Last year's events, in particular, around Ukraine, show that the world has not become more stable and secure, and the mankind is threatened by new challenges. Apart from international terrorism, Russia's aggression against Ukraine (annexation of the Crimea and powerful supporting of separatists in the East of Ukraine), the threat of the spread of the Ebola virus, the rise of cybercrime and the like, increasingly important are becoming challenges connected with depletion of natural resources, especially energy ones, control of their production and transportation routes. Contradictions that arise between states on this issue develop into conflicts, often with use of armed forces.
Already today, the world feels the breath of the new-type “cold war” — between those who have enough energy, and those who do not have enough energy. While in the past countries used to compete for oil, now it is likely that struggle for access to large deposits of natural gas, oil, coal and uranium will become one of the dominant geopolitical themes of the 21st century.
Experts say that at the moment the world is slowly coming to a great energy crisis, and it can destroy the world economies.
Thus, at the beginning of 2014, the proved world oil reserves were of approximately 1.688 trillion barrels, which, according to experts, should be enough for 53 years at current rates of production and consumption. The proven 156 trillion cubic meters of natural gas reserves will be enough for a year or two more. At the same time, the total oil consumption in the world has increased by 1.4 million barrels per day, or by 1.4 % compared with the figures of the last 10 years. World natural gas consumption has also increased by 1.4 %, while the average of previous years was 2.6 %. Gas is the third most popular energy carrier after oil and coal.
The unstable situation in the Middle East and North Africa, which are now the richest in energy resources and at the same time perhaps the most contentious parts of the world; the “gas conflict” between the Russian Federation and Ukraine, which worries the European community about its energy security; international sanctions against the Russian Federation, which have provoked a 13 times drop in net profit of the state monopolist “Gazprom” — the main filler of Russia's budget; the Russian Federation's hasty attempts to turn the vectors of Russia gas supplies to the Asian sector (the signed in May 2014 Shanghai Contract between “Gazprom” and the China National Petroleum Corporation (CNPC) on the export of Russian gas to China for 30 years, the total value of 400 billion US dollars, etc.) have sharpened international energy problems and show the direct domination of the political factor in the global energy sector.
Leading Western and Ukrainian experts believe that in 2014 the international energy policy was influenced by the following main external factors (which affected also the energy state of Ukraine):
- A rapid decline in prices on the world oil market because of excess of oil supply over the demand for it.
- Introduction by the EU and USA of sanctions against the Russian Federation, including in the energy sector (due to the annexation of the Crimea and the situation in the East of Ukraine), which significantly slowed the development of the fuel and energy complex of Russia and influenced its overall financial and economic stability.
- Strengthening of the USA's energy policy due to the “shale revolution”, as well as implementation of this idea in other countries, which eventually made possible the sharp drop in global oil prices.
- Russia's attempts (because of its difficult financial situation) to gain access to gas markets in Europe and the Asia-Pacific region by the operational implementation of large-scale projects to build new gas pipeline systems (“Turkish Stream,” the estimated cost of which is ~16-20 billion US dollars and “The Power of Siberia” cost ~60-70 billion US dollars).
- The Russian Federation's capture of a part of Ukraine's territory, where the Donets Basin (Donbas) and oil and gas fields of the Black Sea shelf (the territory of the Crimea) are, which has aggravated the energy crisis in the Ukrainian energy sector and significantly affected the energy security of the state.
Given these facts, as well as the current state of energy security of Ukraine, it is necessary to focus on prospects of development of the domestic energy sector, in particular, of its main sectors: electric power (the coal industry included), oil and gas.
1. Electric Power Sector
In the electricity industry and energy in general, the most dependent on monopoly Russian import was and still is the nuclear power industry. But as it turns out, Ukrainian thermal power industry cannot be considered fully independent either. In fact, at least half of the “coal” power industry of our country consumes coal mined in the mines of the Donbas, currently located in the occupied territory.
Note: Ukraine's nuclear power plants in 2014 accounted for nearly 50 % of Ukraine's electricity needs. The rest of the electric power was received from thermal power plants, of which approximately 90 % are fueled by coal, oil or gas.
