By Amy Gleich, Oilprice.com:
Steal less, invest more, run a fair game and, by all means, sell off the pipeline system that Moscow has been using to keep Ukraine in line — these were the overriding sentiments of the Ukrainian Energy Forum, which kicked off June 24 in Kiev just as rebels in the east shot down a military helicopter and a ceasefire between government and pro-Russian separatists appeared to be in danger.
As experts and officials from Ukraine, Europe and the United States gathered for the three-day conference to discuss Ukraine’s energy future in the context of the “gas war,” the messages were twofold: Russia’s geo-economic warfare has to stop, and Ukraine can find opportunity in adversity.
“It’s not really coincidental that the pipelines going around Ukraine look as much like a World War II pincer movement as anything; it is; it is meant to bring Ukraine in line, if not to bring it down,” Paul Shapiro, a senior banker for natural resources at the European Bank for Reconstruction and Development (EBRD), told the forum.
“The Gazprom contract is the elephant in the room,” he said. “Obviously when they’re being accused at the same time of supporting what is, essentially, a proxy war in a large part of the country, it’s a difficult situation in which to negotiate a commercial contract.”
And that “pincer” pipeline was a key focal point of the energy forum, with calls mounting for its privatization and transformation into a valuable commercial asset that would help earn Ukraine its freedom from the Russian gas chokehold.
According to Robert Bensh, a Ukraine energy expert and partner with Pelicourt LLC private equity firm, selling off the pipeline system worth $20 to $30 billion is the most crucial step at this juncture for Ukraine’s energy independence.
Others agree. In fact, last week, Ukrainian Prime Minister Arseniy Yatsenyuk told parliament that Ukraine was planning to set up a company to manage the pipeline and suggested bringing on European and American companies to help operate it in order to ensure that Ukraine remains a key transit country for gas to Europe.
“One of the reasons that you’re having such problems with Russia right now is that they’re doing everything they can to secure energy supply to Europe,” Bensh told the conference. “When you threaten that market, they act the way that they have — creating unrest from a trade standpoint in eastern Ukraine. They’ve launched a low-intensity conflict. They’ve taken Crimea.”
U.S. Ambassador to Ukraine H.E. Geoffrey Pyatt told the conference “a great deal about Ukraine has changed over the past year, but the strategic importance of energy issues has not.”
And when it comes to pipeline privatization, it may be a publicly unpopular necessity, which will require a great deal of political will to achieve. As Pyatt noted: “While the Soviet Union failed in providing blue jeans or toilet paper, it excelled in delivering cheap and inefficient energy to its citizens, which is why many Ukrainian customers still feel that energy and gas should be a state-given right.”
“In truth, Ukraine has everything it needs to become energy secure. What it lacks is the political will to achieve that energy security,” Pyatt said. When we talk about energy security in Ukraine, we’re really talking about one issue, and that of course is natural gas.”
But transparency and consistency in the market have also been major problems for Ukraine and kept investors away from the energy sector, in addition to “energy inefficiency, gas-related corruption, unsustainable subsidies and a lack of source diversification,” he said.
From Shapiro’s perspective, “What needs to be done is fairly obvious: steal less, invest more, run a fair game to attract investors.”
“We’re trying to show the marketplace that Ukraine is still a good place to do business, aside from all of the political turmoil we’re going through,” Mikhail Afendikov, CEO of Cub Energy, a junior oil and gas producer that has become a heavyweight in Ukraine’s gas sector, told the forum. “The marketplace is small. It has to be decentralized, non-government upstream production competition which will compete for the services […] Clear regulations, tax incentives and support from the government for independent oil and gas producers – that’s what will take this country to self-efficiency in the energy sector.”
“Ukraine needs to show that it’s creating a consistent market for companies like Cub Energy,” Afendikov said. But at the same time, “Ukraine needs 20 more companies like Cub Energy, which will create a marketplace for the service industry and allow the country to become self-sufficient in the energy sector.”
Yury Vitrenko of Ukraine’s state-run Naftogaz told the forum that the company was “very serious about reform” and is “working hard to make some fundamental and profound changes in the market.”
He lamented the fact that the “hopes for a friendly and fruitful relationship with our eastern neighbor [read: Russia] failed us significantly […] The future for Ukraine is really to integrate into the European market. We are in the middle of a gas war.”
In these stated endeavors at the forum, Ukraine had Norway’s sympathy, if not its direct support.
In his keynote speech, Norway’s Foreign Secretary, Bård Glad Pedersen, noted that his country also found itself between the European Union and Russia, sharing borders with both and extensively cooperating with the latter. Nonetheless, he said, “we have condemned their annexation of Crimea and we are concerned that the violation of international law that we have seen could have political and economic implications for our continent for a long time.”
Despite the violent crisis, Pedersen said, “there is absolutely no reason why Ukraine could not move from being a net importer to a net exporter of energy.”
Ukraine’s future shale development will play a major role in this particular transformation, and those following the supermajors are keen to get a better idea of the fate of planned shale exploration as the crisis with Russia continues to unfold.
Addressing the forum, Shell Ukraine country chairman Graham Tiley sought to allay investor concerns and focus on facing down the current political and economic challenge.
“Clearly Ukraine is going through difficult times, but in every challenge there is an opportunity and I think that now is the right time to look to the future of the Ukrainian energy sector,” he told the audience in Kiev.
Shell has a production-sharing agreement in the Yuzivksa field, which spans the Donetsk and Kharkiv regions—an area that encompasses the center of the fighting. While Shell hasn’t halted operations, the security situation has prompted a drilling pause on the ground, though the supermajor is continuing with an environmental baseline survey and has no plans to abandon exploration.
From the perspective of former Czech prime minister and current head of business development for NAFTA a.s., Mirek Topolanek, Ukraine has great potential for oil and gas exploration and production and is important not only from a local perspective, but also from a wider European perspective. To this end, he promised that NAFTA was entering Ukraine “as a strong finance and know-how partner.”
Norway’s Pederson concluded with the message that “Ukraine’s energy challenge can be turned into a powerful tool for transformation and for growth.” The optimism still abounds, especially because gas prices and the unexplored shale potential of Ukraine remain two very big attractions once the dust settles. By Amy Gleich, Oilprice.com
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