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How Shah-Deniz is changing the equation (6/9)

I resume my series on the fall-out from the discovery of vast natural gas resources at the Shah-Deniz deposit, located off the coast of Azerbaijan. That discovery put into question the Trans-Caspian Gas Pipeline (TCGP) from Turkmenistan to Turkey, though this project has recently been re-endorsed by Ashgabat. I will cover the latter development in a future column. For the present, however, I wish to focus on the neglected Turkmenistan-Ukraine-Russia energy triangle and discuss how TCGP politics have contributed to a political battle among elites in Kyiv.

Elite Conflict in Ukraine

In late August, Oleksandr Tymoshenko, the husband of Deputy Prime Minister Yuliya Tymoshenko and currently a board member of United Energy Systems of Ukraine (UESU), was arrested on charges of embezzlement unrelated to the energy sector and dating back to the early 1990s.

Leaders of the Fatherland Party in Ukraine have asserted that the arrest amounts to intimidation and provocation by entrenched interests, directed against reforms that the government of Prime Minister Viktor Yushchenko has been trying to implement. They have called it "hostage-taking," and Yuliya Tymoshenko has compared this use of prosecutorial power to the techniques of Stalinist repression in the 1930s.

Yuliya Tymoshenko herself headed UESU from 1995 to 1997, before entering parliament and then becoming deputy prime minister. Since entering the government, she has sought further to monetise the country's energy market and to increase controls over cash flows. Early this year, she accused the state oil and gas concern Naftogaz Ukrayiny of stealing Russian gas by siphoning it out of Russian pipeline. She also declared that the country's net debt for gas amounted at that time to $1.7 billion, or more than twice the amount Naftogaz Ukrayiny had claimed.

Until very recently, the Ukrainian presidential power has denied that siphoning of the sort described by Yuliya Tymoshenko has ever occurred. However, theissue broke out spectacularly into the open in mid-August, when President Leonid Kuchma told that gas thefts were being carried out on the order of Ukraine's government (which can only mean the prime minister and his deputies, presumably including Yuliya Tymoshenko).

Addressing Ukraine's Gas Debt to Russia

Since then, the debt admitted by Naftogaz Ukrayiny has risen to $1.4 billion. The Russian side, meanwhile, is claiming more than $2 billion, including fines for late payments. The numbers will likely continue to rise.

Kyiv has not yet secured the nearly 20 billion cubic meters (bcm) of gas it will need by the end of this year for heating and power generation during the winter. Kuchma's statement in mid-August has led expert Russian opinion to conclude that the amount of gas siphoned by Ukraine may double, to more than 2 bcm per year (bcm/y) or more. (The president contended in his interview that this is a small amount in view of the 130 bcm of Russian gas annually transported through the Ukrainian pipeline system.)

Yuliya Tymoshenko subsequently announced that the Russian government had barred Itera, a Russian gas transport company with close ties to Gazprom, from delivering any gas at all to Ukraine and declared the price, upon indefinite resumption, to be $103 per thousand cubic meters. Yushchenko thereupon suggested in mid-August that parts of Ukraine's gas transportation network might be sold off or given to Russia as payment for the Ukrainian gas debt to Russia. (EBRD consultants have assigned this network a market value of $26 billion.)

However, a few days later the prime minister's press secretary asserted that ownership of Ukraine's gas transport system was not up for discussion. At the same time, a report circulated to the effect that what Yushchenko really meant to do was open the way for Russian interests to manage at least a part of the Ukrainian network, but without assuming ownership of the network. This would be in line with Yuliya Tymoshenko's policy of monetising energy supply and services in Ukraine, the better to control illegal transfers.

Turkmenistan's Role and the TCGP

What has all this to do with the TCGP? Recall that in August, Yuliya Tymoshenko visited Ashgabat and concluded a preliminary understanding on Ukrainian imports of Turkmenistani gas. This was immediately denounced by President Kuchma, who insisted that only the presidents of the two countries could arrive at such an agreement. This is a reflection of the institutionalised conflict over prerogatives between president and prime minister that has characterised Ukrainian politics since the early 1990s.

Yuliya Tymoshenko's discussion in Ashgabat of a TCGP that would go not to Turkey but to Ukraine was a means of seeking to pressure Russia on the gas debt problem. Yet the idea is not out of the question. International energy companies have been looking into the prospects for routing the TCGP through Ukraine since the original project faltered earlier this year. Shell has already stated that it was able to reduce the projected cost of constructing the pipeline significantly by arranging for Ukrainian metallurgical enterprises to fabricate pipe for the TCGP.

Yet the same vested interests in the Ukrainian energy sector that do not favor Yuliya Tymoshenko's policy of monetizing resource flows cannot favor a TCGP that terminates in Ukraine rather than in Turkey. The reason for this is that such a project would attract international attention and create demands for greater transparency in the accounting and business methods that now prevail in Ukraine, where important sectors of the national economy have still not successfully implemented reform.

Conclusion and Prospect

President Kuchma is expected to visit Ashgabat in early September to discuss the future of Turkmenistani gas deliveries to Ukraine. It is to be presumed that the route of such deliveries (via Russia or a new TCGP) will also be discussed. The results of his trip will merit attention as having particular significance for the evolution of the Caspian energy pipeline network.

For, almost simultaneously with the eruption of these events in Ukraine (and also independently of them), President Niyazov seems finally to have realised, that if he does not build a TCGP to somewhere, he will be left with only one buyer, Gazprom, which would then be in a position to dictate a price. And that has been his problem for the last 10 years.

Copyright © Robert M. Cutler unless otherwise noted.
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This Web-based compilation: Copyright © Robert M. Cutler
URL:  http://www.robertcutler.org/blog/2000/09/how_shahdeniz_is_changing_the_6.html
First published in FSU Oil & Gas Monitor, No. 98 (5 September 2000): 6–8.

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This page contains a single entry from the blog posted on September 5, 2000 6:59 PM.

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