Ukraine needs to work more closely with Kazakhstan in energy

The most realistic external source that can secure Ukraine’s energy needs in the near future is Kazakhstan, says International Centre for Policy Studies economist Oleksiy Blinov.

Since the gas conflict with Russia took a turn for the worst, the first item on the agenda in Ukraine is the long-urgent task of diversifying sources of gas. Still, the options for diversification are fairly limited. The NABUCCO pipeline from Iran/Azerbaijan to Europe will pass rather far from Ukraine. In any case, NABUCCO is scheduled to go on line only in 2013 and even then, its planned capacity is not large. Moreover, the fate of this and other projects is complicated by the EU’s ambiguous relationship with Iran.

The economics of a terminal for receiving Liquefied Natural Gas (LNG) on the shores of the Black Sea are not promising, at least in the medium term, because of high prices and limited supplies of LNG, as well as the problem of bottlenecks in the Strait of Bosphorus.

The best prospects for currently underexploited an alternative to Russian deposits of gas remain in Central Asia. However, Uzbekistan has made the strategic choice of allying itself with Russia, which makes separate cooperation impossible. Turkmenistan has problem even delivering those amounts that it has already contracted to export, while expanding extraction capacities and infrastructure are hampered by the lack of investment capital.

This leaves Kazakhstan as the most promising partner to allow diversification of gas supplies. Proved reserves of gas in this country have been assessed at nearly 2tn cu m, and anticipated reserves are nearly 6tn cu m. Kazakhstan currently is 11th in the world for proved reserves of natural gas but only 27th for gas production. The country’s high credit rating, the availability of significant domestic financing, and its openness to foreign investment are giving Kazakhstan the opportunity to develop gas extraction without increasing its dependence on Russia’s Gazprom.

Moreover, a recent conflict between the Kazakh gas company KazMunaiGaz and Russian state-owned enterprises over acquiring a stake in the Mazeikiu oil refinery in Lithuania gave the country’s government another reason to limit the presence of Russian capital in the extraction of its hydrocarbons.

Today, Kazakhstan is actively looking for opportunities to increase its exports of gas and oil, in particular to enter the very attractive EU market. Problems in its relations with Russia’s state-owned enterprises, Gazprom’s unwillingness to allow competitors onto the European market, and the limitations of the throughput of Russian export pipelines are making it virtually impossible for Kazakhstan to cooperate with Russia in terms of direct access to European markets.

According to the ICPS expert, laying a new pipeline for gas from Kazakhstan to Europe through the Caucasus—Azerbaijan could joint this project as yet another supplier—and Ukraine would satisfy the strategic interests of all the potential participants in such a project. In addition to diversification of energy supplies, for Ukraine this would also mean access to new markets for its commodities, especially for large diameter pipes.