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By Andrew Holland on Sep 18, 2014 with 14 responses

Winter is Coming: US and its Allies Must Prepare a Strategy to Boost Ukraine’s Energy Security

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It appears that the war between Ukraine and Russian-backed separatists may now be coming to an end, as a cease fire agreed on September 5 looks (increasingly) durable.

However, the end of the war does not mean the end of the struggle. Western policymakers must beware of complacency. Once CNN, the BBC, and the New York Times have gone home and NATO’s leaders have turned their attention to the next global flashpoint (Iraq, as it looks to be), we know that the Russians will test Ukraine. They will test the Ukrainian people’s desire to remain truly independent. They will test the Ukrainian leadership’s ability to turn down the comforts and corrupt spoils that working with Russian businesses has brought to former leaders. They will test the West’ attention span and commitment.

Ukraine’s Weakness: Dependence on Russia for Gas 

A large part of this test will come from Ukraine’s greatest weakness – its energy dependence. Ukraine is, by far, the least energy secure large country in the world. Annually, the country receives between 55% and 65% of its natural gas from Russia’s Gazprom. This fuel is used for electricity production, industrial uses, and winter heating.

Since June, no gas has flowed from Gazprom to Ukraine due to what Gazprom has called “a pricing dispute” (though any impartial observer sees this as a political ploy by the Kremlin to raise pressure on the Ukrainian government). So far, since the dispute began, this has not posed an immediate problem as Ukraine’s domestic gas production combined with stored gas has covered the shortfall during the warm summer months. But, winter is coming – and without Russian gas, some Ukrainians will certainly freeze.

This is a problem for the rest of Europe as well, because pipelines through Ukraine provide about 15% of the EU’s gas supply, and a much larger proportion for some Eastern European countries like Bulgaria, the Czech Republic, and Slovakia. In 2009, when Russia cut the gas off to Ukraine in an earlier “pricing dispute” (this one didn’t involve an accompanying Russian invasion), these EU countries faced significant gas shortfalls in the middle of winter.

A Strategy to Bolster Ukraine

For these reasons, the United States and Europe must build a strategy now for buttressing Ukraine through the winter, as that is when it is most vulnerable; that is when the test from Russia will come. This must include immediate help to get through the winter, and it also must include durable promises of long-term support. This will include through direct support from the U.S. and allied governments, and this must also include support for domestic reforms, infrastructure upgrades, and private sector development within Ukraine.

First of all, any strategy must start with the understanding that Ukraine and Gazprom (and, by extension, also the Russian government) must reach some sort of compromise. There is simply no way to meet the expected gas shortfall for this winter without Russian gas: there is not enough infrastructural capacity to pipe it in from the EU, nor are there any terminals to import Liquefied Natural Gas (LNG).

Even so, there are many measures that can be taken – even in the very short term – to reduce Ukraine’s energy needs and to boost its domestic production. These include fairly simple and inexpensive efficiency measures like upgrading Ukraine’s decaying and outdated pipeline infrastructure, replacing aging boilers with modern, more efficient models, and improving metering and measurement systems.

Ukraine’s domestic natural gas production can be rapidly increased. The American shale gas boom has revolutionized American energy security, and there are ways to help that boom spread to Ukraine. American companies can directly invest in Ukraine, bringing their technology with them. Ukrainian companies can hire experienced American drillers, they can license American drilling and seismic imaging technology, and they can import sophisticated U.S. drilling equipment. All of this is already happening, but the U.S. government can encourage these developments through government-sponsored engagement programs like the State Department’s Unconventional Gas Technical Engagement Program. The US government can speed this investment with financing from the U.S. Export-Import Bank. Put together, an increase in gas production and a reduction in gas demand can help to blunt Russia’s energy weapon against Ukraine.

There are policy and regulatory fixes that the U.S. should support within Ukraine as well. In July, the Ukrainian Parliament increased the tax rate on private sector gas production to 55%, forcing producers to curtail production. Once a new parliament is elected in October, the Ukrainian government should do everything they can to promote private investment in production; this would include lowering these taxes and providing new incentives to energy investment. One particular tax incentive they could offer would be to create a value-added tax (VAT) break for the import of sophisticated drilling equipment, modelled on a recently-initiated VAT break for imports of military equipment.

