Forced to be Free? The Consequences of the Transition to European Netback Gas Prices for Ukraine’s Energy Dependency

From: JUPS #1, 2015 (pp. 58-78).

Photograph: Andrey Skakodub / UNIAN (2011)
April 2015
Conclusion

Since 2009, Ukraine has taken concrete steps to decrease its energy dependency on Russia by working to reduce imports of Russian gas, undermine Russia’s status as a monopolistic energy supplier, and mitigate its energy poverty. In the process, the country began consuming less Russian gas in absolute and relative terms, investing in improving the energy efficiency of its gas-intensive businesses, diversifying its sources of gas supply, and encouraging exploration of non-conventional domestic gas. As a result, Ukraine’s diminished reliance on Russian gas after 2009 has featured as a discursive weapon in Kiev’s efforts to resist joining the Moscow-led Customs Union, and in general has rendered Ukraine freer to pursue a more pro-Western foreign policy and reform its domestic institutions. These findings suggest that it is possible to conceive of Russo-Ukrainian energy relations in terms of a theoretical framework whereby the price at which Ukraine buys its gas from Russia negatively correlates with the extent of Ukraine’s energy dependency on Russia, while its energy dependency positively correlates with Kiev’s political and economic vulnerability vis-a-vis Moscow. Nonetheless, whether or not the Ukrainian public will benefit from the recent changes in the structure of Ukrainian-Russian energy relations will remain crucially dependent upon domestic politics. It is to be hoped that the election of President Petro Poroshenko will be a steppingstone towards a meaningful democratization of Ukrainian governance, and particularly towards increasing public oversight of the work of state representatives. Such a development will be necessary to prevent future hijackings of public institutions by a self-seeking elite. While enabling some domestic reform, a regime of high gas prices will ultimately depend on additional, exogenous support for meaningful political change if it is to be fully exploited by Ukraine as a whole, for the benefit of its people.

Anna Postelnyak is Master’s Degree Candidate at the Department of History, University of Toronto. She can be reached at annapostelnyak@gmail.com

 

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  • 1.Of particular importance here is Turkmenistan. At various points throughout the 1990s and 2000s it would supplied gas to Ukraine through intermediaries operated by individuals on both sides of the Russo-Ukrainian border, but only through the Gazprom-owned gas transit system inside Russia.
  • 2.Despite the contemporaneous construction of the Yamal-Europe gas pipeline, which would bypass Ukraine and instead traverse Belarus on its way to Europe, Ukraine kept its share of the Russo-European gas transit at about 80 percent (Pirani 2007).
  • 3.Cheap gas storage in Ukraine enabled Gazprom, which lacked similar infrastructure in Russia, to manipulate its gas supplies to—and thus prices in—the European gas market (Balmaceda 2013).
  • 4.Ukraine’s imports of small quantities of gas originating in Turkmenistan since independence cannot be construed as a successful supply diversification scheme. This is because that gas was either transited through Russian gas pipelines on its way to Ukraine, or was labeled as ‘Russian’ gas and sold as such. In practice, this enabled Russia to indirectly remain a monopolist supplier of gas to Ukraine.
  • 5.For a comprehensive overview of domestic political factors that have shaped post-1991 Russo-Ukrainian energy relations and perpetuated Ukraine’s energy inefficiency and dependence on Russia, see Balmaceda (2013).
  • 6.The civil war in Ukraine’s Southeastern region, including pro-Russian separatism, can be partially traced back to the importance of cheap Russian gas for the viability of the region’s energy-intensive economy. This economy became threatened in the aftermath of the so-called ‘Maidan’ protests elsewhere in the country, which prompted a hike in the price of Russian gas for Ukraine.
  • 7.Ukraine was asked to immediately switch from paying $50/thousand cubic metres of natural gas (mcm) to paying $160-$230/mcm (Pirani 2007; Goldman 2008).
  • 8.The Russian government provided Gazprom with a variety of perquisites that furthered its competitive advantage domestically abroad (Balmaceda 2013).
  • 9.The rest of the gas consumed in Ukraine was produced domestically. However, “Russian” gas could originate from Central Asia, before being purchased by Gazprom and sold to Ukraine (Balmaceda, 2013).
  • 10.Ukraine would pay European netback minus 20 percent in 2009 ($360/mcm) and 100 per cent European netback in 2010 ($450/mcm). In 2008, Ukraine was only paying about $170/mcm (Svoboda 2011). Although Yanukovych succeeded in securing a temporary 30 per cent discount on Russian gas and amended some other clauses of the contract, he was unable to alter it in substance and Ukraine remains bound by most of its provisions, including the European netback pricing mechanism.
  • 11.It should be emphasized that the 2009 negotiations ushered in the high gas price environment for Ukraine specifically, as many other countries were able to actually lower the prices they were paying for Russian gas in bilateral negotiations with Gazprom around the same time, citing technological breakthroughs and the increased availability of gas on spot markets as justifications for lower prices.
  • 12.The Shell deal in particular was the largest agreement of its kind in Europe and has already led to drilling for gas in Eastern Ukraine, although its future is uncertain (Tuohy & Bulakh 2013). Crucially, Ukrainian officials referred to these deals as being part of Ukraine’s broader effort to boost domestic gas production, diversify sources of supply, and make its gas-intensive heavy industry more energy-efficient.
  • 13.In January 2013, just a month after Yanukovych’s refusal to discuss integration, Gazprom issued Ukraine a $7 billion bill for the gas that the country should have imported according to the “take or pay” clauses in the 2009/2010 gas contracts (Olearchyk 2013c). The issue of unpaid bills only emerged after Yanukovych’s refusal to discuss further integration, and was in any case of dubious credibility as Ukraine has argued that its total gas consumption reaches the volume it agreed to buy if one combines the gas imports of Naftohaz Ukrainy, and those of new private companies that began to import gas from Russia in the aftermath of Naftogaz’s 2011 unbundling (Natural Gas Europe 2013a).

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