nationa security & defence 2009 no. 6

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t o t h e r e a d e rTbis issue of tbe Raz:umkov Centre magarine carries tbe results of another stage of the

permanent project" Ukraine's Energy Security", initiated il l 200 1witb drafting tbe Concept of tbeState Energy Policy of Ukraine tbrougb 2020, and was prepared for tbe Round-table"Diversification projects / : / 1 . Ukraine's energy sector: state, proliems and ways of achievement"arranged Q y the Centre with assistance from the Committee ou Fuel and Energy Complex, NuclearPolicy and Nuclear Safety of tbe verkbovna Rada of Ukraine.

Ukraine for many years formulated in documents of d~ffere71t level - from tbe Law"On Fundamentals of Nati-onal Security of Ukraine" to tbe Energy Stmtegy tbrougb 2030 - itsintention to diversify sources and routes of supply of energy resources, to reduce energydependence on tbe Russian Federation. Meanw/Jile, those issues have caused beated discussion inUkraine itself, wbicb undermined implementation of tbe relevant projects.

Diversification projects are also affected by tb e current aggravation of political confrontationat bome on tbe eve of the presidential elections - mutual accusations of the suprelne Ukrainianleadership of disruption of diversification projects, Tbis greatly impairs the effectiveness o finternational cooperation of Ukraine with foreign governments and transnational companies,since it is very difficult to work with a partner wbicb all tbe time changes or delays its decisions.

71Jeurgen.cy of the problems offered for discussion stems, first, from tbe extreme importanceof reduction of Ukraine's monopoly dependence on deliveries of Russian bydrocarbons and freshnuclear fuel, second, from hindrance of implementation. of diversification projects ill tbe energysector due to tbe uncertainty of further steps all that path and opposition oftbe pro-Russian lobbyin Ukraine. ,

Tbe Committee all Fuel and Energy Sector and tbe Verkbovna Rada in general should, tbougbpassage of relevant legislative acts, promote implementation of tbe projects witb: allocation offunds for their performance, extension of some economic preferences, control of observance of tbenuclear and environmental l eg is la ti on - since it deals with posstble construction of uuclear energyfacilities on the territory of this country.

Hen.ce, furtber implementation of diversification projects in Ukraine will require joint andcoordinated efforts of tbe President, tbe Parliament, tbe Government, the pr.dilic, experts.representatives of all concerned ministries and agencies, state and commercial structures dealingwith tbe fuel and energy sector.

Rarumkov Centre more than OIue addressed diversification of sources. and ralites of energyresources supply to Ukraine. Compared to early 2000s, now, Ukraine's energy dependence on tbeRussian Federation deteriorated and reached 100%, while in the previous years, there were directagreements of su.pply of bydrocarbons from Turkmenistan, Kazakbstan and Uzbekistan. However.tbe current stage 'Of implementation of diversification projects witnesses stall in an domains:uncertainty in tbe oil, marking time in tbe gas, and delay of decision-making ill tbe nuclear sector.Tbis situation is fraught with problems, to say the least, and requires detailed expert analysis andwide expert discussion, to set out tbe prospects and ways of implementation of those projects.

T1JeAnalytical Report pudisbed in this magarine, on tbe basis of analysis of principles fordiversification of routes and sources of energy resources supply to tbe EU and Russia, the currentstate of Ukrainian projects, reasons for the delay of tbeir implementation, proposes specificmeasures and lines of attainment of the goal of diversification in Ukraine. To be sure, promotion~ of tbose projects is imposside witbout solution of problem issues in tbe fuel and ene'KY sector _reformation of the 011-refilu:ngindustry and tbe entire oil and gas sector, decision 011 the scale ofcreation of elements of tbe nuclear fuel cycle and. ways of further development of nuclear powerengineering and Ukraine's tbe fuel and energy sector as a whole.

Diversification projects are transnational, tbeir implementation will require internationalcooperation, employment of huge domestic funds and foreign investments, import of advancedtecbnologies. So, diversification must be paid for, it requires an extremely tougb approach to theassessment of two key items - cost and effectiveness.

It is no secret that diversification projects are intended to mitigate monopoly dependence ofUkraine on supply of energy resources from tbe Russian Federation. It is similarly clear tbatirrespective of tbe time and scale of implementation of tbose projects, Russia will strategicallyremain tbe main partner for Ukraine in the energy sector.

We hope that tbe materials of the report and presented expert opinions will contribute toinformed and wide pulJlic discussion of tbe touched problems and presented proposals. Sucbdiscussion will encourage tbe estadisbmen; of the national diversification policy and concretesteps for furtber implementation of diversif ication projects in tbe energy sector.