The main part of domestic TPP and CHPP work on solid fuels. Those which have not converted to coal yet, are gas or oil-fueled. The TPPs and CHPPs designed for the Donbas coal should be upgraded for coal from other regions as part of the diversification of energy supply sources. In the long term, we must decide what to do with the Donbas coal, when Ukraine's domestic market stops needing it. There are several such options, but they need to be planned and voiced at the state level with the obligatory participation of experts, including world-class ones. A good example here is Germany, which during the last years has started using mainly imported coal!
Ultimately, the power station may remain unreconstructed, burning coal from “non-project” mines, that is, from other regions or the imported one. But this is not quite effective, because a unit of power needs more coal to be burnt than is provided for by the project. Besides, environmental consequences will be worse, and this will complicate the situation in the implementation of mechanisms of the Kyoto Protocol. It is also necessary to create an infrastructure for coal imports in large quantities, to reequip power stations and to solve the question of stable supply of coal, including foreign one, for Ukrainian thermal power plants as part of the diversification of sources of primary energy carriers supply.
This way we could minimize current negative effects of the aggressor and separatists' capture of mines of the Donbas basin. And this is the only way to really ensure the independence of Ukrainian thermal energy system: if we use Donbas coal — it will be excellent; if we don’t — it will be bad, but not a disaster, because it can be imported from other regions.
If such measures succeed, in the nearest future Ukraine can provide itself with its own electric power.
Significantly different is the situation in another important part of the electricity industry — in the nuclear power industry.
Note:in Ukraine at the four operating nuclear power plants (the South-Ukraine, Zaporizhzhya, Khmelnytskyi and Rivne NPPs) there operate 15 nuclear power units, of which 13 are VVER-1000 and 2 — VVER-440 type, with a total capacity of 13.835 Megawatt. All of them are of Soviet (Russian) make. There are more VVER-1000 reactors in Ukraine than anywhere else, inclusive with the Russian Federation.
Ukraine's energy security in the part of the nuclear industry in almost all components of the operating Ukrainian nuclear power plants depends on the Russian Federation. This, above all, includes scientific and technical support, repair, prolonging of functioning, supply of nuclear fuel (NF), storage and processing of irradiated (spent) NF and so on. On each of these issues, it is necessary to consult with Western partners and to take concrete measures. Although now Ukraine continues with the Russian Federation jointly construction and maintenance of power units, in the future Russian reactors should not be built in Ukraine.
Trying to strengthen its energy independence with regard to the diversification of energy sources, Ukraine since 2008 has been working with the American-Swedish-Japanese “Westinghouse Electric Company”, providing its nuclear power plants with nuclear fuel. However, that is about all that over the time of independence has been achieved in this sphere. Therefore, in the nearest future it is advisable to consider the following possible ways to implement energy policy issues in nuclear power industry. About it — in detail.
The world knows very well two companies interested in production of virtually duplicate of the NF for Russian reactors: in Sweden and Spain (both are owned by the “Westinghouse Electric Company”). From the Swedish plant, Ukraine has been receiving NF for more than six years for experiments on its adaptation to the Russian NF on two blocks of the South-Ukraine NPP. At the end of December 2014, Prime Minister of Ukraine A. Yatsenyuk said that the Agreement had been prolonged until 2020 and the contract had been extended for the supply of fuel for nuclear power plants, and providing services at individual stages of the nuclear-fuel cycle. This can be considered one of the successes of our energy industry.
As for the Spanish enterprise, Ukraine has not co-worked with it yet. At least, there is no official information about such cooperation. Although, according to unofficial information, such attempts have been made. And this enterprise is even going to be involved in production of NF for VVER-440 reactors. If so, then it can also be considered a victory. It should be noted that in case of successful implementation of such a project, Czech Republic, Slovakia, Hungary and Finland could get interested in it too.
However, for the sake of the full information, we must point out that “Westinghouse Electric Company” also uses the State Concern “Rosatom's” services for uranium enrichment. Therefore, it should be noted that in the contract between the Ukrainian side and “Westinghouse Electric Company” there is no clear statement about what the Ukrainian side can count on in case if the Russian side stops providing services due to the so-called force majeure. Because, as recent events have shown, Moscow always treats everything only according to its own political-imperial advantage. At the same time, remembering who is the founder of the Company, the Ukrainian side does not need to worry because in the above-mentioned countries everything is all right with democratic values and responsibility. And the “Westinghouse Electric Company's” using the Russian Federation's services for uranium enrichment is most likely explained, by the proposed price being lower than that offered by other contractors. While on the other hand, all this shows once again that the Ukrainian side needs to enlist the support, in particular, of the German-Dutch company URENCO (or any other independent from the Russian Federation company), in terms of uranium enrichment for the company “Westinghouse Electric Company” in volumes needed by Ukraine.
