- The Washington Times - Monday, January 12, 2009


Three years after Russia last shut off supplies of natural gas, Ukraine is under fire for failing to develop its own energy sources that could have eased its dependence on its giant neighbor.

Ukraine is not alone. With Europe blanketed by a cold front and shivering through the 11th day of sharply curtailed gas supplies, similar criticism is being voiced in nearly a dozen other countries.

But Ukraine is especially vulnerable, depending on Russia for about 80 percent of its energy compared with about 40 percent for the rest of Europe.

“This crisis underscores that Ukraine has done little to develop alternative energy resources and that it is not very serious about it,” said Myron Wasylyk, senior vice president and managing director of the Ukraine office of the PBN Co., a Washington-based government relations firm.

Instead, Kiev has managed periodic crises by sending envoys to Moscow to negotiate gas prices as well as the offsetting fees for gas sent through Ukraine’s pipelines to much of Europe.

“Ukraine’s energy situation is much more complicated and perilous than it should be,” analysts Edward Chow and Jonathan Elkind wrote in this month’s issue of the Washington Quarterly.

“It has a capable energy work force and long experience in the exploration, production, transportation, and refining of oil and gas. Most prominently, it is strategically located and has large-scale infrastructure.

“[But] 17 years after the breakup of the Soviet Union, the energy economy of independent Ukraine is still frozen in seemingly permanent transition.”

Russia cut gas shipments to Ukraine on Jan. 1 in a commercial dispute over prices for 2009. Ukraine pays about half the commercial rate paid by most of Europe, and Russia’s gas monopoly, Gazprom, is demanding it pay market prices.

Last week, all gas stopped flowing through Ukraine to the rest of Europe.

Teams of monitors from the European Union deployed Sunday at transit sites throughout Ukraine, but the gas remained shut off.

Russia said it refused to restart gas supplies because the deal on monitors was voided by a Ukrainian “declaration” designed to accompany it. The declaration reportedly spelled out Ukraine’s position on the pricing dispute.

Russia wants monitors in place to prevent what it describes as Ukraine’s theft of supplies meant for Europe - a charge Kiev hotly denies.

“Our goal is to show who is to blame for stealing gas,” the Associated Press quoted Russian President Dmitry Medvedev as saying. “Such thievery can’t be left unaccountable.”

In January 2006, Russia first attempted to cut off gas supplies to Ukraine in a pricing dispute with Ukraine’s state-run gas company, Naftogaz. The action sharply curtailed the flow of gas to the rest of Europe, and Russia resumed full gas shipments after one day.

Last year, Russia charged Ukraine $179.50 per 1,000 cubic meters, about half what it charged its European customers.

Ukraine’s failure to develop non-Russian energy sources is illustrated by the collapse of a recent deal with Houston-based Vanco Energy Co.

Ukraine and Vanco signed a production-sharing agreement in 2007 that would have allowed for offshore oil and gas exploration in the Ukrainian portion of the Black Sea.

Ukraine is thought to have generous hydrocarbon resources both on and off shore in the region.

The deal initially was hailed as a critical first step to freeing the country from dependence on Russia. In May 2008, however, Prime Minister Yulia Tymoshenko withdrew the agreement, citing concerns over Vanco’s partners.

“She said they broke the law,” Gene Van Dyke, Vanco’s founder and president, wrote in an e-mail to The Washington Times.

He said he met with Mrs. Tymoshenko to discuss the matter.

“I asked her what law they have broken and did not receive an answer. She said she would provide me a list of the laws broken but has never done so.”

Marina Soroka, the prime minister’s press secretary, declined to comment on the deal Friday, saying it was not within her competence to do so. However, earlier this year, Mrs. Tymoshenko told media that Naftogaz should take the lead in strategic exploration projects.

According to the Financial Times, Mrs. Tymoshenko said her government had evidence that Vanco was geared to resell rights to other companies, including Russia’s Gazprom.

Vanco’s Mr. Van Dyke rejected those charges and cited reports that Naftogaz itself was looking to partner with Gazprom.

Oleh Dubyna, the head of Naftogaz, has criticized the Vanco agreement, claiming in a newspaper interview: “We sold a large profiteer too large a piece.”

He said he preferred an agreement for the “joint exploration of Ukraine’s Black Sea shelf with Gazprom.”

“This is very disturbing,” Mr. Van Dyke said. “If Gazprom becomes involved in the Ukrainian portion of the Black Sea, they will intentionally go slow on their efforts so as to maintain Ukraine’s energy dependence on Russia.”

Ukrainian President Viktor Yushchenko, Mrs. Tymoshenko’s rival, has supported the Vanco deal, which is now in arbitration.

As the chill continues, Naftogaz is urging factories to switch to alternative resources, such as coal. Other European countries echoed the call.

The Hungarian capital, Budapest, issued its first-ever smog alert Sunday because its power plants had switched from natural gas to other fuels, the AP reported. Austria also voiced alarm over neighboring Slovakia’s plans to restart an aging Soviet nuclear reactor to get heat for its people.

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