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D ir ec to r G e n e ra lEdi tor - in-ChiefL a yo u t a n d d e sig n

Ana t oJi y RachokYe v he n Shu lh aA l e xande r Mos ka lenk oO l eks and r Shap t a laTechn i ca l & compute rsupport Vo lodym yr K ekuh

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Pho tos :U NIA N- co ve rht tp l /www.energy land . in fo / - p. 64

Razumkov Cen t re , .2009Th e pro jec t wa s I m plem e nt ed t hr ou g h s u pp o rt p ro V id e d b y

th e N lllo na l E n do wme nt lo r D e mo cr ac y ( US A )

C O N T E N T SD IV E R S IF IC A T IO N P R O J E C T S I N U K R A I. N E 'S E N E R G Y S E C T O R :P R O G R E S S , . P R O B L E M S , A N D W A Y S O F IM P L E M E N T A T I O N(Analy t ica l report) .2

1. D IVERSIF IC ATIO N OF ENER GY SUPPLY IN TH E EUR OPEAN UN ION ,R US SIA AN D U KR AIN E: G EN ER AL A PP RO AC HE S,. IN TE NT IO NSA ND P RO BL EM S .3

2. D IV ER SIF IC AT IO N O F S OU RC ES O F N AT UR ALGAS SU P P LY IN EU RASIA , 10

3. D IV ER SIF IC AT IO N O F O IL D ELIV ER IE S T O U KR AIN E:TOPICALITY , PROBLEMS, W AYS OF SOLUTION 26

4. D IV ER SIF IC AT IO N O F N UC LE AR F UE L S UP PLYTO UKRAINIAN NPPs 38

5. CONCLUSIONS AND PROPOSALS 50

A R T I C L E SD IV ER SIF IC AT IO N O F O IL S UP PLY T O U KR AIN EM ykh ay lo H ON CH AR 54

D IVER SIF ICATION O F SOU RCES AND R OU TES O F GAS SUPPLY :TH E C HOICE FO R EU ROPE AN D U KR AINEL eon id U NIH OV SK YI, V olod ym yr C HA ST UK HIN ,O le ks an dr L AK TIO N O V, S erh iy F E DO R EN KO 59

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Uraine, s.e . king to back fU.u.re .sustainable development of the national economy Wit.henergy resources,is interested in their reliable deliveries. Since large volumes of energy resources are imported fromone country (or through the territory of one country) - RUSSia,Ukraine logically and reasonably tries todiversity their sources and inthat way minimise risks for its energy security, including political ones.The plans 10 diversify sources of energy supply, first of all, to reduce energy dependence on the Russian

Federation, for years have been declared in official documents of different levels (e.g., the Energy Strategy ofUkraine through 2030). Meanwhile, those questions caused most acute discussions in the Ukrainian politicalcommunity and in society, which hindered implementation of diversification projects.The current stage of such projects' development bears traits endangering their implementation. First,the global economic crisis that substantially complicated normal functioning of the Ukrainian economy alsostrongly affected operation of the national energy sector: in the conditions of foreign credits shortage andreduction of budget allocations on specific energy projects and the energy sector as a whole, investments inthe energy sector go down, hindering its development. So, the global economic crisis adjusts plans that evenbefore were not zealously implemented.Second, another "gas war" (January 2009) again complicated the uneasy relations of Ukraine with itsstrategic partner in the energy sector - Russia. And any economically unsound decisions may not onlydestabilise supply of energy resources but lead to their cut.Third, agg.ravation of home political confrontation on the eve of the presidential elections, unfortunately,

extends to diversification projects in the energy sector. This greatly undermines the effectiveness of Ukraine'sinternational cooperation with foreign governments and transnational companies, since diversification projectsareinternational,their impl.ementation requires huge investments and import of advanced technologi.es.An economic choice of diversification projects should make that area of the energy sector reform thecore of Ukraine's energy strategy, concentrate funds on priority directions of development, cease excessivepoliticisation of that issue in society, making those projects nation-wide. At the same time, it is clear thatirrespective of the diversification projects implementation time, Russia will remain the main partner for Ukrainein the energy sector in the long run.The pause in the "race" of international diversification projects caused by the global economic crisisenables Ukraine and its partners in implementation of said projects to defer for some time, without particularlosses, passage of final decisions lor all-round analysis of the goals they face and search of the mosteffective and acceptable for all actors ways of their attainment.

The analytical report consists of five sections.Section one analyses the energy resources supply diversification principles in the EU and Russia, and outl.ines therelevant tasks for the Ukrainian energy sector.Section two reviews issues of diversification of sources of natural gas supply to Ukraine in the context of new gaspipelines plans emerging on the European gas market.

Section three analyses the prospects of implementation of the oil supply diversification project using the Odesa-Brodyoil pipeline system for transportation of Caspian oil to European countries.Section four examines issues of diversification of nuclear fuel supply for Ukrainian NPPs and construction of a plantfor nuclear fuel fabrication in Ukraine.Sect;on five presents conclusions on the discussed issues on the basis of comparative analysis of the diversificationprojects progress in Ukraine's gas, oil and nuclear power engineering sectors, and proposes a set ofmeasures for their sooner implementation.

2 RAZUMKOV CENTRE NATIONAL SECURITY & DEFENCE No.6,2009


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III

Is

Diversification of sources and routes of energy resources supply is an issue that in the recent decadesattracts growing attention in Europe. Growth of demand for energy resources combined with exhaustionof domestic reserves in the Old World makes it strongly dependent on imports of energy resources ..The energybalance of European countries is dominated by hydrocarbons - natural gas and oil. Exactly those energyresources are most often hit by the crisis of delivery cuts, aggravated by the very shortlist of suppliers,

So, the task of diversification primarily applies to gas and oil supply, butimpiementation of plans of "nuclearrenaissance" may also actuaUse the problem of nuclear fuel sources diversification, if the problem is notresolved in another way.

