Ukraine and its energies

Jul 25, 2001 02:00 AM

The Ukraine is a net energy importer. The main imports are oil and natural gas, primarily from Russia. In 1998, the Ukraine imported an estimated 344,000 bpd of oil and almost 2.0 tcf of natural gas. The primary domestic energy resources include coal and nuclear power.
Ukraine contains proven oil reserves of 395 mm barrels, most of them located in the Dnieper-Donets basin, the major oil and gas producing region located in the eastern part of the country. The oldest producing region is the Precarpathian Basin, located in western Ukraine. Over the last 20 years, the country's oil production has declined by more than 60 %.
Much of the decline was due to the Soviet Union's diversion of resources to develop oil reserves in Siberia, combined with insufficient investment in Ukraine's oil sector since its independence in 1991. Ukraine currently imports nearly 80 % of its oil, almost all of which comes from Russia. In 1998, Ukraine produced 81,000 bpd, down from a peak of approximately 279,000 bpd in the mid-1970s, and consumed 425,000 bpd.

Naftogaz reported that oil production declined by 5 % during the first quarter of 1999, attributing the decline to Ukraine's economic problems and declining oil deposits. In early 1998, President Kuchma created Naftogaz Ukrainy, a company formed by uniting state-owned oil and gas companies and establishing a single state-owned oil and gas company.
Naftogaz Ukrainy controls oil and gas production and marketing, as well as the national oil and gas pipeline network, one of the country's largest sources of revenue. Since President Kuchma has future plans to privatise Naftogaz Ukrainy itself, the creation of the company was seen as an attempt to circumvent parliament's 1995 ban on privatising state oil and gas companies.
However, in July 1998, parliament passed legislation barring the transfer of government stakes in oil and gas companies to the newly created Naftogaz Ukrainy, and banned government agencies from turning oil and gas sector enterprises into shareholding companies. President Kuchma responded in August 1998 by refusing to sign the legislation and by calling on parliament to repeal the law.

Ukraine has developed its national program "Oil and gas of Ukraine to the year 2010" to meet at least half of the country's oil and gas needs within the next 11 to 12 years. Under this plan, foreign investment will be used to finance the majority of this effort. For the most part, foreign investment in Ukraine's oil and gas sectors has been limited to joint venture agreements rather than privatisation.
As of January 1998, foreign investors in Ukraine's upstream sector continued to complain about many barriers to investing in Ukraine's oil sector. These complaints included: lack of a working bureaucracy; a burdensome and confusing tax system; local partners' resistance to western technology; a lack of understanding of international financial procedures; legal system problems; frequent state audits; partiality by regulatory agencies; employment constraints;and limits on the sale of production.
A key component of Ukraine's strategy of reducing its dependence on Russian oil is the $ 1.3 bn Pivdenny (Yuzhnyi) oil terminal near the Black Sea port city of Odessa. Modernization of the terminal already has started, and despite financing problems, the project continues to move forward. The terminal is slated to have a throughput capacity of 800,000 bpd, and is expected to be capable of supplying all six of Ukraine's refineries, as well as permitting oil transhipments to other markets. The new terminal is expected to handle oil supplies from Kazakhstan, Azerbaijan, and the Middle East.

Ukraine has made several proposals in an effort to be included into the transport network for Caspian Sea oil. In July 1998, the government set up an international consortium, consisting of Russia's LUKoil, Ukraine's Oil Transport Institute, and the Odessa and Kherson oil refineries, to construct and manage the facilities that would be needed to implement its proposal. Ukraine has suggested that Caspian oil be taken to the new Yuzhni oil terminal.
From Odessa, the oil would flow through an oil pipeline, currently under construction, to the town of Brody in western Ukraine. From there it could be linked to the Druzhba pipeline system to Western Europe, or be extended to Poland. In February 1999, Poland and Ukraine agreed to complete a pipeline linking Brody to the Polish port of Gdansk on the Baltic Sea.
At the same time, exports of oil from the former Soviet Union via Ukrainian ports are expected to decrease as Russian oil is exported via other ports. In addition, plans have been made for a new crude oil pipeline in the Rostov region of Russia for oil exports that would bypass Ukrainian territory and avoid Ukrainian tariffs. Currently, Russian crude oil bound for the Russian Black Sea ports of Novorossiisk and Tuapse crosses Ukrainian territory.

