Mykhailo Honchar, Director of Energy Programs, NOMOS Center, Ukraine

Dear friends,
What is the formula for improving relations between producer, transit and consumer countries – from upstream via midstream to downstream? There are four main components: strategic reserves + integrated infrastructure+ sources and routes diversification + transparency.

So, the first position: strategic reserves. Let us not forget that the EU, USA and Japan made themselves secure against problems related to possible use of oil weapon after 1973, when the well known events connected with Arabian oil embargo took place, by creating strategic reserves. The events of 2004-2007., connected to Russian-Ukrainian and Russian-Belarusian gas disputes, necessitate the creation of strategic gas reserves. It is not a new idea. In 2006, Martin Bartenstein, ex-Minister of Economy of Austria, suggested this option after the well-known conflict between Ukraine and Russia. But it is still being discussed. Moreover, the International Energy Agency is skeptical about this suggestion. They start explaining the difference between gas and oil and so on. Of course, developing strategic gas reserves is not a simple thing, but quite possible for implementation of such project. If you have gas reserves, you feel freer in case of some extraordinary situation. What advantages does Ukraine have? Ukraine’s advantages lie not only in the pipeline network with capacity of carrying 130 bln cubic meters of gas to EU annually; it’s main advantage is that Ukraine possesses the largest capacity gas storages in the world capable of ensuring continuous gas delivery to European consumers in different emergency situations. I will provide you with an example that is not good for Ukraine, but good for the EU. In 2007, there were two serious damages on the Urengoi-Pomary-Uzhgorod gas pipeline and two weeks were needed for eliminating the accident consequences. Nevertheless, EU did not feel any gas supply drop due the fact that there are gas storages in Ukraine and, in contrast to the European pipeline system, Ukraine’s pipeline system is well connected that enables us to change gas delivery directions.

And here we should start talking about the second component – integrated gas infrastructure. To my mind, Europe needs establishment of a European gas contour. It is full nonsense that the EU does not have it in spite of the high integration level; moreover, even it does not even exist within individual gas consumer countries.

Our Turkish colleague from the Botas Company was absolutely right questioning why Germany having enough financial resources has not realized any project aimed at receiving gas from North Africa. Instead, Germany implements one more project in cooperation with Russia - the North Stream, which obviously increases Germany’s dependence on gas supplies from Russian source.
Now we are reaching the third aspect – transparency. We may ask ourselves why Germany has chosen that approach but not the approach that is logically connected with possibilities of development of capabilities of its own gas sector, as Germany has all the possibilities for receiving gas from Norway, Russia and it would make perfect sense to target gas imports from North Africa. Here we come to the very interesting issue that was raised during our discussions many times. The question is how flows circulate. Not only gas flows. The gas flows circulate via pipelines. How do financial flows circulate? We should pay attention to the fact that when people talk about transparency problems, Ukraine is always mentioned with respect to this issue. That is only partial truth. The issue is that final result of gas traffic is a financial flow emerging at a European end of the pipeline. And here there are some interesting moments. As you all know, Ukraine consumes Turkmen gas. But if you think that Ukraine buys gas in Turkmenistan, you are mistaken, - Ukraine and Turkmenistan do not have any relations. Neither Ukraine buys gas in Russia. De jure, Ukraine buys gas in Switzerland, in Canton Zug, exactly where the RosUkrEnergo is registered. NaftoGas of Ukraine has a contract with RosUkrEnergo; by that contract, Ukraine buys Turkmen gas that is transported through Russian gas pipeline system to Ukraine and partially to the EU. And if you think that this scheme is unique and devised for Ukraine only, you are also mistaken. This scheme is actively cloned in the EU. Where is the office of the North Stream? - In Canton Zug, Switzerland. Where is the office of the South Stream? – In Canton Zug, Switzerland. Where is the office of Stockman Development? – In Canton Zug, Switzerland. You may just imagine how big these projects and the financial flows are. Why in Switzerland? Switzerland is a very interesting country; it is not an EU member. Neither Ukraine, nor Russia or Brussels, can control such companies in accordance with the existent legislation. And such companies are established with the aim of redistribution of financial flows in a non-transparent way. Mr.Nemtsov and Mr.Krutikhin have already talked about the amounts of money reaching the final contractors; and that is why this position of major “cash-maker” is needed in Russia. Thus, as long as these problems are not solved, it would be impossible to establish any system for relations improvement, especially, considering the fact that some groups do not want that. In this regard, the financial crisis is a bad thing, but it is good since it forced us to pay attention to the existence of the off-shore companies’, being part of the serious businesses and also partially causing the current crisis on the stock market. I would draw your attention to the absolutely reasonable suggestions made two weeks ago in Paris at the meeting of EU member-states’ financial representatives. President Sarkozi raised the problem of Switzerland, pointing out that a lot of answers to existing business questions are concentrated there. And first of all – to the questions existing in energy business, since high energy prices makes everyone sensitive to energy resource-related topics.
It is important to develop necessary system of measures, e.g., the European Parliament could play a key role for ensuring a higher transparency level by demanding more transparency from European energy concerns. You are, obviously, aware of the existing transparency initiatives such as “Publish what you pay”, “Publish what you spend”. However, they are not reacted to; these initiatives predominantly are only in the focus of different NGO activities, while the governments and big companies do not pay attention to them. The role of the International Energy Agency should be raised. And, finally, we should understand that there is no other way out but to conduct a dialogue on the newly-developed basis with improved existent instruments. Unfortunately, the prognosis is more pessimistic. If we think that because of the reduced oil prices the monopolist supplier would become more loyal, this is just a nice illusion. In this case, we should undertake special measures aimed at forced relations’ harmonization. Thank you.

Downloads