In the Eurasian region, the EU~Russia~Ukraine triangle is decisive for the energy security. However, in thattriangle,. the EU and/or some member states, alongside with Ukraine (as importers and transit countries), onthe one hand, and Russia (as an exporter), on the other, have similar but often opposing interests.

Their common interests include: (1) enhancement of security and reliability of energy facilities operation ascomplex and hazardous technical systems; (2) a decrease of political influence on energy supply.

However, the consumer is primarily interested in market terms of supply of energy resources and, as aresult, acceptable prices, while the supplier seeks monopoly and no competition on the market. By contrast,the transit country is most of all interested in proceeds from transit of energy resources, while the exporter andconsumer - on the contrary, in reducing the transit cost.

In such situation, complicated by the far from constructive Ukraine-Russian relations in the energy sector,the problem of diversification of sources and routes of energy supply further aggravates for all parties to the"triangle" .

The EU is pursuing a log.ical and clear energy security policy backed on all levels that incorporates projectsof diversification of energy supply sources. Feature of Ukraine is the lack of political will, poor state governance,unpredictable policy. Russia demonstrates not only merger of political and economic motives of the energypolicy but repeated instances of pol.icy outbalancing economy. This is a negative factor complicating relationsin that triangle.

In some segments of the energy policy (gas, oil, nuclear energy), those relations bear specific traits attributedto particular kinds of energy resources and their criticality for the energy security of specific countries or theirunion - the EU.

This section briefly outlines the general approaches of the EU, Russia and Ukraine to diversification ofenergy supply, reviews problems of their interests coordination, sets tasks for the Ukrainian energy sector,proceeding from the current situation in Ukraine's energy relations with the EU and Russia in the context ofEurasian diversification trends.

R AZU M KO V C E N TR E N A T IO N A L S E C U R IT Y & D E FE N C E N o .6 , 2 0 0 9 3


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1.1 EUROPEAN UNIONThe EU is one of the biggest importers of energyresources in the world: in 2008, dependence of the EUon imports of coal reached 58%, hydrocarbons - 53.8%(Table "Consumption of energy resources by EU member

states, their net imports and dependence in 2008 "1) . Dueto the preval.ence of coal deposits, dependence on coalimport does not pose a problem for the energy security,but the situation with hydrocarbons is different.2 TheirConsumption of energy resources by EUmember states,their net Imports and dependence In 2008

No . E ll m embe r s ta te s G ross e ne rgy Ne t Im po rts~ Ene rg ycnnsempuen, dependence .m il li on I on s o f o lt %'"equ lva Ient'1 Cyprus 2. 6 3. 0 10002 Mal ta 0. 9 0 ,9 100 ,03 Luxembou r g 4.7 4, 7 98.94 Ire land 1S .5 14 .2 90 ,95 I ta ly 186 .1 164 .6 86,86 Portuga l 25 .3 21 .6 83 17 Spa in 143 .9 123 .8 81 .48 Belg ium 60.4 53.5 77 99 Austria 34 .1 24 .9 72.9to G reece 31.5 24 .9 71.911 Latvia 46 3.2 65 .712 l I thuaJ1ia 8, 4 5 .5 64 .013 Slovak ia 18.8 12 .0 54.014 Hunga r y 27,8 17.3 62 .515 Ge rmany 349 ,0 215.5 61 .316 F in land 37.8 20.9 54.617 EU-27 1825.2 1010.1 53 .818 Sloven ia 7, 3 3 .B 52.119 France 273,1 141.7 51.420 Bulgar ia 20 .5 9.5 46.221 Nether land 's 80 ,5 37.2 38 .02. 2 Sweden 50 8 19.8 37.423 Eston ia 5, 4 19 33.524 Rom an ia 40 ,9 11.9 29.125 C zech R epub lic 46 .2 12 .9 28.02 .6 Great Br i ta in 229.5 49.3 21.327 Poland 98 3 19.6 19 .928 D e n m a r k 20,9 8 ,1 36.8 . . . .T he la rges t de live ries o f o il a nd o f gas w ere trom Russ ia (33% of o il and40 % of ga s im po rts ) an d N orw ay (1 6% a nd 23 %, resp ec tive ly ). D e fined as the agg regate o f dom estic p roduc tion and im po rts le ssexpor ts . N et im ports : im po rts m in us exp ort.*. * Im p or ts d iv id ed b y g ro ss c on su m pt io n. ' D enm ark is a ne t ex po rte r o f en erg y re sou rces .

main suppliers to the EU in the past decade have beenRussia and Norway.'Meanwhile, deliveries from Russia are becomingever more questionable in p a rt i c ul ar, due to regularRussian-Ukrainian gnd Russian-Belarusian "gas wars".