The newly-formed Association of Independent Gas Producers of Ukraine is working to build a politically stable, transparent energy system that can meet domestic demand for gas as quickly as possible. Private-sector pushes like this deserve support because it fosters civil society and accountable government.

It is important that Ukraine not only has strong laws and a good regulatory environment, but that it also has an open and transparent civil service, in order to prevent the corruption that was rampant under the old regime from becoming rooted into the new one. To prevent that, the U.S. and European governments should promote transparency within the government by encouraging engagement between American civil servants with the new members of the civil service of the Ministry of Energy and Coal Industry.

Within the U.S. Congress, the Ukraine crisis has sparked a debate about U.S. exports of LNG. In the short term, we cannot expect that there will be LNG flowing from the United States to Ukraine, for the simple reason that the U.S. does not have the export capacity, nor does Ukraine have any import terminals. In addition, Turkey has expressed concern about shipments of LNG passing through the Bosporus. However, a high-level statement of principle from the U.S. government that it is in our national interest to overcome these policy and infrastructure challenges would act as an important counterbalance in Ukraine’s negotiations with Gazprom over pricing and supplies. In this way, the promise of US LNG can be almost as good as actual deliveries of LNG to Odessa.

Conclusion: Time for Action

Ukraine needs assistance. Many of these proposals have already been put forward, some in Congressional legislation and some by the U.S. government. However, now is the time for action, not debate. These measures are not about bringing Ukraine into the West’s sphere of influence, much less into NATO. Instead, this is about supporting the ability of Ukraine to exist as a truly independent state. A country that does not control its ability to keep its people warm in the winter can hardly be called a functioning state. In his speech in Estonia, President Obama vowed to “stand with the people of Ukraine.” These measures would allow the US to stand with Ukraine while also building its capacity to stand on its own against Russian aggression. We must remain focused on Ukraine even after the shooting stops. We know that the Kremlin will.

  1. By mtracy9 on September 18, 2014 at 2:50 am

    This article is a joke. The reason Ukraine will not have gas this winter is a simple one: Ukraine does not want to pay its bills. Ukraine has been a basket-case economy for several years. It’s hyper-nationalist new leaders prefer to blame Ukraine’s disastrous state of affairs on Russia, in an attempt to cover-up for their own incompetency, and to gain to sympathy from the West.

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    • By On the Balcony on September 18, 2014 at 4:24 am

      You are right,,,, this article is a joke –because it will not be heeded. Today’s Europe will happily subsidize it’s Russian gas payments with Ukrainian territory and blood. Ukraine must destroy the pipeline to help Europe overcome the energy dependence that has corrupted its soul.

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      • By Strodensky on September 18, 2014 at 12:20 pm

        Not happily subsidising Portugal or Greece but Ukraine ???! LOL :) !!!

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      • By MRecordati on September 18, 2014 at 3:57 pm

        Does the author even know what he is chatting about? This article is a joke.

        “For these reasons, the United States and Europe must build a strategy now for buttressing Ukraine through the winter, as that is when it is most vulnerable; that is when the test from Russia will come. This must include immediate help to get through the winter, and it also must include durable promises of long-term support.”

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        • By Robert Rapier on September 19, 2014 at 10:51 am

          We are all about discussing and debating issues here, so if you have specific criticisms please list them and perhaps the author can address them. As written, your comment doesn’t really add value to the discussion.

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    • By caap02 on September 18, 2014 at 3:40 pm

      “their own incompetence”? They have been in power for less than 4 months. It was Moscow’s man, Yanukovich, who brought the country to where it is now. Key ministries under Yanukovich were actually headed by (i.e. the Ministers were) Russian citizens.

