August 14, 2014

Analysis of the Situation on the World Energy Markets and Its Impact on the Energy Security of Ukraine

1. Analysis of the situation on the world energy markets

1. Analysis of the situation on the world energy markets

  1.1. Gas industry

  1.2. Oil market

  1.3. Nuclear power industry

2. Analysis of the threats to energy security of Ukraine

  2.1. Gas industry

  2.2. Oil market

  2.3. Nuclear power industry

3. Strategic Vectors of influence on the energy security of Ukraine

  3.1. Russian vector

  3.2. European Vector

4. Recommendations for the protection of energy security of Ukraine

  4.1. Gas sector

  4.2. Oil industry

  4.3. Атомная энергетика

5. General conclusions

The first half of 2014 is characterized by highly unstable and tense state of global energy markets, where problems of ensuring energy security and stability are becoming more and more important. Events in the Middle East and Ukraine have exacerbated these problems. Trends and developments suggest the rapid growth of influence of political factors on global energy policy. Thus, the “gas conflict” between Ukraine and Russia has posed a threat to the energy security of the whole of Europe and has become a shining example of the influence of political motives on relations in energy sphere.

Analysis of international energy policy leads to the conclusion that in the last months, actions of the world's major players in this field depended on the following factors:

preservation of the downward trend in prices on the world oil market caused by excess of supply over demand for oil;

  • growth of the USA's energy self-sufficiency (due to the “shale revolution” included), which negatively affects crucial aspects of energy relationships and can lead to changes in strategic directions of the foreign policy of the official Washington regarding traditional regions of cooperation, in particular the Middle East, Africa and Latin America;
  • gradual “energy reorientation” of China from coal to natural gas, as well as its willingness to make major investments into its nuclear power plants. It is becoming one of the key geopolitical factors which will affect the development of energy in the coming years;
  • introduction of the third level of sector, including energy, sanctions against Russiaby the USA, EU and other countries against the background of aggravation of Ukrainian-Russian relations, which will hinder the development of Russian oil and gas industry;
  • increased risks for stable and safe transit of Russian energy resources to Europe through Ukraine, taking into consideration the lack of transparent and mutually acceptable mechanism to eliminate contradictions between Kiev and Moscow in the gas issue.

1.1. Gas sector

It is expected that by the end of 2014 the situation on the gas markets will be shaped by the following factors:

  • possible “collapse” in world oil prices to 70-80 US dollars per barrel;
  • acceleration by the USA of the process of issuing licenses to export liquefied natural gas (LNG);
  • continuation by EU countries of measures aimed at reducing their dependence on energy suppliers by constructing interconnection pipeline jumpers, obtaining the cumulative effect of previously started projects in the spheres of energy conservation and energy efficiency, participation in the development of oil and gas fields outside the EU;
  • aggravation of the dialogue “Russia-EU” on the issue of fulfilling by all participants of the European gas market of the requirements of the Third Energy Package of 2009, which will increase competition in the regional market. This applies to the requirements of the European Commission to adjust the bilateral intergovernmental agreements with the EU member states on the project of construction of the “Southern Stream”, publication by the European Commission of the results of the investigation of “Gazprom's” wrongdoings in the European market, and so on).

Analysis of these factors shows growth of challenges and threats to regional energy security, taking into consideration Russia's attempts to counter European countries in implementation of policy aimed at reduction of their energy dependence on Russia. Thus, EU energy strategy provides for support to member countries in the implementation of measures in the spheres of energy conservation and efficiency, with the help of which the European Union plans by 2020 to reduce its needs in primary energy by 20%. Besides, the EU member countries should intensify measures aimed at reducing their dependence on energy suppliers by constructing interconnection pipeline jumpers (which will make it possible to quickly compensate for raw materials delivery interruptions, as well as provide access to the sites of gas spot trading in Europe).

On the other hand, the trends in the global gas market indicate the presence of favorable conditions for transformation of traditional relationships between exporters and importers of natural gas. Thus, it is expected to increase the supply of liquefied natural gas due to imports from the United States and Australia. Thus, in case of the resumption of work of the nuclear power plant in Japan, additional 25 billion cubic meters of LNG are expected to arrive at the world market, some of which may be sent to Europe.

Besides, the EU will support the development of the “Southern Gas Corridor” to ensure natural gas supplies from Azerbaijan. Therefore are expected enhanced actions of Turkey (with the USA's support) for the development of transit infrastructure in its own territory for the supply of energy carriers to Europe from the Caspian region, the Middle East and Eastern Mediterranean. In view of this situation, and to intercept the strategic initiative, Turkey will give the RF signals about its readiness to increase the volume of purchases of Russian gas and to increase the volume of its transit, in particular through the transfer of the route of the pipeline “South Stream”, having intensified at this cooperation with potential competitors of the Russian Federation in the European market — Iran, Iraqi Kurdistan, Turkmenistan.

In order to minimize potential losses, Russia stepped up the signing of a 30-year gas contract with China, implementation of which has much larger political and image components than the economic one. The said above can be explained by the fact that by 2030, China expects to increase its own production of natural gas at the expense of projects for development of shale deposits and coal gasification technologies. At the same time China forecasts increasing of LNG imports, while the volume of pipeline supplies from external markets will play only a supporting role and will be formed mainly due to the resource base of Turkmenistan and Uzbekistan.

In this regard, Ukraine's strategic interest is to preserve Russia's interest in the use of the domestic gas pipeline route as the main route of delivery of natural gas to the European market. Because in case of reduction by the EU of consumption of Russian gas to levels that can be delivered without the use of Ukraine's transit capacities (only though Belarus and the “Northern Stream”), Russia will be able to carry out a more hard-line policy towards Ukraine in the absence on Ukrainian territory of threat of damage to the vitally important for the EU energy infrastructure. Besides, the disowning by Russia of the signed 17 December 2013 additions to the main contract for the supply of Russian gas to Ukraine of January 19, 2009, has demonstrated the political orientation of “Gazprom's” so-called “discounts” and the Kremlin's primary goal to gain control over the Ukrainian gas transportation system, the unique underground storage facilities included.

