Whither Ukraine’s Energy Relationship with Russia, Europe, U.S.?

February 1, 2011
James George Jatras

The return to $100-per-barrel oil caused by the Egyptian crisis reminds us of the obvious, but often overlooked, fact that energy is not just an economic commodity but a strategic one. With the prospect of the Arab world’s most important country ending up with a government that includes or even is dominated by the Muslim Brotherhood, not to mention worries about the security of the Suez Canal, the market’s jitters are understandable.

The same appreciation of the strategic value of energy has been the loadstar of American policy toward the former USSR. Aware of Moscow’s dependence on energy revenues, Washington’s policy has been single-mindedly focused on the question of how we can diminish the reliance of our European allies on Russian energy, specifically natural gas. (You would think a realistic U.S. policy concerned about the American national interest would fret less about Europe’s dependence on Russia and more about why our own country is hostage to oil supplies from countries that fund jihad. But if you were to think that, you would be mistaken.)

The consistent American policy toward Eurasian energy following breakup of the Soviet Union can be summed up as obstructing as much as possible Russian access to European markets and facilitating as much as possible alternative sources, in particular from countries in the Caucasus considered within the U.S. geostrategic orbit: Georgia (under our puppet Mikheil Saakashvili, firmly so) and Azerbaijan (functionally), both in concert with Turkey (still Washington’s favorite Muslim ally, despite the increasingly Islamic direction of the administration of president Recep Tayyip Erdoğan, who visited Kiev in late January). The showcase of this policy is the Baku-Tbilisi-Ceyhan (BTC) pipeline, completed in 2006. Its companion is intended to be the Nabucco pipeline (a rival to the Moscow-supported South Stream). Although the intergovernmental agreement to proceed with Nabucco was signed in Ankara in July 2009, the project is still in doubt in the absence of firm commitments of adequate sources of oil to be transported. The political handmaiden of Washington’s anti-Russia energy strategy is the otherwise purposeless “GUAM,” a loose arrangement under NATO tutelage of Georgia, Ukraine, Azerbaijan, and Moldova. (The American Institute in Ukraine has called on Kiev to rethink its affiliation with this grouping, participation in which is inconsistent with the Yanukovich administration’s non-aligned policy.)

Ukraine’s Assigned Role

In Washington’s calculus, a key role in energy politics vis-à-vis Russia was assigned to Ukraine. The large majority of Russian gas for European markets goes through Ukraine, with the remainder via Belarus. (By staging periodic interruptions in the flow, the previous Orange administration in Kiev adroitly, if not truthfully, was able to disparage Russia as an unreliable supplier.) With respect to oil, a key initiative was the Odessa-Brody pipeline, designed to facilitate northwest flow of Azeri oil brought to Ukraine from Georgian ports. (Regarding the latter, Odessa-Brody sat unused from its 2002 commissioning until 2004 because sources of oil for transport had not been identified. So in 2004 the cabinet of then-president Leonid Kuchma accepted Moscow’s offer to ship Russian oil from the Druzhba pipeline through Belarus and Ukraine from Brody to the Black Sea, and thence to world markets – the opposite direction from what Washington intended. Instead of facilitating a Caucasian alternative to Russian energy, Odessa-Brody became a conduit for it.)

With accession to the presidency of Viktor Yanukovich just under a year ago, it could safely be assumed that the days of Ukraine’s participation in Washington’s energy intrigues at Moscow’s expense were over. While not the Russian agent he is sometimes unfairly depicted, Yanukovich at least would be expected to behave as a realist, meaning acceptance that when it comes to Ukraine’s energy options, Russia is pretty much the only game in town. That view seemed to be crystallized by the April 2010 agreement to extend the Russian fleet’s tenure in Crimea in exchange for a multiyear concession on the price of natural gas for Ukraine’s domestic consumption. To be sure, no one in Kiev ever pretended to be enthused with Russian plans for pipelines that would bypass Ukraine: the Nord Stream pipeline across the Baltic Sea direct to European, especially German, markets, due to begin operation later this year; and South Stream under the Black Sea and through the Balkans, a direct competitor to Nabucco. President Yanukovich restated those concerns most recently at Davos, stating that he shared Poland’s opposition to Nord Stream; with respect to South Stream, the cost of which Yanukovich cited at a high $25 billion:

"Why are our [Russian] partners today pretending that there is no alternative? A year ago we proposed a project [to upgrade Ukraine’s pipelines] that would cost … not more than $5 billion, it would come to the same destination points to which South Stream would go. If this is a way to exert pressure … serious questions arise about how we should build our relations."