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      • By Hweits_Wulfs on September 19, 2014 at 10:46 am

        The “Moscow’s man” Yanukovich nearly signed an agreement with the EU and posponed it only due to the pressure from some Ukrainian oligarchs (Akhmetov, first of all) :D

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  2. By Jimmy Bonds on September 18, 2014 at 3:29 am

    mtrac9: To the FSB Troll who knows Russia is using every weapon it can against Ukraine, like doubling the cost of the product it was supplying ( this is called price fixing) to Cutting off Crimea from supplying the mainland, to limiting coal supply from Dombass region, it is all Russia’s fault and Putin knows it. He will freeze Ukrainians to death this winter to get what he wants. He is a very cruel person and you are his evil TROLL

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  3. By Jacob Schønberg on September 18, 2014 at 4:12 am

    Ukraine should start to educate about insulating houses with plastic and other materials on TV. Very much energy can be saved by educating! Ukraine should make a list of industries that save gas by shutting them down. Start making simple biogas to be used directly for electricity and heating. China do this for 40 years! Make a taskforce to find the places first to give better insulation. Do NOT hesitate – Україна повинна почати виховувати про ізоляційних будинків з пластику та інших матеріалів на телебаченні. Дуже багато енергії можуть бути збережені шляхом виховання! Україна повинна зробити список галузей, які економлять газ, закриваючи їх. Почніть робити прості біогазу для використання безпосередньо на електроенергію та опалення. Китай цього протягом 40 років! Зробіть цільову групу, щоб знайти місця, першим, хто кращу ізоляцію. Не соромтеся – Jacob Schønberg, Danish citizen in Ukraine

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    • By Andrew Holland on September 25, 2014 at 11:56 am

      A good idea – energy efficiency is often the “low-hanging fruit” – and I think that could go a long way. Probably not going to get the country through this winter, but it could help…

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  4. By Forrest on September 18, 2014 at 8:19 am

    Conservation would provide the biggest bang for the hryvnya for the winter needs. Also, as you post a great time to improve infrastructure if economically possible. This will save more valuable gas resources for industry and keep the economy going. Heat homes with biomass a good low cost solution. The country has good coal resources. Again, I complain the U.S. should maximize the combined cycle clean coal power plant technology per needs, such as Ukraine. The world community is unstable per dependance on oil and natural gas fuel supply. Europe found this out the hard way, lets not make the same mistake within U.S. borders, since we have gigantic supplies of the coal fuel. Ukraine does have one such plant under construction and Japan is working with them to update 40 year old coal plants to more efficiency, but per economizing coal use and environmental benefits nothing appears close to gasification process of coal and powering combined cycles of hot air turbine and steam turbine. They could throw in some biio-mass within the mix for synergistic benefits of low pollution and cost. Coal and biofuel appear to be the best energy source for Ukraine. They would win as well in near future with corn or starch ethanol as a quick mature technology to offset needs of transportation fuel. Lot’s of proven knowledge and resources to make that happen quickly. The biomass and biofuel industries a good tool to maximize low investment benefits per quick results of economy and job creation. OIl and gas exploration a good thing, but requires a lot of time and money. The country has severe economic problems, not a good time for them to increase imports costs.

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    • By Forrest on September 18, 2014 at 10:01 am

      They produce 50% of their power from nuclear and work with GE for fuel and technology. Coal is 2rd and natural gas 3rd. They are very fortunate indeed for foresight of power diversity. Also, estimates of 120 TWh/year biomass fuel available. Shell oil is working with Ukraine for exploration of fossil fuel for energy independence. These stats per Wikipedia.

      The country is 3rd biggest producer of corn crop. They have fertile land mass, that gained them the attribute title of “bread basket of Europe”. It’s the largest country in Europe. They have a wonderful geographic position to export to Europe biomass and ethanol. Europe pays premium for these products per U.S. and Canadian experience. The above advice looks better per their stats.

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      • By Andrew Holland on September 25, 2014 at 12:01 pm

        I wonder if nuclear is really a good option to expand in a country as indebted and poor as Ukraine. Certainly, though, you want to keep the ones running now open, so you don’t have to replace that capacity.

        And – yes – Ukraine’s “black earth” really is the best soil in Europe – perhaps the world. They should be doing more to take advantage of that as an export.

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    • By Andrew Holland on September 25, 2014 at 11:58 am

      Forrest – agree that conservation/efficiency would be best to help Ukraine – if anyone’s spent any time in soviet-built housing, you’ll understand how a place can be both cold and drafty and overheated at the same time! I’m not sure any of it will help them get through this winter, but it will certainly help down the line.

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