Energy interests and economic security of Ukraine

The decision of Germany and other EU countries to permit the construction of the “North Stream-2” gas pipeline again raised the issue of the future of Ukraine's gas transportation system and energy security of the country as a whole. Despite certain tactical achievements (reducing the volume of Russian gas consumption, the acceptable for “Naftogaz” decision of the Stockholm arbitration, etc.), the question of a strategy for achieving the energy security in general remains one of the most important challenges for Ukraine's national interests. At the same time, the government announced plans for achieving energy independence of Ukraine in 2020 and its sustainable development in 2035, however the way towards remains blurred. In addition, the implementation of Russian alternative gas pipeline projects may leave Ukraine at the edge of such an important element of economic activity as gas transit, leading to significant financial and political losses.

Main figures and trends

In 2017, “Gazprom” increased its exports of gas to Europe by 8.1%, reaching 193.6 billion cubic meters. In total, EU consumption in 2017 is estimated at 560.5 billion cubic meters of gas. Thus, “Gazprom's” market share in Europe has reached 34.7%. At the same time, Germany remained its largest market, while having imported 53.4 billion cubic meters of gas.

Ukraine's GTS in 2017 provided 44% of Russian gas supplies to the EU. The transit of gas through Ukraine last year amounted up to 93 billion cubic meters. Compared to the volumes of 2016, transit has increased by 13.7%. This allowed Ukraine to earn nearly $ 3 billion due to the transit of Russian gas. Given that the country's GDP in 2017 was equal to $ 110 billion, this amount has made up to 2.7% of its volume.

At the same time, in mid-January 2018, “Gazprom” received permission from Turkey for the construction of the second line of the "Turkish Stream" gas pipeline. Later, on March 26, Germany allowed to construct the “Nord Stream-2” in the Baltic Sea. The Russian gas monopolist has also made concessions to change the gas prices for the markets of Central and Eastern Europe. Such actions can have a positive impact on the European Commission's decision to address “Gazprom's” antitrust legislation in the European markets, which is expected in late April.

These facts indicate that, despite complicated political relations, the EU Member States' own interests in the sphere of economic cooperation and, especially, energy, remain crucial. The construction of new gas pipelines, alternative to the Ukrainian GTS, can marginalize Ukraine's role in the issue of gas transit, transforming such a strategic national resource as a gas transportation system into a scrap in the future. In order to avoid the implementation of such a scenario, fast and effective actions are needed to preserve the role and place of the Ukrainian gas pipeline in the transit of gas from Russia to European countries.

Consequences of Russian gas streams

“North Stream-2” and “Turkish Stream” projects envisage the launch of a gas pipeline with a total throughput of about 85 billion cubic meters of gas per year. Given the recent data on transit through the Ukrainian GTS, the launch of the above-mentioned streams can take away nearly 90% of Ukrainian transit or nearly $ 2.7 billion in revenue per year.

Main gas pipelines from the Russian Federation to Europe

Source: Information from public sources

Approximately the same figures are announced by “Naftogaz”, which estimates the financial losses at $ 3-3.5 billion dollars from the launch of alternative gas pipelines by Russia and from the complete stop of the Ukrainian GTS.

In addition, the term of the current contract with “Gazprom” on the gas transit expires in 2019. According to the head of the Russian company, Alexei Miller, “Gazprom” can provide transit through Ukraine in the amount of 10-15 billion cubic meters per year, which is up to 10% of its capacity and less than 20% of the current volume of transit. For that, according to the head of the Russian monopolist, Ukraine must justify the "economic feasibility" of a new transit contract.

In turn, the Ukrainian side announced that its main goal would be to preserve the transit of Russian gas through Ukraine after the expiration of the contract with “Gazprom”. However, it has not informed yet in what volumes and how it is planned to be reached. Nevertheless, the Cabinet of Ministers of Ukraine has already said that it is looking for a company to manage the Ukrainian gas transportation system. It also presented the idea that Ukraine would be able to further operate the gas transportation system by importing or transiting gas from Romania, however it is unlikely that the Romanian transit would be able to replace the vacuum created due to the redirection of the current transit flows.