Such situation undermines energy security, so, the EU isinsistently pursuing a diversification policy on sources androutes of supply of hydrocarbons (primarily; gas), reducingits dependence, first of all, on Russia.For instance, in 2008, the European Commissionproposed to the EU its Energy Security and SolidarityAction Plan, envisaging five lines of energy securityguarantee, topped by diversification of energy supplies."Diversification is viewed as a common task for allCommunity members, since solidarity in the issue ofenergy security is a basic principle of the Unionmembership. Le, in the domain of diversification andwider - provision of energy security - the main principlesof the EU include,first, risk sharing and joint use of the

aggregate weight of the EU in international relations,which is much more effective, compared to the weight ofseparate member states.Second - a strategic approach to solution of energysecurity problems in t e rms of both integrity of the relevantmeasures and their long-term character. Such is the foresightof the ambitious EU strategy through 2020 (Strategy"20-20-20"/ that envisages, in particular, reduction ofenergy consumption by 20% by 2020. Nevertheless, thedecline of domestic extraction can be offset, and existingflows of energy supply can be partially substituted withothers only through long-term diversification projects.Third, rather a flexible approach to correlation ofpolitical and economic arguments at substantiation of the

choice of one or another diversification project.The feature of the EU (and the whole Eurasian marketof energy resources, where it is the largest consumer) isthe strong dynamic dependence of economic and politicalpriorities at different stages of diversification projects.Dependent on the criticality for energy security, politicalpriorities may dominate on all stages of a project, whenthe influence of tbe main political actors (both suppliersand consumers) is strong, or yield to economic priorities atthe stages of business plan development and conclusion ofcontracts, when market competition mechanisms begin tobe employed. Under such circumstances, energy securityrelies on policy foresight, political will proper stategovernance and good project management.Thus, the priority line in implementation of energysecurity enhancement plans in the E"U presumesdiversification of energy supplies, and preconditionsfor their implementation include solidarity of themember states and logical integrity of all energysecurity domains.

S ou rc e: E ne rg y D ep en de nc y. - Eu rope 's Ene rgy Po r t al , . h tt { JJ /www .ene rgy .e i J /#dependency2 T he E U ca lcu la te d th e w orld re serve s o f en erg y reso urce s a s o f J an ua ry 1 , 20 09: o il-1 65 tr illio n to ns ; ga s -1 74 ,4 36 tr illlo n C ll.m ; c031- 8 41 t rillio n to ns ;u ran ium - 18 .096 tons (ca lcu la ted as uran ium -235 ). U nde r the p resen lle ve l o f consum ptton , rese rves w ill be exhaus ted : o f o il- in O ctober, 2047 ; gas - inS epte mbe r, 2 06 8; coa l- in M ay, 2 14 0; u ra niu m - in O cto be r. 21 44. S ee : E uro pe 's E ne rgy P orta l. D ep le t ion , ht tpJ /www.energy .eu3 Fo r in s tance , in 2008 , the R uss ian share in the E U im ports o f o il m ade 33% , gas - 40% ; N orweg ian -16 % and 23% , respec tive ly .4 E U E ne rgy S ecu rity and S olida rity A ctio n P lan : Second S tra teg ic Energ y R ev iew . M EM OI08n03 . - B russe ls , N ovem be r 13 . 2008, http/ /ec.europa,eu.The o ther fou r line s w ere : im provem en t o f e x te rna l energy ties ; c rea tio n o f re se rves o f o il (p e tro leum p roduc ts ), ga s and m echan ism s o f c ris is se tt lem en t;enhancem en t 01 ene rgy e lfec liveness ; m ax im um use o f d om estic resou rces , -5 F urth erm ore , b y 2 020 , the E U p lan s to red uce d ischa rge o f g ree nh ou se g ase s ' by 2 0% an d to ra ise th e s ha re o f ren ew ab le en erg y so urce s in the en d co nsu mpn cnba lance to 20% . S ee : S ecuring your energy fu tu re : C om miss ion p resents energy secu rity , so lida rity and e ff ic ie nc y p roposa ls . - E UR OPA , Novem be r 13 ,2008 , h t tp f /eu ropa. eu

4 RAZUMKOV CENTRE NATIONAL SECURITY & DEFENCE No.6, 2009
http://httpj/www.energy.euhttp://httpj/www.energy.eu


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DIVERSIFICATION OF ENERGY SUPPLY IN THE EUROPEAN UNION, RUSSIA AND UKRAINE

Diversification in the gas sector. Issues of diversifica-tion in the gas sector are regimented by a document binding01 1 all EU members - Council Directive 2004/67IECconcerning measures to safeguard security of natural gassupply, listing diversification of sources and routes ofgas supply among the attainment tools of uninterruptedgas deliveries standards." In particular, the Directiverecommends diversification of gas supply throughconstruction of terminals for acceptance of liquefiednatural gas (LNG).

