Shale gas in Poland and Ukraine: a great potential and an uncertain future

Geopolitics of shale gas in Ukraine

Likewise, domestic and foreign commentators often interpret the issue of Ukrainian shale gas (and unconventional gas extraction in general) in geopolitical terms. With 60% of natural gas consumption covered by imports, Ukraine’s economy is highly dependent on the price of natural gas negotiated. The price of gas, indeed, is a topic that has fuelled negotiations between Ukraine and Gazprom, the main gas supplier: of 32.5 billion cubic meters Ukraine imported in 2012, 26 billions came from Gazprom. The gas price is one of the currencies of Ukraine-Russia diplomacy: a multiyear gas discount starting in 2017 was incorporated in 2010 in the so called “Kharkiv accords” — an agreement that prolonged the Russian lease of Ukrainian naval facilities in Sevastopol’, Crimea from 2017 for 25 years with a possible 5-year extension in exchange for gas price discounts and an increase in gas transport rent. This is, however, but one example of how Gazprom has become a leverage of the Russian foreign policy in the neighborhood. Recently, Russia has insisted on Ukraine joining the Customs Union of Russia, Belarus and Kazakhstan, offering gas price discounts in exchange. However, Ukrainian Government has been wary of entering the Customs Union: signing the accords with the three former ‘fellow republics’ would mean jeopardizing the already-initialed Association Agreement with the EU that in perspective could open new markets for iron, Ukraine’s main export item.

However, as the iron exports stagnate and Ukraine experiences severe difficulties with collecting revenues for the budget, the issue of gas prices is becoming all the more important. At a meeting on May, 26 in Sochi the presidents of Ukraine and Russian Federation Viktor Yanukovych and Vladimir Putin, according to the Ukrainian newspaper Kommersant, discussed Ukraine’s participation in the Customs Union with an observer status (the agreement is to be signed in Astana on May, 29) and the creation of a joint Ukraine-Russia consortium to manage Ukrainian gas-transporting system (GTS).‘The pipe’ that supplies a great part of Russian export gas to Europe, is one of the main levers Ukraine has used to counter Russia’s aggressive pricing and supply policies. However, as new pipelines from Russia to Western Europe are built, Ukraine is losing the ability to mobilize the control over the gas pipelines as an argument in gas pricing negotiations with Gazprom. At the same time, the GTS needs modernization and constant maintenance; in a TV-broadcasted “dialogue with the country” on February, 22 Viktor Yanukovych announced that Ukraine is currently negotiating the terms on which a Ukraine-Russia GTS consortium will be created. This consortium, with Gazprom taking the leading role in it, is likely to lease the Ukrainian GTS on conditions of its modernization  and — once again — reduction of gas prices for Ukraine. Crucially, Ukrainian private companies will also take part in the new consortium, thus radically reshaping the status quo in which the Ukrainian state-owned giant Naftohaz (that is also likely to be privatized) controls the GTS. The exact accords are yet to be reached. But be it as it may, “gas diplomacy” remains – and probably will remain – one of the main ways in which Russia exerts its pressure on Ukraine, unless gas supplies are diversified.

Like Poland, Ukraine is paying one of the highest prices for gas among other Gazprom clients — more that Western European countries situated 1000 km to the West of Ukrainian borders: 425 USD per 1000 cubic meters. In contrast, Russian gas imported to Germany and then re-sold to Ukraine, costs Ukraine 390 USD per 1000 cubic meters. The difference between the “market” price of Russian gas for the EU countries, and the “political” price for Ukraine is so big that it makes profitable buying Russian gas from Western European owners. Although in 2012 the volumes of re-imported gas from Western Europe were dismal, Ukrainian importers hope to bring re-import to 8 billion cubic meters in the recent future.

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