KIEV-- Russian gas prices have long succeeded in dictating Ukraine’s energy future and determining the fate of Kiev’s plans to diversify into liquefied natural gas. That game is now up, and LNG infrastructure is just a year away, leaving only Turkish acquiescence to transport it through the Bosporus Strait.
On June 27, the chairman of the Ukrainian government’s investment agency, Serhiy Yevtushenko, announced that a floating LNG terminal run by a Texas-based company would start operating near the Black Sea port of Odessa in April 2015, potentially supplying Ukraine with up to 5 billion cubic meters of natural gas per year.
Earlier this year, Prime Minister Arseny Yatsenyuk said another more ambitious and expensive land-based LNG project was being revived—one that could handle 10 billion cubic meters of natural gas, or one-third of what it imports from Russia.
The first project raises the pressing question of where LNG for Ukraine will come from beginning in April next year, while the second project raises concerns about funding and feasibility.
With a heavily indebted Ukraine that is holding off disaster on the economic front and a violent Russian-inspired uprising on the eastern front, some are skeptical that Kiev could muster the resources—right now—to build a massive land-based LNG terminal in Odessa.
In an interview with Oilprice.com on the sidelines of the Adam Smith Ukraine Energy Forum on June 25, Simon Pirani, senior research fellow at the Oxford Institute for Energy Studies, suggested such a terminal might be out of Ukraine’s reach at present.
“I think that such a terminal would cost at least $5 billion,” he said. “Personally, I think it would be more effective from Ukraine’s point of view to take that money and invest it in making the energy system more efficient so that demand for gas imports would be reduced in that way.”
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This land-based terminal has been revived since Russia’s annexation of Ukraine’s Crimean peninsula earlier this year. It had only been shelved in the first place by former president Viktor Yanukovych, who was overthrown by the Maidan protests in February. Talks had gone as far as to include potential suppliers such as France’s Total and British BP, among others, but Yanukovych shoved it under the rug last December when Russia offered Kiev a gas discount. In April, Russia put an end to that discount, sparking immediate talks of reviving the land-based LNG terminal. But the pipeline infrastructure that will have to link it up to Ukraine’s gas network alone will cost an estimated $1.3 billion.
Ukraine energy expert Robert Bensh largely agreed with Pirani, but with one caveat: The land-based terminal may seem overly ambitious at this juncture, but what few realize is that Kiev already has a contract for a floating LNG terminal that is ready to go as soon as Ukraine has its first LNG deal.
In an interview earlier this year with Oilprice.com, former Ukrainian deputy prime minister and energy minister Yuri Boyko also noted that efforts were already underway to establish a U.S. -made floating offshore terminal that could receive shipments.
“LNG arriving offshore Ukraine under an American-flagged vessel would be a powerful and important way to support Ukraine,” Boyko said. “The same should be promoted for Europe; America could become an exporter of gas to Europe to offset Russian influence.”
A floating LNG terminal would be much faster and much cheaper—and therefore much more feasible. The open question is rather whether Turkey will allow LNG through the Bosporus strait en route to Ukraine via the Black Sea.
The two countries have been negotiating for years, to no avail.
According to Bensh, “Turkey is refusing, and Ukraine is not presenting its case well.” He added that while on a government level, these talks were going nowhere, on a private level activity to this end was picking up pace, with private companies and groups active in Ukraine talking to like-minded private groups in Turkey about LNG supplies through the Bosporus.
The official line in Turkey has been that LNG transport through the Bosporus is unsafe, but Western experts disagree.
“There may be some element of safety concerns, but it’s just a matter of sheer congestion. There’s only so much traffic the Bosporus can take,” Paul Shapiro, Senior Banker/Natural Resources for the European Bank of Reconstruction and Development (EBRD), told Oilprice.com on the sidelines of the conference in Kiev.
Bensh maintains that a number of other commodities that traverse the Bosporus are much more dangerous, particularly ammonia, liquefied petroleum gas (LPG), chlorine and oil.
“Certainly LNG transportation through the Bosporus is risky and has environmental and well as security issues; however, LNG transport is one of the safer commodities that would be passing potentially through the Bosporus. LNG, from a ranking standpoint, would be much safer than what is already passing through the Bosporus,” he said.
The bottom line is that while LNG may not be an immediate elixir for Ukraine, it is a viable long-term form of energy therapy that will have the side effect of strengthening Kiev’s bargaining power with Moscow.
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The recent success of the Baltic state of Lithuania in using LNG plans to negotiate lower gas prices with Gazprom is a case in point.
Lithuania’s new floating LNG terminal, Klaipeda, is slated to go online in December this year, producing gas at a lower price than what Gazprom has been charging, keeping in mind that Lithuania has been paying the highest price for gas in the European Union. As the country neared the signing of a LNG supply deal with Norway, Gazprom agreed to cut prices by an expected 20 percent through the end of next year.
Overall, both as a diversification element and a bargaining chip, LNG has a strong future in Ukraine, but it won’t be immediate.
Across the board, however, experts see LNG’s role in the Black Sea region soaring in five to 10 years.
"I think the role of LNG will increase because it’s a different way of moving gas from one part of the world to the other,” Pirani told Oilprice.com. “We’ve heard a lot about LNG becoming available from the United States as a result of its increased gas production. Russia has now joined other countries that are exporting LNG to Asia, so I think what LNG will do is help to create a more global gas market and that of course will affect this region as it will others.”
"When partners can't agree
Their dealings come to naught
And trouble is their labor's only fruit.
Once Crawfish, Swan and Pike
Set out to pull a loaded cart,
And all together settled in the traces;
They pulled with all their might, but still the cart refused to budge!
The load it seemed was not too much for them:
Yet Crawfish scrambled backwards,
Swan strained up skywards, Pike pulled toward the sea.
Who's guilty here and who is right is
not for us to say
But anyway the cart's still there today."
Moreover the prices for LNG is usually high and cannot compete with price for tube gas.