April 30 (Bloomberg) -- Spring has barely started in Ukraine and the nation is already thinking about winter’s chill.
As the country finds itself close to conflict with Russia, Prime Minister Arseniy Yatsenyuk’s government is desperate to make sure there will be enough natural gas to heat households and keep factories running throughout the long Ukrainian winter. That’s a daunting task for a country that depends on its larger neighbor for half of its gas consumption.
With Vladimir Putin using energy to assert Russian power over its neighbor, Ukraine is sifting through its choices. They run from developing shale gas fields and spending billions of dollars on modernizing obsolete, energy-wasting industries, to building an import terminal on the Black Sea -- a multi-year project. In the coming months, Ukraine will pin its hopes on the European Union, even though the EU itself gets 30 percent of its fuel from Russian state-controlled exporter OAO Gazprom and hesitates to go against Russian interests.
“The EU is the only place where we can get gas should Russia cut off supplies,” said Dmytro Marunych, co-chairman of the Energy Strategies Fund in Kiev. Ukraine will find it hard to buy all the gas it needs in European markets, he said.
Slovakia, Poland and Hungary, three EU members bordering Ukraine, theoretically could supply as much as 37 billion cubic meters of gas a year through their pipelines, more than the 25.8 billion Ukraine imported from Russia last year, according to NAK Naftogaz Ukrainy, the country’s national gas provider.
Ukraine has so far not struck a deal for sufficient supplies from Slovakia, which has the largest capacity of the three. Gazprom said it will ask Ukraine to pay $485 per 1,000 cubic meters in the second quarter, more than the European market price. Gas from the EU would cost between $350 and $400, several EU and Ukrainian officials said.
In the meantime, Ukraine has started to ship as much as as it can from Russia to build up storage supplies for the winter: the country has ramped up imports to more than 110 million cubic meters a day since April 18, more than double the average at the same time last year, according to the Russian Energy Ministry.
That may come to an end any day as Putin threatens to cut the supplies unless Ukraine settles outstanding bills. Gazprom wants more than $2.2 billion in back payments and an additional $11.4 billion for gas Naftogaz was obliged to buy under a take-or-pay contract clause, an arrangement the Ukrainian government calls unjust.
With painful sacrifices and the EU’s help, Ukraine will be able to survive the winter even if Russia cuts supplies off completely, Energy Minister Yuri Prodan told lawmakers in Kiev earlier this month. However, the amount of gas EU can supply will still depend on how much the continent can get from Russia, he said.
Ukraine agreed with Slovakia on shipping gas through the European Union member April 28. The flows will begin in September at 22 million cubic meters a day, or 8 billion cubic meters annually, after 400 meters of new pipes are laid, Ukrainian Energy Minister Yuri Prodan said the same day. That’s a long way short of Slovakia’s reverse flow capacity of 30 billion cubic meters a year, according to Naftogaz.
Difficult as the negotiations are, obtaining gas via reverse flow from the EU is still more realistic in the short term than importing liquefied natural gas by the Black Sea, according to Mykhaylo Honchar, an analyst at the NOMOS center in Kiev.
Ukraine, currently without any LNG facilities, is seeking to rent a floating platform and would like to start importing the fuel as early as the end of next year, Finance Minister Oleksandr Shlapak said on April 11. The country will need to spend $100 million linking the platform near the port of Odessa, the minister said.
The problem may be securing access to the crowded Bosphorus controlled by Turkey, which also depends on Russian gas, according to Leslie Palti-Guzman, energy analyst at Eurasia Group in New York.
“The Bosphorus is a very busy channel,” Palti-Guzman said in a telephone interview. “There are geopolitical and strategic considerations from the Turkish government because of their relationship with Russia, but there are also important environmental and safety issues.”
The passage through the Bosphorus is in principle open to all merchant vessels according to the 1936 Montreux Convention, according to an official at the Turkish Economy Ministry, who declined to give his name in line with the government policy.
Ukraine will need to reduce its gas consumption to about 35 billion cubic meters in the next few years, said Volodymyr Omelchenko, an analyst at the Razumkov center in Kiev. The country currently requires 10 times as much energy to produce goods and services as the average industrial economy, according to the International Energy Agency. Industries such as chemical plants, which consume a lot of gas, will have to either become more efficient or die, Omelchenko said.
The country now has about 7 billion cubic meters of gas in storage, Naftogaz chief Andriy Kobolyev said on April 18. It needs to ramp up reserves to 20 billion cubic meters to ensure basic supplies for the 2014-2015 heating season.
“In case of a Russian aggression, we need to sacrifice hugely and rely only on domestic gas consumption and imports from the EU,” Honchar said. “It’s a question of surviving. We may be forced to cut our gas consumption dramatically.”
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