In this situation, priority tasks of the Ukrainian authorities remain as follows: diversifying Russian gas supplies, viewing in court contractual formula to determine its value based on the experience of European consumers, as well as preventing the establishment of control over the Ukrainian gas transportation system.

1.2. The oil market

By the end of 2014 the world oil market is expected to continue the declining trend in oil prices. As of today, the price of Brent oil (102.5 US dollars per barrel) has decreased to its lowest level since November 2013 after the peak in July of this year (115.71 US dollars per barrel). This is primarily due to the increase in Iran's oil exports (under the partial lifting of international sanctions against Tehran) and the refusal of powerful OPEC members (Saudi Arabia, the United Arab Emirates and Qatar) to reduce their own quotas for production of hydrocarbons to counter the economic growth of powerful competitors. Among other factors — the intensive development of unconventional deposits, reducing the risks to stable production in North Africa, the decrease in demand from Europe and China, building up oil reserves in the USA, speculative factor.

Analysts forecast increase in oil supply by tanker fleet from the Middle East to China and from the Mediterranean basin with a simultaneous decrease in the volume of deliveries to the United States (taking into consideration the increased production volumes of shale oil in this country). At this, reorientation of Russian exports of energy carriers to China and the Asia-Pacific region, although meets Russia's long-term interests, so far is technically impossible.

Rising of oil prices (above 100 US dollars per barrel) is possible only in case of escalation of conflicts in North Africa and Middle East, threatening infrastructure facilities of the oil industry. At this, the expected pirate or terrorist activity, as well as the Russian-Ukrainian conflict itself will have little impact on the dynamics of pricing in the oil markets.

Taking into consideration the fact that the Russian budget for 2014 was formed on the basis of the average price of oil at 93 US dollars per barrel, the current trends in the oil market have a negative impact on the Russian economy, which is partially compensated by the devaluation of the rouble (in roubles revenues from oil exports will remain at the planned level). At the same time, the reduction in foreign exchange earnings and depreciation of the Russian ruble form significant risks for supplying Russia with goods of “critical imports” group (equipment, machinery, certain groups of food products), which is further complicated by both, sector sanctions from the West and Russia's retaliatory trade embargo. At this, the ongoing efforts to substitute imports, cannot achieve the desired results in the nearest future, and thus the issue of lifting of Western sanctions by the end of this year is becoming critical for Russia.

For Ukraine, the current trends in the global oil market are, by and large, favorable, as they will reduce the estimated price for Russian gas, as the cost of hydrocarbons affects its price. This will strengthen Ukraine's negotiating position in determining the market price of gas (as well as in the Stockholm arbitration), and will contribute to a gradual decline in prices of petroleum products in the domestic market. However, for Ukraine remain the risks associated with the significant level of dependence on imported petroleum products and the need to spend foreign exchange reserves on the purchase of not raw materials but petroleum products (with higher added value).

Taking into consideration development of the situation and trends in the world economy, it is possible that the price of Brent crude oil will be in the range of 76-86 US dollars per barrel, WTI Light Sweet — 70-80 US dollars per barrel, with a tendency to stabilization in the winter. In early 2015 the world markets will continue the trend of low prices of raw materials, while in the second half of the next year the world oil prices are expected to grow.

1.3. Nuclear power generation industry

In the nearest future characteristic for the global and regional nuclear power engineering will be the following:

  • gradual restoration of the international community's confidence in nuclear power after the accident at the Japanese nuclear power plant “Fukushima-1” in 2011 and construction of new nuclear power units in several countries, which will contribute to the growth of its share in the global electric energy balance by 15-20 % by 2030;
  • development within the framework of regional energy markets, of diversification projects and projects on branching interconnections, grids included;
  • revision of world prices upwards for uranium, zirconium concentrate, conversion services, enrichment and fabrication of nuclear fuel (NF);
  • requirement strengthening on the part of the international community in order to reduce the volume of world energy consumption, as well as to accelerate introduction of advanced energy-saving technologies and alternative sources of energy production.

Regarding Ukraine, the Russian side's primary goal in the short term remains preventing of strengthening of the “Westinghouse’s” positions in the Ukrainian market. At the same time preserving the RF's monopoly position in the domestic market of nuclear fuel is a priority for Russia, including taking into account counteracting the American company's coming to the markets of other Eastern European countries (Bulgaria, Czech Republic, and Romania), operating VVER-1000, nuclear fuel for which is supplied by Russia on monopoly conditions. Besides, the management of the corporation “Rosatom” intends to develop its own capacities to replace Ukrainian counterparts, which will allow to gradually give up the import of high-tech products made at enterprises of the nuclear industrial complex of Ukraine, first of all electrical equipment made at Kharkiv “Turboatom” plant.

However, intensification of the European integration course of Ukraine creates preconditions for French and American energy companies to develop cooperation with Ukraine in areas such as uranium mining, production of zirconium concentrate and construction of nuclear power plants.

2. Analysis of the threats to energy security of Ukraine

The main threat to the energy component of the national security of Ukraine is the failure of the tripartite consultations “Ukraine-Russia-EU” on the issue of supply and transit through the territory of Ukraine of Russian natural gas, which took place on 14-16 June in Kyiv. The result was a complete cessation from June 16 on of Russian natural gas deliveries to Ukraine and filing counterclaims of “Naftogaz of Ukraine” and OAO “Gazprom” to the Arbitration Institute of the Stockholm Chamber of Commerce (combined into one case). Going to court will not allow Ukraine to prevent the risks associated with the deficiency of natural gas during the heating season 2014/2015, but in the future will contribute to reaching non-discriminatory conditions for cooperation with Russia in the gas sector.

