Greater coordination between the private sector, state-owned energy companies, government and the international community can make Ukrainian energy independence a reality, says Alan Apter.
Over the last few years Ukraine has become synonymous with instability, tragedy and war. While many international powers, from the United States to the European Union, are attempting to bring stability to the region, one key element that is guaranteed to change Ukraine’s fortunes for the better is energy independence.
Ukraine’s historical dependence on external energy sources, predominantly Russian gas, has been well documented and has significantly impacted Ukraine’s political climate. As Reuters recently reported, energy politics and Ukrainian politics are often the same thing. According to the U.S. Energy Information Administration, approximately 40 percent of Ukrainian energy comes from natural gas. As much as three fifths of the gas has historically come from Russia. Today, internal resources cover less than 50% of requirements.
Not only did this empower Russia over Ukraine, but it resulted in Ukraine paying for gas from Russia at substantially higher prices than most of the rest of Europe, forcing the Government to heavily subsidise individual consumers, burdening industry with abnormally high prices and hindering Ukraine from reaching its optimal GDP growth. Energy independence must be achieved to safeguard Ukraine’s future as an independent sovereign state which does not need to make political decisions based on its dependence on gas imports and to maximize the country’s growth in GDP.
The Ukrainian gas sector is evolving, the relationship between Ukraine and Russia is changing resulting in dramatically decreased gas imports from Russia and the EU is now providing more of Ukraine’s gas. However, the independence of Ukraine’s energy market remains of fundamental importance to the country’s stability and prosperity and there is a danger that the substitution of gas from Europe rather than Russia will reduce domestic initiatives to become self-sufficient in gas production.
In the long term, the potential for Ukraine to become a major gas producer is huge, eventually even resulting in Ukraine becoming a gas exporter. The country possesses enormous gas reserves. In recent years, private gas producers like the company I chair, Burisma Holdings Limited, have made significant investments and deployed advanced seismic and drilling techniques to dramatically increase production. But this can only continue with meaningful support from the central and regional governments.
Since the conflict began, private companies, both domestic and foreign, have faced a difficult political, fiscal and regulatory climate that does not lend itself to investment or foster growth of production. While the fiscal and regulatory environments have improved based on dialogue between the Government and the private producers, there is still need for further changes to create an environment which will maximize investment and production.
We need the Government to support the energy sector and to enable private sector companies to make the investments required to safeguard the country’s future. In particular, there is a pressing need to further decrease the extraction tax to encourage exploration and production. It is a two way street and if the sector is successful then it will provide increased revenue through increased production to support national and local budgets.
Greater use of public private partnerships, where there is significant investment from both the government and the private sector would also be highly beneficial. Private public partnerships are a crucial component of public policy in the globalized world today. They are cost efficient and provide an effective mechanism for implementing policy. Changes to Ukrainian legislation in late 2015 have opened the door to more investment, and further reforms could see the sector strengthen further.
Helping Ukraine achieve energy independence should be a major pillar of the country’s strategic goals for the years ahead. We continue to encourage government and market players to reform the Ukrainian gas market based on European best practices. It is crucial that market players, infrastructure investors and Ukraine’s international partners see Ukraine as a reliable partner. If we all work together, private sector, state-owned energy companies, government and the international community we can make energy independence a reality.