Weekly actual topics in Azerbaijan (May 6 – 10)

Analysis Materials 14 May 2013 15:03 (UTC +04:00)

Why Ukraine needs Azerbaijan's gas?

Offers by the Ukrainian side on Azerbaijani gas supplies to Ukraine are sounding more insistent each time. This is understandable: the times are changing; no alternatives are expected to hydrocarbons as an energy source in the foreseeable future, the demand for gas promises to grow in the future, and with it, the growth in prices is projected as well. Azerbaijan, once importing gas, now itself is a reliable supplier. The route for supply of Azerbaijani gas to Europe is about to be chosen, while Ukraine is still dependent on energy supplies.

Ukraine hopes to participate in construction of the gas pipeline that would go from Azerbaijani Shah Deniz field through Georgia and Turkey, followed by its reversal in the direction of underground gas storage facilities in the west of Ukraine, on the border with Europe. It should be noted that in September 2010, Ukraine joined the European Energy Community, which gave the country an advantage to speak as a partner of Europe with a voice in decision-making, as well as sell gas not at the border, but to the end-users.

It would not be unnecessary to recall that Ukraine is one of the largest consumers of natural gas, which makes up 61 percent of total energy consumption in the country. Significant portion of natural gas is consumed by the industry - the locomotive of the Ukrainian economy. Ukraine does not have a lot of gas with its annual production at about 35 percent of the total volume of gas consumed. Accordingly, the share of imports is 65 percent of consumption, and is provided through the supply of Russian gas, some portion of which is purchased, and the remaining part is transferred as payment for transit under the delivery to European countries through the gas transportation system (GTS).

However, the interest toAzerbaijani gas is caused not only by the desire to fully satisfy the needs of the economy in gas or bring down the price of Russian gas, which Ukraine calls grossly overestimated ($406 per thousand cubic meters). It should not be forgotten that today Ukraine can ensure its energy security only through ability to technically implement the uninterrupted transit of gas. This requires the modernization to upgrade the out-of-repair gas transportation system, which is still the basic infrastructure of the transit of Russian gas to Europe. Large portion of gas is lost due to its poor technical condition. According to the Ukrainian program of socio-economic reforms in 2010-2014, this process was scheduled to begin in 2013.

However, the modernization of the system requires guarantees of supply and significant financial resources, promised by the European Union. Diversification of Russian gas supply routes bypassing Ukraine threatens the status of the country as a transit country for Russian gas supplies to Europe. After all, if Ukraine loses its status as a transit country, there is no need for the EU to invest $2.5 billion to modernize the system.

According to the Russian and European dispatcher, the share of Ukraine in the transit of Russian gas to Europe was 42 percent in early January 2013 versus 56 percent in the first quarter of 2012 and 63 percent in the first quarter of 2011. Reducing the use by the Russian side of Ukraine's gas transportation system comes amid increasing download on the Nord Stream gas pipeline, which connected Russia and Germany under the Baltic Sea. The benefit of its use for Russia is that it is not necessary to agree on the cost of transit to neighboring countries. It is expected that within a few years, Russia will be able to completely dispense with the Ukrainian gas transportation system. This will happen the "South Stream system, a gas pipeline that runs under the Black Sea, enters into force.

As we can see, the dependence of the Ukrainian economy on guarantees and supplies of Russian gas as well as from the European bailouts is obvious. In order to maintain the energy security, Ukraine should, first of all, preserve its status as a transit country, upgrade its gas transportation system and its importance, invest in the oil and gas industry in an attempt to produce its own hydrocarbon resources, but most importantly for today - find new alternative sources of gas supplies to the country.

Ukraine has resorted do reverse gas supplies from the European Union, but it does not solve the problem. Thus, the country's looks today are fixed on the Caspian Sea basin as an alternative route for gas supplies. In addition to Azerbaijani gas, Ukraine hopes that Turkmenistan with its world's largest natural gas can enter the Ukrainian market not through the re-export, but directly and on more favorable terms. The route for Turkmen gas has been pre-defined; it will be supplied via a natural gas pipeline that runs through the northern part of Turkmenistan and through Russia. But first, Kiev should negotiate with Russian partners on the use of Russian gas transit system.

As for Azerbaijan's oil supplies to Ukraine, the working group of Azerbaijan and Ukraine in the field of energy will meet by late May this year to assess the economic viability of the project.