At this, delaying by the Stockholm arbitration of the decision before the autumn-winter period will sharpen the needs of both Ukraine and European countries for energy. Against this background, Russia will raise the tone in the negotiations and put pressure on Ukraine through the EU in the issue of the need to establish the price of gas for the winter at 385-420 US dollars with the mandatory redemption of the debt for 2013-2014.

Perhaps Ukraine's one and only successful countermeasure to minimize the negative impact of another Russian-Ukrainian gas crisis is the completion of the preparatory work on the establishment of the reverse supply of natural gas from Slovakia from September, 1, 2014 (up to 3.2 billion cubic meters per year). These works are carried out according to the Memorandum of April 28, 2014 on reverse supplies of natural gas to Ukraine through the pipeline section “Voyany-Uzhgorod”, signed by the operator of the gas transportation system in Slovakia “Eustream s.r.o.” and Ukrainian PJSC “Ukrtransgaz”. Representatives of “Eustream” point out the prospects for increasing of the volume of deliveries by this section in the format of “small reverse of gas” from March 1, 2015 to 10.8 billion cubic meters per year.

2.1. Gas industry

The main threats to Ukraine in this sphere are as follows:

  • the continued existence of the critical level of dependence on imports of Russian natural gas, as well as the Russian Federation's energy pressure on Ukraine in questions of mutual payments and determination of the price of Russian gas. Not resolving these issues threatens, at least, with “Gazprom's” transition to the unfavorable for Ukraine system of payments (100 % prepayment of volumes stipulated by the contract of 2009). Complete cessation of Russian gas supplies to Ukraine in summer 2014 will not allow to fill Ukrainian underground gas storage facilities (UGS) at proper level with gas in volumes sufficient to meet the needs of the EU member states in the winter. In future this will be used by the Kremlin for traditional accusing the official Kiev of “stealing” gas and undermining the European energy security during periods of peak demand (autumn-winter 2014/2015);
  • Ukraine's loss due to the occupation of the Crimean Peninsula, of a part of its own natural gas production (in volumes up to 1.8-2.4 billion cubic meters), as well as the access to the development of hydrocarbon deposits located on the Crimean shelf of the Black and Azov Seas. Ukraine's loss of control over the production capacities of “Chernomorneftegaz” first of all over off-shore platforms, significantly complicates further development of the fields “Odesskoye” and “Bezymyannoye” in the Black Sea. Most of the natural gas deposits both, in shallow and in deepwater fields in the Black Sea belong to the Crimean shelf, Pallas structure included. Besides, there is a risk of abandoning the project for development of deposits of the Scythian area (forecasted gas production — almost 4 billion cubic meters) by the consortium of companies “ExxonMobil” (40 %), Shell (35 %), Austria's OMV in the face of the Romanian subsidiary “Petrom” (10 %) and NAK “Nadra of Ukraine” (10 %); possibility of failure of the implementation of agreements on products distribution between Ukraine and foreign companies “Eni” and “EdF” within the areas “Abikh” and “Caucasian”, as well as on Subbotinskoye fieldnear the Kerch Strait;
  • difficulties with the development of unconventional sources of natural gas, first of all within the framework of projects for the development of shale deposits, coal gasification and methane production from gas hydrates. Thus, taking into account the existing barriers to shale gas production (lack of investments and technologies, the need to phase out large plots of land in densely populated areas, the need to reduce environmental risks and so on), shale gas production on an industrial scale in the volumes of 6-11 billion cubic meters per year may begin no earlier than 2022. At the same time, aggravation of the situation in Donetsk region has led to postponing of drilling of the first exploratory wells on Yuzovskyi site. The joint project of the State Development Bank of China and “Naftogaz of Ukraine” on coal gasification (appropriate plants were planned to be built in Donetsk, Luhansk, and Kirovograd regions) remains frozen. In its turn, the main problem of the implementation of projects for the extraction of methane from gas hydrates is limitedness of effective technologies allowing to ensure economic viability and environmental safety of the works. Thus, the cost of the test-patented in Ukraine equipment for extraction of gas hydrates is estimated at 480 million US dollars;
  • lowering of Ukraine's energy transit potential. Despite the fact that the Ukrainian gas transportation system is the main route for Russian gas supplies to Europe (in 2013 the volume of transit through Ukraine amounted to about 83.7 billion cubic meters, accounting for 52 % of the total volume of Russian gas transported to Europe), between 2008 and 2013 the volume of its transit through the territory of Ukraine decreased by 28 %, resulting in a corresponding decrease in revenues from transit. At this, these losses are not yet critical for Ukraine and make us seek new ways to use the unique Ukrainian gas transportation system;
  • problems with organization of reverse supplies of natural gas to Ukraine from European countries (from Slovakia, Poland, Hungary) as a result of an unprecedented political and economic pressure of “Gazprom” on national gas transportation operators of these countries. In particular, there are risks of disruption of reverse gas supplies from Slovakia to Ukraine because of the Slovak operator “Eustream s.r.o.'s” management's attempts to avoid the RF's accusations of violating the terms of the bilateral transit agreement.

2.2. Oil market

The main threats to Ukraine in this market are as follows:

  • significant level of dependence on imports of petroleum products during the crisis of the domestic refining industry. Processing of oil at refineries in Ukraine, taking into account Shebelinskiy gas processing plant in 2013 decreased by 26.1 % (1.2 million tons) compared with the same period of 2012 — to 3.4 million tons. Given the design capacity of domestic refineries at 54 million tons per year, their load does not exceed 7 %. In 2013, petrol production in Ukraine decreased by 41.1 % (to 963.6 thousand tons), production of diesel fuel — by 30.3 % (to 950.6 thousand tons) of heavy fuel oil — by 16.1 % (to 115.2 thousand tons);
  • speculative increase in prices of petroleum products in the domestic market as a result of the instability of hryvnya, as well as some problems with the import of petroleum products, has a destabilizing multiplier effect on the domestic economy and has an additional negative impact on the socio-economic situation in the country;
  • loss of oil transit potential due to the reduction of volumes of oil transportation through pipelines from Russia to the EU (the agreed volumes for 2014 amount to 15.5 million tons). Russia is pursuing a systematic policy of building export-oriented oil supply routes (in particular, the Baltic Pipeline System-2 (BPS) bypassing Ukraine, as well as increasing the supply of oil to the world market by maritime transport (from ports of the Baltic and Black Seas). As a consequence, the domestic route for transportation of hydrocarbons plays the role of compensatory (used for contractual obligations of Russian companies to consumers of Central and Eastern Europe);
  • lack of a settled legal order of the formation of strategic fuel reserves in case of blocking or suspension of imports, which is of particular importance in the context of the deepening conflict with Russia — a major supplier of oil and oil products to Ukraine.

