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Energy Issues in the Ukrainian Crisis

Submitted by on March 27, 2014 – 7:32 am 4 Comments |  
Ukraine pipelines mapEnergy issues figure prominently in many discussions of the conflict in Ukraine. As is often noted, Europe’s reliance on Russian natural gas gives Moscow significant leverage. Ukraine, moreover, is weakened by its own dependence on Russian energy, and its situation is complicated by the Russian natural gas pipelines that transverse its territory. Less often noted are Ukraine’s own significant gas deposits, several of which are threatened by Russian actions. To be sure, Ukraine’s proven natural gas reserves—which ranked 24rth in the world as of 2010—are dwarfed by those of Russia: 1,104 billion cubic meters vs. 48,600 billion cubic meters. But Ukraine’s reserves are still substantial, and the country had hoped to emerge as a gas exporter. Many of its recent initiatives, however, have focused on offshore deposits in the Back Sea, which are now under effective Russian control. As was recently explained in B92:

The new authorities in Crimea decided to nationalize the oil and gas company Chornomornaftogaz, a part of Ukraine’s Naftogaz. Chornomornaftogaz owns 17 fields and has 13 offshore platforms, in the Black Sea and Sea of Azov, employing 4,000 people … [T]he company [will] soon be put up for privatization and Gazprom has expressed an interest. Chornomornaftogaz’s deputy chief executive Volodymyr Plechun told Forbes that “representatives of the new authorities took the helm of the company on March 13, accompanied by gunmen,” adding that four representatives of Gazprom were also there, and “immediately began to study documents.”

Crimea Natural Gas MapThe fate of Ukraine’s off-shore gas deposits remains to be seen. So does the eventual position of the de facto maritime border between Russian-dominated Crimea and Ukraine proper, a potentially vexatious issue.

Ukraine’s unconventional onshore gas deposits, however, may prove more important in the long run. The issue here is shale gas, trapped deposits that can only be released by hydraulic fracturing (fracking), a technique honed over past decade in the United States. According to 2011 data from the US Energy Information Administration, Ukraine’s “estimated recoverable shale gas resources” amount to 42 trillion cubic feet. This figure is the 18th highest in the world, although it is dwarfed by the 1,275 trillion cubic feet of China and the 862 trillion cubic feet of the United States. According to a 2012 Reuters article, Ukraine had hoped to start commercially production of shale gas by 2017. But again, Ukraine’s shale gas deposits are not necessarily geopolitically secure. Robert Kaplan, in his Time essay analyzed in Monday’s post, emphasizes this point, claiming that Putin has sought to “demonstrate Russia’s geographical supremacy over the half of Ukraine … Ukraine Shale Gas Mapblessed with large shale-gas reserves” (p. 33). In actuality, the situation is more complicated. As can be seen on the map posted here, the eastern Dniper-Donets shale-gas basin extends almost to Kiev, well inside the Ukrainian core, whereas the Lublin Basin, which may hold even more gas, is located in the heartland of Ukrainian nationalism in the west.

Shale Gas in Ukraine MapShale gas, however, is a notoriously controversial issue. Some optimistic expectations have been dashed, as tight gas can be difficult to extract even through the most advanced fracking techniques, and initial deposit estimates have not always panned out. Public opposition, moreover, can be even more challenging.

The failure of the shale-gas industry to develop as anticipated has been especially sharp in Poland. As reported in November 2013 by Krakow Post:

Two years ago, shale gas was being heralded as the key to a prosperous, energy independent Poland, and Central Europe as a whole was looking forward to a shale gas revolution like the one that has transformed the US economy. Today, several multinational energy companies have withdrawn from the region, disappointed by poor exploration results, excessive red tape, and protests by residents over the controversial gas-extraction process known as ‘fracking.’

Fracking is indeed controversial, regarded by green stalwarts as an abomination, assaulting Earth through the injection of toxic chemicals deep into its veins. Eco-modernists, on the other hand, tend to grudgingly support fracking, as the natural gas that it unlocks is much less carbon-intensive than the coal that it generally supplants. Debates between the two groups often focus on technical issues, such as the amount of methane that is inadvertently released during fracking operations.

In Europe, green opposition to the practice has generally prevailed. Fracking is banned in France and Bulgaria and under moratorium in Germany. Bulgaria’s decision to ban hydraulic fracturing in 2012 was particularly contentious, as it has been argued that pro-Russian forces organized the oppositional movement, fomenting protests and lobbying the Bulgarian parliament. If hydraulic fracturing were to prove as economically successful in Europe as it has in the United States, Russia’s clout in the region would be diminished. As a result, anti-Russian Bulgarian nationalists were appalled by the decision to ban the practice. Green activists, on the other hand, were thrilled.

The connection between energy and the Ukrainian conflict extends beyond the fracking debate. Critics charge that Europe’s—and particularly Germany’s—energy policies have played into the hands of Vladimir Putin, making the region unnecessarily dependent on Russian gas. In a recent article in the Financial Times, Bjørn Lomborg argues that:

The Ukrainian crisis has again put German energy policy in the spotlight. As long as Europe’s green energy is expensive and unreliable, it favours Russian gas and leaves the continent’s energy policy unsustainable. Germany’s energiewende, the country’s move away from nuclear and fossil fuels towards renewable energies has been regarded by some commentators as an example for the rest of the world. But now Germany shows the globe how not to make green policy. It is failing the poor, while protecting neither energy security nor the climate.