At the same time, it would be appropriate for the Cabinet of Ministers of Ukraine to make the “Eastern MPC” urgently increase production of uranium concentrate to answer the needs of Ukrainian NPPs. Because today, without taking into account sufficient stocks, we produce a little more than 30 % of the total demand. We should also constantly work on buying uranium concentrate at world markets. There is also an urgent need for signing contracts with Western partners to continue the life of the existing units, in particular regarding the annealing of buildings, and with domestic enterprises — on the manufacture of equipment and spare parts for nuclear reactors. Indeed, in recent years, our nuclear power industry for the most part has focused on the Russian and counterfeit products, ignoring the domestic industry and science.
It should also be borne in mind that if the Russian Federation stops supplying Ukraine with NF (and this can happen at any time and under any circumstances), then no one could provide the necessary assistance in this case. And then maximum in one year all nuclear power industry in Ukraine will stop. A typical example is 2014's situation with coal, which the Russians did not let across the border. But if Russian coal can still be replaced by some other, one cannot do the same about the Russian NF. That's how Ukraine is losing almost half of the electricity and, accordingly, its energy system is collapsing.
In other words, the Russian Federation, without resorting to new combat schemes in the so-called “hybrid war”, without spending a single ruble on its army, militants and weapons, without casualties, but just through blocking supplies of NF, can “bring Ukraine to its knees”. And this cannot be prevented within a year, two years or even three. This problem can be really solved only within 5-6 years in a peaceful environment by building new nuclear power plants with different, not Russian reactors. In the context of the war, these terms could be reduced, but at the expense of increased costs.
Therefore, in Ukraine it is necessary to develop nuclear energy and to diversify nuclear technologies in order to avoid monopoly dependence on Russia. Canada and France can be considered our most promising partners as they are successfully developing third-generation reactors EU-6 (SANDU) and APR-1650, respectively. We can also consider China's capabilities, which is planning to jointly build a nuclear power plant with France in the UK. It is important that these reactors can successfully work not only on natural uranium, but they also can “burn” the generated in the VVER reactors in Ukraine uranium-plutonium oxide, emitted during the reprocessing of the spent NF (of which we now have more than 60 tons). It is also very important to maintain the non-proliferation regime. Moreover, the EU-6 Canadian reactor (CANDU) has the potential to use uranium-plutonium oxide, withdrawn from the reactors RBMK-1000 of the Chernobyl NPP (we have nearly 7 tons in storage).
CANDU reactors are successfully operating in Canada, South Korea, India, Argentina, Romania and China. Romania's long-term experience is extremely useful for Ukraine.
This type of reactor was once recommended by the then Minister of Foreign Affairs, the current Prime Minister of Ukraine A. Yatsenyuk. We obviously need to carefully study the process of gradual replacement of the Soviet (Russian) technologies with Canadian ones (gradually, with the completion of life of the working ones). Or at least to start a reasonable diversification.
EC-6 reactor has been studied in detail back in 2008-2009 by the Interdepartmental Group of Ukraine, which included, in particular, specialists from the State Enterprise NNEGC “Energoatom”, National Academy of Sciences of Ukraine and others. As a result, this reactor by all parameters was recommended to be used in the Ukrainian energy sector. It would be useful to explore also the French reactor APR-1650, the owner of which provides services for reprocessing of irradiated NF, and production from it of a modern MOX fuel for “burning” of the energy-grade plutonium to generate electricity. It is interesting that the reactor APR-1650 can be delivered by waterways to the South-Ukraine NPP and to Zaporizhzhya NPP to replace Russian reactors.
It will be good if with the course of time our relations with Russia improve. If not, it will not be a big deal, although it will significantly affect our costs. We can't state that Russian reactors are worse or better. They are just different. But they don't suit us at least, due to the Russian monopolism, that is, for political reasons. Therefore it is always important to remember that nuclear power has always been and remains an important element of energy security of Ukraine.