2.3. Nuclear power generation industry

The main threats to Ukraine in this sphere are as follows:

  • probability of suspension of supplies of Russian nuclear fuel for Ukrainian nuclear power plants under the influence of a political decision of the Russian leadership. However, the management of the corporation “Rosatom” considers this approach unreasonable and intends to continue to fulfill its obligations under the agreements with Ukraine;
  • suspension of the project for construction in Ukraine of a plant to produce nuclear fuel (in Kirovograd region). So, by the end of 2013 the Russian company “TVEL” and Ukrainian concern “Nuclear Fuel” had been planning to contribute to the share capital of the JSC “Nuclear Fuel Production Plant” 42 million US dollars each. These funds were needed for implementation of part of the work on the construction of the plant, but the Ukrainian side had not contributed its share and preparatory work at the plant was suspended;
  • Russia's resistance to all Ukraine's attempts to diversify supplies of nuclear fuel, especially considering the prolongation by “Energoatom” until 2020 of the Agreement for the supply of NF produced by the company “Westinghouse Electric Sweden AB”. In particular, the Russian Federation is trying to discredit the US company by launching an information campaign aimed at lighting technological and design problems identified in the operation of nuclear fuel produced by “Westinghouse” at the South- Ukrainian nuclear power plant;
  • Russia's making no progress in the implementation of the project for the completion of the 3rd and 4th nuclear units of Khmelnitsky nuclear power plant;
  • RF's attempts to create leverages over the development of other elements of the Ukrainian nuclear fuel cycle (NFC). Thus, the Russian Federation's leadership is considering steps to deepen cooperation between Russian and Ukrainian enterprises of the nuclear industrial complex in order to prevent a full-fledged operation of the respective companies without involvement of Russian production facilities.

These external threats substantially strengthen traditional for Ukraine internal threats, associated with low energy efficiency of industrial production and communal services, which ultimately leads to significant inflation expectations and destabilizing of the economic development of the country as a whole. At the same time Ukraine’s capability to independently counteract those threats, especially of Russian origin, are severely limited by the low energy efficiency of the domestic economy, the current critical state of Russian-Ukrainian relations and created in previous years unprofitable for Ukraine contract base. Besides, the involvement of support (not only on energy) from other regional and European states is limited by the level of their own energy, economic and political dependence on Russia.

3. Strategic vectors of influence on the energy security of Ukraine

3.1. Russian vector

The main factor, which today forms the development of Russia's energy policy (towards Ukraine included), is introduction by the USA and the EU of the third level of sectoral sanctions against the Russian Federation. These sanctions are related to energy and financial sectors, production of military and dual-purpose, sensitive technologies, high-tech equipment. This will hinder development of the Russian oil and gas industry, and can lead to the following consequences:

  • curtailing cooperation with foreign partners within the framework of new agreements, suspension of the implementation of pre-planned joint investment projects as a result of the RF's not having necessary technological and financial resources for its implementation;
  • suspension of projects for development of the Arctic shelf, reducing the number of proposals of foreign companies for cooperation within the framework of projects for development of new hard to access areas, decline in energy carriers production due to the use of outdated technologies, a strong focus on production of energy carriers from old fields;
  • loss of competitiveness of the Russian economy, reduction of filling the revenue of the budget of the Russian Federation, increasing risks of improper execution of contracts for the supply of oil and gas abroad, economic inadvisability of foreign companies' making cooperative ties with Russia in the energy sector.

Russia traditionally uses energy levers of pressure on Ukraine to solve its own foreign policy goals. The Russian Federation's strategic goal is restoration of its status of one of the global centers of power that provides for the successful implementation of its own integration project — Eurasian Union. Since this cannot be done without establishing full control over Ukraine, Moscow's objectives in relations with Kiev is inclusion of Ukraine (or at least parts of it) into the Eurasian integration project under the aegis of the Russian Federation, preventing Ukraine's strategic rapprochement with the West, as well as ensuring a free access to the Ukrainian markets and resources, energy ones included (in particular deposits of hydrocarbons and uranium).

As a consequence, Russia, introducing a set of measures aimed at limiting the sovereignty, undermining the social and economic base and weakening of the Ukrainian statehood, is giving priority to the use of energy, industrial-cooperation, trade-economic means of pressure on Kiev. The above-mentioned, combined with the support of the activities of terrorist and separatist organizations in Donetsk and Luhansk regions of Ukraine (where strategic objects of the energy sector of Ukraine are situated, most of the coal mining industry enterprises included) leads to increased social tensions in the country.

In parallel, Russia continues to implement the policy of so-called “diversification” of routes of gas supplies to Europe, continuing the construction of pipelines bypassing Ukraine (“Northern Stream”, “Blue Stream”, promising — extension of “Northern Stream”, “Southern Stream”, “Yamal-2”), with the help of which it binds European countries to Russian energy carriers even more.

