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Could Ukraine join AGRI project?

Analysis Materials 7 July 2011 10:46

Ukraine , one of Europe's largest gas consumers, continues to be dependent on imports of this fuel. The Ukrainian Prime Minister Azarov stated recently that Ukraine is now 100% depends on Russian gas imports. In early June, at a meeting with his Russian counterpart, Azarov tried to argue the need to reduce current gas prices for Ukraine, but failed. Putin hinted that Russia has no need to review them: "We have a contract, it acts, has been signed. We believe that it reflects the interests of both Russian and Ukrainian sides". However, the Ukrainian side does not think so, trying to convince partners to revise the price formula for gas. Increased prices for Russian gas are painfully reflected in the Ukrainian economy, said Azarov. "Increasing the gas price reduces our foreign exchange reserves and undermine the stability of our monetary system," said Ukrainian Prime Minister. "We would like our partners to understand, and we insisted in our negotiations that can not long work with contract that does not satisfy, absolutely does not satisfy one of the sides," he said. Azarov said the arguments of the Ukrainian side to revise the contract are simple: the price of gas for Ukraine should not be higher than the price of gas, for example, for Poland, Slovakia, Germany, that is, countries that are located more far from Russia than Ukraine. For this, it needs to review the gas price formula. The Russian side has a response that the cost of gas is tied to the price of crude oil and petroleum products, and that the price formula for Ukraine is the same as for other partners in Europe.

The backdrop for the gas negotiations is Ukraine's inhibition of the process of accession to the Customs Union, which includes Russia, Kazakhstan and Belarus. According to the Ukrainian President Victor Yanukovych, Ukraine intends to continue cooperating with the Customs Union in the format of "3+1". Answering the question whether the Russian side insisted on Ukraine's accession to the Customs Union in exchange for lowering gas prices, Yanukovych replied that "this proposal was sounded in all negotiations". At the same time, Ukraine is preparing for entry into the Free Trade Zone with the European Union. At the talks in early June, Azarov said: "Ukraine is a major European country, which appeared between two customs unions - the EU and the union of Russia, Kazakhstan and Belarus. We need to explore and see what we will join." In response, the Russian prime minister made ​​ it clear that if Ukraine enters a free trade zone with the European Union, Moscow would be forced to turn to certain trade restrictions. "I do not want to scare anybody. But we need to know about it beforehand and honestly talk to each other, that's all," said Putin. Later, in late June, Azarov said in an interview to the Ukrainian TV channel "1+1" that Ukraine will not make any political concessions to Russia in exchange for lowering gas prices.

To meet their interests and intentions, both sides are using different arguments, economic and political, in order to strengthen its position and put pressure on the opponent. Ukraine is planning to launch upgrades of certain elements of its gas transportation system, plans to increase coal production in the country, significantly expanding its cooperation with NATO, which, of course, irritates Russia, is looking for ways to diversify supplies of energy resources to Ukraine. The Russian side announces the reduction of gas transit through Ukrainian territory by 20 billion cubic meters after the commissioning of the Northern Stream gas pipeline, announces the increase in gas prices for Ukraine in the third quarter up to $500 per 1,000 cubic meters as compared to the current $297. It became clear from the last press reports that Gazprom can reduce gas prices for Ukraine only under the unification with the Naftogaz Ukraine National Company, about which the head of Gazprom Alexei Miller stated on June 30. He added that Ukraine could solve many problems by adopting a proposal to merge the two companies. Literally on the same day, the Ambassador of Hungary to Ukraine Michal Bayer announced the offer of the EU to Ukraine to join the establishment of a single European energy market, which the EU member states plan to create by the end of 2014. He said that the EU has adopted a strategy that "will enable to reduce dependence of the Europeans on energy resources imported from Russia, to attract energy-efficient technologies and unite energy system of Europe into one."

According to the Director of the Global Strategies Institute in Kiev Vadim Karasev, Moscow wants Ukraine to join the Customs Union and give up European integration. "The problem is that Russia might give something to Ukraine only in exchange for pieces of geopolitical and economic sovereignty," Karasev said.

According to the BP Statistical Report, Ukraine consumed 52.1 billion cubic meters in 2010, of which 18.6 billion accounted for its own production and 33.03 billion - imports from Russia.

It is clear that in such a situation, for Ukraine it is a very topical issue to diversify supplies. Sooner or later the sides will take concrete actions, particularly on gas prices, but the energy security of Ukraine is still on the agenda. Ukraine needs alternatives.

Making a speech at the Vienna Economic Forum in June, the Ukrainian Prime Minister Azarov voiced determination to find ways to diversify energy supplies to Ukraine: "In order to ensure energy security, Ukraine will continue negotiations to diversify natural gas supply. In 2011, Ukraine will begin construction of the terminal, which will receive about 10 billion cubic meters of liquefied gas. Ukraine is also in talks with Azerbaijan and Central Asian countries on energy supplies".

Ukraine planned to build a liquefied natural gas terminal on the Black Sea by 2015. Head of the State Investments Agency of Ukraine Vladislav Kaskiv, making a speech recently in New York, said that it is a matter of national security. He discussed plans to build an LNG terminal with companies Exxon Mobil, Halliburton, Chevron. According to him, Ukraine has already received a declaration from 34 leading international companies interested to participate in the tender for construction. "Ukraine expects the terminal to process 2 billion cubic meters of gas will start in 2013," said Kaskiv, adding that the capacity will increase to 5 billion cubic meters by 2016 and 10 billion cubic meters by 2020. The government plans to purchase LNG from countries such as Azerbaijan, which signed a preliminary agreement for the supply of 2 to 10 billion cubic meters per year. Kaskiv also noted that the government will give priority to those companies that have a resource, that is liquefied natural gas.

Already in April this year in Baku, the director of the department for oil, gas, peat, petroleum industry and alternative fuels of the Ministry of Energy and Coal Industry of Ukraine, Igor Kiryushin, invited the Azerbaijani side to take part in the construction of liquefied natural gas terminal in Ukraine. In parallel, the Ukrainian side expressed its readiness to cooperate in the construction of an LNG terminal in the Georgian Port of Kulevi, to be built under the AGRI project.

Deciding to build LNG terminal, Ukraine could expand the geography of the AGRI project, becoming a part of it, the more that already there are prerequisites for this. Azerbaijan, as the closest country to the Ukrainian market, with its gas resources could act as a supplier of gas and possibly as an investor in the Ukrainian project to build the terminal. Joining the AGRI project, Ukraine also would expand the market, making the project economically more feasible and effective.

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