Ukrainian Energy Sphere under the Triple Strike

Ukrainian energy sphere has entered the zone of high risks on many directions, which are under Russian influence, starting from gas supply and up to the nuclear cooperation, import of oil and its products. The coal production is also strongly suffering from the Russian military aggression in Donetsk and Lugansk regions.

One of the main risks for Ukrainian energy sector is the dynamic reduction of coal production in Donbass (territory of Donetsk and Lugansk regions). Reason – military actions which are going on because of direct Russian aggression against Ukraine after the annexation of Crimea. Warfare on this territory already led to serious reduction of coal production about 10-20% in last couple of months. But the main problem besides production is transportation of coal to energy stations as many railway roads and bridges are destroyed by Russian terrorists. So the problem of logistics is also very sharp. The reserves of coal on Ukrainian energy plants are for about 40 days. After that country will need new coal for industrial enterprises as well as for the energy producers. One of possible ways is coal import but it will mean additional costs for Ukrainian government. Because of possible coal deficit Ukraine can seriously reduce its electricity export to European countries. 

Potential substitution for coal will be the nuclear energy in Ukraine. During the first 7 months of 2014 Ukraine imported 231 tons of nuclear fuel from Russia paying 389 million USD. This is the increase of expert on more than 60%. So for now nuclear energy cooperation with Russia is fruitful. But potentially the Ukrainian dependency from Russia on nuclear fuel is extremely high that can also be used in political struggle.

Top energy risk for Ukraine remains the gas one. Stockholm arbitrage united the cases of Gazprom and Naftogas of Ukraine but did not announce the decision on them yet. Gas price agreements between Ukraine and Russia are absent as well as plan of further gas supplies to Ukraine. Starting from 16th of June 2014 Ukraine is not receiving any Russian gas getting ready for the winter without it. Anyhow, there is still the possibility of new gas agreement on the half-year or year period with additional payment for about 6-10 Bcm of Russian gas by market price in order to pass the winter of 2015 and did not put in jeopardy the gas transit to Europe. After that the new gas agreement between two sides can be signed according to the decision of Stockholm arbitrage. 

So far Ukraine has already pumped about 15,5 Bcm in its underground gas storages trying to partially restore its gas import through reverse routes on its border with EU. Besides gas reverse route through Poland and Hungary Ukraine has launched a new one (right now in testing mode) via Slovakia. This route has the potential to deliver to Ukraine up to 10 Bcm annually. 

But unless new gas agreements with Russia and Ukraine are made Ukrainian industry is suffering severe reduction – in July 2014 it made about 12%. If the winter will be without any import of Russian gas then Ukrainian industry can lose up to 20-30% of its current possibilities. The most vulnerable positions are chemical, coal industries and metallurgy. 

Besides, we shall mention of Ukrainian dependency from the import of oil and oil products. During 7 months of this year Ukraine imported of oil products on 1,864 billion USD from Belarus, 679 million USD from Russia, 373 million USD from Lithuania, 717 million USD from the other countries. If Russia will stop its export of oil products to Ukraine Belarus, Lithuania and Poland are ready to substitute these volumes rather fast which is a good sign.

So now Ukraine is under the triple energy pressure or strike from Russia. The ability to survive this strike will depend from the effectiveness of announced by Ukrainian government reforms in energy sector and the support of European Union and the United States. In any case Ukrainian economy will face hard times.

This article originally appeared on Hazar Strateji Enstitusu