Besides, Russia is hindering any project to develop alternative forms of energy (unconventional/shale gas, coal gasification), as well as the real diversification of sources of conventional gas. Thus, in the region of the Caspian Sea, the Russian policy is to purchase from Turkmenistan the entire volume of produced gas (this has already led to the gradual reorientation of Ashgabat to the Chinese market), and interfering with Azerbaijan's implementation of the European Southern Energy Corridor (using tension around Nagorny Karabakh conflict included).

At the same time, Russia is actively mastering the capacity to supply its own natural gas to eastern markets — especially to China and Vietnam. It is also developing energy cooperation with Iran. However, in the way of Russian plans there stands lack of necessary infrastructure and weakness of positions in negotiations with these countries.

The key elements of the policy of the Russian authorities in the energy sector in the first half of 2014 were as follows:

  • increased energy blackmailing Ukraine. In particular, the unilateral cancelling of discounts (exemption from export duty) in the amount of 100 US dollars, provided for by Kharkiv Agreements of 2010, is used for accusing Ukraine of the debt to “Gazprom” for lost profits during the period of this discount. At this, the Russian leadership in its dialogue with Ukraine as well as with the EU and its member states actively threatens to stop the transit of gas through Ukraine and to switch to prepay in payments with “Naftogaz of Ukraine” for imported energy carriers. In parallel, Russia inspires in international information space the question of the Ukraine's delayed payments for the gas supplied, in advance blaming Ukraine alone for all the failures in fulfilling the contracts.
  • attempts to slow down the proceedings in the Stockholm arbitration of the complaints of “Naftogaz of Ukraine” and OAO “Gazprom” in order to prevent the loss of strategic initiatives in the gas conflict (pushing it to the winter period). At this, the Russian side is actively spreading in the media the thesis of groundless claims of Ukraine to revise the formula for determining the price of gas and reimbursement of overpayment for imported from the Russian Federation natural gas in the period from 2010 to the 2nd quarter of 2014. In order to strengthen arguments of their claims, “Gazprom” has paid to the Russian budget export tax of about 1.8 billion US dollars, which should confirm its financial obligations associated with Ukraine's having got discount of 100 US dollars per thousand cubic meters;
  • activation in the last months of bilateral cooperation between Russia and the European countries-participants in the project “South Stream” (Bulgaria, Macedonia, Serbia, Bosnia and Herzegovina, Austria). At this, Russia is trying to exert pressure on the European participants in the project in order to counter the activities of the official Brussels on the formation of and sticking to a joint position of the EU member states in responding to external threats to energy security. Russia keeps telling them that the resolution of the European Parliament of 17 April about the suspension of the project “Southern Stream” is just a recommendation;
  • concomitant goals of the Russian Federation's active work on the project “Southern Stream” is to deprive Ukraine of the transit role in order to weaken the EU's sensibility to Russia's steps in the military, political and economic destabilization of the situation in Ukraine, widening space for Russia's expansion and creation through energy dependence of the countries of South Eastern Europe of a springboard to expand its economic presence in the region and to strengthen its influence on the foreign policy vector of development;
  • attempts to neutralize the impact of the third package of sanctions, using Russia's lobbying positions among European officials and politicians, as well as leaders of some European energy companies. Active work on making agreements with energy companies of Switzerland, Germany, Norway and other countries;
  • activation of the energy dialogue with China, the main stage of which was the visit of Russian President Vladimir Putin to China (20-21 May), during which an agreement was reached on the supply of Russian natural gas in the amount of 38 billion cubic meters per year for the period of 30 years, beginning in 2018-2020 totaling about 400 billion US dollars. Moscow's political motives at its conclusion were to demonstrate to the West possibilities of diversification of natural gas markets, which was supposed to influence the position of the EU and the USA on the reasonability of introducing the third level of sanctions against Russia. However, China has successfully taken advantage of this factor, and secured the average price of gas under the contract at 310-320 US dollars per 1 thousand cubic meters, as well as access to Russian gas fields in Eastern Siberia;
  • intensification of cooperation with Iran in the format of “oil-for-goods”, which provides for the Russian Federation's buying oil for further resale on the world oil market in the amount of about 500 thousand barrels (a special memorandum was signed at the beginning of August of this year);
  • continuing significant activity of the enterprises of the Russian nuclear industry to expand its presence in the markets of third countries. At this, the level of reciprocal interest of foreign partners is high. Thus, the Russian state corporation “Rosatom” (was not included in the list of sanctions) is holding talks with Peru on the possibility of implementation on the territory of Peru of joint projects in the sphere of nuclear energy generating industry (construction of a nuclear power plant and modernization of the Peruvian research reactor according to Russian designs);
  • continued cooperation of “Rosatom” with Italy, Norway and Germany (unlike Great Britain);
  • Russia's further steps to integrate the energy infrastructure of the occupied territory of the Crimea into the Russian market. At this, so far the Russian Federation is avoiding interference into financial and economic activity of “Chernomorneftegaz”, despite the deterioration of its activities under administrative isolation of the Crimea and actual withdrawal of the company's capabilities from the management system of “Naftogaz of Ukraine”.

3.2. European Vector

In its turn, the European Union has focused on the enhancement of activities aimed at consolidation of positions of the EU member states in approaches to ensuring energy security of Europe in the face of sharpening of Russian-Ukrainian relations. In particular, within the framework of the priorities of the EU's Energy security strategy for the period up to 2030, the European Commission presented the main directions of improving energy efficiency. They include the EU's measures aimed at reducing the volume of consumption of primary energy resources in order to reduce energy dependence on foreign suppliers and struggle against climate changes. This creates prerequisites for narrowing the Russian Federation's abilities to use its dominant positions in the European gas market for political pressure on member states of the European Union.

Despite the ambitious long-term plans to reduce greenhouse gas emissions, the official Brussels sees OPEC as an important partner and expects to compensation in case of need, lack of energy supply, which may arise due to the risk of disruptions in oil supplies from Russia. Evidence of this is to hold the 11th ministerial meeting of the Energy Dialogue “EU-OPEC” (Brussels, June 24.), At which, inter alia, were discussed problematic aspects of the transparency of the exchange of information on production and consumption of oil in order to increase the predictability of the market situation. EU's interest in developing cooperation with OPEC is due to the fact that, despite the introduction of alternative energy sources and implementation of long-term priorities in the sphere of decarbonization, oil will remain a major source of energy for European countries.

