Speech of William Tailor, Ambassador Extraordinary and Plenipotentiary of the USA to Ukraine

I’m honored to be here. Today we can speak as we can tell in great detail about energy security. And I will start with European energy security and speak a little bit as the Speaker has done on Ukrainian energy security. Both Deputy Ministers have pointed out the troubles, the problems and insecurities of supplies that effect Europe. This has been clear, it’s clear for Ukrainians since the beginning of 2006, it’s clear to Georgians that last month, last summer in August and it’s clear that it’s more important, than ever for you to mitigate your facts of dependency on one supplier.

European supplies have been interrupted on a number of occasions as we have heard this afternoon; and the best insurance against this supply interruption that we have also heard this afternoon, is alternatives, is diversification. Markets function best when there are alternatives, when there is competition. This includes competition among transportation, as well as suppliers, as well as consumers. We have some suggestions in this regard for European energy security. First, several people have already mentioned the Southern Corridor of supply. This would allow gas, in particular, but other resources, oil as well, to move from the Caspian region through the Southern Corridor into Europe. This includes options including the Turkish agreed Nabucco project, the Deputy Minister also mentioned White Stream. There are several alternatives which would give the opportunity for Caspian and other Eurasian countries to exert their independence and to increase diversity of supply through this transit network. The Deputy Prime-Minister urged us not to bypass Ukraine. We would agree with this suggestion.

A key part of this energy security, in particular, in the Southern corridor involves two countries – Turkey and Azerbaijan. They need to come to terms in order to make this real on gas transit that meet Azerbaijan’s commercial needs while still addressing Turkey’s legitimate security of supply concerns. And this need to happen at the top levels and so this is a very good Forum in which to make this point. Speaker Yatsenyuk has already mentioned importance of the EU policy, European policy in energy field. We certainly support European actions to create a unified energy market. And with the Deputy Minister of Georgia here, we will also point out the importance as re-establishing Georgia as a secure energy supplier, energy transit nation. We have concerns about the effect of the last summer’s incursion into Georgia on the investment in regional architecture, regional infrastructure, and so, we hope to see partner countries join us and others to reiterate the confidence in Georgia as a key energy transit nation and to assist in restoring its energy infrastructure.

Regarding Ukraine’s energy security - this is the issue that Ukraine has tried to address to greater or lesser degree over the 17 years of its independence. It also depends on diversification. Ukraine currently relies on one supplier for the majority of its natural gas, its oil and its nuclear fuel. Nearly total dependency on energy from one source clearly threatens Ukraine’s energy security. Today Ukraine has taken a couple of steps in diversifying its energy suppliers, increasing transparency in the sector, attracting much needed foreign investment, and developing alternative energy sources. But 17 years after independence, the energy economy of Ukraine is still a kind of frozen in elements of that Soviet time. Naftogas Ukraine contains many able and knowledgeable professionals. However, it probably has too many of them. It is the management. It does not have enough resources and operates under conflicts of interest. Price signals, - others have talked about the importance of price signals, that is the most fundamental element in the functioning market. This was confused in the energy sector in Ukraine. E.g., in its current form, the gas industry suffers under multitier pricing that reduces incentives to conserve a precious resource and that enables grey market trading. Gas from domestic Ukrainian production is theoretically earmarked for use by residential consumers and budgetary organizations while imported gas is meant to be used for industrial consumption. This scheme does not work. Well positioned parties use border arrangements and re-export schemes to profit handsomely while injuring the national welfare. Meanwhile, the domestic gas production is depressed by artificially low prices. The Speaker and the Deputy Prime-Minister had a conversation about another of these problems, about the transparency of the gas market.

On RosUkrEnergo – we were also glad to hear that RosUkrEnergo is being removed. This is clearly a step forward. Energy efficiency is important. The multitier wholesale gas pricing of domestically produced gas normally designated for public and health consumption, made it so that a grey market developed for domestic industrial users or export buyers who are unwilling to pay European prices. These illicit sales and fuel market corruption have muffled the market signal that would otherwise promote increased domestic production and decreased consumption. What is required, - is a serious pricing reform, based on a sensible, transparent and easily understandable rate methodology. That allows gas producers or sellers to recoup the costs plus a reasonable rate of return. Price formation in Ukraine will require capable and independent regulators. The Speaker has addressed this.

To operate in a publicly transparent fashion, so the interests of producers and consumers are adequately balanced and equally protected. Let’s be clear. Price reform will mean higher prices for all across the Ukrainian economy. And that means the potential for negative impact on the poor namely of those least able to pay those higher prices. Here, Ukraine should follow the example of other Eastern and Central European countries that have already undergone price reform. Energy efficiency programs can help reduce energy consumption of residential institutional buildings as of the first priority. Lending programs can be created or expanded. And strengthening them will allow Ukraine to borrow money in order to invest it upgrades to plants and equipment. Targeted assistance can be introduced to alleviate the burden of those people who are unable to pay the higher prices. The current system operates in the interests of well connected gas consumers and supports the poor. The IMF will provide an opportunity for Ukraine to make some of these changes and address some of these reforms. It also includes price liberalization to market levels by 2012. This reform will clearly take political will. The Deputy Prime-Minister has addressed the importance of political will in attacking all kinds of reforms. Political reforms are difficult to make, politically challenging to make, and so it is so important for the President and the Prime Minister and the Rada to be working together on these reforms. Unity will be important. The investment climate is important. For exploration of production of hard carbonates it leaves something to be desired. If natural resource endowment with the only relevant factor, Ukraine would be able to produce significantly greater qualities /quantities of oil and gas than it does today.

There are people in this room who have told us that the resources in the Black Sea are comparable to the Caspian Sea. But they have not been developed. Significant improvement in the business climate is required to attract the investment of billions of dollars needed from international energy companies for serious development. Ukrainian energy legislation and regulation will need to be updated to correspond with norms found elsewhere around the Globe. The updated system will need to provide for fair access to geological data, for transparent decision-making processes, for longer licensing periods, the use of model contracts, and truly competitive tenders. In other words, almost all of today standard practices which will optimize for insiders and those paying for inside access would need to be replaced with practices that will attract much needed foreign investments and technologies to Ukraine’s various energy sectors including hydrocarbons, nuclear, electricity and alternative energy. If Ukraine decides to proceed with these reforms, the picture gets brighter. There is a bounded potential for improvement in Ukraine’s position. Friendly governments and international institutions can help with capacity building for effective policies execution. The political will for energy reform is in place. Not only Ukraine would be helping itself but also through the energy sector reform it would be making the single and the most important contribution that Ukraine can make to the security of Europe. Thank you very much.

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