Six years following the breakup of the Soviet Union, Ukraine still remains
heavily dependent on
Russia and Turkmenistan for its supplies of natural gas and crude oil.
Domestic production of gas
satisfies about 20% of its needs, while only about 10% of required
crude is produced in Ukraine.
Furthermore, domestic production of oil has been declining since the
1970s.(1) Ukraine imports about 35 million tons of oil and 40-55
billion cubic meters of gas per annum.((2)
During the Soviet period, Ukraine exchanged agricultural and largely
low-level quality industrial
goods for energy imports, but following independence, Ukraine's terms
of trade with Russia and
Turkmenistan deteriorated sharply as the price of imported gas and
oil skyrocketed. By early 1995,
Ukraine was paying higher than world prices to Russia for crude.(3)
The economic crisis, which has affected all the CIS countries, has hit
Ukraine particularly hard. Its
severity is in part due to Ukraine being a large energy importer and
inefficient energy user. Ukraine is an inordinately large consumer of energy,
in part because its Soviet-era economy is structured
around industries, many of them highly inefficient, which use great
amounts of energy. As a result of
the economic and energy crises, Ukraine has experienced difficulties
in meeting payments for its
energy imports, resulting in the accumulation of large debts to Russia
and Turkmenistan.(4) One
consequence of Ukraine's payment difficulties for energy-related debts
has been the slowdown or
even stoppage, on occasion, of the flow of gas and oil to Ukraine from
Russia and Turkmenistan.
Another consequence has been the under-utilization of its refineries,
which are now operating at
under 40% of capacity.(5)
Political consequences of Ukraine's energy debts
The economic and energy crises have had negative political consequences
for Ukraine. Moscow has been more than willing to use its position as energy
exporter and creditor to try to coerce Ukraine
into accepting "integration" into CIS structures on its terms. The
Kremlin's formulas for "integration"
would, in effect, dilute Ukraine's sovereignty and make it even more
dependent on Russia. For
instance, Moscow has used Ukraine's debt to try to force it to join
the Russia-Belarus-Kazakstan
customs union.(6)
In addition, Gazprom, Russia's gas monopoly, has pressed Ukraine to
swap critical assets in
pipelines as well as gas and oil production and storage facilities
for debt. While the Ukrainian
government initially agreed to this debt for assets swap, opposition
in the national legislature - the
Verkhovna Rada - killed it.(7)
The seriousness with which Ukraine views Russian attempts at gaining
key assets in its economy was clearly stated in a memo written by Ukraine's
foreign minister, Hennadii Udovenko, in response to
Russian president Boris Yeltsin's September, 1995, decree on CIS integration.
In the memo,
Udovenko expressed fears that key economic assets and infrastructure,
including pipelines and gas
storage facilities, would fall into Russian hands, which would have
negative consequences on
Ukraine's sovereignty.(8)
Ukraine's advantages
Despite its weak position, Ukraine has some cards of its own to play
in its energy battles with
Russia. The most important pipeline routes for Russian and other CIS
countries' oil and gas exports
to central Europe pass through Ukraine. Oil exports pass through the
southern branch of the
Druzhba oil pipeline. Ukraine has thus been able to offset some of
the costs for oil imports from
Russia through transit fees for pumping crude to central Europe, and
it has also threatened to cut off
Russian energy shipments to Europe. In a successful attempt to gain
additional revenues to
compensate for increased prices for oil charged by Russia, in early
1996, Ukraine raised transit fees
to $5.23/ton per 100 km, to which Russia responded by temporarily shutting
off the flow of oil.(9)
Currently, Ukraine pumps about 28 million tons of crude annually, although
capacity in 1995-96 was running at about 60%.(10)
Plans to decrease dependence on Russian imports
Ukraine has taken some steps to lessen its dependence on Russian imports.
Its government adopted
a plan to achieve greater self-sufficiency in 1995 called a "National
Program for Ukraine's Oil and
Gas Up to 2010."(11) Ukraine has taken some steps to stimulate
domestic production, and is trying to develop its significant oil and gas
reserves in the Black Sea region. Despite these intentions,
Ukraine's plans to become more energy self-sufficient have not proved
successful. In part, this has
been due to lack of domestic financing of energy-related projects and,
related to this, the inability of
Kyiv to attract foreign investment.
Arguably, the most important component of Ukraine's attempts to diversify
its sources of oil imports
has been the construction of a $1.3 billion oil terminal near Odesa
- Pivdennyi (Iuzhnyi). This
terminal could receive supplies from oil exporting nations, such as
those from the Middle East, but
also from the former Soviet republics of Azerbaijan and Kazakstan.