In terms of the increased risk of termination of Russian natural gas supplies in winter 2014/2015, the official Brussels initiated stress tests aimed at finding out the most vulnerable, in terms of energy security, states in South-Eastern Europe (Greece, Bulgaria, Romania, Hungary and Croatia), the Baltic countries and Finland, as well as among the member countries of the Energy Community and the candidate countries for accession to the EU. Appropriate mechanism provides for preparation (on the basis of the provided by the member states information about the features of the functioning of national gas markets) of a document with a number of specific recommendations, which must be approved in October, during the meeting of the European Council.

The key elements of the European energy policy and of that of individual countries of the region during this period were as follows:

  • rapprochement of positions of the official Brussels and Washington to coordinate immediate practical measures aimed at leveling the negative impact of the crisis in Russian-Ukrainian relations at the energy security of the EU and Ukraine;
  • implementation by the EU and the USA of the third package of sectoral sanctions against Russia, providing for significant limitations to the energy sector, in particular blocking investments into advanced technologies in the field of exploration and production of energy carriers. At this, taking into consideration the significant dependence of the EU on Russian natural gas, the official Brussels, unlike the United States has not included the gas industry into the sphere of applying the sanctions;
  • reduction of European countries' dependence on Russian gas through increasing volumes of domestic production, diversification of sources and supply routes, improving the internal market and energy infrastructure, development of underground natural gas storage. At this, realization of the idea of a joint buying of energy carriers for the needs of the EU member states is considered to be inappropriate, since such an approach will negatively affect the internal competition;
  • creation of appropriate investment climate for development of projects for using the potential of shale gas, renewable energy sources, nuclear energy;
  • reaching agreements with the United States on duty-free trade in liquefied natural gas, which will help to increase offers of the competitive with Russian natural gas in the European market;
  • creation of conditions for sending additional volumes of gas to Europe from Africa and the Middle East;
  • elimination of the so-called “Energy islands” in the Iberian Peninsula by providing greater access to LNG terminals in South-Eastern Europe;
  • development of new mining projects in the Barents and Norwegian Seas to provide for additional 25 billion cubic meters of natural gas to Europe by 2020;
  • creation of an energy corridor “North-South”, which provides for natural gas transportation between Poland, the Czech Republic, Slovakia, Hungary and Austria in duplex mode, as well as the construction of interconnector between LNG terminals in Poland and Croatia;
  • assisting the transit countries in ensuring legal and technical conditions for the supply of gas through the “Southern Gas Corridor” by 2019;
  • support to projects that allowing to increase production of Caspian gas at other fields apart from “Shah Deniz-2”;
  • in the face of rising risks to ensure its energy security, Romania is activating efforts to diversify sources and routes of natural gas supplies by intensifying the energy dialogue with Georgia, which plays a key role in projects related to the transportation of hydrocarbons from Central Asia to Europe, bypassing both Russia and Iran. The official Bucharest focuses on the importance of development of the gas route “Azerbaijan-Georgia-Romania Interconnector” (AGRI), completion of the feasibility study of which by the British engineering company “Penspen” is expected in September this year;
  • Spain is trying to take advantage of mainstreaming of the EU’s energy security in order to justify the wisdom of sending additional financing from European funds for the development of infrastructure projects on its territory. In particular, we are talking about expanding the capacity to import liquefied natural gas, increasing the transit of gas through pipelines of the Algerian origin “Maghreb-Europe” (through Morocco) and “Medgaz”, as well as receiving additional volumes of natural gas for the needs of European countries by the construction of a new gas pipeline “Midcat” through Catalonia to France;
  • Turkey showed increased attention to the issue of the stability of gas supplies through trans-Balkan pipeline, which supplies natural gas to western regions of the country. In this context, Ankara is studying the possibility of increasing the volume of deliveries through the pipeline “Blue Stream” from 14 to 16 billion cubic meters. However, Turkish experts use the question of the Ukrainian-Russian gas crisis to justify before the foreign partners the importance of implementing the “Southern energy transport corridor” as the route of gas supplies to Europe from alternative sources, from the Caspian, Middle East and Mediterranean regions included.

4. Recommendations for the protection of energy security of Ukraine

4.1. Gas sector

In the nearest future the main energy security challenges in Ukraine will be getting formed, first of all, in the gas sector. This is due to the complete cessation from June 16 of Russian natural gas deliveries to Ukraine and high risks of suspension of gas transit to Europe through the Ukrainian GTS against the background of the unresolved issue of the market-based level of gas prices, taking into account differences in the interpretation of the provisions of the Agreement of 2009. However, another important factor is that in recent months there were favorable conditions to start real negotiations on the possibility of integration of the domestic gas transport system into the European network. Besides, under the European Commission's promoting of the concept of the “Southern Gas Corridor” as a diversified one by delivery routes and sources of gas, and taking into consideration the expected release in the world market of additional volumes of gas, are being formed possibilities for Ukraine to compensate for Russian supplies through buying gas on the European market. Taking into consideration Russia’s having at this stage no chances to completely abandon the transit services of Ukraine, there is a possibility and there is time for the conversion of the technological process of control of main gas pipelines that will allow to carry natural gas supplies to the east and to the west for its storage and redistribution through capabilities of domestic UGS. A prerequisite for harnessing potential abilities associated with changes in the global energy market, is creation of a liberalized gas market in Ukraine itself, which, taking into consideration the compliance with the strategic objectives of the European Union and the United States, allows to count on financial and technical support from them in relevant activities.

