The pipeline is calling

Ukraine owns one of the world’s most powerful gas transportation systems (HTS). The economic and political revenues from its pipelines, which transport a considerable part of all the oil and gas coming to Europe, have long been the object of keen attention from its Russian “brother.” Ukraine’s HTS is run by Ukrtranshaz, a subsidiary of Naftohaz Ukrainy. The annual incoming capacity is 288 billion cubic meters and the outgoing one is 142.5 billion.

According to Ukrtranshaz statistics, the transit of the blue fuel to European countries increased by 23 percent between January and July 2008. These indicators are reassuring, of course, considering that last year they dropped by 1.5 percent compared to 2006, and by 4.6 times to the CIS countries, to 3.1 billion m?.

Experts note that the continuing success of the HTS will depend on its modernization and an increase in its carrying capacity. Russia is already building the Northern and Southern pipelines, as well as a pipeline across Belarus. Europe is using the Nabucco pipeline. Will Ukraine succeed in maintaining its leading energy transit positions?

MONEY FOR THE PIPELINE

The European Commission estimates that upgrading Ukraine’s HTS will cost 2.5 billion euros. “This assessment is proof that our HTS is not in a bad operational condition. Moreover, if the gas transportation systems of Russia and Ukraine were thoroughly audited now, we would look much better,” gas expert Oleksandr Narbut told The Day. Upgrading the compressor stations is the first thing that needs to be done.

In a recent article Academician Borys Paton of the National Academy of Sciences of Ukraine (NANU) and Corresponding Member Artem Khalativ write: “The continuing use of worn-out and obsolete gas turbine engines may result in an avalanche-like degradation of Ukraine’s gas transportation system and its inability to provide reliable gas deliveries for domestic needs and its transit to Europe.” The continuing use of these turbines (with 18-15% efficiency rates) has resulted in excessive gas consumption to meet the HTS’s own need. In 2006, this consumption amounted to 4.9 billion m3.

Scientists are convinced that after the HTS is equipped with a new generation of turbines, their long-term operation may not only lower gas consumption in Ukraine but also reduce carbon dioxide emissions into the atmosphere. New equipment will also lead to greater efficiency of the system and maintain continuous gas supplies to Europe.

Academician Volodymyr Makhnenko, a department head at the Paton Institute of Electric Welding, agrees that the state of Ukraine’s gas transportation system is no worse than in Russia and the US. However, in order to receive a transit mark, it is necessary to constantly monitor the system’s technical condition and prevent various defects. He told The Day about a repair technology used in pipelines under payload. This year a team of Ukrainian scientists submitted it for a Ukrainian science and technology prize.

“Traditionally, a pipeline can be repaired only after turning off the flow and removing the gas or oil. Then the problem section is cut out and a new one is welded in. This is a very time-consuming process, and you also have to let some gas into the atmosphere, and we have international environmental commitments to uphold. Our technology envisages spotting, defining, and preventing technological defects, and then welding without stopping the flow in the pipeline. If the width of the defective section is less than 4-5 mm, no welding is required, but special couplings and bands are placed over this defective section, and then their ends are welded to the normal section of the pipeline.”

RUSSIA’S INTEREST

Even in planning the modernization of its HTS, Ukraine cannot rid itself of Russia’s special interest because the Russians want to be the sole owners of the pipeline. If this happens, what would Ukraine get in return? Most likely it would lose its last trump card in the gas price regulation game. Will the Ukrainian leadership agree to this?

In recent weeks there has been increased interest in this subject. Gazprom reportedly proposed to revive the idea of having Ukraine’s HTS managed by the International Gas Transportation Consortium. In 2002 President Leonid Kuchma of Ukraine, Chancellor Gerhard Schroeder of Germany, and President Vladimir Putin of Russia had agreed to form such a consortium. It was formed in 2003 (on a parity basis, with Naftohaz Ukrainy and Gazprom each holding a 50-percent interest) in order to carry out new joint projects aimed at transporting natural gas from Russia to Europe. However, this project never came to fruition because the two sides had different views on its activities.

Rumors about the transfer of Ukraine’s HTS to the Russians were quelled by a statement issued by the Ministry of Fuel and Energy of Ukraine. “Matters pertaining to the creation of an international consortium to run and develop Ukraine’s gas transportation system are not on the agenda of the company’s talks.” Prime Minister Yulia Tymoshenko, accused by Bankova Street of having betrayed Ukraine’s national interests with regard to the pipeline in exchange for Russia’s support during the presidential elections, also decisively rejected the idea of transferring the HTS to the Russians.

PIPELINE TRUMP CARD

As the verbal battles continue to rage, work continues on the drafting and signing of long-term contracts between Naftohaz Ukrainy and Gazprom. The gas price is not known, but the formula appears to have been determined. Will it change after the recent events in Georgia and Ukraine’s reaction to them? Time will tell. Meanwhile, it is worth remembering that every year, starting in 2006, the Russian monopolist has increased the price of Central Asian gas for Ukraine. As a result, it has risen from $95 to $179.6 per thousand cubic meters. This year Ukraine is expecting another price jump.

By now the Ukrainians should have learned from the Russians how to resolve their energy supply problems. For the Russians, gas is just another business that is reinforced by a business strategy for a given company, and it doesn’t matter who determines this strategy. The main thing is that it is not the Russian government that is responsible for increasing gas prices for Ukrainians and Europeans, but a commercial structure whose main task is to make money and increase its capitalization. In contrast, Ukraine, abiding by its neighborly tradition, is once again holding fast to the transit rate, which is 3 to 6 times lower compared to other European countries.

There is a way to obtain revenues (by increasing transit prices) while remaining on friendly terms with one’s neighbor. Thus, gas experts queried by The Day do not rule out the option of converting Ukrtranshaz into a separate company. This would allow it independently to set the value of the “controversial” transit proceeding from market prices, and the government has nothing to do with this. In this case, the chances of the Russian and Ukrainian monopolists would become more or less balanced.

In addition, many interesting things with regard to the formation of Russia-Ukraine HTS-based relations can be obtained from the European Energy Charter. One of its clauses provides for equal access to energy sources for both consumers and transiters. If Ukraine made use of this clause, it would be able to resist Russia’s political pressure. When promised gas at the price of $400, it could say that all Russia’s exported gas for Europe will be purchased on the border and then we’ll transport it across our territory and resell it to European companies.

So what’s in the offing for Ukraine’s HTS? According to experts in the oil and gas sector, everything will be decided in the next three or four years, once the deadline passes for launching the European and Russian bypass pipelines. Will Ukraine’s ruling elite manage to unite its efforts to resolve these strategically important issues? Although this is a rhetorical question, it touches on another obstacle to the effective implementation of all economic initiatives.

One expert interviewed by The Day said: “We have almost no real political elite, just a political class. A political elite never trades away national interests, just as it never creates a domestic political conflict out of internal political battles over who can best haggle over something with our neighbors in exchange for our national interest. This elite is made up of people who, regardless of the different ways of achieving a goal and an internal discussion, are ready to shout themselves hoarse in championing national interests vis-a-vis both the East and the West.”