Russian aggression against Ukraine became possible due to Nord Stream
Volodymyr Omelchenko, the director of the Razumkov Center's energy programs, believes that funds paid by the EU to Russia for gas are partially used to undermine Europe.
Volodymyr Omelchenko, the director of the Razumkov Center's energy programs, believes that funds paid by the EU to Russia for gas are partially used to undermine Europe.
DS How feasible is the 20/20 program for increasing gas production by 2020?
V. О. The 20/20 program is ambitious and looks good, but it is not feasible. It is clear that in 2020, the entire gas industry will not be able to produce 27 billion cubic meters. The state company Ukrgazodobycha, the largest producer, won't be able to provide the planned 20 bcm of gas a year. Although, compared to other companies, Ukrgazodobycha is trying to invest in the development of new deposits and drilling, including exploratory drilling. True, this year, the company will increase output by approximately 500 mcm (in 2016, it totaled 14.6 bcm). At the same time, most private companies are reducing the pace of growth of output, despite the fact that until 2013 it was increasing rather robustly, and the state company was at the same level with them or even reducing its output. Several increases in gas prices for internal consumers did not lead to an expected increase in gas production. Investments are not enough for discovering new reserves, intensifying gas production, or achieving the objectives that have been set.
DS Then what will be achieved?
V. О. According to my estimates, by 2020, we'll be at 23-24 bcm, maximum. This is Ukrgazodobycha plus all private producing companies, with the share of the state company at 17-17.5 bcm. But even this isn't guaranteed! I said the 20/20 program wasn't feasible when it was being adopted, as not every risk was taken into account. Increasing gas production requires long-term investments. Nobody will provide us such lines of credit. Ukrainian investors can provide very limited financing. Thus, given our investment climate, maximum production is 23-24 bcm. And, again, this is the optimistic forecast! This level of production cannot be satisfactory.
§ It was planned that increase in gas prices would go to gas production, but not all of it went there. The biggest part went to the state budget and the personal needs of the owners of gas companies.
We still haven't gotten the expected result.
DS In 2016, Ukraine consumed 33.2 bcm of gas. How possible and how desirable is it to reduce consumption in 2020?
V. О. Ukraine can achieve consumption of 25-27 billion. This requires, first of all, monetization of subsidies. When subsidies are received not by monopolist companies, but particular consumers, they will be interested in saving money, and hence gas.
§ At present, there is no incentive for receivers of subsidies to save, and monopoly companies are interested in higher levels of consumption.
Second, total accounting of energy resources.
Consumption at the level of 25 billion is a feasible goal. If our own production increases to 23 billion and consumption falls to 25 billion, it will be necessary to buy an additional 2 bcm of gas. Ukraine can shift to 90% self-supply for gas. By the way, there is no point in significantly increasing gas production when your energy resource consumption system is like a colander. That is, the issue of consumption efficiency should have higher priority than increased production.
DS There is a bill in the Verkhovna Rada on reducing rent for gas production. What do you think about this legislation?
V. О. This is a bill that would reduce rent payment for new deposits to 12%, by more than half. (The rent for existing wells remains unchanged: 29% at deposits of up to 5 km in depth and 14% for deeper ones - ed.) This will help a bit, but not much.
§ The reason is that under conditions of incredible political risk and absence of the rule of law, there will be no long-term investment.
It is easier to buy gas and resell it in Ukraine. More than 40 companies earning money by exporting natural gas have entered the Ukrainian market. This is easier than investing in projects that could pay off after 20 years.
DS Russian bypasses, above all Nord Stream 2: what can be done, and how much time is left?
V. О. There is no time, a lot of time has been lost, actions have not been consistent. The biggest factors here are delays in unbundling, the restructuring of Naftogaz, and the creation of GTS operators. The issue is being dragged out, but it should have been settled three years ago.
Plus, tariffs for natural gas transit are increasing. Ukraine's GTS tariff is among the highest in Europe.
This is another argument Gazprom is using to get Europeans to support the bypass. The decision to increase the tariff was untimely and uncoordinated. This is the result of the uncoordinated activities of the government and Naftogaz's management. I still don't see any harmonization of the actions of the government and Naftogaz. They have two points of view on many issues of gas sector reform, which promotes neither the reform itself, nor the creation of an image as a reliable partner.
DS This is true, but why can't we perform unbundling? Hardly anyone is interested in the specifics of relations between Groysman and Kobolyov. Is it the result that's interesting?
V. О. In my view, it's due to the unwillingness of Naftogaz's management to lose control over its largest subsidiary, Ukrtransgaz, which provides over 90% of the company's revenue. This is the first reason. Second, control of Ukrtransgas ensures the political importance of Naftogaz managers, and if they lose that, they'll just be managers, as their political significance in Ukraine and around the world will be much lower. They understand this quite well. Thus, on the one hand, they support the reform, but in practice, they're delaying it. I can understand them: no company wants to give away the best part of its business. Thus, another issue here is that of the will of the government, which is responsible for reforming Naftogaz.