Germany New Coal Powerplants MapLomborg is an extremely controversial figure in environmental circles. A self-styled “skeptical environmentalist,” he is regarded by most members of the green movement as a mere apologist for polluting industries. Yet some of his charges against Germany’s energiewende are difficult to deny, as the program has faltered not merely on economic but also on environmental grounds. Certainly the country’s production of solar and wind power has surged, but neither renewable source of electricity provides the baseload that must be maintained when the sun is not shining and the wind is not blowing. Due to both to a drop in natural gas use and the phasing out of nuclear reactors, Germany has had to increase its use of of coal, especially of dirty lignite, swelling its emissions of carbon dioxide. The country has also turned extensively to biomass burning, which also has distinctly negative environmental consequences. Faced with a major squeeze on consumers due to its high energy costs and burdened by its failure to meet its own environmental goals, Germany is poorly prepared to face possible Russian retaliation in the gas market.

Germany’s energiewende has many defenders, who argue that it is much too soon to dismiss the program, as steady progress is being made in renewable energy efficiency. New York Times columnist Thomas Friedman takes a particularly optimistic position:

Anyone following the clean power industry today can tell you that there is something of a Moore’s Law now at work around solar power, the price of which is falling so fast that more and more homes and even utilities are finding it as cheap to install as natural gas. Wind is on a similar trajectory, as is energy efficiency. China alone is on a track to be getting 15 percent of its total electricity production by 2020 from renewables, and it’s not stopping there. It can’t or its people can’t breathe. If America and Europe were to give even just a little more policy push now to renewables to reduce Putin’s oil income, these actions could pay dividends much sooner and bigger than people realize.

It is too soon to tell whether Friedman’s sunny predictions will come to pass, but they strike me as somewhat naive. Germany is giving a huge “policy push to renewables,” and thus far its dividends have been rather meager. The idea that solar and wind power are at the verge of becoming economically competitive, moreover, has been repeated now for decades; I was taught exactly the same when I was an environmental studies major at the University of California at Santa Cruz in the 1970s. It is true that substantial progress has occurred in the intervening years, but a renewable energy panacea still eludes us. The biggest problem is that of storage. Although progress is also being made on this front, battery and other storage technologies remain inadequate—and batteries themselves are extremely environmentally damaging.

Considering Europe’s dependence on Russian energy and the current abundance of natural gas in the United States, many voices are now calling on the U.S. to drop its ban on exports and to begin shipping liquefied natural gas (LNG) to European markets. This proposal is strongly opposed by mainstream environmental groups, which condemn fracking and fossil fuels more generally, by American consumer organizations, which favor low domestic prices, and by the U.S. chemical industry, which also benefits from cheap gas. Some European countries, however, are keen to acquire non-Russian LNG from whatever source is possible. Currently, a major South Korean-made floating import terminal is being prepared for Lithuania. But the overall effects of lifting the U.S. export ban would probably be minimal, in large part because LNG prices are higher in East Asia than in Europe, likely making East Asia the favored export market.

Whatever the fate of LNG exports, the problems with Germany’s energiewende, are leading to some profound re-thinking. Eco-modernists, for example, are increasingly accepting nuclear power as the best near-term option, hoping that fusion power is not too far off in the future. But to the committed greens, nuclear power remains anathema. Their challenge is to devise alternatives that are environmentally, economically, and technologically viable.

Despite such problems, Europe has achieved much success on the energy front. As reported in The Economist, the region has partially filled its gas-storage reservoirs and has been integrating its gas pipeline network, thus reducing its vulnerability to sudden moves by Russia. Western Europe’s energy efficiency, and especially that of Germany, is also striking. Ukraine uses almost twice the amount of energy that Germany does per unit of GDP. As such, the government of Ukraine has been advised to study German techniques. Meaningful reform would probably necessitate phasing out its generous subsidies. As was recently argued in The Economist:

A major target for reform were Ukraine’s cushy energy subsidies. The state gas company, Naftogaz, only charges consumers a quarter of the cost of importing the gas. Cheap gas discourages investment: Ukraine is one of the most energy-intensive economies in the world and domestic production has slumped by two-thirds since the 1970s. The IMF ended up freezing the deal in 2011 after Kiev failed to touch the costly subsidies.

Reducing energy subsidies, however, is always a politically perilous maneuver, as it puts a new burden on consumers. Considering Ukraine’s current instability, action on this front will likely not be a high priority. Ukraine’s subsidies to Crimea, however, will almost certainly come to an end, and it will be interesting to see if Russia offers the peninsula a favorable subsidy scheme to prevent any further instability, or if Crimea will now have to pay more expensive Russian prices for its energy supply.

Nuclear Reactors Ukraine mapUnlike Germany, Ukraine is not abandoning nuclear power—despite having suffered the world’s worst nuclear disaster (at Chernobyl in 1986). Almost half of the country’s electricity supply currently comes from nuclear plants. Plans drawn up between 2008 and 2012 call for a major expansion of the industry. Most financing, however, was to come from Russia. According to the World Nuclear Association, moreover, “Ukraine receives most of its nuclear services and nuclear fuel from Russia.”

All in all, Ukraine faces a difficult energy situation in the near future.

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