QUESTIONABLE RATIONALES FOR THE BOHORODCHANY-UZHHOROD GAS PIPELINE PROJECT

The Ukrainian government is stepping up its efforts to form a consortium with Gazprom to construct a gas transit pipeline in Ukraine from Bohorodchany to Uzhhorod. The 230-kilometer line, with a projected annual capacity of up to 20 billion cubic meters, would provide an additional outlet from the main gas trunk line into European Union territory near Uzhhorod.

The project has been under discussion for several years in the context of proposals to form a Russia-Ukraine gas transport consortium that would own and/or operate Ukrainian pipelines. Ukraine officially takes the position that such a consortium could only be created for building new pipelines, particularly Bohorodchany-Uzhhorod; but it would not apply to the existing transit system, which is 100% Ukrainian state-owned. This declarative position dates back to the final years of Leonid Kuchma’s presidency and the first government of Viktor Yanukovych. However, Ukrainian officials during that time and at present have proposed various indirect methods for instituting “joint” Russian-Ukrainian control over Ukraine’s gas transit system.

For its part, Moscow takes the position that a gas transport consortium would by definition involve establishing joint control over Ukraine’s gas transit system, with Gazprom investing in the system’s modernization in return for shared ownership and/or management. Viewed in this light, a Bohorodchany-Uzhhorod pipeline in Ukrainian-Russian shared ownership looks less problematic to Ukraine than sharing control of its existing transit system with Russia.

Apart from this questionable value, the Bohorodchany-Uzhhorod project involves serious drawbacks to Ukraine and Europe. First, it would render Ukraine even more dependent on Russian-delivered gas, preempting market niches that could otherwise be filled by gas from alternative supply sources.

Second, it would discourage existing plans and proposals to build gas pipelines that bypass Russia. Those could include pipelines originating in the Caspian basin, such as the Nabucco project, which Kyiv recently declared its interest to join via Romania, or the proposed trans-Black Sea gas pipeline from Georgia, or the proposals for a liquefied-natural-gas import terminal on the Black Sea to supply the region, whether in Romania’s port of Constanta (where ample port installations are available) or in Odessa or Pyvdenny (as Ukraine prefers despite the less developed infrastructure there).

Third, a jointly owned Bohorodchany-Uzhhorod pipeline (presumably on a parity basis) would mean that Ukraine is forfeiting half the transit revenue for Russian gas en route to points west.

From a European perspective, a Bohorodchany-Uzhhorod pipeline would enable Gazprom to increase its market share in Europe even further and faster, thereby setting back the EU’s declared goals of supply diversification. Building this pipeline would only be consistent with the peculiar diversification concept entertained by a large part of Germany’s political and big business establishment: namely, “diversifying” the supply routes from a single source, Russia.

Moreover, building that pipeline would give Russia an additional incentive to strengthen and expand its monopoly on the transit and marketing of Central Asian gas to Europe. With Gazprom’s extraction and existing fields insufficient to meet its massive contractual commitments in Europe after 2010-2011, Moscow relies on cheaply bought Central Asian gas to sell expensively in Europe and fill that looming Russian deficit. Most of the volume to be pumped through Bohorodchany-Uzhhorod to the EU would almost certainly originate in Central Asia. Thus, this project would help perpetuate an exploitative arrangement (with windfall rents to the Kremlin). By the same token, it would preempt those very volumes of Central Asian gas that EU countries need in order to reduce dependence on Russia.

During his February 27-28 visit to Berlin, Yanukovych sought to interest the German government in the Bohorodchany-Uzhhorod project. Within Ukraine as well, Yanukovych concedes that Russian officials give ambiguous answers when asked whether Russia can provide an additional 20 billion cubic meters per year for this pipeline project. From this he concludes that Ukraine cannot alone bear the risk of investing in this project, but should launch it together with Russia in order to share the risks and give Russia an incentive to pump gas through Ukraine to Europe’s lucrative markets (Radio Deutsche Welle cited by Interfax-Ukraine, February 24; ICTV Television [Kyiv], February 25; Handelsblatt, February 26).

Russian President Vladimir Putin and Gazprom most recently reiterated offers to allow Ukraine “access” to Russian extractive deposits in return for Russian takeovers of transit assets in Ukraine. In response, Ukrainian opposition leader Yulia Tymoshenko initiated and the Verkhovna Rada adopted legislation banning the alienation of such assets (February 6), and President Viktor Yushchenko wasted no time signing that law (February 20).

The move has infuriated Russian officials. On February 21, Gazprom vice-president Alexander Medvedev on videoconference link from Moscow to Brussels attacked “Ukrainian politicians who seek to politicize [sic] the bilateral relationship …. by adopting strange laws that ban the alienation of Ukraine’s gas transport system” — obviously a swipe at Tymoshenko. On February 21 and 26, Gazprom president Alexei Miller made clear to Ukrainian Fuel and Energy Minister Yuriy Boyko in Moscow that the Russian side still seeks joint management of Ukraine’s transit system in return for Ukrainian access to extractive project in Russia (Interfax-Ukraine, February 21, 26). And on February 27, Valery Yazev, the Russian Duma’s Energy Committee chairman, declared that Russia could only offer “a small, unimportant gas field” to Ukraine in return for Russian-shared control of the Bohorodchany-Uzhhorod project (Inform Newsletter, February 27).

With the exchange value of this project thus deprecated, and its strategic drawbacks plain to Ukraine and Europe, there is ample reason in Kyiv and Brussels to promote pipeline projects that aim for supply diversification, instead of continuing Russian monopolization (see EDM, February 7, 21).