Analysis: Is Ukraine heading into an energy war?

By agreenerlifeagreenerworld on March 7, 2014 • ( 4 Comments )

A solar farm in Odessa Oblast, Ukraine. Photo credit: Activ Solar via flickr.

By Anders Lorenzen

As the tension in Ukraine is intensifying and Russian forces have claimed Crimea, a fear of a military war between Russia and Ukraine is becoming more and more likely, another war looms in the background: a trade and energy war.

An energy war?

The Russian state-owned oil and gas company, Gazprom, who are the main gas supplier to Ukraine warned of ending their cheap gas supply to Ukraine on Monday. On the same day, Gazprom’s shares fell by a staggering 13%, while the threat of war saw US’s oil prices jumping more than $2 to $104.75 a barrel, the highest it has been since September. Analysts are predicting that if it develops to full scale war, it could rise as high as $120 a barrel.

Credit: AFP

This infographic (above) produced before the conflict started in December by Agence France-Presse (AFP) shows the strategic importance of Ukraine and it’s all about gas. First of all, Ukraine holds the key in getting Russian gas to the European market as it all flows through Ukraine pipelines. In other words, with the current infrastructure in place it would be impossible for Russia to get gas to the European market without Ukraine’s corporation. Europe and the US are threatening Russia with a trade war that could have higher implications for Russia than Europe. As the infographic points out, a large proportion of Russian gas: 66%, is exported to the EU. The BBC reports that the EU are becoming less reliant on Russian gas, as the EU have reduced its reliance on it to 30%, down from 45% in 2003.

Sanctions

As both the US and Europe have warned Russian of sanctions, this could have disastrous consequences for the country’s oil industry too, by completely isolating a large energy exporter as Russia, but so far they have not been intimidated by the threat of isolation.

Ukraine reliant on Russian gas

But Ukraine seems more intimidated by the situation. They are actually very dependent on Russian gas and and equally dependent on being supplied that at a fair price which they can afford to pay. The Ukrainian Parliament ousted now former President Viktor Yanukovych (now under Moscow protection) who engineered a gas deal with Russia, that deal that now hangs in the balance. The uncertainty of how much Ukraine has to pay for Russian gas could prove disastrous for financially hard hit Ukraine, they might not be able to cope with what Gazprom are demanding they pay. Gazprom have turned off it’s gas supply to Ukraine several times, as they have claimed that Ukraine have failed to pay the full price. The ongoing rows over gas debts and the threat of Gazprom shutting it’s gas supply to Ukraine is a valuable trump card played by Russia and Gazprom.

The alternative

In short, Ukraine relies on Russia to provide them with gas at a fair price and in return Russia relies on Ukraine to export their gas to Europe – it’s hard to determine who got the upper hand, but there are no doubts that Russia are using their bullying power to intimidate Ukraine.

While Ukraine relies on Russian gas, it is also itself both an oil and gas producer and have coal reserves. However, the country is also a high energy consumer showing energy efficiency measures could ease their reliance on Russian gas. Ukraine has so far only a small capacity of renewable energy installed, but their renewable energy industry could grow fast. The Economic Bank for Reconstruction and Development have earmarked Ukraine’s enormous renewable energy potential. Wind power could yield 40 terawatt hours (TWh) per year, solar at 50 TWh per year and small scale hydro at 3.8 TWh/year per year. To get an estimation of how much this is, one TWh would roughly provide 94,000 US homes with electricity annually.

Conclusion

The people of Ukraine undoubtedly want to loosen their reliance on Russian products and the protests that started in Kiev were fuelled by now former Prime Minister Viktor Yanukovych moving to agree trade deals and a close partnership with Russia, while distancing themselves from EU.

It has not been in Russia’s interest to allow Ukraine to be more self-reliant in energy, by producing more renewable energy or becoming more energy efficient. It has undoubtedly been a key requirement from Russia for Viktor Yanukovych to maintain that renewable energy production is low and energy efficient measures are not adopted.

If the situation were to stabilise in Ukraine and Russia were to withdraw troops, Ukraine could start their work on creating an energy independent economy free of ties from Russia. Ukraine are rich in fossil fuel resources so that could be a part of it, but a surge in renewable energy would move the country a long way in becoming energy independent from Russia. If energy efficiency is also addressed, Ukraine’s energy demand could be dramatically slashed, helping the hard hit Ukrainian economy.

But that is several large if’s, the outlook looks far from rosy for the former Soviet Union state and two wars are looming over the country: a military war and an energy war – it’s hard to say which one could damage the other other country most – they both would severely damage the financially strained country.

Sub edited by Charlotte Paton