Geological studies suggest that the country of Ukraine has close to 1 trillion cubic meters of natural gas reserves. Significant reserves of coal have also been discovered in the country. Because domestic production remains very limited, Ukraine continues to be heavily dependent on other countries for its energy needs.

The price for natural gas imported into the country from Russia increased dramatically. By next year, the cost should reach European levels.

The disagreements of Ukraine’s government with Russia over the past several years resulted in the termination of gas supplies to the country on several occasions. The chief priority of Ukraine’s energy strategy is to reduce gas imports. The government is making plans to intensify domestic production – though to accomplish the task Ukraine would need to make big improvements in its current business climate.

The rising cost of gas led the country’s industry to become more energy-efficient and environmentally conscious. The same trend is not yet reflected in individual consumer use, since utility services have continued to receive subsidies from the state. According to 2007 data from the International Energy Agency, Ukraine’s energy subsidies for domestic consumers stood at USD 15 billion, with USD 10 billion earmarked for reducing the cost of gas for individuals. Since additional increases of gas prices are soon expected, the government is now lessening its support for the stabilization of domestic gas prices.

At the same time, energy demand in Ukraine dropped sharply since 1990 as a consequence of large-scale reduction of the size of the national economy following the disintegration of the Soviet Union. The consumption of oil decreased almost twofold compared to 1990 levels. Similar downward trends are noticeable for electricity use and the demand for coal.

Despite the low figures, Ukraine is considered to be among the most intensive energy-consumers. In 2007, Ukraine used more than two times as much energy over the size of its GDP than Germany. According to some analysts, Ukraine is using energy more intensively than either Russia or Belarus.

The International Energy Agency reported that a slight rise in energy efficiency could help Ukraine economize enough energy before the year 2030 so as to meet the annual energy demand of the United Kingdom.  

At the present time, the use of natural gas constitutes close to 40 percent of Ukraine’s energy consumption, placing the country at the 10th spot in terms of gas use worldwide.

Conservation efforts notwithstanding, the Ukrainian economy will stay one of the most intensive consumers energy-wise in the foreseeable future. The country’s reliance on Russian imports is not likely to be replaced in the medium term.  

Inadequate privatization of the energy sector continues to present problems for the coal and electric power industries. Ukrainian authorities always remained adamant about keeping the country’s coal mines operational, even though they were losing money. The electric power sector underwent considerable transformation throughout the past decade, allowing Ukraine’s generating companies to stay in business. Ukraine now exports a small percentage of electric power it produces, though the country is not connected to the European grid.

Oil and gas

Oil reserves in Ukraine total 395 million barrels and are found in the south-eastern region of the country. Gas reserves have been estimated at 1 trillion cubic meters. Production of oil and gas condensate in Ukraine was 4.2 million metric tons in 2008, 5 percentage points lower than in the previous year. Ukraine currently imports almost 80 percent of oil and 75 percent of natural gas that it uses.

The country of Ukraine serves as the major transit hub for most energy supplies going from Russia and the Caspian region to European countries. In 2008, 42.8 million metric tons of oil and 116.9 billion cubic meters of gas crossed the territory of Ukraine on the way to Europe. The pipelines are in great need of repair and upgrade, as the age of some transportation systems is estimated to be 20-30 years.

The share of natural gas of the total energy resources used in Ukraine according to Statistical Review of World Energy was 43 percent in 2007, while the share of oil made up only 11 percent. In 2008, consumption of oil in the country reached 347 600 barrels a day. According to EIA, Ukraine imported approximately 267 000 barrels per day of crude oil in 2006.

The statistics of gas consumption in Ukraine change significantly depending on the source used. The general trend is nevertheless reflected in the various indicators for measuring gas use in the country – Ukraine’s consumption of natural gas has continued to decrease since 2006. Lowering gas consumption rates evidence Ukrainian industry’s efforts to modernize and become more efficient. For example, the steel industry, most usually linked to high gas usage, has recently started significant upgrade activities. In 2006, the industry’s share in total gas consumption was 40 percent. Power-generation companies used 10 percent, while the remaining 50 percent went to individual users, regional utilities, and other public consumers. In the industrial segment, the metallurgy sector used 50 percent of the gas, with the chemical sector taking a close second place at 40 percent.