Meanwhile, neither the directive, nor any other EUdocument sets the required minimum number of sourcesandlor routes of supply. For supply to be reliable, it isdeem sufficient to have three sources of delivery.As one may see from Table "Balance of natural gasin EU member stales in 2008", in practice, not all EU

Balance of natural of gas In EU member states In 2008,BCM

countries have several sources. However, they seek toacquire them, in particular by building terminals for LNGadmission.The latest Russian-Ukrainian gas war (January 2009)made the European Commission to work out newdocuments on preventive and extraordinary measuresto secure gas supply to the EU, not approved yet.' Thedocuments provide that each EU country should establisha competent authority respon ible for formulation andimplementation, in particular of a response mechanismto emergency situations in gas supply, and the EuropeanCommission will have the right to announce an emergencysituation in gas supply, if at least one EU member statereports a decrease in daily imports (or growth of demand)of gas by lO%, or on a request of at least two EU memberstates. It also sets the risks assessmen t terrns for the security

- .~-=--Pr ima ry p r oduc ti on Impor ts Resou r ces ' S t oc k c h a .n g e '" Expor ts Gf()SS In land Ene rgy

consumpt ion ' " dependency . .. ..2007 2 008 2008/ 2007 2008 20071 2007 2DOS 2008/ 2007 2008 2007 200S 2008/ 2001 2008 200S/ 2007 20082 007% 2 008'1. 2007" '< ' 2 007% 2007 'Y .

Denmar k 10.92 1116 7 .6 9% 0 0 0.00 '/0 10.92 11.76 7 .69% 012 a SA 6.36 17 .78% 5, 4 5A 0 . 00% 100.00 '10 117.78'10Nether lands 73.2 81,&4 11.80% 24,67 23.57 -4 .0B '/o 97,87 105 .41 i.70% 0 0 53 4 57 .36 7 .42% 44 .47 48.05 8.04% -64.60% 70 .33%Cypr us 0 0 0.00% 0 0 0.00% 0 0 0.00% 0 0 0 a 0.00% 0 0 0.00% 0.00 '11> 0,00%Mal ta 0 0 0.00% 0 0 0.00% 0 0 0,00% a 0 a 0 0.00% a 0 0.00% 0.00% 0 .00%GreatBr i ta in e s s e 83.64 ~ l . (16% 3M 2 41.64 16 .14% 121.2 125.28 3.37% 0.'6 2 .76 12 .72 12 .48 1 .89% 109 ..o S 115 .56 5.94% 20.35% 25.23%Roman i a 12 .72 12 .46 -1,69% 5A 4 . 9 Q 9.76% 18.12 17 A .J.97% -0 .12 -1.32 0 0 0.00% 18 16.08 -10,67% 30.00% 30.60%EU-27 223,34 227.04 2% 43~78 457.64 5 % 658.13 684.68 4% 62 . 0.6 91.54 97 .2 6'10 5 7 2 . 1 1 3 588.08 3% 6 1 1 % 61%Poland 5.16 4 ,92 - - 4 , 6 5 % 11.04 12 .24 9.80% 16.2 17 .16 5 . 9 3 ' 1 ' . 0.36 -036 0 0 0,00% 16.56 16 .8 1.45'l ' , 66 .67% 72.86%Latv ia 0 0 0,00% 1.8 1.44 25 .00% 1.8 1.44 20.00 '10 0.12 0 .36 0 0 0,00% 1.92 1.8 -6 .2 5% 93,75% 80.0 .0%Germany 17 .15 15 .6 9.09% 95 .28 99.72 4 .45% 112 .44 115 ,32 2 .56% 2 .64 0.72 12 .96 13.56 4 . 