According to U.S. government estimates, oil deposits in the Caspian
Sea basin are in the
neighborhood of 178 billion barrels. The problem for oil producers
is to develop reliable
transportation systems to transport the oil to markets worldwide.
Ukraine's proposal
Ukraine's proposal to act as major transportation corridor for Caspian
oil from the Black Sea to
central and western Europe is linked to the completion of Pivdennyi
terminal and a stretch of pipeline to connect the terminal to the southern
Druzhba pipeline running through its territory.
First discussed in 1995, by winter and early spring 1997, it has become
increasingly clear recently
that Ukraine has launched a serious bid to become a major transporter
of Caspian Sea oil to
Europe. In December 1996, an agreement was reached in Odesa among Ukrainian,
Georgian and
Azeri officials to transport small amounts of Azeri oil by pipeline,
rail and ferry to Ukraine. With
some modernization of existing pipelines from Azerbaijan through Georgia,
and development of rail
links to the Black Sea, Ukraine could soon begin to receive up to four
million tons annually.12
The Ukrainian proposal, however, goes much further beyond these initial
agreements. It was widely
reported in the Ukrainian press during and following a series of meetings
among high-level
government officials from Georgia, Azerbaijan and Ukraine, including
its presidents in winter-early
spring 1997.(13)
Ukraine's proposal is that Caspian Sea oil (from Azerbaijan, Kazakstan
and Turkmenistan) be
transported via pipeline from Baku to Supsa, Georgia, on the Black
Sea Coast. From here, it would
be taken by tanker to the oil terminal Pivdennyi, currently under construction
near Odesa. From
there, the oil would be transported north through a 670 km. pipeline
to Brody (also under
construction), where it would connect to the existing Druzhba pipeline
that supplies central Europe.
Building a 300 km. connecting pipeline from Brody to Adamowa Zastawa
in Poland, would allow
supplying oil to Poland and Germany along the northern branch of the
Druzhba pipeline. Importantly, Caspian Sea oil would supply Ukraine's half-idle
refineries.
For the Ukrainian option to become operative, the oil terminal Pivdennyi
and pipeline to Brody must
be completed. The terminal is scheduled to be operational in mid-1998,
at 12 million tons per year
capacity, while the pipeline to Brody is set to be completed in the
spring of 1999. Final completion
of the Pivdennyi terminal, with capacity between 40 to 70 million tons
per year, is scheduled for the
year 2000. In addition, the Ukrainian proposal foresees the building
of an 850 km pipeline from
Baku to Supsa, and export terminal, which would have an annual capacity
of 30 million tons.(14)
In addition to economic agreements reached between Ukraine, Georgia
and Azerbaijan at the recent meetings, political ties were strengthened
as well. Relations among the three was described as that of a strategic
partnership in the Ukrainian press.(15) During his visit to Kyiv
in mid-February 1997,
Georgian president Eduard Shevardnadze described relations between
Ukraine and his country as
"special," for the bilateral friendship and cooperation treaty between
the two states foresaw mutual
assistance.(16) The importance of the visit to Kyiv in late
March 1997 of Azerbaijan's president,
Heydar Aliyev, was underscored by the signing of twenty agreements,
as well as the highly symbolic
awarding of Aliyev with Ukraine's highest state award - the Order of
Prince Iaroslav the Wise.(17)
There are several variants for transporting Caspian Sea oil to markets
in the West, the Ukrainian
proposal outlined above being one of the options. Azerbaijani ambassador
to, Ukraine, Nazim
Huseyn Ibragimov, mentioned three such routes recently by which oil
could be transported to the
West: by pipeline to Novorossiysk (Russia), and then by tanker through
the Bosporus straits to the
Mediterranean and European markets (the northern route); to Jeyhun
on the Mediterranean coast of
Turkey by pipeline (through Georgia and Turkey), and then by tanker
to Europe, and; through
Azerbaijan and Georgia by pipeline, by tanker to Odesa, and then by
pipeline to Brody, where it
would connect with the Druzhba pipeline (the Ukrainian variant).(18)
It is likely that early Caspian Sea oil will be transported through
the northern route to Novorossiysk,
which is favored by Russia. The disadvantages of using this route are
that the pipeline passes through
Chechnya, which recently fought a war for independence and still has
political problems to sort out
with Russia. Yet, transit fees represent one of the few important potential
sources of income for the
Chechen government, so the interests of Grozny and Moscow coincide
in reaching an agreement to
get the pipeline operational as soon as possible. Other potential problems
along the northern route
include the risk of political instability in northern Azerbaijan among
the Lezghins, as well as in
Daghestan. In addition, Turkish officials have expressed reservations
on shipping oil by tanker from
Novorossiysk through the narrow Bosporus straits. The Ukrainian option
would avoid this potential
problem.