As the most recent data provided by the Ministry of Fuel and Energy show, gas consumption in the country went down by 5 percent in 2008, dropping to 66.3 billion cubic meters. The decline in gas use was partly precipitated by the economic downturn that began in September of 2008. By December of 2008, according to the Ministry, consumption of natural gas was 21 percent below its levels for the same period of 2007.

Downward demand dynamics in industrial and home use are anticipated to persist throughout 2009 and even 2010. The drop in gas consumption in Ukraine in 2009 is likely to reach 15 percent. The situation is exacerbated by the terms of an IMF loan stipulation providing for the increase of internal gas price to import-cost levels by the year 2012, to which Ukraine’s government agreed. The cost of imported natural gas is also expected to go up during this timeframe.

In dollar figures, Ukraine is an insignificant exporter of hydrocarbons. Last year, the country’s exports of natural gas brought in USD 2.1 million, while gas exports stood at USD 9.5 billion. For oil, the numbers were USD 7.6 million and USD 4.5 billion respectively.

Ukraine’s efforts at domestic oil production are meager. In 2008, only 3.1 million metric tons of crude oil were recovered in Ukraine, a figure that is 6 percent lower than the results for 2007. Even while Ukraine inherited from the Soviet times the second-largest refining capacity from all the countries of the C.I.S., the refining sector suffered significantly following the nation’s independence. The current refining potential of Ukrainian plants is estimated at 880 thousand barrels per day. Still, refining activities dropped to remarkably low levels over the course of the first decade following independence. At independence, Ukraine refined close to 60 million metric tons of oil products a year. The numbers ten years after independence were well below the 10-million-tons mark. Although output spiked briefly in 2003 and 2004 following massive investment activities by Russian and Kazakh refinery operators, reaching the levels of 20 million tons, the processing of petroleum products decreased again to 14 million tons by 2007. The negative trends in refining activity are a consequence of pricing and ownership disputes between Ukraine’s government and the Russian owners of the country’s refineries.

Even though the processing of crude oil in the country rose to 2.6 million tons in the first quarter of 2009, reflecting a 29-percent rise compared to the previous year, the increase is almost entirely attributable to the launching of refining activities at the Nadvirna refinery, which had not been operational in the past.

Ukraine’s Soviet-era refineries generally lack advanced processing mechanisms necessary for producing fuel that conforms to European standards. Light-sulfur product output is still low. On the international arena, Ukraine’s oil refining sector is not in a position to compete even with the refineries in Belarus or Lithuania.

Gas production declined in Ukraine during 2008, slipping down to 19.8 billion cubic meters.

Supplying gas to Ukraine has been problematic in the last few years. In contrast to its multi-year contracts with most clients in other European countries, Gazprom negotiates new agreements with Ukraine every year. The subjects of these bargaining talks not only include the cost of gas delivered to Ukraine, but also the transit cost Gazprom pays for shipping its product across the country – nearly four fifth of Gazprom’s exports of natural gas to Europe go through Ukraine. Additional factors for consideration include the debts of the Ukrainian side, as well as the interests of Russia to receive ownership of Ukraine’s pipeline network.

Another important set of differences between Ukraine and Russia is related to the intermediary position of RosUkrEnergo, a company that is controlled by Gazprom and two Ukrainian businessmen.     

The price for natural gas deliveries to Ukraine increased by almost 100 percent in 2006, reaching USD 95 per 1 000 cubic meters. In 2007 the price escalated to USD 130 and in 2008 to USD 179.50. 

Contract negotiation for gas supplies in 2009 also resulted in significant conflicts. The deterioration of the economic situation in both Ukraine and Russia had a definitive impact on the course of dealing between the countries. At the end of 2008, Russia claimed that Ukraine’s debt for past gas supplies reached USD 600 million, while the Ukrainian side denied the existence of any indebtedness. When the sides failed to reach an agreement, gas supplies to Ukraine were completely shut down.

