012 and first quarter of 2013. Construction work in the first phase of creating the terminal will be completed by the end of 2015, starting from the second quarter of 2013. According to different sources, the cost of the project totals from 1 to 1.5 billion euros.

There are a number of mutual interests in oil and gas sector between the two countries. In case of exploration and exploitation of oil and gas fields on the shelf of the Black and Azov Seas, the help of Azerbaijan can be invaluable, as Ukraine has no such experience, which Azerbaijan has in this field. Azerbaijancouldalsobecomeaninvestorforsuchprojects.

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