Publication: Eurasia Daily Monitor Volume: 4 Issue: 36

Since the law initiated by opposition leader Yulia Tymoshenko and adopted by parliament on February 6 has banned any form of alienating gas transit pipelines and other Naftohaz Ukraine-owned assets (see EDM, February 7), Russia’s Gazprom and officials in Kyiv seem to be adjusting their approach. They now suggest transferring stakes in Ukrainian oblast-level and local distribution companies to Gazprom, in return for Ukrainian “access” to gas extraction projects in Russia. Such transfers could, however, eviscerate Ukraine’s gas transport system from within, aggravating Naftohaz’ already bleak financial situation and potentially setting the stage for a transfer of the transit system itself later on.

On February 19, Ukrainian Fuel and Energy Minister Yuriy Boyko indicated that the government might transfer parts of Ukraine’s gas distribution networks to Gazprom. Speaking in the wake of talks with Gazprom president Alexei Miller, Boyko said, “Russia is not interested in anything other than distribution networks in Ukraine.” Gazprom has proposed specific options to exchange Russian extraction assets for Ukrainian infrastructure assets. Ukraine’s State Property Fund is currently preparing sales of minority stakes in distribution companies in certain Ukrainian oblasts (Interfax-Ukraine, February 19).

Swapping Ukrainian infrastructure for “access” to Russian oil and gas deposits does not seem to be a viable proposition. Ukraine is hardly able to provide the high inputs of technology and investment capital required by extractive projects in Russia. More likely, such “access” would become a cover for non-transparent transfers of Ukrainian infrastructure portions to Gazprom or to companies and individuals fronting for Gazprom.

These proposals are being accompanied by distracting suggestions emanating also from Boyko’s ministry as well as from Prime Minister Viktor Yanukovych. These profess intentions to seek production-sharing agreements for gas and oil — including some offshore projects — in Turkmenistan, Uzbekistan, Egypt, and Libya (Zerkalo nedeli, February 17; ICTV Television [Kyiv], February 19). Such intentions are also clearly beyond Ukraine’s means and might form a smokescreen for the real game ongoing with Moscow. More realistically perhaps, Yanukovych proposes that Naftohaz participate in reconstructing Uzbek gas pipelines “together with the other interested parties” — apparently referring to Russia, next to which Naftohaz could only play a relatively minor role in Uzbekistan.

In a variation on this theme, Boyko cites Ukrainian investment projects in Turkmenistan (building a bridge on the Amu Darya river, several gas compressor stations, an irrigation water supply ring) as entitling Ukraine to certain volumes of Turkmen gas (UNIAN, February 19). However, most of these low-tech investments date back to the late 1990s and have strained Ukraine-Turkmen relations because of long delays and cost overruns. This situation was a factor in Ashgabat’s December 2005 decision to renounce direct sales of gas to Ukraine, selling the gas instead to Gazprom for indirect delivery to Ukraine via RosUkrEnergo.

Members of President Viktor Yushchenko’s team are airing serious concerns over proposals to sell infrastructure stakes to Russian interests. In a February 19 teleconference with heads of oblast administrations, First Deputy Head of the Presidential Secretariat Arseniy Yatseniuk criticized such “regrettable schemes” for thwarting the creation of a competitive environment in Ukraine and placing Russian interests in control. Alluding to similar processes ongoing in European Union countries, Yatseniuk decried the absence of a common energy policy for the EU or the former Soviet countries (Interfax-Ukraine, February 19).

For his part, National Security and Defense Council Vitaliy Hayduk refutes Russian President Vladimir Putin’s claim that Yushchenko presented a “revolutionary proposal” to Putin about “unifying” Ukraine’s and Russia’s gas transit systems during their summit in December (Interfax-Ukraine, February 16). That bold assertion by Putin in his February 1 press conference backfired, prompting Tymoshenko’s legislative initiative and the Rada’s February 6 vote to ban alienation of Naftohaz pipelines and other assets. However, that law does not protect Ukrainian local and oblast-level gas distribution networks.

Meanwhile, both the presidency and the government support the creation of a Russian-Ukrainian consortium to build the long-planned Bohorodchany-Uzhhorod pipeline, which could add as much as 19 billion cubic meters to Ukraine’s annual transit capacity for Russian and/or Central Asian gas to Europe. While consistent with Ukraine’s interest in a narrow and short-sighted sense, this line would actually increase Gazprom’s market share in Ukraine and Europe and also expand the “single channel” for Central Asian gas through Russia and Ukraine to Europe. A Bohorodchany-Uzhhorod pipeline could preemptively absorb Central Asian gas volumes that are needed for the projected trans-Caspian and Nabucco projects.

With Tymoshenko in the forefront, the case is gaining political ground for eliminating RosUkrEnergo — or any intermediary fronting for Gazprom — from the Russia-Ukraine gas trade. By the same token, Tymoshenko is calling for direct purchases of gas from Central Asia, with Russia as transit country but not as commercial intermediary (Ukrainian News Agency, February 16).

Last month, Yushchenko and Yanukovych separately signaled interest in having Ukraine connected to the projected Nabucco pipeline for Caspian gas. However, Yushchenko’s and Yanukovych’s signals on energy policy are mixed and confusing (see EDM, December 14, 2006). Given the magnitude of Ukraine’s gas market, some clear signals of Ukrainian interest in the projected trans-Caspian pipelines could substantially enhance those projects’ commercial attractiveness, demonstrating that market demand is present and massive.