January 10, .2008
A dynamic, efficient energy sector is a major prerequisite for Ukraine`s development into a vibrant market economy that could rapidly improve living standards for its citizens. However, Ukraine will need to make the energy industry much more efficient because it has the highest ratio of energy use to per capita GDP in the world. It has the world`s most energy intensive economy.
Ukraine has extensive reserves of coal and a large nuclear power industry. However, it relies heavily on imports of oil and especially natural gas for its energy needs.
Natural gas is more important than oil for Ukraine. The country consumes five times more natural gas than oil in energy equivalent terms. Although Ukraine consumes about a quarter of its natural gas from domestic production the other three quarters are purchased from Russia, Kazakhstan, Turkmenistan, and Uzbekistan. Unfortunately, all of these imports come through Russia with its imposed tariffs.
The recognized corrupt corporate system of energy imports and sales has actively discouraged Western investment in the energy sector, leaving Ukraine with one of the lowest levels of foreign direct investment in energy in the region.
Ukraine is the key energy corridor bringing oil and gas shipments to Europe from Russia and Central Asia and can play an even more significant role in Europe`s attempt to achieve greater energy security.
If Ukraine were to implement progressive policies in its energy sector including current market pricing for its products and reducing barriers to foreign investment, it could reduce Russia`s influence on economic policy decision making in Ukraine and it might even induce Russia to introduce additional reforms into its own energy sector.
Current Situation
Despite the known corporate corruption, Ukraine has had some major accomplishments in the energy sector, including increases in energy efficiency. As a result, the country is about 20 percent more energy efficient today than it was in 1990. New nuclear power plants have replaced most of the electricity previously generated by the RBMK reactors at Chernobyl. Ukraine is set to become a net exporter of electricity as a result of its robust nuclear industry. In spite of continued Russian pressure, the Ukrainian government intends to retain control of its major gas pipeline system rather than allow it to be controlled by Gazprom, a Russian company. The World Bank has indicated that it is anxious to help Ukraine modernize its energy infrastructure, develop a progressive tariff system and integrate the country`s energy sector with those of Western Europe.
There is a great awareness in Ukraine of the need to diversify the country`s sources of oil and natural gas and to reduce its domestic consumption through increased efficiency.
Ukraine is fortunate in that the country contains ( 1 ) significant reserves of oil and gas, both on and off shore, ( 2 ) massive coal deposits, with Europe`s best coal-bed methane prospects, and ( 3 ) at least six functioning nuclear reactors, backed by a sophisticated nuclear industry. With improved energy policies and stronger rule of law to support supply contracts, Ukraine has the capability to reduce its import dependency by 50% over the next 15 years. Other reforms could also strengthen Ukraine`s position when negotiating energy import prices with Russia and the Central Asian suppliers.
Unfortunately, Ukraine has become more dependent on energy imports. Ukraine still lags behind other European nations in modernizing its energy sector. It requires greater business transparency, coupled with tariff reform and energy efficiency gains that could help reduce or eliminate the constant build up of payment arrears to Russia and Central Asian suppliers.
What the critics recommend
The critics of the government have stated that Ukraine should immediately repudiate its contracts with RosUkrEnergo, the Russian subsidiary of Gazprom and negotiate gas purchase contracts directly with Gazprom. This move would weaken the power of Ukrainian oligarchic groups who benefit financially through their collaboration with Russian state - controlled entities.
Conclusions
Further, Ukraine should implement the transit protocol of the European Energy Charter that stipulates the creation of a “ common carrier “ system.ConclusionsReforms in the energy market in Ukraine can have a multiplier effect including the reduction of influence of the corrupt business groups over the country`s political system. It could also accelerate Ukraine`s economic and political integration into the West.
There are a total of nine recommendations in this report.
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