4.1.1. The most important internal tasks for the Ukrainian state in the gas sector are as follows:

  • saving the potential of the domestic gas transportation system as an important element in ensuring energy security of Europe. To do this, it is advisable to strengthen the dialogue at the European Commission level and individual potential European investors about the modernization of the Ukrainian GTS to ensure, above all, more efficient use of underground gas storage facilities and creation of technological conditions to fill them with gas from both western and eastern directions. This will allow to come closer to the realization of the idea of creating the Eastern European energy hub (gas trading platform for the needs of Eastern Europe) using domestic UGS facilities. Besides, abilities for protection of national interests in the energy sector, are within the framework of institutional mechanisms of the Energy Charter of 1994;
  • acceleration of the process of organizing reverse gas supplies from Slovakia, Poland and Hungary. In this regard, an important aspect is efforts to obtain the agreement of the Slovak state gas operator on the development of the relevant direction of cooperation with Ukraine, taking into account the risks associated with the possible revision by the Russian side of the advantageous for Slovakia agreement on transit of natural gas to European countries on a “take-or-pay” conditions;
  • reformation and optimization of the gas industry management, increase in domestic production, which will neutralize the critical level of dependence on imports of natural gas;
  • a significant increase in prices for natural gas in Ukraine with the simultaneous introduction of targeted assistance to the most vulnerable strata of the population;
  • activation of implementation (with the support of the World Bank, EBRD and European countries) of projects for raising energy efficiency in housing and communal services and modernization of energy-intensive industries in order to reduce the level of excessive energy consumption in Ukraine.

4.1.2. In the dialogue with European partners on gas issues Ukraine needs:

  • to guarantee to the EU an uninterrupted transit of Russian gas through the national GTS in the winter 2014/2015 (especially during peak periods of demand) and to draw to our European partners' attention to the importance of establishing an international consortium for the transparent operation of Ukraine's GTS;
  • to initiate before the European Commission consideration of the question of taking into account specifics of functioning of the transit component of the national GTS in the face of possible termination of deliveries from the Russian Federation in the assessment of potential risks to European consumers;
  • to include into the dialogue with the RF and EU the issue of legal consolidation of pumping volumes of Russian gas through the domestic GTS for the long term, as the basis of a clear program of filling the available capacities with raw materials, which will be produced by foreign investors in Ukraine, by “unconventional” gas included;
  • to speed up consultations with the European Commission on the mechanisms of filling the domestic UGSs, emphasizing that the delay of the relevant steps will increase the risks for the continuity of supplies of Russian gas to Europe;
  • to prepare proposals for further development of the trans-European energy infrastructure and the need to invest into the domestic energy sector, as a condition for the effective implementation of common policies of the EU and the RF within the framework of the Power Roadmap till 2050.

4.1.3. Priority tactical steps of the Ukrainian side in the gas sector:

  • to pay “Naftogaz of Ukraine’s” debt for the imported Russian gas with simultaneous determination of a fair price for it (to counter the arguments of the Russian Federation about the economic foundations of a possible decision on the termination of gas supplies through Ukraine to Europe);
  • to find legal ways of revising the terms of the contract with “Gazprom” in order to avoid the use in the formula for calculating the cost of gas the uncharacteristic for Ukraine's economy price parameters of oil (gas oil), as well as to cancel the “take-or-pay” principle;
  • Ukraine's contracting in the European spot market of gas that can be transported in the reverse mode on the basis of the rules of the Third Energy Package of 2009, which provide for the pipeline operators' allowing free access to transit facilities;
  • ensuring practical implementation of the Memorandum of Understanding with Slovakia on Reverse supply of natural gas;
  • to ensure the use of the internal capacity to generate volumes of gas that can be pumped into the domestic UGS as a reserve in case of force majeure (due to the transition of domestic heating and electricity generating capacities to coal and fuel oil);
  • providing European companies with favorable conditions of storage of natural gas in the domestic UGS in order to create additional motivation of participants of the European energy market to develop cooperation with Ukraine;
  • intensification of negotiations with the EU, the countries of the Vishegrad Group and states of the South-Eastern Europe on modernization of the domestic GTS and its integration into the European gas system in order to provide conditions for safe transit of Russian gas and effective management of reverse flows on the basis of the rules of the Third Energy Package;
  • development of the European sub-project “Adriatic Gas Corridor”, which provides for integrating gas transport systems of Croatia, Hungary and Ukraine and creation on the basis of a Ukrainian UGS of a regional center for storage and distribution of natural gas;
  • development of cooperation with the Central Eastern European organized market of natural gas (CEEGEX);
  • long-term contracts with companies-exporters LNG, providing for the supply of natural gas to Ukraine through terminals in Croatia and Poland;
  • measures to maximize preservation of Ukrainian property assets (equipment) of state-owned energy companies (in particular, “Chernomorneftegaz”), located in the Crimea, by preparing lawsuits to international courts for their illegal alienation by the Russian side;
  • launch of the project of laying a new pipeline from the field “Odessa” (now connected to the Crimea) to the mainland of Ukraine near the city of Odessa.
  • full support to implementation of projects for production in Ukraine of shale gas, coal gasification, using coal mine methane, production of methane from gas hydrates.

