Ukraine balances energy needs and European aspirations

Viktor Yanukovich

Events over the past fortnight have demonstrated that Ukraine is still a point of competition for the EU and Russia. Should Ukraine manage to resist Russia’s pressure, its energy policy aimed at diversifying energy resources might reap benefits in the years to come.

Ukraine is one step farther away from Europe. A sudden decision made by the Ukrainian president Viktor Yanukovich to cancel the signing of a pre-agreed deal with the European Union is a strong blow to Brussels and, at the same time, an important victory for the Kremlin. The key person responsible for snatching the bride at the altar is President of Russia Vladimir Putin, who used Ukraine’s economic dependency on Russia to prevent further bonding between Kiev and Europe.

Despite clearly accepting a marriage of convenience with Russia, Ukraine still seems determined to diversify its energy sources and continue with energy projects that involve European and US companies. Energy is one of the key pressure levers that Moscow actively uses to keep Kiev away from the West, as Ukraine and Europe painfully experienced during the 2006 and 2009 winters when Moscow cut off the gas supply. Ukraine covers around 70% of its natural gas consumption with imports from Russia.

The latest development pointing in this direction is the signing of a production sharing agreement on 27th November between the Ukrainian government and a group of investors led by the Italian oil company ENI. The consortium is planning to explore offshore unconventional hydrocarbons in the Black Sea. The investment is worth about $4 billion, with an estimated production of 2-3 million tons of oil annually.

On 5th November Kiev signed a deal with US oil giant Chevron to exploit the shale gas reserves in Western Ukraine, which are worth up to $10 billion. In January this year, Ukraine signed a similarly valued agreement with Shell. The initial explorations of the 8,000-square-kilometre Yuzivska field are expected to start next year. Another major deal with the Exxon-Mobile led group is expected to take place by the end of the year, involving explorations off the Ukrainian western coast in the Black Sea.

However, even if these massive deals lead to results, this will not solve Ukraine’s energy problems in the short term. Shale gas and oil explorations are time-consuming, and Kiev cannot expect to benefit from the shale (in terms of energy independence) before the end of this decade.

It is still early to see whether the recent political developments will affect Ukraine’s energy policy. With his U-turn towards Russia, Yanukovich has shown pragmatism and awareness that Ukraine is still not ready to start an open war with Moscow. On the other hand, Ukraine’s opposition to becoming a member of the Eurasian Economic Community, a Russian-led customs union composed of former Soviet republics, is a sign that Kiev has not entirely dropped – but rather postponed – its European ambitions.

Energy will most certainly play a key role in this process in the years to come. Should Ukraine manage to diversify its energy resources in the next five to ten years, the geopolitical dynamics surrounding the country might significantly change. However, the recent events have shown that the Kremlin will not watch quietly as Europe meddles in what Russia still considers to be its backyard.

More on Ukraine’s balancing act from GRI:

Ukraine Teeters Between the EU and Russia

Ukraine Moves Closer to Europe

Ukraine Could Become Europe’s Next Energy Hub

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Categories: Economics, Europe

Author:Dr. Ante Batovic

Ante is a foreign policy and energy analyst. Previously he was a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a Masters degree in Global Politics from the London School of Economics and a PhD in History from the University of Zadar. He is an experienced researcher interested in foreign policy, political economy and energy.

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  1. Ukraine’s EU rejection harmful to business environment | Global Risk Insights - December 10, 2013

    […] Ukraine balances energy needs and European aspirations […]

  2. Ukraine remains caught in tug-of-war between Russia and West | Global Risk Insights - February 28, 2014

    […] in the oil and gas sector, will almost certainly be put on hold. Last year, Ukraine signed production sharing agreements worth $4 billion with the investment consortium led by Italy’s ENI to explore offshore […]

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