DS Nord Stream 2. Whom does it benefit in Europe?
V. О. Germany, the Netherlands, France, and Austria are lobbying for Nord Stream 2. Risks for companies taking part in Nord Stream 2 construction are low, the Russian Federation takes the risks on itself.
§ Gazprom gives these companies discounts on gas and provides large volumes of construction work, which means jobs and orders for these countries. Bigger interests and bigger money.
Plus special relations between Gazprom and important European figures, primarily in connection with financial interests. They've established reliable setups with Gazprom.
The issue of geopolitical risk doesn't interest them very much, as they are protected by Eastern and Central European countries. They do not see any direct threat to themselves.
DS Maybe there is no threat?
V. О. In my view, this is a mistake, as the more money they send to Russia via increased energy resource purchases, the more dangerous Russia becomes for Europe. Using these funds, it carries out cyber attacks and buys off politicians, entire political parties, the media, journalists, parliamentarians. There is a reason for this: they're working to deepen political risks and crises for Western European countries. In addition, Russia's aggressive behavior is making Europeans re-equip their militaries and increase expenses on defense. This is a kind of suspicious cooperation that brings real profit to a relatively small group of European business representatives and corrupt officials but will result in general instability in Europe.
All the more so, given that Nord Steam will unbalance the geopolitical situation in Europe. For example, Russia has significant natural resources and a larger population than Ukraine. The only thing to compensate this imbalance is Russia's dependence on Ukraine in terms of transit. As long as this balance was in place, European stability was guaranteed, there was no war.
§ With the construction of Nord Stream, Russia partly eliminated its dependency on the Ukrainian pipeline and became free to act against Ukraine.
Unfortunately, European businesses and officials corrupted by it often think in terms of fast commerce at any price and not in terms of European values, which are aimed at supporting peace and safety in Europe.
DS This isn't the first time that the Germans have tried to establish a common border with Moscow...
V. О. Ultimately, a significant portion of the hundreds of billions of dollars and euros that the EU is pumping into the Kremlin is used to undermine Europe's security system. It is already there. This is one of the reasons that political problems in EU countries are increasing, and this is only the beginning. This kind of behavior by Russia is largely enabled by the money that it's been getting from Germany over all these years. Thus, it would be wrong to say that Germany will be an island of stability in a more and more unstable Europe. Metaphorically speaking, Germany is still awaiting its turn to pay.
§ Eastern European countries are simply closer to Russia. Poland, Slovakia, and Ukraine feel all of this more keenly than Western European countries.
DS Can the Third Energy Package stop Nord Stream 2?
V. О. Today, an algorithm has been found that can bypass the provisions of the Third Energy Package. This is when a pipe is owned by a group of European companies, and gas can be repurchased by European companies, but this will of course be Russian gas. Formally, this all seems to comply with the Third Energy Package; it's hard to get a foothold. However, the essence is the same: a pipe will be built from Russia for the transportation of Russian gas, European dependency on Russian gas will increase, Russia will get pumped full of money in exchange for energy resources, and it will use it to undermine the EU as a project.
DS Can LNG or Norwegian or Algerian gas compete with Russian gas?
V. О. The share of Russian gas in European consumption is approximately 30%. That figure is increasing, because Europe's own production is decreasing. There are hopes for LNG. Terminals have been built in Poland and Lithuania. There are expectations with regard to American gas. Many European terminals are not working at capacity and are capable of receiving serious volumes.
§ The US has an excess of natural gas due to the shale revolution. This forces Russia to compete on price. For them this is a political issue.
Russia can compete on price, and American business will be unable to withstand the political dumping. There will be a battle between the US and Russia for the European market. There's no guarantee that the Americans will win.
DS What trends will prevail on the global gas market?
V. О. The share of LNG will increase. It may come to exceed that of pipeline gas. The price of natural gas will become independent of those of oil and oil products. The gas market can become independent, the number of contracts on the spot market will increase. This is beneficial for consumers. Supplies from Australia to the Asia-Pacific Region (APR) will promote a decrease in gas prices. Accordingly, Qatar, the US, and the UAE can redirect part of their resources to the European market, which will push prices down. This is good for all European consumers.
DS And the coal issue. In Ukraine they say they've refused Russian gas, but this year, the country has already spent over $2 billion importing coal, over 50% of which comes from Russia. How can we get away from this?
V. О. First: saving energy, thermal upgrading of buildings, metering devices, upgrading boilers. Second: the transportation and heat supply system, losses in power grids, these are areas for optimization. Third: it would be good to invest more in wells with gas group deposits, to re-equip TPP units using anthracite coal for gas coal. Fourth: increase investments in RES, which could gradually replace part of coal generation. Fifth: increased natural gas production.
Given a proper and well-coordinated policy, given increased diversification of supplies and an increase in our own production, it is possible for us to solve this problem within the next few years. Investments in energy-saving would provide the fastest effect.
Oleksandr Kurylenko