6 3 0 / 0 102,12 102 ,48 0.35% B6.61 % 84,07%Aust r ia 2 .16 1 .8 16 .67% 10,92 11.5 2 5 .21% 13.08 13,32 1.83% -036 -O .4B 3.12 324 3.85% 9.6 9.6 0.00% 61.25% 86.25%Hunga r y 2.64 2 .76 4 .5 5% 11,4 13.44 15 .18% 14.04 16 .2 15 .38% 0.6 -0 .84 0,12 0.96 700.00% 14.52 14 .4 -0.83% 77.69% 86,67%I re land 0.6 0.6 O.OO~ 5.16 5.52 6 .5 2% 5 .76 6 , 1 2 - 625% 0 0 0 0 0.00% 5.76 6 .12 62 5% B9 .>8% 90,20%I taly 10.56 9.96 5 68% 80.76 83.88 3.72% 91.32 938-4 2.76% 1.44 1.08 O.H 03 150.00% 92,64 92.46 "0,18% B7.05% 90,40%Belg ium 0 0 0.00% 16.8 15 .7 2 6 .B 7% 16.8 15 . 7 2 -6,43'10 0 1,44 0 .0 0.00% 16,8 17.16 2 ,1 4% 1 00 .0 0% 91.61%Slovakia 0.14 0.12 -16 .67% 6.12 6 .17 0,78%' 6 . 26 6 .29 .0 .38'1, 0 0 .12 0,2 2 0,18 16 .6 7 '1 '. 6.,0.5 623 2 .98% 97 .62% 96.15%Li thuania 0 0 0,00% 3.% 3.41 16 .20% 3.96 3.41 1'394% -0.12 0.12 0 0 0.00% : 3 . 8 4 3.53 8.12% 103.13% 96.6 0%France 1,2 1.08 1 0.00% 5 2.0 B 53.28 2 .2 5% 53 .28 54 ,36 2.03% 0. 6 0,12 2 .76 1.44 -47 .S J% 51.12 53.04 3.76% 96.4 8% 97 .7 4%C z e c l J 0.24 0 . 24 0.00'10 9.36 10,32 9.30% 9.6 10.56 10.00% 0.24 -0 .12 0 .48 108 125 .00 '10 9.36 9,36 0.00% 94.87% 98.72%Republ i cBulgar ia 0_36 0.2 4 -33.33% 3.6 3 . 7 2 323% 3.96 3.96 0.00% -0.12 -0 .24 0 0 0.00% 3 1 1 4 3.72 -3 .12% 93. ;5% 100.00%Estonia 0 0 0 .00 '10 1 .02 0.96 -6 .25% 1.02 0,96 5 .88% 0 0 a 0 0 0 0% 1.02 0,96 - 5. 8B% 1 00 .0 0' 10 100,00 '10Luxembou r g 0 0 0 .00% 1 .S7 1,44 '9.17% 1,57 1.44 8.40% 0 0 0 0 0,00 '10 1.57 1.44 .fIA O',\. 100.00% 100.00 '/0Por tugat 0 0 0 .00% 5 .04 5 .5 2 8 .70 '10 5 .04 5 .5 2 9.5 2% 0.12 0 a 0 0.00 '1 '0 516 5 .5 2 6 .98% 97 .6 7% 100.00%Slovenia 0 0 0 0 0 ' 1 0 1.2 1.13 -6 .38% 1.2 1.13 6 .00% a 0 a 0 0.00% 12 1.13 6 .00% 100.00% 100,00%Fin land 0 0 0.00% 4.92 5 , 28 6 .82% 4.92 5.28 7.32% 0 0 0 0 0.00% 4.92 5,28 732% 100.00% 100.00%Sweden 0 a 0,00 '10 1.2 1.09 9,89% 1. 2 1.09 -9.00% 0 0 0 a 0.00% 1.2 1.09 -9,00% 100.00% 100,00%Spain 0 0 0.00% 42 47 .04 10.11% 42 47 .04 12.00'/0 IiA8 -048 0.24 0.24 0 0 0 ' 1 0 42,24 46 .32 9.66% 98.86% 10104 '10Greece 0 0 0.00% 4,56 4.68 2 ,56% 4 . 56 4.68 2.63 '10 -0,12 -0.12 0 0 0.00% 4.44 4 .56 2.70% 102.70% 102 .&3% R e s ou rc e s e q ua l t h e a g gr eg a te 0 1 e om es n c p ro d uc tio n a n d i mp o rt s . "+" r e du c ti o n o f r e se r ve s , " _ ,, i n cr e as e i n r e se r ve s .... G ro ss d om e stic c on su m ptio n is th e a gg re ga te o t d om e sn c p ro du ctio n, im p orts a nd c ha ng e o f r es erv es le ss e xp orts . E n e rg y d e pe n de n ce - 1 0 0'} 'o x (i m po rt s e x po rt )/ gr os s d om es ti c c o ns um pt io n . A n e ga ti ve le v el 01 e n er gy d e pe n de n ce is s p ec if ic o f c o un tr ie s w h e re e x po rt s e x ce e d im p o rt s.A p o si tiv e l ev e l o f e n er gy d e pe n de n ce , a b ov e 1 0 0% , m e a ns a n ln c re a sa 01 r es e rv e s i n t he p e ri od u n de r r ev ie w