2. Oil Industry
The greatest threat to Ukraine in the oil industry is our high dependence on oil from foreign refineries, working fully or partially on Russian oil (Mozyr Oil Refinery in Belarus, Lithuania Mazhekyay Refinery, several refineries in Romania, the company ORLEN of Poland and so on).
Besides, a number of Ukrainian enterprises of the chemical industry (e.g., Kalush Scientific and Production Association Oriana) depend on Russian imports of petrochemical raw materials, as a rule, by 100 %. These companies actually cannot be upgraded in advance and, consequently, their products are not competitive (due to the low quality of raw materials). Ukraine usually imports high-quality products for its petrochemical industry. True, such products could be made in Ukraine without any problems.
In 2014, Ukraine produced more than 2.7 million tons of oil, at least 200 thousand tons were imported from Russia. Refineries processed up to 1.5 million tons of oil products, with annual consumption of over 8 million tons. That is, Ukraine imported at least 6.5 million tons of petroleum products.
To date, six refineries and seven GPPs are located on the territory of Ukraine, but not functioning. They are able to process more than 51 million tons of oil annually, which is normally produced in Russia, and to produce oil of Euro 2 and Euro 3 standards.
Some of the current owners of refineries claim that their modernized enterprises produce high quality products. However, the facts show otherwise. Low quality oil is in demand in Ukraine so far, because there is still the Soviet make machinery, especially in the Armed Forces and in rural areas.
Last year, high-quality petroleum products (Euro 4, 5) were purchased at Russian refineries, Mozir, Mazhekyay, Orlensk refineries, several refineries in Romania.
These refineries were built in the times of the socialist camp and used to produce products Euro 2 and Euro 3, but due to timely measures taken by governments of those countries, they have been upgraded and, as a result, began to compete successfully, in particular on markets of the European Union.
Thus, due to the current state of the domestic refineries, there arises the question of supplying the Ukrainian market with high-quality petroleum products.
Lately, Russian suppliers of energy carriers have been using the “energy blackmail”. And we cannot exclude that at a certain development of the situation in eastern and southern regions of Ukraine, they will try to limit the supply of petroleum products to Ukraine, including from foreign refineries receiving Russian oil. And then Ukraine's current problems with gas and coal will not be so severe. Because the price of most of Ukrainian goods and services depends on availability and price of oil products.
Today we can say that in the short term, Ukraine is not able to ensure reliable functioning of its refinery complex and domestic market of petroleum products. In case of the “caused” crisis, we can count only on reliable imports. And creation of our own, Ukrainian capabilities to supply the internal market with petroleum products, will take time, which is so far measured in years!
Taking this into consideration, there are three solutions for this problem, namely:
- Transition to 100 % imports of petroleum products from importers uncontrolled by the RF. As a consequence, the Ukrainian oil refining industry will be completely liquidated, and due to this will suffer, as they say, the human factor (the industrial school, jobs, and so on), which is unacceptable, especially in terms of energy security of Ukraine.
- Modernization of existing Ukrainian refineries. This will require the same amount of funds as construction of new refineries. Besides, the process of allocating resources for modernization may be accompanied by a certain tension in the relationship between the owners of the refinery and the state. However, you can ask the following question: How did the owners meet their obligations to modernize the refinery fixed earlier in the agreements on purchase of the business from the state?
- Construction of a new modern petrochemical complex for production of realizable petroleum products and high-quality modern materials for chemical industry.
According to the majority of industry experts, the most promising is creation (construction) in Ukraine of a new modern petrochemical complex (by the range of products much wider than production of oil refineries) for processing 8-10 million tons of crude oil annually (optimal for so-called price volumes) through a loan.
Creation of such a complex is possible with raw materials — oil; hardware supplies; technical and human resources, scientific schools and traditions; markets for manufactured products and supply routes.
Ukraine does not have the first condition, since oil is produced in limited quantities. But we do have the three that follow, which majority of our partners do not have (there are opportunities and markets, partially have been built accesses to these markets). Russia, of course, cannot be considered a partner. Therefore, to solve the above-mentioned issues of energy security, it is advisable to build a petrochemical complex in Western Ukraine with the participation of three parties:
- Ukraine;
- A country that has reserves of oil resources for the nearest future;
- A country that is open to liquid markets (the most appropriate EU Member State).
