Solving the EC-Russia-Ukraine Question
Ukraine is playing an increasingly central role in European thinking about energy security, even though Russia has said it is planning to halt gas deliveries to Europe via Ukraine in the next four years.
And Ukraine's energy minister, Volodymyr Demchyshyn, thinks it might not be too late to put together some kind of international consortium to operate Ukraine's gas transit system in a way that would encourage Russia to continue to use Ukrainian pipelines beyond 2020.
Demchyshyn was speaking alongside such luminaries as the European Commission's vice president for Energy Union, Maros Sefcovic and Johannes Hahn, the EU Commissioner for European Neighbourhood Policy & Enlargement Negotiations in Brussels on 17 March 2016. The meeting, organised to mark the 20th anniversary of the EU's Inogate programme, covered a wide variety of subjects from tariffs and investment incentives to standards and regulation. However, if only because of the minister's presence, time and again in the plenary sessions the discussion came back to Ukraine.
Demchyshyn said the Ukrainian system was able to carry 150bn m³/yr, but was now carrying 60bn m³/yr. "But what if the Ukrainian gas system is operated by an international gas consortium – an international gas corporation headed by Europeans, Americans....."
Such an approach, he argued, would "bring money into the system."
In response to critics who have sometimes considered that the Ukrainian transit system might be outliving its usefulness, Demchyshyn had this to say: "Some people say the system is outdated; but it is OK technically." Then he added: "But only if this consortium is operating this system."
Storage was a key issue, with Sefcovic saying: "We can use Ukrainian gas storage as strategic assets for European gas security," and stressing that was the answer if people asked why Ukraine should be considered in discussions on European energy security. Demchyshyn, noting that storage was vital for any centre seeking to become a gas trading hub, stressed that Ukraine possessed 32bn m³ of existing gas storage, whereas Turkey was planning to spend $700m on developing just on 1bn m³ of gas storage.
Sefcovic acknowledged that Ukraine was "going through very tough times." And while appreciating Ukrainian efforts to promote reform, he nonetheless stressed, "you need the determination, effort – and you need to complete the reforms."
The deputy director-general at DG Neighbourhood & Enlargement Negotiations, Katarina Mathernova, stressed the need for Ukraine to push for a much greater focus on energy efficiency as it pushed for reform. When she commented that "if Ukraine had energy efficiency at the lowest band of the European Union, there would be no gas imports necessary," Demchyshyn immediately interjected: "Agree."
Energy efficiency, described by Mathernova as low-hanging fruit in a garden where fog meant you couldn't see the trees, was repeatedly stressed. She said that what Ukraine "needs to do is to lower its energy intensity, one of the highest – if not the highest – energy intensity in the world.
But all too often, she said, the focus was misplaced, with officials seeking to promote big projects for new sources of energy, rather than simply saving money by using less energy.
But, as she commented wryly, "boys like big toys; it's always sexier to talk about large projects."
"One should massively invest in energy efficiency," Mathernova argued. There was "the golden triangle of energy: availability, acceptability and affordability." With most energy sources and investments, she argued, "you have a trade-off; you have two, but not three." However, she then added: "Energy efficiency has demand management, so its available; it's affordable, because it saves you cash; and its very socially acceptable." It's also, she said in an apparent dig at Russia, very important in a region "where you have a dominant supplier who doesn't shy away from using energy to blackmail customers."
Hahn also said that if Ukraine's energy efficiency were up to EU standards that it would no longer have to import gas, then added: "Imagine, just for a moment, how that might have changed recent history."
Ukraine, Hahn stressed, needed investment in its energy sector. "But you can only attract private investors if there is rule of law, an independent judiciary, and they are not confronted – not to be naive – with too much corruption."
Demchyshyn agreed with this. "You need to have a regulator that transparently sets the prices – and a judiciary that operates transparently," he said. Ukraine, he added, faced a host of problems "apart from corruption" and lack of transparency. "But these are problems, problem of government. And with the support of our parliament we will make a transparent market." In 2014, he noted, parliament had passed two fundamental laws on gas market and electricity market reform.
John Roberts, Chief Analyst