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