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Christopher Stakhovsky

Christopher Stakhovsky

Christopher Stakhovsky is an EU energy policy consultant based between Paris and Kiev with over 30 years experience working with EU institutions. 

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An Unlikely Winner Of The Ukraine-Gazprom Row

With the help of Ukrainian tycoon Dmitry Firtash, Turkmenistan,that unsung gas giant that boasts the world’s fourth largest reserves, could very be the clincher in securing Ukraine’s energy security. During a meeting with Turkmen Deputy Prime Minister Rashid Meredov on March 27, Ukrainian President Petro Poroshenko sent a shot across the bow to Moscow by expressing his desire to resume Turkmen gas imports as an alternative source to Gazprom’s dominance.

Poroshenko essentially hinted at a nifty gas deal sealed back in 2006 by Dmitry Firtash’s RosUkrEnergo (RUE), whereby Ukraine imported 40 billion cubic meters of gas from Turkmenistan and Kazakhstan at $60 per 1000 cubic meters, which was meant to dampen the more expensive Gazprom gas and which yielded a final price of $95 per 1000 cubic meters – the lowest price in the country’s history. The agreement was supposed to run until 2029. As a point of reference, compare that to the $485 per 1000 cm paid by Kiev in 2014 or to the Brussels-brokered temporary 25% rebate in Gazprom gas of $248 per 1000 cm.

Before Russia’s aggression, which sent Ukraine’s gas guzzling heavy industry to record productivity lows, Ukraine needed some 40 billion cubic meters of gas per year, half of which was imported. However, as a result of Moscow’s blackmail, Kiev turned its attention to other sources to replace its dependency on Gazprom. Related: Has The U.S. Reached “Peak Oil” At Current Price Levels?

In 2014, Russian imports were promptly slashed by 44%, to their lowest level in 15 years. Fortunately, Ukraine found unlikely allies in Slovakia, Poland and Hungary, who, by reversing the flow of natural gas through the existing pipeline network, began exporting Russian gas to Ukraine at much better rates than what Kiev could have obtained from Moscow. As it stands now, alternative import partners, coupled with reduced internal demand, have considerably curtailed the Kremlin’s levers of influence in Ukraine’s political sphere.

The Turkmen connection

Between 2006 and 2009, Turkmen gas delivered through Firatsh’s RUE played a major part in Ukraine’s energy mix and kept Kiev’s budget in check and free of debt to Moscow.

Unfortunately, following the rise to power of Viktor Yushchenko and his (temporary) ally Yulia Tymoshenko, a crusade was unleashed against individuals that had been associated with the opposition Party of Regions, including Firtash. When the 2009 gas dispute with Moscow flared up, Tymoshenko, a former gas trader herself, negotiated a deal that eliminated both Turkmen gas and RUE from the equation. Thanks to a first year rebate, gas prices for 2009 were fixed at $230, only to skyrocket to almost $400 by 2011. In 2010, under the Kharkiv Agreement, Ukraine received a $100 gas price discount in exchange for extending the lease on Russia’s naval base in Crimea till 2042. Nevertheless, prices kept on climbing to record highs, as can be seen in the graph below. In hindsight, it can be argued that the deal paved the way for Ukraine’s total dependency on Gazprom and the current outstanding debt of $5 billion.

UkrainianGasPrices

Sources: 2008, 2009, 2010, 2011, 2012, 2013, 2014

Cutting Turkmenistan back into Ukraine’s energy mix could change all that. Indeed, the Central Asian country has seen its fortunes change over the last six years and, like Ukraine, it’s seeking to diversify away from an unpredictable Moscow. Up to 2009, Turkmenistan was comfortably supplying Gazprom with some 45 bcm per year. However, the share was unilaterally reduced by the Kremlin to 11 bcm annually, while in October 2014, Gazprom announced that it would refuse any gas imports from Central Asian countries in the future. Related: The Inconvenient Truth About A Green Revolution

Ergo, the contract between the two parties was reduced in 2015 to a mere four billion cubic meters. Ashgabat took this step as a slap in the face and announced its desire to supply between 10 and 30 bcm of gas to the EU, potentially as part of the Union’s Southern Gas Corridor – the pipeline network currently under construction meant to bring Caspian Sea gas to Europe via Turkey. As things stand now, Turkmenistan has a spare production capacity of at least 13 bcm, which could increase as Iran ramps up its production and reduces imports from Ashgabat. Against this serendipitous backdrop, cheap Turkmen gas could represent a good solution for Ukraine.

It all sounds like a match made in heaven, but how would Turkmen gas reach Ukraine, seeing how any deal would need Gazprom’s pipeline network?

To begin with, even if they are often used interchangeably, Gazprom is not always shorthand for the Kremlin. As a consequence of Russia’s meddling in Ukraine, Gazprom saw its net profit fall by a dramatic 70% in 2014 to around $3.3 billion. The scrapping of South Stream, being cut off from Western capital, a weakening ruble and the fall in European demand for Russian gas have all contributed to Gazprom’s demise. The company stands to recover its lost profits only if it breaks ranks with the Kremlin and tries to infuse the Russian leadership with a view that takes into account its own interests. Related: How Much Money Can You Really Save With A Smart Home?

Indeed, Wojciech Jakóbik argued recently that “Gazprom has become the advocate of Ukrainian interests in the Kremlin”, knowing that losing Europe would spell the end for a company that not too long ago boasted it would reach a market cap of $1 trillion. With Firtash interested in using his business connections to finance a $300-billion-for-Ukraine project, the Agency for the Modernization of Ukraine (AMU), it wouldn’t be surprising to see Turkmen gas flowing back into Ukraine. The Agency, staffed by bigwigs such as Peer Steinbruck and Ferdinand de Klerk, is mandated to draw up policy proposals and investment projects to reform the Ukrainian economy.

Since gas would be coming from Turkmenistan and would only transit Russian territory, Moscow’s capacity to use its energy weapon on Kiev would be severely limited. What’s more, Gazprom’s own economic interests say that making a smaller profit – from renting out pipelines - is better than not making anything at all. With Turkmenistan keen to find other export markets and with Ukraine eager to break free of Russian gas, this deal would lock together all the actors with the prospect of a sure and steady stream of revenue. Ensuring Ukraine’s energy security is a first step towards unlocking a wider peace process with Moscow.

By Christopher Stakhovsky for Oilprice.com

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Leave a comment
  • anon on April 24 2015 said:
    "Between 2006 and 2009, Turkmen gas delivered through Firatsh’s RUE played a major part in Ukraine’s energy mix and kept Kiev’s budget in check and free of debt to Moscow.

    Unfortunately, following the rise to power of Viktor Yushchenko and his (temporary) ally Yulia Tymoshenko, a crusade was unleashed against individuals that had been associated with the opposition Party of Regions, including Firtash. "

    But Yushchenko rose to power in 2005 so the 2006-9 arrangement would have taken place during Yushchenko's time.

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