Ukraine Takes Another Step Out from Under Gazprom

In the modern world, energy security is not only a proxy for financial wealth, but a necessary precondition for social advancement, material well-being, democracy, and the rule of law. This is not to say that it causes these things, nor that energy security is synonymous with energy independence; the United States uses a great deal of energy originating elsewhere, and overheated rhetoric notwithstanding, American democracy is alive and well.

But the power of Russia’s Gazprom — and therefore Moscow — over much of the former Soviet Union and indeed much of Western Europe is a constant reminder of that hard truth. It is to Kyiv’s credit that Ukraine’s government has made escaping Gazprom’s clutches a top policy priority.

The problem of course goes back decades, but reached a darker stage when former Prime Minister Yulia Tymoshenko agreed to set Ukraine’s natural gas supplied from Russia at one of the highest levels in Europe. The Yanukovych administration’s attempts to end that bargain — which beggar the government’s treasury, stall IMF tranches, and worsen public and private existence — have been met with demands from Russia that Ukraine turn over its pipe network to Gazprom in return.

Yanukovych has instead worked to develop Ukraine’s own natural gas sources, and those efforts appear to be coming to fruition:

But in tandem with this apparent maneuvering, Ukraine, however, has gone on a concerted drive to attract foreign investment into projects that would replace Russian gas imports. Ukraine has successfully courted Chinese sponsorship for a coal revival in order to wean itself off gas. On July 16, the Ukrainian Energy and Coal Industry Ministry told Bloomberg that China has agreed to lend Ukraine $3.7 billion to switch its power plants to coal from gas. Korolchuk said this could cut Ukraine’s consumption of Russian gas by 6 billion cubic meters.

Ukraine is also looking to offshore Black Sea reserves. Ukraine’s state-owned Chernomornaftogaz, a subsidiary of Naftogaz, last year bought two drilling rigs from Singapore’s Keppel FELS in a bid to boost domestic gas production. One if these rigs drilled its first well in July at the Odesskoye natural gas field in the Black Sea. The second rig is expected to be delivered by the fourth quarter of 2012.

Despite embezzlement allegations surrounding the purchase of the two rigs at $400 million apiece, Chernomornaftogaz has said it hopes to use them to boost domestic gas output to 3 billion cubic meters by the end of 2014.

Ukraine has also held a series of tenders to attract foreign know-how and technology to tap into its unconventional gas reserves. Ukraine has the third largest shale gas reserves in Europe with an estimated 1.2 trillion cubic meters, according to the U.S. Energy Information Administration. Shell and Chevron are already partnered to explore and potentially develop the Yuzovskaya shale gas area in eastern Donetsk and the Olesskaya shale gas area in Lviv region respectively. Ukraine is reported to be considering inviting majors to another tender for the Slobozhanska shale gas area in the eastern Kharkiv region in September.

Anything that breaks Gazprom’s stranglehold over Europe’s natural gas supply — and alleviates Ukrainian suffering — is a positive thing for European energy security, and security in general. Whatever else may be said of Kyiv, in this, the West should be cheering Ukraine.

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