The destructive consequences of the German-Russian Nord Stream 2 natural gas pipeline bypassing Ukraine, electricity market turbulence and uncertainty about state policy all raise one big question: Will Ukraine fight pressing external and internal challenges to secure uninterrupted gas and heat supply during the winter of 2020?
Ukraine’s movement towards European integration during the last five years has partly released Ukrainians from a hard burden of constant speculation about the price and supply stability of natural gas.
Since 2014, the Ukrainian parliament managed to undertake a number of crucial reforms on promoting free competition, the creation of regional gas markets and bringing domestic gas prices to the import parity level. These steps, combined with the state of the world markets, gave a 28% reduction in gas prices compared to April this year and improved liquidity in the gas market. Moreover, the former government replenished the underground storages by more than 21 billion cubic meters of gas and managed to achieve a two-year delay of construction of the Nord Stream 2. This left sufficient preconditions for the new government for effective negotiation on gas transit between Ukraine, the Russian Federation, and the European Union.
The winter of 2019-2020, however, will be different. As the trilateral negotiation unfolds, it becomes clear that not only the price level, but also the very presence of gas in Ukraine and gas transit to the European Union, may be jeopardized if the new government does not take decisive action, more importantly, does not advance in the development of the gas industry in Ukraine.
Still expecting the construction of the bypassing Nord Stream 2 to gain momentum, Russia will strive to enforce its demands – small volume and short-term supplies – just to fill the time gap until the new transit route comes into use. Such conditions are dramatic for Ukraine that runs the risk to be “thrown overboard.”
Therefore, the Ukrainian side must stay determined to conclude a new long-term transit agreement between Gazprom and Naftogaz (for 10 years minimum) with an annual transit volume of at least 70 billion cubic meters of gas, without giving in. Besides, the negotiations must stay commercial, without touching the political aspects or gas supply to Ukraine. It is also essential to build mutually beneficial partner relationships with European and, possibly, U.S. major gas transit companies to increase the chances of contracting larger volumes of gas and obtaining long-term transit guarantees in the future.
Another critical task is to sign the production sharing agreements with the nine winners of the June tender so that they can start implementing programs that are going to give early gas production in two years and dramatically change the structure of the Ukrainian gas market in the next 5-7 years. As a strategic step for the government and a matter of our national security, another PSA competition should be conducted on the Black Sea shelf.
In an attempt to achieve clarity in the gas market, Ukraine should not forget about other sources of energy, such as the fast-growing liquified natural gas, or LNG, market. A maritime nation, Ukraine has a vast potential for building effective LNG infrastructure to avoid the threat of geographical “squeeze” and monopolistic influences as well as achieve further reductions in the price of gas and greater supply flexibility. At least, Ukraine can increase the volume of interconnectors with Poland, to transit chipper LNG gas from Poland Swinoujscie LNG port.
Meanwhile, the government’s unreadiness to implement a recently enacted law on the electricity market is worrying.
The incumbent Verkhovna Rada has worsened the situation by amending the law and allowing electrical energy imports from the Russian Federation. This decision, made without the agreement of our EU partners, might imply serious risks for Ukraine’s energy security, such as weakening of the domestic market independence, slowing down the integration with EU market systems, and loss of the sanctions support from the West. The current parliament should urgently reverse the amendment and, instead, focus on the de-monopolization process of the domestic energy market in order to create favorable conditions for sustainable economic growth, developing technical infrastructure and lowering the prices for the end-user.
Similarly, nuclear generation, which counts for more than 50% of the share of electricity, is in poor shape. The project life of 11 out of the 15 nuclear reactors built in the Soviet era, ends by 2020; nine reactors are working over the project life. The question remains as to the further actions of the government regarding the functioning of these reactors. Apart from shutting down or extending the project life, the government should keep in mind dealing with radioactive waste and polluted territories.
It is also necessary to develop the renewable energy industry. The terrible environmental situation and the long-stretching inefficiency of the traditional energy industry in Ukraine make the development of green generation one of the topical issues. Even though the previous Verkhovna Rada built a solid base for investing in green energy by introducing auctions in the green generation market, the algorithms for the auctions and their very existence depend on the current government. Besides, the incumbent government should aim for reforming the coal mining industry, increasing CO2 emission taxes, and stimulating the growth of the alternative energy sector to release citizens from paying extra taxes and implement the Paris climate agreement’s conditions.
Transit gas negotiations are under threat. There is turbulence in the electricity market. There is uncertainty in the state’s policy in support of green generation. There is critical underfunding and a lack of strategy which present difficulties for the minister of energy and the environment of Ukraine. The short-term challenge is to go through the winter without severe disruption in the energy markets. The results of the government’s work will determine not only the country’s economy and security as a whole, but also the fate of the Cabinet of Ministers in spring 2020.
Nataliya Katser-Buchkovska is an energy and investment expert at the Ukrainian Institute for the Future