Kiev looks east
Ukraine may have swapped dependence on Russian natural gas for reliance on European supply but diversifying import routes is proving challenging
Having eliminated its dependence on Russian natural gas by switching to supply routed through neighbours in the European Union, Ukraine is now looking for alternative sources to strengthen its energy security and bring down costs. Central Asia's producers are top of Kiev's wish list, but getting hold of the gas won't be easy.
Ukraine still acts as a transit route for Russian gas to Europe. But it hasn't imported any for domestic use since late 2015, due to the long-running political hostilities that escalated with Moscow's support for pro-Russian fighters in the east of the country, and the Russian annexation of Crimea in 2014.
Instead, Kiev has been buying gas through the EU countries it borders—Slovakia, Hungary and Poland. That practice started in November 2012 and supply has been growing since. Ukraine imported some 11.1bn cubic metres from Europe in 2016, up from 10.3bn cm in a year earlier, according to Ukraine's state-run company Naftogaz Europe. This makes up the balance between domestic gas production-of around 17bn-19bn cm/year- and consumption, which stood at around 29bn cm/y in 2015.
But demand has the potential to be a lot higher, if the Ukrainian economy and industrial output recover following a calamitous decade. Consumption is now less that half the 69bn cm/y it was in 2005, back in the days of abundant Russian supply. Even allowing for recent rises in gas prices for consumers, which have encouraged greater energy efficiency, there is clearly scope for increased gas demand in future.
Scaling up gas imports from Azerbaijan would require billions of dollars in investment
Boosting domestic production is difficult. Ukraine's proven gas reserves are limited—some 0.6 trillion cm, according to BP—and exploiting them has been complicated by the unrest and resulting problems in attracting investment. Meanwhile, EU gas demand is forecast to rise, to around 500bn cm/y by 2020, while its production will be only around 135bn cm/y, limiting the scope for exports to Ukraine.
So Kiev is now looking east to complement its European supply, eyeing some of the same sources the EU is planning to tap for similar reasons—to diversify imports and introduce greater competition between rival suppliers.
The prime target is Azerbaijan, which hopes to start gas exports to Europe in 2020. Azerbaijan's gas production currently stands at 18bn-19bn cm/y, based on proved gas reserves estimated at some 1.1 trillion cm. Production from Caspian fields, such the BP-operated Shah Deniz project and future output from Total's planned Absheron development should also contribute to exports of around 10bn cm to the EU via the Southern Gas Corridor pipeline project from 2020 onwards.
But, while Ukraine has been evaluating potential supply from Azerbaijan, formal negotiations over large-scale shipments have yet to start. Kiev would also need to reach agreement with Georgia to act as a transhipment point for the gas, given it lies between Azerbaijan and the Black Sea on the most direct route towards Ukraine.
One solution would be for Ukraine to finance a terminal at the Georgian port of Kulevi, from where liquefied natural gas or compressed natural gas could be shipped across the Black Sea. A similar route was used at the end of 2016 for a small-scale shipment, when Ukraine bought 740 tonnes of liquefied petroleum gas from Azerbaijan, which was delivered to the Georgian port of Batumi by rail, before being sent to Romania by sea, and then by rail again to Ukraine. However, scaling up gas imports from Azerbaijan would require several billion dollars of investment in Ukraine to build the Kulevi export and import terminals.
Similar projects were mooted several years ago, before the unrest in the country worsened, and came to nothing. Persuading foreign investors to look again in the current political environment would be challenging and Ukraine itself has limited financial resources.
Another option is to look further afield perhaps taking gas from Turkmenistan—which is seeking new markets for its reserves of 7.5 trillion cm. The obvious route for the gas via Gazprom's pipelines through Russia is out of the question so Turkmenistan will remain focused on getting its gas directly to Europe across the Caspian Sea and into Southern Gas Corridor pipelines.
Whatever options Kiev settles on to meet gas demand, it will come at a price, whether it is supporting new domestic production, import pipelines or transhipment terminals.