In order to revive the negotiations, European Union authorities intervened in the talks in January of 2009. On January 19, Ukraine’s Prime Minister Yuliya Tymoshenko met with Russia’s Prime Minister Vladmir Putin, and the two state leaders agreed on a solution to the crisis. Ukraine would have a 20-percent discount of the European rates for 2009, while Russia would similarly enjoy a lower transit fee before having to pay the market price in 2010. RosUkrEnergo was also removed from the energy relationship between the countries.  

Even though gas supplies were restored shortly after the leaders established consensus, the Ukrainian side soon found the conditions of the deal unsustainable, and began to push for renegotiation of the agreement.

The gas conflict with Russia also gave grounds for Ukraine’s internal political fighting. Within the framework of the January 19, 2009 agreement, Ukraine’s Naftogaz decided to settle a USD 1.7 billion indebtedness of RosUkrEnergo to Gazprom. In order to compensate for the loss, Minister Tymoshenko seized the gas kept in an 11-billion-cubic-meter storage by RosUkrEnergo. The government claimed that the gas supplies were levied against in accordance with the law and that they were necessary for Naftogaz to remain solvent. 

Ukraine’s customs service, lead by Valery Khoroshovsky who was connected through business relationships to the owners of Ros-UkrEnergo made efforts to prevent Yuliya Tymoshenko’s attempts to seize the gas. When Tymoshenko fired Khoroshovsky, he was appointed by her political opponent President Viktor Yushchenko as the head of Ukraine’s Security Service. In March, the Security Service conducted a raid of Naftogaz headquarters, purportedly looking for agreements that Tymoshenko and Putin signed in January.    

The agreements signed in January present a series of concerns for the Ukrainian side. Import volumes are the primary issue, at least short term. The delivery schedule provides that Ukraine’s imports of gas should be 5 billion cubic meters in quarter one of 2009, 10.5 billion cubic meters in quarter two, 12 billion cubic meters in quarter three, and 12.5 billion cubic meters in quarter four. In actuality, during the first quarter, Naftogaz imported only 2.5 billion cubic meters.

Ukraine’s consumption of natural gas has fallen significantly below last year’s figures. Gas use was 25 percent down in January on year-on-year basis. According to Naftogaz estimates made in March, consumption during the current year would be 55.9 billion cubic meters. An optimistic figure given for domestic production is currently 20.6 billion cubic meters, making it necessary for the country to import close to 33 billion cubic meters of natural gas.

Ukraine began 2009 with 17 billion cubic meters of gas placed in storage. Another 11 billion cubic meters in storage was seized from RosUkrEnergo. Minister Tymoshenko set the target storage reserves for the end of 2009 at 19.5 billion cubic meters.

Another problem with the agreement is that transit volumes of Russian gas through the territory of Ukraine did not reach the levels specified in the January agreement. Gazprom planned to export 120 billion cubic meters through Ukraine’s pipeline network in 2009. At the same time, only 16.4 billion cubic meters of natural gas was exported in the first quarter of 2009. No official sanctions for reduced transit levels are provided for in the contract between Naftogaz and Gazprom.

The immediate ramifications of lower transits for Ukraine include substantially reduced revenues. The current transportation charge is USD 1.70 per 1 000 cubic meters over 100 kilometers, but only a portion of these funds were to be paid in cash. Naftogaz was to collect only USD 500 million in actual funds, since Ukraine agreed to provide transit services to compensate for its gas debts. In the current market situation, it does not seem likely that Gazprom would use as much transit services to reach cash repayment levels.

Coal

Ukraine’s reserves of coal have been estimated at 34 billion tons in 2007, placing the country at the seventh spot in the world. The sector is experiencing significant problems as a result of continued government subsidies to unprofitable mines. The losses of the industry reached USD 816 million last year, according to the Coal Ministry. Almost all of these losses were compensated by the government. For the current year, the losses are expected to be more than twice the level of 2008. Thanks to state support, the coal sector has a large worker-base of almost half a million people.