6 C o un cil D ir ec tiv e 2 0 04 !6 7 1EC o f A p ril 2 6 , 2 0 04 , c on c er nin g m e a su re s t o s a fe g ua rd s ec u rity o f n a tu ra l g a s s up p ly . - E u rL e x, O ff ic ia l J o ur na l L 1 2 7, 29/0412 0 0 4 , 0 0 9 2- 0 09 6 .7 T he C o mm is sio n a do pts n ew ru le s to p re ve nt a nd d ea l w i ih g as s up ply c ris es , - E u ro pe , P r e s s Re le a s es . B r u ss e ls , J u ly 1 6 , 2 0 0 9 , ht tp . / leuropa.eu. I n c a seo f a p p ro v a l b y t he C o u n ci l 0 1 th e E U H e ad s 0 1 S ta te s a nd th e E ur op ea n P a rlia m en t, th e d oc um e nts a re to e nte r in to fo rc e o n M a rc h 3 1. 2 01 0.

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of gas supply, measures at actions coordination of all EUmembers in a crisis situation, etc.sSo, in th e short and middle run, the guarantee of energysecurity in the conditions of strong dependence 00 importscomes to prevention an d prompt settlement of crises inenergy supply observed today.Meanwhile, as we noted above, in the long run,large-scale infrastructural projects are considered andimplemented, envisaging fundamental changes among themain suppliers of energy resources (first of all, gas) to theCommunity member states.At that, the EU energy policy should concentrate onpromotion of competition on the European gas market andcreation of equal conditions for all gas supply projects.Economics is one of the main criteria for political supportof the EU for specific projects - they should be cost-effective. Only after the interested energy companiesassess the prospects of t r a n s p o r t a t i o n projects and a S S L U T I eall risks of their implementation tbe EU institutions maypartially fund their implementation (priority infrastructuralprojects on the EU level). Strict abidance by that positionmight bar further eastward expansion of the vital for theED 'abucco gas pipeline project - from Iran toAzerbaijanand further to Turkmenistan - in search of raw materials,that nevertheless remained questionable.To be sure, as the EU, possessing the funds, cansupport disputable from the viewpoint o f economy andavailability of raw materials projects, Russia, too, canuse funds of state energy companies for political projects.However, less rich countries (e.g. Ukraine, Georgia, theBaltic States) carmot effectively compete in the "race ofdiversification projects".Diversification in the oil sector. After the pricehock of 1973 on the oil market, the share of oil in the

world balance of primary energy, previously exceeding46%, steadily went d0W11and is now close to 39%. Evendespite the most optimistic scenarios of alternative kindsof energy development, oil is expected to retain iIs priorityimportance for the world power engineering till 2030although its share in the world balance will drop to 30%.9So oil deliveries reliability is treated by governments ofmost countries of the world short of own reserves as oneof the top energy security priorities.Among all large importers of oil, the EU is the mostdependent ou foreign sources, and that dependenceis growing to nearly 85 % in 2008.10 The problem ofdiversification of oil deliveries, although less acute thanof gas, still remains vital for the EU energy policy and issolved by conclusion of new contracts of oil supply andparticipation. in its production in otber countries.Noteworthy, the levels of oil delivery diversificationto the EU countries notably differ. While West Europeanstates, as a rule, get oil from not less than four sources,"each not exceeding 30% of consumption, Central Europeancountries are critically dependent OD Russian oil -60-100%, due to the following factors: their refineries (builtyet in the Soviet times) using Urals oiJ blend, the extended

oil pipeline system connecting those countries with oilfields in Western Siberia and th e Volga region, discoun tsenvisaged by long-term del ivery contracts, and attempts oftbe Russian authorities to keep Central European coun trieswithin their sphere of interests.An example of successful creation of an alternativeto deliveries of Russian oil is presented by the oilp i p e li n e I n go l st a d t-K ra l upy -L i t vi n o v built in tbe CzechRepublic in 1996, that connected Czech refineries withthe Transalpine oil pipeline and let the country get upto 10 million tons of oil a year from the MiddJe East,Caspian region and North Africa via the port of Trieste inthe Adriatic Sea. Resolute concerted efforts of the Czechauthorities seeking energy security seriously weakenedRussia's political influence on that country, whichstrategically largely offset commercial costs of the oilpipeline construction project.Hence, issues of oil sources diversification in theEU are not regimented by legal acts or solved by meansof elaboration of some priority projects list and its

implementation, as in the gas sector, due to the possibilityof oil delivery by tankers and railways, as well as bycreat ion of strategic reserves of oil and petroleum products,and the main factor - the existence of a developed globaloil market.Diversification in the nuclear sector. The worldnuclear energy sector is rather conservative and subject tointernational restrictions, since a great deal of its productsand equipment bas dual lise (besides power engineeringthey can be used toproduce nuclear weapons). Meanwhile,the world nuclear market witnesses emergence of n ewties that can seriously rearrange political and economiccooperation formed over decades. In one of the keysegments of that global market - supply of nuclearmaterials and nuclear fuel- the recent years have broughtimportant changes, first of all, a rise of tile Russian nuclearsector.In absence of a common EU legislation on diversifica-tion of sources of nuclear fuel, the EU member states(or, rather, national and transnational nuclear companies)mainly resort to regional diversification of sources ofraw uranium and uranium enrichment services, guidedby purely economic considerations and creation of acompetitive environment.Given the varied approaches of the EU member statesto nuclear power engineering and limited ability of theEU to influence the nuclear market Craw materials, fuel,technologies, equipment etc.), one may hardly expectthe emergence of a common policy in the nuclear powerengineering sector.Meanwhile, the EU protects its own market of nuclearmaterials. A few years after the USSR break-up - in June,1994 - it passed a document regimenting EU importsof nuclear materials. In particular, the quota of importsof uranium from Russia and the CIS states was limitedby 20% for enriched and 25% - for crude uranium. Thedocument titled the Corfu Declaration intended to defend

8 E uro pe an C om miss ion , E ne rg y. E urop ea n S tra teg ies . S eco nd S tra teg ic E ne rg y R ev ie w S ecu rin g o ur E ne rgy F utu re (fo llo wup ), Ju ly 2 00 9. I l t tp : / lec .europa .e u ie n er gy ls tr af eg le s !2 0 0 9! 20 0 9 _0 7 _ se r 2_ e n. ll tm9 W ord E ne rg y O ullo ok 20 08 .. B as ic p rov is ion s. - lE A, h t t p :/ /www .wo r ld ene rg you t /o o k . o r g /do c s /weo200B IWE0200B_esJuss i an . pd f10 C a lc ula te d b y R a zu m ko v C e ntra experts on th e b as is o f da ta o f B P S ta t is t ic al R ev ie w o f W orld E ne rg y, J un e 20 09 , h l lp : / Iwww.bp.com11 M ean ing p erm an en t s ou rce s o f su pp ly . T he re m ay a lso be v ar ia ble s ou rc es , c re ate d, a s a ru le , b y in te rm e dia ry c om p an ie s.