And, strange as it might seem, this project has been developed by public authorities. Its implementation was once locked due to the next change of government and a return to the post-Soviet oil refining industry performance standards. Now more than ever, we need to come back to it! Therefore, in the nearest future we should (with the participation of leading experts and specialists) update, modernize and begin to implement it, as there is no and cannot be any other option for Ukraine's real energy security!
Commercial and political benefits for participants and supporters of this project are obvious:
- In Ukraine, is mainly being solved the issue of the internal market for petroleum products and raw materials for the chemical industry. This does not prevent their partial imports and, accordingly, there remains transparent competition among importers and there is no additional stress among them. The issue of the averse (planned) use of the pipeline “Odesa-Brody” will be solved, that is, successful further implementation of the joint international project “Sarmatia” is possible. Large capacities of the enterprise “PrykarpatZahіdtrans”, which returned to the property of Ukraine, will be used. The manufacturer will have free access to competitive markets for petroleum products, in particular, to the EU market. Relatively easy to solve is the problem of employment of skilled workers from western Ukrainian refineries.
- The country-owner of oil will implement its strategic interest in liquid markets (EU): it will be selling not crude oil but petroleum products.
- A third country (most likely a member of the EU) will act as a guarantor of the complex' functioning according to European transparent rules and, if necessary, will balance sales. In particular, it will increase its influence on competitive markets (EU). The fact that products made in Ukraine will have all chances to be competitive, can be explained first of all by the fact that our labor force for quite a long time will be paid less than, for example, in EU countries.
Only in this way, when the Ukrainian state, not oligarchic private owners is able to enter the market of petroleum products with high-quality products, in particular, the cost of petrol and diesel fuel will not increase when oil prices fall.
Of course, for such a complex to function, it is necessary to ensure a reliable supply of the raw material — oil. This can most easily be done in Western Ukraine, where you can cheaply and quickly arrange diversification of supplies from international open markets excluding Russian interests. In particular: via Poland by creating for obverse and reverse of the European oil transportation corridor, as well as through Slovakia by upgrading existing pipelines for obverse and reverse use. Later Hungary can be considered.
Of course, while designing such a complex, apart from diversification, quality and cost, one must determine the optimum site, taking into account everything, even most unlikely aspects, in particular, threats to energy security. Taking into consideration the last year's Committee's hearings in the Verkhovna Rada of Ukraine and a number of other circumstances, the most optimal location for petrochemical complex now would be the site of the former NPO “Sіrka” in the town of New Rozdol, Lviv region.
3. Gas Industry
Recently, our state has been facing gas problems. They are one of the main factors influencing the country's energy security.
Every year, Ukraine (with the Crimea) consumed about 50-52 billion cubic meters of natural gas. Annually the Crimea produces and consumes almost the same amount of gas, about 2 billion cubic meters.
Structure of gas consumption during the year in Ukraine is as follows: 16-17 billion cubic meters — “to the stove burner” (directly to the population), 0.5 to 1 billion cubic meters are consumed by the public sector, 7.9 billion cubic meters — by enterprises of heat and utilities, about 23-25 billion cubic meters — by industry (in particular, chemical and metallurgical ones, most products of which are exported to world markets through offshore zones — that is, with understated income to the Ukrainian budget). These volumes also include 4-6 billion cubic meters of technological gas, which secures the transit.
Ukraine's own gas production makes 20 billion cubic meters annually (together with the Crimea), imports make 28-30 billion cubic meters of gas. Analysis of the current gas market shows that Ukraine until recently had been answering its needs (population and industry) in natural gas with the help of gas produced domestically by about 40 %. Up to 60 % had been imported. Until 2012, all imports of gas, according to the old Soviet tradition, had been from Russia. Since 2012, gas has been imported not only from the Russian “Gazprom”, but also via the German company RWE through the territory of Poland, Hungary and more recently, Slovakia. As is known, the German RWE company in a certain way is also dependent on Russia. But there is hope that from 2014, thanks to the initiative of the “Naftogaz of Ukraine” gas imports will be provided by other Western firms too.
So, “Gazprom” provided 26-30 billion cubic meters of gas, and RWE — 1-2 billion cubic meters. It is obvious that such a structure of gas imports cannot satisfy the demand of the domestic market and has a negative impact on Ukraine's energy security.