While the demand for energy will decrease greatly with the onset of the crisis, the use of coal is likely to increase in relation to other forms of fuels, prompted largely by higher gas prices. The goals of modernizing the metallurgy industry include the gradual shift to the use of coal-burning equipment.

Still, compared to the Soviet period, coal production decreased remarkably. While production totaled nearly 220 million tons annually in the 1970s, in 2008, the figure was only 77.7 million tons. In 2008, coking coal constituted a little over 30 percent of production, with thermal coal making up the other portion of the recovered supplies. In quarter one of 2009, production fell 12.5 percent as a consequence of reduced demand.

The country has not constructed any new coal mines following independence. Safety conditions are very poor at Ukraine’s 190-some coal mines still in operation, with death rates second only to Chinese statistics. State-owned mines, accounting for close to 57 percent of production, operate with gross inefficiency. Privatization efforts have not been successful, and the ambitious production targets set by Ukraine’s political leaders were not met. Viktor Yanukovych, for instance, put in place a program for production to rise to 100 million tons by 2011 and 130 million tons by 2030. The development of methane reserves was also made a priority. Yuliya Tymoshenko’s government made efforts to initiate a large-scale privatization program, but by the economic crisis exacerbated the problems, as the state is planning to renationalize the coal mines.

Electricity

The power-generation sector is plagued by the poor operating conditions of nuclear plants and thermal generators. The lack of adequate investments has stymied privatization. Most of the facilities still remain under state ownership. Stock of electricity-generating companies was auctioned off in 1998 and 2001. The government’s plan is to sell the stock of five state-run electric utility companies in the current year.

The sector is currently plagued by heavy transmission losses of almost 20 percent. Payment problems have been lessened to a great degree in the past decade.

Electricity use began to rise in 2001 at a rate of 2.8 percent. Growth continued throughout the first half of 2008, falling abruptly as a result of the economic problems. 

Rising gas prices also made an impact on electricity use. The shift to electric energy for commercial and residential heating is in the plans, although it is not likely to happen in the near future.

The exports of electric energy are still very low. Greater integration of the country’s grid with the Europe-wide network would open new opportunities in this area. The export markets for Ukraine’s electricity are now Hungary, Moldova, Romania, and Slovakia. Poland, Russia, and Belarus no longer have demand for Ukraine’s electricity because export prices are higher than what the utilities in those nations charge on the domestic market.

Electricity exports went down by 14.5 percent in 2008 to the level of 7.9 billion kilowatt hours. In the first quarter of 2009, exports fell another 48 percent.

Atomic power

Ukraine’s nuclear power plants are supervised by the state-owned company Energoatom. The capacity of Ukraine’s 15 water nuclear reactors is 13 gw. Capacity increased by 2 gw in 2004, after the launch of the Khmelnytsky and Rivne plants. The building of these two reactors was started during the Soviet period. The Chernobyl reactor was permanently shut down in 2000.

During the previous year, 89.9 billion kilowatt hours of electricity was generated by nuclear plants. The government’s plan to increase the capacity of nuclear generation involves the construction of two new reactors with a capacity of 1.9 gw.

Nuclear fuel in Ukraine is imported from Russia. The World Nuclear Association estimated that the country imported 1974 tons of uranium fuel.

Renewable energy

The use of alternative energy is small in Ukraine. Hydropower accounted for only 2 percent of the country’s energy use in 2007, and is now on the rise. The use of biomass fuels is also increasing, particularly in agricultural regions.

Since the government had not made efforts to address environmental problems systematically, the situation is not changing quickly. Laws enacted in 2001 are targeted at providing incentives for investing in alternative fuel sectors – solar power, geothermal energy, and wind-generated energy. The Kyoto Protocol was ratified by Ukraine in 2004. However, it was not until the end of 2007 that the country could begin to implement it. Emissions in Ukraine continue to present great problems. The estimates by the World Energy Outlook for 2008 suggest that Ukraine could reduce carbon emission per each ton of steel produced by nearly 700 kilograms. The global average reduction potential is 300 kilograms.