Ukraine and Turkey: the European energy coup

Though Norway in June overtook Russia in total exports of natural gas to Europe, the balance of Russian gas to Europe comes through Ukraine, which itself is dependent upon Russia for 60% of its current gas consumption.

While Ukraine controls the transit of 90% of its gas to Europe, Russia is consistently trying to use its gas exports to Ukraine to gain greater control of the Ukraine transit system, which itself deems a strategic asset. The struggle for control of export to Europe and Ukraine's own struggle to increase domestic production and move closer to Europe, with an European Association Agreement set to be signed in November this year, has put extreme stress not only on the energy independence of Ukraine but of Europe as a whole.

From an energy geostrategic standpoint, Europe needs Ukraine to move closer to Europe, “but for all its planning, Europe also knows retribution, in the shape of an energy squeeze, is likely from Russia.

Moscow, which has a long-standing disagreement with Ukraine over gas, has said it will raise Ukraine's gas prices and officials do not rule out it doing the same for the EU, which gets nearly 40% of its gas from Russia. “The EU should not look at Ukraine as a business opportunity alone, particularly in light of currently lagging gas demand, but should examine the long-term future of European energy security and the key role Ukraine will continue to play in it. Partnership with the EU is not a silver bullet for the troubled Ukrainian energy sector, but it is certain to reduce the volatility of future pricing disputes and is perhaps the only solution that does not leave Ukraine's fate entirely in Russian hands,” according to an article by Richard B Andres and Michael Kofman.

Ukraine has also done much in the past 18 months to increase its energy independence. Recent shale tenders with Shell and Chevron and with Exxon for the development of the Ukrainian Black Sea have the potential to greatly reduce the dependence Ukraine has on Russian exports and potentially for Europe as well. “While the full picture of unconventional gas is expected to be assessed in the coming years, the key to success, as is the case of Ukraine, is infrastructure. If the future of shale gas exploration is to be bright, a new infrastructure will have to be built to link the sources of unconventional gas with the grid to allow for the commercialization of the gas.

“To ensure that the Energy Community brings results, once operationalized the shale gas opportunity should be extended to the Eastern Neighborhood. It would allow the Eastern Neighborhood, in particular Ukraine, to create stronger bonds between the EU and the region and, as a result, galvanize stronger energy interdependence between the EU and Russia by stabilizing Ukraine's internal energy supply,” according to a policy paper from the Black Sea Trust for Regional Cooperation (BST).

Coup in the Making?

In the past five years, there has been significant growth in Europe's LNG import capacity; however, high LNG prices driven by Japanese demand, and the higher oil-linked price that LNG receives in Asia has diverted much of this supply from the European market.

An agreement between Ukraine and turkey for the transit of LNG through the Bosporus, as the gateway to the Black Sea, would be a major coup for European energy security. It would put downward pressure on current LNG prices due to the high demand and premium paid in Asia and would eventually provide Europe with cheap shale gas through a viable alternative marketplace.

It's an idea developed by Robert Bensh, energy advisor to Ukrainian Vice Prime Minister Yuriy Boyko, managing director of Pelicourt Limited and senior advisor for Cub Energy Inc., which operates in both Ukraine and Turkey.

The potential for LNG exports to Europe without a deal between Turkey and Ukraine for liquefied natural gas (LNG) through the Bosporus will fall flat, and Russia will continue to provide at least 30% of Europe's natural gas through 2023.

“The European Union can and should play a more active role in shaping the Black Sea security environment. As a full regional player, it should promote cooperation on an equal footing, and refrain from acting as a sponsor as it does, for instance, in the Mediterranean. As a privileged partner of all countries of the region, the EU should use its bilateral relations with each of them, including Russia and Turkey, to contribute towards the emergence of a cooperative security environment in the Black Sea region,” according to a European Parliament briefing .