According to Ukrainian specialists, the Ukrainian variant would also
be shorter and less expensive
than transporting by pipeline to Novorossiysk and then by tanker to
western Europe. The distance
from Baku to Wilhelmshafen, Germany, (near the Netherlands) via the
Ukrainian route, is about
4,100 km. Through Novorossiysk, and then by tanker through the Mediterranean,
the route would
be about 8,500 km. From the Tengiz fields in Kazakstan to Wilhelmshafen,
the distance would be
about 5,300 km using the Ukrainian route, as opposed to about 8,900
km via Novorossiysk.
Ukrainian experts have calculated costs for transporting Azerbaijani
oil using the Ukrainian route to
Europe at $25-$29 per ton, and Kazak oil at $33-$37 per ton, which
is considerably less than the
estimated $50-$63 per ton for Kazak oil using the Novorossiysk route.
Distances to central Europe
are also shorter using the Ukrainian route.(19)
Ukrainian specialists have also pointed out that the question of retaining
the quality of Caspian Sea
oil, which is low in sulphur content, is also problematical if the
northern route is used, as Caspian Sea oil would be mixed with Russian
oil, which has high levels of sulphur (up to 1.8%). The higher quality
Caspian Sea crude would be better suited to markets in central and north-west
Europe, which have
traditionally relied on low sulphur oil from the North Sea.(20)
Conclusions
Since the breakup of the Soviet Union, Russia's policies have been aimed
at retaining control over
development and marketing of natural resources of the newly independent
states. This falls within its
overall strategy of keeping these states economically weak, and thus
maintaining their political
dependence on Moscow as well. Russia will certainly be unhappy if Azerbaijan
moves to ship its oil
through Ukraine, but, according to Azerbaijan's president Heydar Aliyev,
Moscow will not be able
to block it.(21) Ukrainians Ministry of Foreign Affairs spokespersons
told correspondents that
Moscow is very displeased over the plans to ship Caspian Sea oil through
Ukraine because it will
not be able to control the project.(22) In late 1996, an influential
Russian newspaper published an
article focusing on the unfolding cooperation among Georgia, Azerbaijan
and Ukraine and its
negative geopolitical consequences for Russia.(23)
For Ukraine, it is critically important to diversify its sources of
energy imports, for both economic
and political reasons. Economically, diversification of oil supplies
will give Kyiv leverage to bargain
with Russian oil companies on the price and supply of oil. It will
also give it more political leeway as
well in its dealings with Moscow.
Ukraine's strategic geographic position on the edge of eastern and central
Europe and lying between
the Black and Baltic Seas, should be developed to its fullest advantage.
Despite setbacks and
delays, through its commitment to financing and building the Pivdennyi
terminal and pipeline to Brody during difficult times, Ukraine is showing
that it is serious about developing these possibilities.
The obvious economic payoff for Ukraine will be in its ability to earn
tariffs for transporting Caspian
Sea oil, which will help pay for part of its energy imports. In addition,
Ukraine would be able to
supply more crude to its refineries, thus operating them at greater
capacity.
The major hurdle to overcome for Ukraine is that it needs to find the
financing and complete the
Pivdennyi terminal and pipeline to Brody projects on time. In addition,
Ukraine and the oil-exporting
Caspian Sea states would need to reach agreements on transit fees.
The Baku-Supsa pipeline
through Georgia and Azerbaijan, and terminal, also need to be completed.
Ukraine has offered to
become involved in the construction of the pipeline, but it cannot
finance it. Apparently, Georgia,
Azerbaijan and Ukraine have applied to the European Bank for Reconstruction
and Development to
help finance construction costs.(24)
Just as it is in the interests of Ukraine to diversify its sources of
energy imports, so it is in the interests of Azerbaijan and Kazakstan to
diversify their sources of transporting oil to markets in the West,
specifically in breaking Russia's virtual monopoly for transporting
their oil.(25)
The political and economic interests of Kazakstan, Azerbaijan, Georgia
and Ukraine, especially the
latter three, therefore, coincide when it comes to the question of
developing a reliable and efficient
transportation route for Caspian Sea oil to European markets. All are
striving to become less
economically and politically dependent on Russia. The export of Caspian
Sea oil through Ukraine
would allow all four states to earn badly-needed hard currency for
their national treasuries - either
from the sale of crude or through its transport - which could be used
to strengthen their state building processes. The successful implementation
of the Ukrainian option would give these states more
economic and political leverage against Russia, which would strengthen
their sovereignty.
References
1. Oles M. Smolansky, "Ukraine and the Fuel Problem," Ukrainian
Economic Review, vol. II (3),
1996, p. 125.
2. Ustina Markus, "Energy Crisis Spurs Ukraine and Belarus to
Seek Help Abroad," Transition, 3
May, 1996, p. 16.