Ukraine contains natural gas reserves of 39.6 tcf, but only about 24 % of the country's demand is met by domestic production. Ukraine relies heavily on natural gas imports, primarily from Russia, to meet its demand. Ukraine is also the main transit route for Russian natural gas shipments to Europe.
Ukraine is looking to exploit more of its own reserves with a goal of meeting at least 50 % of domestic demand by 2010. Under the Oil and Gas of Ukraine to 2010 program, the country is looking to decrease its dependence on imports by developing new wells, boosting production from existing wells, developing coal-bed methane production, and increasing foreign investment. However, the president of Naftogaz Ukrainy noted in December 1998 that he expected natural gas production to fall by 16 % in 2000 because of insufficient funding of infrastructure.

Several development projects are still moving forward. British Petroleum (BP) plans to set up a joint venture to develop gas reserves in the Dneiper-Donets basin. BP started exploration activities in the area in 1997, and preliminary estimates suggest that gas reserves could be as much as 17.7 tcf.
EuroGas announced in June 1998 that it is planning to drill two natural gas wells, Ortinitske and Kameniske, in western Ukraine with an estimated 255 bn cf of natural gas. Other projects include JKX' 1 tcf Novo-Nikolayevskoye field, Carpatsky Petroleum's 1.3 tcf Rudkovsko-Krasnozavodskoye field, and Gazprom 50:50 joint venture Chornomornaftogazshelf with Chornomornaftogaz (the Ukrgazprom subsidiary in the Crimea).
In August 1998, the government approved a plan to break up Ukrgazprom, a leading energy company in Ukraine and one of the world's largest gas companies, into separate companies dealing with natural gas production, transport, and sales, and incorporate them under the umbrella of the new Naftogaz Ukrainy. The plan is part of a World Bank-sponsored effort to reform Ukraine's gas industry and break the monopoly power on the country's gas market currently exercised by Ukraine's large gas trading houses.

One of the major barriers currently hindering Ukraine from further developing itsnatural gas industry is a large non-payment problem. Consumers owe Naftogaz Ukrainy about $ 3 bn for past supplies. Payment rates varied from 48 % for municipalities, 61 % for industrial customers, and 67 % for residential customers (excluding municipally-owned apartment buildings).
On July 1, 1998, the government began cracking down on non-paying gas consumers by suspending gas supplies to all debtors until outstanding bills are settled. A total of 13,700 customers were disconnected in 1998, including 3650 industrial customers. The government pledged to forbid cut-offs during the winter, and dismissed Aleksei Sheberstov, Minster of Energy, in February 1999 for doing so. However, cut-offs resumed in spring, and at the beginning of April, 378 debtor firms were disconnected from natural gas supplies.

Ukraine is the main transit route for Russian natural gas shipments to Europe, and transit fees are a major source of revenue for Ukraine. Ukraine also imports about 2 tcf of Russian gas per year, paid for in part by the transit fees Ukraine charges Russia. Russia's Gazprom has accused Ukraine of siphoning off natural gas without payment, and estimated that in December 1998 almost 90 mm cf of natural gas vanished from the transit pipelines, causing losses of $ 5 mm daily. In addition, Ukraine is far behind in payments for gas for which it did contract.
The government and several private Ukrainian gas traders owe Russian gas company Gazprom between $ 1-1.5 bn for past deliveries. In an effort to repay part of this debt, Ukraine agreed to construct a 344 mile, $ 250 mm pipeline in southern Ukraine to help Russia expand its natural gas exports to Europe.
In an attempt to reduce its dependence on Russian gas imports, Ukraine signed an agreement to resume natural gas imports from Turkmenistan, which had been suspended since 1996. Payments for these imports were to be made largely through barter agreements in lieu of cash. However, this agreement was suspended almost as soon as it began, and Ukraine stopped receiving Turkmen gas in May 1999 because Ukraine was unable to pay for the Turkmen gas, and Ukraine's existing debts for Turkmen gas are already $ 240 mm.

