Ukraine’s unpaid gas bills dwarf US aid

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Ukraine’s best hope for keeping furnaces and factories running through to next winter is to store as much natural gas as it can after a US aid pledge fell far short of the nation’s needs.

Energy supplies have given Russian leader Vladimir Putin powerful economic leverage in his battle with Ukraine.

The former Soviet republic gets half its gas from Russia, and it’s the transit route for 50 percent to 60 percent of the gas Russia sells to other European nations.

US Vice-President Joe Biden told Ukrainian leaders this week that the US would provide help so that “Russia can no longer use energy as a weapon”.

Biden announced $50 million (R530m) in aid, an unspecified part of which would go to develop the country’s gas reserves, explore alternative energy and improve efficiency.

Russia responded yesterday, when Prime Minister Dmitry Medvedev said Ukraine would have to prepay for gas shipments unless it started paying down the $2.2 billion debt it had accumulated to March.

Tensions escalated on Wednesday as Ukrainian military units moved against pro-Russia separatists in several eastern cities, prompting Russian Foreign Minister Sergei Lavrov to threaten retaliation if his country’s “legitimate interests” were “attacked directly”.

The immediate danger facing Ukraine is a cut-off of Russian gas shipments for non-payment of its debt.

Medvedev told the Duma, the lower house of Russia’s parliament, earlier last week that Ukraine’s only option was, “Gas for cash”.

“The near-term options are limited, so if supplies were cut off tomorrow, they’d be in a pretty difficult spot,” Jason Bordoff, who heads Columbia University’s Center on Global Energy Policy and is a former energy and climate adviser to the Obama administration, said on Tuesday.

“Before next winter, they really want to be building up as much storage as possible.”

Saddled with aging electric generators, leaky furnaces and drafty apartment blocks that date back to the Soviet era, Ukraine lacks the infrastructure to curb energy demand enough to make a significant dent in its dependence on Russia.

Exploiting new petroleum discoveries beneath the Black Sea will take years of drilling and pipeline construction to bear fruit.

Modernising Ukraine’s energy infrastructure and attaining supply independence would take 16 years and require e170bn (R2 trillion) in investment, a figure that dwarfs its annual economic output, the Paris-based International Energy Agency said in an October 2012 report.

Despite Medvedev’s warning and rising violence in eastern Ukraine, the US wants to see how the situation plays out in coming weeks before deciding whether and how to fund the energy initiatives, according to a US official who requested anonymity to describe internal policy deliberations.

Of the $50m Biden pledged, $11.4m is committed to funding Ukraine’s May 25 elections.

If every penny of the remaining $38.6m were used to help solve the country’s energy problems, it would be only about 1.7 percent of Ukraine’s $2.2bn gas bill – representing less than 2 cents toward every dollar of debt.

The International Monetary Fund (IMF) has endorsed a $17bn loan to Ukraine to help Ukraine pay its gas debt to Russia and soften the blow of economic reforms.

It’s expected to receive formal approval on Wednesday.

To reduce Russia’s leverage, Biden outlined a US offer to advise Ukrainians about accessing gas from other European neighbours, developing domestic fields and accelerating extraction of gas from shale formations.

The US also would send experts to advise on energy conservation and regulatory change.

Technical teams will visit Poland, Hungary and Slovakia to evaluate pipeline flow reversals, which are meant to “provide Ukraine with additional immediate sources of energy”, according to a White House fact sheet.

Matt Sagers, the managing director of Russian and Caspian energy research at the consultancy IHS, said that would have little impact.

“About the only alternative source of gas available for Ukraine in the near term is reverse imports from eastern Europe,” Sagers said.

“But the total amount will remain relatively small” because of pipeline capacity and supply limitations.

Ukraine relied on Russia for 25.8 billion cubic metres, or 90 percent, of its gas imports last year, compared with just 2 billion cubic feet sourced from Hungary and Poland, according to IHS data.

The Hungarian and Polish deliveries halted during the first quarter of this year when Russia was providing the fuel at reduced prices to help prop up the regime of then-President Viktor Yanukovych.

The pro-Russia Yanukovych was deposed in February amid violent street protests.

Specialists from the US Department of Energy and the Agency for International Development also would travel to Ukraine in May to advise officials there on maximising energy efficiency, the White House said.

A multi-year project with 17 Ukrainian cities will reduce greenhouse gas emissions, improve energy planning and policy, and draw private sector investment to the energy sector, according to USAID.

The agency will also work on integrating electricity and gas markets with the EU internal energy market.

The US will work with the European Bank for Reconstruction and Development to help Ukraine attract private companies to increase output from domestic gas fields, according to the US official.

Developing the country’s gas resources in both conventional fields and shale formations would take two to five years, the administration official said.

Russia saw a longer-term threat in US measures that suggested Russia wouldn’t be able to use energy to bully eastern Europe 10 years from now, the official said, and that, in turn, gave Europe more strength in dealing with Russia.

Any company’s interest in operating in Ukraine has to be measured against the hurdles.

First up would be changing laws to encourage oilfield technology providers such as Schlumberger, based in Houston and Paris, and Houston-based Halliburton, to want to work there, Ken Medlock, the director of Rice University’s Center for Energy Studies at the Baker Institute, said last week.

Additionally, US-based drillers and exploration companies might have too much to lose in Russia, home to some of the biggest untapped reserves, to risk angering the Kremlin by helping Ukraine resurrect its faltering energy sector, said Marc Lanthemann, the Eurasia analyst at Stratfor, the private intelligence consultancy to governments and corporations.

Explorers also would be reluctant to work on one of Ukraine’s largest shale formations because it sits in the eastern part of the country, where violence between government forces and pro-Russia separatists had been most intense, said Lanthemann, whose firm was described in a 2001 Barron’s article as “the shadow CIA”. – Joe Carroll, Nicole Gaouette and Julianna Goldman from Bloomberg


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