What Ukraine managed to achieve in 2016, what will happen in 2017, how the oligarchs continue to affect the energy sector, why reverse from the EU is not very reliable, and how to avoid risks. The EP sums up the year with an expert on energy issues, the president of the Centre for global studies "Strategy XXI" Mykhailo Gonchar.
Energy challenges in 2016. How we coped
"The most notable success was in reducing gas dependency, which has traditionally been the Achilles heel not only of the Ukrainian economy, but also of the policy. For the first time we got "zero" imports of Russian gas.
In addition, there was a reduction in overall gas consumption and also to an unprecedented level. If in the 1990-ies the annual consumption of natural gas was about 80 billion cubic meters, in 2000-s — 60 billion cubic meters, then in 2016, in my opinion, it will be about 30 billion cubic meters. (according to "Ukrtransgaz", in 2016 gas consumption by Ukraine decreased by only 4% and amounted to 30.3 billion cubic meters, EP).
Taking into account absence of imports from Russia it is a serious progress. All gas we import from European directions. The volume of imports will be at the level of 11 billion cubic meters (Ukraine in 2016 reduced the import of natural gas by 32.7% compared to 2015 — to 11.78 billion cubic meters, EP); this is also an unprecedented figure".
"We also solved the problem of ensuring nuclear power plants with fuel. Its imports from an alternative source - the company Westinghouse - accounted for 6-7% in terms of total nuclear fuel cost in recent years, but in 2016 it was worth about a third of total cost. This means that in 2017 it may be achieved a parity in the volume of imports with the Russian company "TVEL".
In this way we will secure ourselves, because our energy industry relies on nuclear generation. In 2015, the share of nuclear generation in total electricity production amounted to 55.8 percent. In 2016, it will not be less, perhaps even 60%".
"Another challenge was and will be cyber attacks on our power grid. We remember the events of a year ago, when on Dec 23, 2015 the Integrated Power System of Ukraine became the object of massive cyberattacks, which, fortunately, failed. Power outages were massive in only three Western Ukrainian regions. The situation was recently repeated in Kiev and the region".
What causes concern
"The year 2016 passed quite successfully for us. However, the biggest concern now is slow progress of institutional changes and overall transition to an energy-efficient economy. But this issue concerns not only energy but the whole scope of economic reforms".
"We need to create an appropriate system of incentives for citizens. But we are witnessing now government's striving to subsidy consumers. Without monetization of subsidies, the positive effects will not happen".
"The drawback of the last three years is also that we have not adopted a new energy strategy. The ready variant exists; it is the synthesis of the developments of previous years. However, there were delays, change of the government, so the strategy is not adopted".
"Against this background, we are observing yet another fundamental challenge that the government does not take into consideration: fragmentation occurs in the energy sector. We used to use the acronym FEC, fuel and energy complex, which has been now torn to pieces by different oligarchic empires. This process began in the mid-2000s and got the green light by Yanukovych. Now the government hasn't turned on the red light for this fragmentation. Now there is no any oligarch, who wouldn't want to pull a piece of FEC into its own Empire.
This leads to chaotic energy development where everybody implements its strategy without regard to strategies of others and national interests.
For example, for someone the basic scenario is the coal one. It is problematic because Antracite grades of coal are in occupied territory and this creates a new dependency for Ukraine — the coal one. It is also contradicts the fundamental development, because we are talking about limiting harmful emissions".
"There are also attempts of "privatization" of the national regulator. Although the corresponding law was adopted, de facto oligarchic groups, which became the favorites of new kleptocracy, are trying to put it into their service. Accordingly, we see mindless bringing out of new tariffs.
For example, the IMF did not demand full price parity with the cost of imported gas, it was talked about 75% of parity. The government raised tariffs to 100% parity. As a result, consumers received bills with sky-high numbers in the situation of poverty and social tension. The regulator decided to make advances for monopolists.
It highlights the following problem: the lack of effective work of the Antimonopoly authority, which does "not see" where monopolies were formed in our economy. Sometimes it even tries to persuade that de jure they do not exist there. Even when it's clear to everybody that 70% of thermal power generating capacities are in one's hands and this is a situation of a dangerous concentration, the Antimonopoly Committee does not see any problems".
On energy diplomacy, which we don't have
"When you don't have a consolidated position, you have multidirectional movement. And then arise situations, when "Naftogaz", for example, solves the problem of accumulating reserves of gas for the winter based on its corporate visions but thermal utilities (TPPs, for which the main fuel is coal) — on their own visions.