Additional aspects of energy relations

In addition to the gloomy prospects in relations with the Russian Federation on gas transit and while taking into the account the blockade of the Donbas, Ukraine has to solve the issue of own energy supply and the reduction of its import dependence. This is confirmed by the fact that in 2017 Ukraine significantly increased the volume of imports of natural gas, coal and petroleum products. Moreover, Slovakia, Belarus and Russia were the main energy resource supply countries in 2016-2017.

                                                                 Main energy resources: import, export, transit

Source: According to the data of Energy Customs and State Fiscal Service

On the other hand, the development of the renewable energy sector is positive for Ukraine. In particular, according to the State Department of Energy Efficiency, its total launched capacity reached 121 MW in 2016 and 257 MW in 2017. At the same time, only during the 1st quarter of 2018 Ukraine launched nearly 159.4 MW of renewable energy. In general, since 2015 more than 550 million euro has been invested in "green energy" and the total capacity of renewable energy entities is now equal to 1.5 GW.

At the same time, in the near future, renewable energy will not replace the traditional energy sources, and only the implementation of real market conditions in the energy sector while promoting investments, increasing own gas production and strengthening the energy-saving technologies, will allow the country to approach the minimum acceptable standards of energy security.

The ways of balancing the energy interests

The nearest tasks for the Ukrainian government in the energy sector include:

• liberalization and opening the energy markets;
• preservation of the transit infrastructure of the state, restoration of confidence of external partners and financial organizations in the reliability of Ukraine as a transit country;
• well-balanced tariff policy for the transit of energy resources and domestic energy consumption;
• the fulfillment of requirements of the Third Energy Package, namely the separation of the “Naftogaz” activities for the transportation and distribution of natural gas;
• "Energy Euro-integration", synchronization of the energy systems with the European market (ENTSO-E, ENTSOG);
• diversification of sources of the energy resources;
• decreasing the energy consumption for own production, increasing the energy efficiency of the country;
• growth of Ukrainian energy resources production;
• stimulating the alternative renewable energy.

In the near future, Ukraine has to settle the issues of “Gazprom's” supply of 2 billion 427 million cubic meters of gas to the occupied Donbass area and the $ 1.3 billion invoice. In addition, the decision result of the Court of appeals in the County of Svea (Sweden) on the dispute between “Naftogaz” and “Gazprom” about $ 2.5 billion of fines due to the Stockholm arbitration is being expected.

The solution of the above-mentioned issues will eliminate the possible risks of Ukraine's energy and economic security. Otherwise, Ukraine risks losing a significant share of transit, which will result in the further increase in tariffs for the population and in the disruptions in functioning of its GTS.

However, even under these circumstances, there is a hope that the growing demand in the European market and the interests of “Gazprom” to constantly increase its market presence there (as evidenced by data - its market share reached only 26% in 2012) may partly save Ukraine from the total loss of the GTS.

Thus, the chess game on the energy interests of all interested parties has not finished yet. The fact that “Gazprom” will not be able to completely stop the transit of gas through the Ukrainian territory plays in favor of Ukraine. This is supported by the growing demand for gas in Europe, by the load of gas pipelines branches, by the relative loyalty of neighbors and by the favorable infrastructure of the Ukrainian GTS. However, it is not possible to win due to only these factors.

Therefore, in order to ensure the transit of gas after 2019 in the amount not less than 40 billion cubic meters per year (minimum economically profitable volume) and to attract investments in modernizing the Ukrainian GTS, the government should not continue the only rhetoric of confrontation and should not feed the illusion of independence, but it should take the concrete steps, negotiate with all parties and propose alternatives to achieve long-term goals rather than short-term benefits.

Otherwise, the levers of influence can finally disappear and economic security together with the energy interests will be once again solved at the expense of the Ukrainian population.