Likewise, the Yanukovich administration pointedly has been cold to repeated Russian overtures to merge Naftogaz and Gazprom, which given the disparity in size would amount to a takeover of the former by the latter. Despite the EU’s statement that it would have no problem with such a development, Kiev’s reluctance regarding control of its prime state asset isn’t surprising.

Back to Washington’s Agenda?

Perhaps more surprising are other recent initiatives which may indicate that Kiev is stepping back in the direction of Washington’s policy. At the top of the list is Yanukovich’s agreement at Davos with Azerbaijan’s president Ilhan Aliyev not only to import Azeri liquefied natural gas at Ukrainian ports but to reverse the Odessa-Brody pipeline back to its original direction, from Azerbaijan and Georgia to European markets. Reportedly a first shipment of Azeri oil bound for Belarus via Odessa-Brody docked at Yuzhny on 29 January. Perhaps coincidentally, the Ukraine-Azerbaijan deals came on the heels of Erdoğan’s stop in Kiev and signing of a Ukraine-Turkey “strategic partnership,” with strong emphasis on energy cooperation.

More interesting developments will soon follow on the American front. In mid-Febraury Ukraine’s Foreign Minister Kostyantyn Gryshchenko and Energy Minister Yuriy Boyko will be in Washington. An agreement will be signed for cooperation on “unconventional” energy, specifically on exploitation of “shale gas,” a technology in which American and Canadian firms are the undisputed leaders. (Extraction of natural gas from shale already accounts for more than 10% of U.S. natural gas, with that share expected to rise dramatically in coming years, despite environmental concerns over the extraction processes, which require use of high pressures, hazardous chemicals, and horizontal drilling techniques. Former head of BP Tony Hayward, widely disliked in the U.S. because of his association with last year’s oil disaster in the Gulf of Mexico, has described shale gas as a “game changer,” which has contributed significantly to lower gas prices paid by American consumers compared to Europeans.) The upcoming U.S.-Ukraine agreement will pave the way for participation of U.S. firms in exploitation of the Kerch section of the Black Sea shelf (expected to hold some 10.8 billion cubic meters of natural gas), where deposits lie some two kilometers below the marine surface, well out of reach of any equipment currently possessed by Ukraine.

Prime Minister Mykola Azarov is frank about the purposes of Ukaine’s energy initiative with Washington:

"We are in talks with an American company on transfer of the relevant technology, adding that the government's plans were above all aimed at reducing Ukraine's dependence on gas imports from Russia.”

This is an expression of a practical and commendable desire for Ukrainian energy independence and for price advantage for Ukraine’s consumers. It can be seen as Ukraine’s version of the American conservative call to increase domestic production and reduce imports, that in the 2008 electoral campaign was summed up in the Republican slogan, “Drill, Baby, Drill!” If combined with sound business sense and a sharp eye for environmental risks, such an initiative is indeed compelling for Ukraine. It is not per se an anti-Russian initiative, and indeed TNK-BP was quick to submit a bid for a special permit to develop Ukraine’s shale gas fields, with the first test drilling hoped for in the first quarter of this year.

U.S. Intentions at Issue

However, given the history of American policy, assessing Washington’s intentions is another matter. Will Gryshchenko’s and Boyko’s American counterparts – Secretary of State Hillary Clinton and Special Envoy for Eurasian Energy Richard Morningstar – be similarly motivated by business opportunity and mutual economic advantage? Or will they see this as an opportunity to try to corral Ukraine “back onto the reservation” of America’s anti-Russian energy policy? It should be kept in mind that the position held by Morningstar (who represented the United States at the Nabucco signing) is the point office for that very policy. He also served as president George W. Bush’s Special Advisor for Caspian Basin Energy Diplomacy, in which capacity he was the major U.S. promoter of BTC. In general, the U.S. view remains, according to Morningstar, support for “the entire South Energy Corridor – a series of pipelines that will be required to deliver Caucasian and Central Asian gas to Europe via Turkey.” It seems that the Obama administration’s “reset” of relations with Moscow does not extend to the energy sphere, where the Bush-Clinton-Bush line still prevails. Further, Washington’s worries about Russia as a supplier of energy to Europe evidently don’t apply to an increasingly neo-Ottoman Turkey.

In short, Kiev’s representatives’ motives, objectives, and opportunities in Washington are to secure advantages for Ukraine while not undermining Ukraine’s primary energy relationship with Russia. Those of the American representatives are less straightforward. This is a meeting that bears watching.