For comparison, Poland, which is nearly equal to Ukraine in territory, consumes annually 14-16 billion cubic meters of gas. Despite the fact, that Poland's GDP is more than three times higher than Ukraine's! This proves once again that our main reserve in the gas industry is to reduce gas consumption.
According to independent experts of the gas industry, in 1998 there was a technical possibility to import up to 30-35 billion cubic meters of gas to Ukraine by the reverse scheme: more than 5 billion cubic meters — through the territory of Poland and Hungary, through Slovakia — up to 10 billion cubic meters (by the so-called recently opened “small gas reverse”). The so-called “big gas reverse” has not been used yet — up to 30 billion cubic meters of gas (with relatively small investments, which seriously are not even discussed). That is, the gas imports from Russia can be completely replaced by imports from other European countries by the above-mentioned reverse scheme. And the Russian Federation understands this very well. Therefore, it acted prudently having reserved spare capacities of gas transit and keeps them as “dog in the manger” in spite of the current European legislation.
Consequently, these issues (both technical and legal) need negotiations and political support. Today, more than ever, Ukraine is supported by Brussels and almost the entire democratic world.
Based on this and taking into consideration the existing challenges, the most suitable for Ukraine today and in the future, is the Norwegian state oil company “Statoil”, which has already met us halfway and competes with the supplier leader on European markets — the Russian “Gazprom”. It is extremely important to negotiate with other companies, in particular, with those to which it points and which have just appeared or will appear in the gas market. And in this we should not neglect negotiation strategies in terms of their conduct, involvement of professional experts of the industry and securing trade secrets. The society needs to know only about the results.
It should be remembered that in the coming years there will also be heating seasons, in particular, the 2015/2016 season. It is as natural as the arrival of summer. And without taking into account the decline in consumption, the relevance of gas imports, unfortunately, will not be completely removed from the agenda in the next decade. But certainly not of the Russian gas-to the moments when the aggression stops and all disputed issues between Ukraine and the Russian Federation are solved.
But it is never too late to search in Europe and worldwide for suppliers, to negotiate with them, to contract gas. And in the future this must be done as soon as possible and having learnt well, because now in the western markets without additional effort one can find no more than 3-5 billion cubic meters of free gas annually, while Ukraine needs about 30 billion cubic meters.
So, with the availability of resources (gas) in the European markets (most appropriate for the reverse is the hub Baumgarten in Austria), Ukraine could completely abandon Russian gas imports in the nearest future and refocus on foreign suppliers. We must move forward, in particular, we should negotiate on gas imports from Europe immediately.
Of course, now such gas (by reverse, from the European markets) is by 100-120 US dollars more expansive (including transport costs and the supplier's profits) compared with gas obtained from Russia at a fair market price. But it is still cheaper than the current “political” Russian prices for Ukraine of 485 US dollars per 1,000 cubic meters according to the “Russian” formula of 2009.
Naturally, in parallel to perfecting the “reverse”, we should actively and accurately fulfill the main strategic objective-to reduce gas consumption and in the future, to completely abandon its imports. At least to try and provide ourselves with gas of our own production.
4. Conclusions and Suggestions
Based on the above-said, it is extremely necessary for Ukraine to conduct extensive international negotiations over gas and oil and over and over nuclear power. At this, each negotiating team, apart from specialists in the industry, should include Ukrainian patriotically minded skilled diplomats. Experts will provide the professional component and Ukrainian diplomats — the international one in the interests of Ukraine. It is this symbiosis, which will provide our country's independence from the Russian monopolism.
So far in Ukraine, sadly, it has not been so: Ukrainian diplomats often learned about some issues of sensitive international cooperation from the media. This happened in 2009, when the unfair gas contracts were concluded. It was so not long ago, when there was the scandal over coal from SAR, and at the same time, we agreed on Australian coal. While in Australia, even de facto the head of the state cannot influence the market, there is a well-established democracy there. While the agreements with the President of Kazakhstan are more effective and relevant. And so in 23 years, Ukraine, unfortunately, has received Russian tanks, which replaced the Ukrainian diplomacy.
Anyway, Ukraine extremely needs reforms in the energy sector, which requires the political will of the state leadership and uncompromising struggle against corruption. And then, with the direct support of the EU and the European Commission, we need to get a complete energy independence.