Concerns have also been rising over the state of Ukraine's natural gas pipeline system. Almost the entire natural gas pipeline system consists of pipes that have been in operation for 20-30 years, and a large portion of them initially had no anti-corrosive coating. Ukrgazprom estimates that repairs were needed for about 500 km of pipeline in 1998, although there was only sufficient financing for about 26 km of pipelines. Shell signed a protocol with Ukrgazprom and the State Oil and Gas Committee in February 1998 to evaluate Ukraine's natural gas pipeline network, and estimates that about $ 1.5 bn will be needed to modernize the country's aging pipelines.
In June 1998, EuroGas signed two agreements to develop coal-bed methane properties in Ukraine. Under the first agreement, EuroGas formed a 50:50 joint venture with Makyivs'ke Girs'ke Tovarytstvo, a privately held Ukrainian company, to explore and develop coal-bed methane in the Donetsk coal basin, located in eastern Ukraine. The joint venture company is called Eurodongas.
Initial plans call for the company to drill three methane gas wells which will provide information on the potential for recoverable reserves in the license area. The Ukrainian Ministry of Coal estimates that the Donetsk coal basin contains approximately 13 tcf of natural gas. The second agreement is with the state-owned geological company Zahidukrgeologia, covering license area 770 in the Lviv-Volyn coal basin, located in south-western Ukraine. This agreement also calls for the company to drill three methane gas wells, and Zahidukrgeologia estimates that the Lviv-Volyn basin contains approximately 350 bn cf of natural gas.

Coal production accounts for almost half of Ukraine's domestic energy production. Most of this coal is produced in the Donetsk/Donbas region of eastern Ukraine. However, production has been declining, and by 1998 coal production was less than half of what it was in 1990. The decline in production was caused in large part by the fall in domestic demand during this period resulting from the closing of heavy industry as Ukraine's economy contracted during the 1990's.
In addition, Ukraine's coal industry continues to be troubled by shortages of spare parts, unsafe mines, inefficiency and low productivity, corruption, failure of customers to pay debts, unpaid wages and huge debts, and worker strikes. Only three or four of the country's approximately 250 mines are profitable, and virtually all of the mines need to be modernized. According to researchers at the Ukrainian Academy of Sciences, 80 % of the mines in the Donbas have been operating for at least 20 years without any appreciable modernization or renovation, and no new mines in the Donbas have been constructed in 25 years.

The World Bank has estimated that the average production cost of Ukrainian coal is $ 50 per ton, compared to a world market price of $35 per ton. A recent study of the Stakhanovskaya mine by the British firm International Mining Consultants concluded that 3,200 of the 7,500 workers could be laid off with no drop in output. The study pointed out that Polish mines produce twice as much coal as Ukrainian mines with half the work force and under safer conditions.
In January 1997, the World Bank approved a $ 300 mm loan to support a program to close 20 mines per year and to retrain displaced workers. However, the program never developed, and the World Bank moved to renegotiate the loan, this time requiring fewer mine closures.
The government spent $ 990 mm in 1997 on coal industry subsidies and approximately $ 900 mm more in 1998. In an effort to reduce subsidies and restructure the industry, the government announced in January 1999 that it would change the way it allocates subsidies to mines. Instead of rewarding increased production of low-quality coal, the government would base its subsidies on the quality of coal produced at each mine as well as the quantity produced, with the indicators or quality to be determined by the Coal Industry Ministry.
The reduction in government subsidies has also resulted in cutbacks in equipment needed to keep the mines operating safely, and widespread theft of equipment has made this situation worse. Outdated equipment, a lack of spare parts, and poor safety procedures have resulted in safety problems and lost production estimated at over 8 mm tons in 1997. The number of accidents has been rising, leading to 283 deaths in 1997 and 360 fatalities in 1998, the highest total in recent years. In protest, miners launched strikes across the country in March 1999, demanding better working conditions and back wages of 2.5 bn hryvna (about $ 625 mm).