4.2. Oil industry

In order to create conditions for the effective use of oil refining and transit potential of Ukraine, in the oil sector are considered advisable the following measures:

  • to develop a national program of modernization and rescuing from the stagnation of the domestic refining industry, taking into account the long-term strategy of attracting hydrocarbons from diverse sources;
  • to optimize the state policy in the sphere of oil transit, in which, in particular, to develop mechanisms for application of a flexible and competitive system of tariffs for the transit of hydrocarbons;
  • to regulate the order of formation of strategic stocks of fuel in case of blocking or suspension of imports because of the deepening conflict with Russia as a major supplier of oil and oil products to Ukraine;
  • to study the possibility of creating conditions for Azerbaijani and Kazakh companies' participation in the retail oil market of Ukraine, including through buying one of the existing or joint construction of a new refinery in Ukraine;
  • to have negotiations with potential consumers of oil transported through Ukraine to Poland, Slovakia and the Czech Republic, in order to determine the conditions and terms of signing protocols about intentions on oil transportation using pipeline capacities of Ukraine. It would be helpful at this to focus their attention on the fact that implementation by Russia of projects for construction of pipelines BPS-2 and the Eastern Siberia–Pacific Ocean oil pipeline (ESPO) with high probability will lead to a reduction of supplies through the pipeline “Druzhba” into the countries of Eastern Europe;
  • to organize a closer cooperation in the energy sector within the framework of the EU's “Eastern Partnership” initiative;
  • to intensify cooperation within the concept of the Baltic-Black Sea energy space, one of the elements of which is transportation of oil to the EU through the pipeline “Odessa-Brody” (project of the Eurasian oil transportation corridor). To study possible mechanisms for settlement of technological complications associated with simultaneous pumping of light and heavy oil grades;
  • to initiate an information campaign on the benefits of domestic oil transportation system for supplies of energy carriers to the EU, focusing on the fact that, compared with other routes in the Black Sea region, the Ukrainian direction does not require significant investments, taking into consideration the existing infrastructure (“Odessa-Brody”).

4.3. Nuclear power industry

In order to mitigate the negative impact of the risks and threats to the efficient and safe functioning of Ukraine's nuclear power industry the following should be done:

  • to implement a multi-vector policy of cooperation with foreign partners within the framework of development of international cooperation in the sphere of nuclear fuel cycle (NFC) to maximize the use of the potential of the domestic nuclear power complex. In this context, it is very important to use international cooperation only in the areas that will ensure the development of domestic nuclear technologies and diversification of their foreign suppliers;
  • to minimize the influence of pro-Russian, pro-American and pro-French lobbies in Ukraine on the authorized Ukrainian representatives' taking decisions on prioritizing the development of international co-operation exclusively with one of the partners;
  • to deepen cooperation with “Westinghouse” in the project of qualification of fuel assemblies in the South Ukrainian Nuclear Power Plant, as a prerequisite for the replacement of Russian nuclear fuel with the US analogues;
  • to speed up the activities associated with construction of a centralized storage facility for spent nuclear fuel;
  • to expand production capacities of enterprises of the nuclear industrial complex of Ukraine and to concentrate financial resources of the state in the development of those elements of the nuclear fuel cycle, which are not related to economic risks and have a focus on ensuring long-term needs of the domestic and foreign markets;
  • to increase volumes of production of natural uranium based on domestic deposits, first of all, Novokonstantinovskyi in Kirovograd region.

5. General conclusions

Analysis of the situation in the global and regional energy markets indicates an increase in threats to energy security of Ukraine related to:

  • increasing competition between European and Asian markets for access to sources of supply of liquefied and traditional natural gas in Central Asia and the Middle East;
  • slowdown in rate of growth of natural gas consumption in the EU countries due to the introduction of alternative energy sources and implementation of energy-saving policy;
  • growth of volumes of production of unconventional gas deposits in the world;
  • reduction of oil consumption in the European Union and at the same time an increase in the level of diversification of imports;
  • foreign investors' being not interested in the implementation in Ukraine of projects in the spheres of energy efficiency and alternative energy.

At the same time, favorable to national energy security and strengthening of Ukraine’s positions on the regional energy market may be the following factors:

  • increasing the volumes of trade in liquefied natural gas in the world;
  • raising the level of being supplied with their own gas of the main importing countries through the development of shale deposits (USA, China), as well as through development of the coal gasification technology (China);
  • implementation of the EU's strategy to reduce the excessive energy dependence on Russia in order to mitigate foreign policy risks and energy leverage on the part of the Russian Federation;
  • tendency to the excess of offer over demand on the world oil market;
  • Japan and other countries' intentions to develop nuclear power industry as the most environmentally friendly and cost-effective form of power generation that will lead to the release of additional volumes of natural gas on the world market;
  • increased competition on the world market of nuclear services, taking into consideration coming onto the international arena of the China National Nuclear Corporation (CNNC);
  • increased competition between the Russian corporation “Rosatom” and the company “Westinghouse” on regional markets.

All this indicates the presence of the prerequisites for increased confrontation in the energy markets between the major players in the transformation of the traditional routes for the transportation of hydrocarbons, as well as increased risks to security and stability in energy security of European consumers, taking into account Russia's geopolitical ambition. At this, there is expected formation of situational alliances between countries of the region, in particular, of Turkey and China with Russia, in order to achieve their short-term goals and strengthen negotiating positions.

The situation in the European energy market significantly increases the level of risks and threats to the efficient use of the transit potential of the Ukrainian gas transportation system. At the same time, prospects for the domestic workload of the route, as well as conditions of its use will largely depend on the nature of the political dialogue between Ukraine and Russia, which openly uses energy blackmail to achieve its goals for global domination. An additional factor negatively influencing the energy security of Ukraine will be preservation of the risks of periodic cessation of the Russian natural gas supplies to Ukraine.

New challenges for energy transit potential of Ukraine are also provided by the EU strategy to reduce the share of Russian energy resources to ensure the EU's energy needs. In this regard, they forecast Turkey's (with the USA's support) activity for the development of transit infrastructure in its own territory for the purpose of energy supplies from the Caspian region, the Middle East and the Eastern Mediterranean to Europe. Besides, there will be a growing trend towards individual European states' (which have joint projects with the RF in the energy sector), taking steps that will violate the official Brussels' efforts to promote the common external EU energy policy vector.

In any case, it is extremely necessary for Ukraine to negotiate with Russia with the direct participation of the EU and the European Commission on the resumption of gas supplies in winter 2014/2015 and ensuring uninterrupted transit to Europe. The deadline for this task is the end of October 2014, — the beginning of the heating season. And then to move on to complete energy independence.