3. Oles M. Smolansky, "Ukraine and the Fuel Problem," Ukrainian
Economic Review, vol. II (3),
1996, p. 125.
4. One recent estimate of Ukraine's debt to Russia and Turkmenistan, largely for oil and gas imports, are over $4.2 billion. See "Ukraina i Rossiia obsuzhdaiut vozmozhnost' restrukturzatsii dolga srokom na 25 let," Zerkalo nedeli, February 15, 1997.
5. IntelNews daily report of April 24, 1997
6. Oles M. Smolansky, "Ukraine and the Fuel Problem," Ukrainian
Economic Review, vol. II (3),
1996, p. 125.
7. Ustina Markus, "Energy Crisis Spurs Ukraine and Belarus to Seek Help Abroad," Transition, vol. 2, no. 9 (3 May 1996), p. 15.
8. Udovenko's memo was published in the October 5, 1995 issue of Nezavisimost'.
9. Ustina Markus, "Energy Crisis Spurs Ukraine and Belarus to
Seek Help Abroad," Transition, 3
May, 1996, p. 16.
10. Ibid. Volodymyr Lopatin, First Deputy Chairman of the State
Committee of oil, gas and oil
refining of Ukraine, estimates that the Druzhba pipeline operated in
1995-96 at 60% capacity. See
his "Pro nadiinist' postavok hazu i varianty transportu Kaspiis'koi
nafty v Ukrainu i krainy Ievropy
cherez terytoriiu Ukrainy," Nafta i haz, no. 3, 1997, p. 15.
11. Oles M. Smolansky, "Ukraine and the Fuel Problem: Recent
Developments," The Ukrainian
Quarterly, vol. LII, no. 2-3, 1996, p. 169.
12. "Ukraine, Georgia seek to end Moscow oil dependence," Reuters
news report of February 14,
1997.
13. Viktoria Vlasenko, " Wooing Baku: Ukraine a Contender for
Caspian Oil Shipment," IntelNews
Weekly Digest, June 2, 1997, p. 18. See also, Mikhail Sokolovskii,
"Zakavkazskaia neft' - bomba
pod SNG," Zerkalo nedeli, March 22, 1997.
14. V. Lopatin, "Pro nadiinist' postavok hazu i varianty transportu
Kaspiis'koi nafty v Ukrainu i
krainy Ievropy cherez terytoriiu Ukrainy," Nafta i haz. Visnyk Derzhnaftohazpromu
Ukrainy, no.
3 (March) 1997, p. 15; see also I. Zahada, "Investytsiinyi proekt `Naftoterminal
u m. Iuzhnomu,'" p.
24, Ibid.
15. Viktor Zam'iatin, "Stratehichne partnerstvo, zmashchenoiu naftoiu," Den', March 25, 1997.
16. Viktoriia Vlasenko, "Druzhba, spivrobitnytstvo, vzaiemodopomoha,"
Uriadovyi kur'ier,
February 15, 1997. See also the official report on Shevardnadze's visit
to Kyiv in the Ukrainian
Foreign Ministry's journal Polityka i chas, no. 3, 1997, p 82.
17. Viktoriia Vlasenko, "Kaspiis'ka nafta poteche cherez Ukrainu?,"
Uriadovyi kur'ier, March 27,
1997. See also the official report on Aliyev's visit in the Ukrainian
Foreign Ministry's journal
Polityka i chas, no. 4, 1997, pp. 87-88.
18. Viktoria Vlasenko, "Wooing Baku: Ukraine a Contender for
Caspian Oil Shipment," IntelNews
Weekly Digest, June 2, 1997, p. 18
19. See V. Lopatin, "Pro nadiinist' postavok hazu i varianty
transportu Kaspiis'koi nafty v Ukrainu i
krainy Ievropy cherez terytoriiu Ukrainy," Nafta i haz. Visnyk Derzhnaftohazpromu
Ukrainy, no.
3 (March) 1997, p. 15.
20. Ibid., p. 14.
21."Azerbaidzhanskii gopak," Zerkalo nedeli, March 29, 1997.
22. Viktor Zam'iatin, "Stratehichne partnerstvo, zmashchenoiu naftoiu," Den', March 25, 1997.
23. Valerii Nikitin, "Moskva i novyi troistvennyi soiuz," Nezavisimaia gazeta, December 24, 1996.
24. Viktoriia Vlasenko, "Kaspiis'ka nafta poteche cherez
Ukrainu?," Uriadovyi kur'ier, March 27,
1997.
25. See Ariel Cohen, "The `New Great Game': Pipeline Politics
in Eurasia," Caspian Crossroads,
vol. 2, no. 1, 1996, pp. 14-21.