Crimea emerging from a blind alley

On the prime minister’s instruction, the Ministry of Fuel and Energy decided at a meeting in Yalta to adopt measures aimed at solving the energy problems of the Crimean peninsula, which generates a mere 8 percent of Ukraine’s total electricity. At the same time, consumption is growing every year by about 5 percent, while the pass-through capacity of the grids connecting the peninsula with the mainland remains the same. Under the maximum load, the grids are working at maximum capacity, which can lead to a massive power failure at any moment.

Is there a solution? Equipment is being upgraded at the Dzhankoi- Symferopil segment, which will allow more power to pass through. There are also plans to modernize Krymenerho by investing UAH 500 million in the construction of new grids by 2010.

The total amount of investments for developing and updating Crimea’s fixed energy assets is estimated at $150 million. It will take about $350-400 million to create additional 600-MW generating facilities (rebuilding existing thermal power plants and constructing new facilities). According to Minister Yuriy Boiko, the gas supply system needs $600 million in investments. Such significant amounts are necessitated by the fact that the wear-and-tear of grids in the Crimea is one and a half times higher than in Ukraine.

However, the minister is certain that the Crimea is one of the most investment-attractive regions of Ukraine. So the problems of power supply on the peninsula should be addressed on a first-priority basis. The minister is convinced that, in strategic terms, it is more beneficial to develop local sources of energy than to lay grids from the mainland.

Boiko also focused on the supply of oil, gasoline, diesel fuel, and gas to the peninsula. He is particularly worried that in the last while the Feodosia-based oil refinery has cut down processing from 10 to 5 million tons, a serious blow to the Crimea’s public sector and the nationwide system of oil deliveries. In the past two years, Russia has sharply increased the export of its own oil and oil products through pipelines and has in fact stopped transporting them by railway, for which the Feodosia refinery was designed.

Boiko announced that in September his ministry and Russia’s Transneft Company will discuss the possibility of increasing the trans-shipment of Kazakh oil through the Feodosia facility. “We badly need a breakthrough in the extraction of gas on the Black and Azov sea shelves.” To achieve this, Chornomornaftohaz and all the structures of Naftohaz Ukrainy should make a joint effort. The minister is certain that maximum involvement of state-run companies and loans from leading international banks for funding these large-scale projects will allow Ukraine to improve its gas and oil balance and lower the risks of abrupt fluctuations in gas prices in the next four to five years.

Boiko also claims that his ministry has ample grounds and instruments to prevent its rivals from raising their prices. “I do not think there will be any major gas price hikes or any threat to national security. The agreements reached during Viktor Yanukovych’s recent visit to Russia are now being documented,” the minister said.

To increase the production of Ukrainian own gas, the government is planning to invite bids and choose companies that will be granted the right to exploit shelf deposits in the Black and Azov seas. The minister is sure that this country’s gas and oil balance will be formed within the next four or five years. Recently he discussed the question of gas supplies to Ukraine with Gazprom chief Aleksei Miller in Moscow. The negotiators again raised the question of establishing a gas transportation consortium, which was agreed upon in principle in 2002.

Everything seems to be returning to its circuits, and the consortium will be set up (by hook or by crook) in its original version. The consortium will guarantee Russia a steady and stable supply of gas to European consumers, while Ukraine will get the chance to finish the construction of new gas transit facilities (e.g., the Bohorodchany-Uzhhorod gas pipeline) and reactivate ones standing idle, such as the Ivantsevychi-Dolyna and Torzhok-Dolyna gas pipelines.

The government is also constantly tackling the oil problem. “Unfortunately, we are not the ones who set the pace in this sector,” Boiko noted. “As you know, Ukraine imports about 70 percent of its oil and gas. We depend on oil suppliers, and the chief problem here is the high import duty imposed by Russia and other exporting countries. For example, oil traders are now delivering oil products at 480 dollars, with duty reaching 216 dollars. In other words, right off the bat we have to pay twice as much as Russia and, say, Belarus.”

Boiko says that the government is working in partnership with companies operating on the domestic oil market. The goal is to create a milder and more comfortable climate, to encourage the importation of crude oil and reduce the amount of imported oil, build new oil refineries, and raise the quality of oil products to European standards. Ukraine did not regulate market price formation because the government deals with this separately during monthly routine meetings. The role of the state in a situation when oil product prices vary every two weeks is to minimize the impact of speculation.

According to Deputy Prime Minister Volodymyr Rybak, who also heads the construction, architecture and public utilities ministry, it is very important to determine financial requirements in order to reform Crimea’s energy complex. This should be done right now, when the country’s state budget is being drafted. “We must do everything so that the local authorities will have the necessary funds to fulfill their pre-election promises on improving peoples’ lives,” Rybak said. He is convinced that Kyiv and Symferopil should agree to sign a contract on the joint funding of social programs.