The Energy Potential in Ukraine's Troubles

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[LONDON] As you read this, Marina and I will be in London for the annual energy consultations at Windsor Castle.

Now, if it seems like I'm spending far too much time traveling these days, you're right. But the truth is our trip to England is just the beginning… more is yet to come.

You see, most of the major new developments are no longer taking place in North America. The global energy sector is intensifying, and its importance has never been more striking than it is right now.

The American unconventional oil and gas revolution has gone global. In fact, that is the prime topic of our discussions at Windsor.

However, there is another place in the world that has my attention on this flight. It's Ukraine.
Needless to say, the situation there hasn't exactly been encouraging.

But here's what you might not be aware of. In addition to all of its other problems, Ukraine is also at the center of an increasingly messy energy situation.

Here's what's behind it all…

Six Facets of a Very Sticky Situation

There are at least six components here, and they complicate any easy receipt of the short-term, international financial support that is critical.

First, the country still remains dependent on natural gas from Russia. The chill in cross-border relations as a result of the ongoing political turmoil hardly improves this situation.

In fact, the Kremlin had advanced the prospect of offering discounted gas. But that was before the pro-Russian President Viktor Yanukovych was ousted and pro-Ukrainian nationalists took over the reins of government in Kiev.

Now, that gas will certainly revert to its earlier "cash on the barrel head," or COB arrangement.

There will be no Russian credit forthcoming, and Ukraine cannot pay. They had been playing their earlier contracts by accumulating volume in storage during the high summer at low prices to be used in the higher-priced winter months, but all of that reserve is now gone.

Second, the European Union (E.U.) had offered assistance pending reforms of the gas transit system in tandem with the E.U.'s Energy Charter Treaty (ECT).

The ECT requires that signatories separate production and distribution assets as well as provide third parties with access to domestic pipeline and other transit systems. Russia has rejected this all-too-obvious frontal attack on Gazprom's natural gas monopoly over the market pricing and home pipeline system. Ukraine has been (at least in theory) more flexible.

After the recent events, however, Kiev will now probably have to give up some administrative control over the pipeline system for significant energy assistance.

Yet it is unclear where outside interests such as the E.U. or the U.S. would be able to source gas for use inside Ukraine. Some financial assistance will be forthcoming, but when it comes to the large price tag demanded by the domestic pipeline upgrades, immediate help will require that whatever government emerges be amenable to relinquishing some control.

The Kremlin, and therefore Gazprom, had been pushing for the same concession.

Third, there is an element I happen to be working on currently.

Join the conversation. Click here to jump to comments…

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. Richard Malmed | March 1, 2014

    How far along are the production possibilities are the shale oil deposits in the Ukraine and Poland? Would they be enough to sustain both Ukraine and Poland projected usage? What would it cost for the EU and the US to build nuclear facilities in the Ukraine? Final question: Can the Ukraine survive economically if the shale oil and nuclear developments could be developed within five years while the US and Eu subsidize the energy needs of the Ukraine? Oh and one last question: Isnt Russia dependent on the Ukraine for grain and other agricultural products? Surely someone must have seen this coming and answered some of these questions

  2. James Tasker | March 1, 2014

    Kent,

    Include in your thinking and discussion in London and elsewhere helping Poland develop their huge shale (I think) gas deposits. Putin and Gazprom have been bashing fracking (for no good reason other than keeping control of gas to Europe). This would give Putin the black eye he deserves and free Europe and Ukraine from dependency on Russia – something they should do every thing they can to do. Our government probably won't do this but maybe business will. In the meantime remember the airlift to Berlin and our Founders who were willing to give their live, their fortunes and the sacred honor to secure freedom

    Blessings
    Jim Tasker

    Jim Tasker

    • Robert in Vancouver | March 1, 2014

      Some investigative reporters followed the money and found cash going from Russia and OPEC oil and gas interests to enviro-groups and native indian bands in North America to fight against oil and gas development here.

      The #1 target is Canada's oil sands which scare OPEC because the oil sands can supply all of North America's oil needs for 200 years securely, safely, and at a lower price than OPEC oil.

      The #2 target that Russia and OPEC are paying enviro-mercenaries to fight everywhere is fracking. Fracking reduces most of the world's dependence on Russian and OPEC oil and gas, and that reduces Russian and OPEC influence in the world.

  3. Rolalnd Ilsen | March 3, 2014

    Agree very much with your comments, except for one: the LNG terminal should not be built in Odessa, which is populated by Russians and can be a target for Russian aggression in the future. It should be built 250 miles west, west of Danube in Rumania with a pipeline to Ukraine by the city of Constanza.

    • Jeff P. from Canada | March 4, 2014

      Odessa is Ukrainian speaking and not populated by Russians. It is on the oposite side of the Black Sea from Russian speaking Sevestapol.

  4. Jeff P. from Canada | March 4, 2014

    Kent,
    With your connections, can you find out if Gazprom has been doing any exploration off the coast of Crimea? And if they have, have they found any major reserves? It just did not ring true to me that Putin, who has never cared about anyones human rights, is all of a sudden concerned about some Russian speaking Ukrainians and is prepared to invade another country for their sakes. What is more likely is that Gazprom has found a major reserve off the coasts of Crimea. It is just a case of following the money.

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