Within the former Soviet Union and Eastern Europe, Ukraine is one of the largest producers and consumers of electricity. Almost half of the electricity is generated by fossil-fuel plants, about 45 % is generated by the nuclear plants, and the remainder from hydroelectric plants. Ukraine has 19 power plants with a generating capacity larger than 1,000 MW (13 fossil-fuel, 5 nuclear, and 1 hydroelectric), including the 6,000 MW Zaporozhe nuclear plant that is almost twice as large as the largest fossil-fuel fired plants.
Despite this large capacity, Ukraine is not a net exporter of electricity. Although it exports to several regions in Russia, Moldova, and countries outside of the former Soviet Union, it imports roughly equal amounts from Russia. Ukrainian supplies to Moldova from almost one-third of Moldavian supplies; however, in April 1999 Ukraine suspended the supply of electric power to Moldova because of non-payment of debts. Russia had also suspended power supplies to Ukraine because of Ukraine's $ 123.5 mm electricity debt, reconnecting the electricity grids between the two countries after an energy accord was reached in March 1999.

Ukraine's utilities are in need of modernization. By some estimates, improving plant capacity factors from the current 50 % to 60 % would add the same amount of power as a 1,000 MW power plant. In addition, the main controller at national energy company Ukrenergo has warned that failures to repair the electricity grid could lead to shutdowns of the nuclear units at Zaporozhe, Khmelnitsky, and Rivne.
However, non-payments by utility customers of more than $ 1 bn have left the utilities without the cash to modernize or even purchase fuel, as have artificially low fuel prices. Government statistics indicate that industrial and individual customers paid for less than 60 % of their electricity in January 1999. Ukrainian efforts to increase fuel payments have resulted in twice as many collections in March 1999 as in January 1999 - enough to pay salaries, but not enough to buy fuel, purchase equipment, or pay interest on debt.
However, in February 1999, Ukraine dismissed Aleksei Sheberstov, Minster of Energy, for cutting off energy supplies during the winter for users unable to pay. In an alternative effort to help utilitiescover costs, electricity prices were increased by 20 % on April 1, 1999.

In addition, Ukraine has used up the fuel that it received from Russia in exchange for returning nuclear warheads. As a result, Ukrainian nuclear utility Energoatom is suffering from a fuel shortage, and is running out of fuel for its VVER nuclear plants. To stretch supplies, it has been operating its VVER plants at reduced output levels. Zaporozhe-1 has dropped its output by half since March, and South Ukraine-2 has also dropped output by over 20 %.
Zaporozhe-6 was refuelled only by collecting fuel from other Ukrainian plants. Chernobyl, the site of the world's worst nuclear accident in 1986, might remain in operation beyond 2000 in part because fuel for it is available from units 1 and 2, which will be decommissioned. In an effort to address the shortage of nuclear fuel, the Supreme Rada (Ukrainian parliament) has moved to allocate funds to buy nuclear fuel from Russia.

In an effort to head off further shortages, the Supreme Rada has also called for the creation of a state nuclear fuel stock. In March 1999, the Supreme Rada ratified the US-Ukraine agreement for nuclear cooperation with the hope of increasing US investments in its nuclear industry and of diversifying its nuclear fuel supply. The US has started a pilot project to fabricate fuel for Ukrainian VVER-1000 nuclear plants. Ukraine has large uranium resources that it wants to utilize to move towards economic independence.
It also wants to solve the problem of storing spent fuel, and boost the share of nuclear power to more than 50 % by building a new western-design reactor by 2012 that would meet international safety standards. In an effort to help Ukraine solve some of Ukraine's many nuclear energy needs, the United States Department of Energy has been working with Ukrainian officials to promote increased safety and develop new energy-related industries.

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