As a result, additional gas reserves are not stocked for such cases like interruption of supply of anthracite coal from the occupied territories or impossibility of importing gas by reverse. It will be difficult to compensate for the plunge in generation.
DTEK, for example, secured itself by signing contract for import of South African coal and coal from Poland. Looks like good, but the lack of coordination at the state level leads to the fact that everyone is trying to act by himself".
"Both in terms of domestic energy policy and in terms of external energy policy - the Coordinator should be. The Ministry of Energy cannot be such Coordinator, because "Naftogaz", for example, is run by the Ministry of Economy. The latter also can not be a regulator, because it is not responsible for the energy sector.
It is necessary to appoint either a line Vice Prime Minister or a special Commissioner on the government level, who will coordinate the activities of all ministries and agencies that are relevant to the energy sector".
"We have energy and diplomacy, but not energy diplomacy. We can't have it, because there is no consolidated position. Because of this, a radical reduction of rental rate on gas extraction didn't happen. We managed to avoid gas imports from Russia, and now we get it from the EU".
Why the system of gas reverse from the EU is not sufficiently reliable for Ukraine
"What we call the European Union is a rather amorphous concept. There are about ten countries with Pro-Russian position in it that contains risks for us".
"This system can be reliable from a technical point of view, however, we had the example of Hungary. Gas supplies from this country were interrupted several times for no apparent reason, although formally this was explained by the need to perform some sort of technical work. Here we can not be insured against surprises.
If we parallel work on energy saving and increasing national gas production, we will not need any gas import. We consume blue fuel twice more than Poland, which has a five times higher GDP. By that, the structure of Ukraine and Poland's economies are similar.
Moreover, after reduction of gas consumption to 30 billion cubic meters, we still have a small margin of reduction - 3-4 billion cubic meters. There is already a program that will allow to increase gas production from 20 billion cu m to 25-26 billion cu m for next three years. It is a realistic one, if to cut wild rates of rent".
About pressure of Moscow
"Russia is acting quite consistently, but it cannot be considered as presented by Ukrainian media. Russia is not building the "Nord stream-2" or "Turkish stream". In early 2010-s Russia claimed as a fact that since December 2015 the "South stream" would be in operation. That is, it would have to work the whole year.
Similar situation is with "Turkish stream". Russia presents it so like today or tomorrow the Russian gas will come to the Turkish coast bypassing Ukraine. In fact, even the State Duma has not yet ratified the agreement, which was signed during Putin's visit. The Turkish Parliament has already ratified it.
At the same time Turkey understands that Russian gas is not the hub of the universe. They have the TANAP project, which plans to bring Azerbaijani gas and in the future Turkmen gas via the South Caucasus to Turkey and Europe. They also play the game trying to become the southern gas crossroads for the European Union, when all the gas from Iran, Egypt, Azerbaijan, Turkmenistan and Russia will be pumped to Europe via Turkey.
They compete with us and the Russians use it. However, among the Russian experts there is an opinion that Gazprom should not closely deal with Turkey, because its behavior is even more problematic than the behavior of Ukraine.
Besides, the Turkish side has not received from the Russians detailed maps of the onshore gas pipeline route, which will require complex approval procedures. On managerial level of "Gazprom" it is acknowledged that no "Turkish stream" will appear in 2019. However, in a peculiar manner for Russia, Gazprom puts political and psychological pressure".
How to counteract this
"We use it, but our status as a leading transit country is not eternal. So, at the beginning of the 1990s, 80% of Russian gas went to Europe through Ukraine, but now a little less than 50%. Ukraine has no monopoly position, as it is sometimes said by representatives of Russia and the EU.
In such circumstances, it is important for us to mobilize pressure on Russia from the EU side, to prove that the exclusion of Ukraine from the transit system is not an advantage for Europe. In fact, it increases own dependence by diversifying the routes, but not changing supplier".
"Currently multilateral negotiations are ongoing on creating the consortium involving "Ukrtransgaz" and a group of European companies without "Gazprom". On our side is Art. 274 of the Association Agreement. It provides that not only Ukraine, but also the EU, must consider the available potential and use it by implementation of projects. Our route has the advantage of being more cost-effective. And the position of Ukraine as the main transit country still remains the same".