http://www.worldenergyout/ook.org/docs/weo200BIWE0200B_esJussian.pdfhttp://hllp/Iwww.bp.comhttp://hllp/Iwww.bp.comhttp://www.worldenergyout/ook.org/docs/weo200BIWE0200B_esJussian.pdf


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European producers first of all enriching companies,from foreign production. The share of European suppliersof enriched uranium in the EU should be not below80%. Since Russia possesses 40% of the world uraniumenrichment capacities, this restriction in the first placeapplies to Russian enriched uranium. According to somereports, the Declaration expired on December 1, 2007, andthere was no information of its extension."

Therefore, issues of diversification of nuclear fueldeliveries for NPPs are actually not addressed in the EUacquis, first of all, due to the operation specificity of theenergy sector's nuclear subsection."From the economic viewpoint, it is more beneficialto upgrade the existing energy facilities (e.g., pipelines)than to build new ones. However, the diversificationmust be paid for; The acceptable cost of diversificationis decided by governments and participants of theconcerned projects after the analysis of alJ possibleoptions and thorough feasibility study of everyspecific project. The world practice proves that the

economic factor not always prevails - sometimes,political expediency dominates. Anyway, the costof diversification projects is paid by citizens of themember states.1.2 DIVERSIFICATION APPROACHESIN RUSSIA'S ENERGY POLICY

Russia's diversification policy is of a point nature -concentrating on large-scale infrastructural projects - andbecomes systemic only in the issue of reduction or completebarring of transit countries , involvement in projects of newoil and gas pipelines. This primarily refers to the formerSoviet republics and Poland, with which Russia insistentlycurtails transit relations.InAugust, 2009, the Russian Government approved (ingeneral) a draft oftbe new Russian energy strategy through2030. The Strategy envisages implementation oflarge-scaleinfrastructural projects aimed at diversification of exportroutes and promotion of Russian energy resources at newmarkets. First of all, this refers to the oil pipeline systemEastern Siberia-Pacific, Baltic Pipeline System, Burgas-Alexandroupolis, and Trans-Caspian, ord Stream, SouthStream gas pipelines.In particular, Russia is evidently trying to keep theshare of primary energy resources in Russian exportsbelow 70% and simultaneously raise the weight of theeastern direction in exports of liquid hydrocarbons (oil andpetroleum products) from the current 6% to 22-25%, in

exports of gas ~ from 0 to !9-20%.'~Russia often views EU projects of energy supplysources diversification (for instance, the Nabucco gaspipeline project) as a threat to its energy security, and inresponse develops counter-projects for their disruption.Such intentions may be seen as an attempt to producethe impression of tough competition between Europe and

Asia for Russian energy resources (or trigger it). It i notthe first time that Russia resorts to this device. For instance,it actively pushes projects of Russian energy resourcessupply to China (Russian oil is already delivered there).However, promotion of the eastern direction in the newRussian strategy so far looks only as a threat.Such counter-projects include the Russian plans ofsupply of energy resources (first of all, gas) to the EUby new routes (bypassing some or all "unfriendly transitcountries"), and those supported by some EU states (e.g.,the South Stream project). At that, Russia tries to winpotential partners in the EU by large financial proceedsfrom gas transit, industrial orders, participation in profitsfrom sale of gas, etc.Finally, Russia is trying to concentrate all flows ofenergy resources from the CIS states on its territoryfor their further transportation by its pipeline systems(Gazprom's attempt to outbid Azeri gas is especiallyinteresting, given tbe exces of domestic and CentralAsian gas). Respectively, it strongly opposes any projects

of independent access of CIS states to the world energymarkets.The "race of diversification projects" betweenthe EU and Russia results in the growth of mutualmistrust. Meanwhile, first, the practical capabilities ofdiversification for both parties are more limited, in termsof resources (meaning both funds and energy deposits),than presented by officials and in public discussions.Second, in any case, the most of Russian oil and gaswill be supplied to the EU, while its dependence on theRussian oil is not critical.The uneasy relations between Russia and the EU intile energy sector are witne. sed by the official refusal ofthe Russian Federation from joining the Energy Charter

Treaty (BCT). As we know, yet in 2006 Russia's PresidentPut in openly said that joining the Energy Charter wasdisadvantageous for Russia, since it envisaged mutualaccess of the parties to the infrastructure of extraction andtransportation of energy resources.' 5Russia's non-accession to the BCT, inpatti cular, barredadequate solution of conflict situations arising at supplyand transit of energy resources. The impracticability of theEeT principles application was latest proven by another"gas war" of early 2009 between Russia and Ukraine.However, long-standing hopes that Russia would ratify theECT might keep the ED from harsh assessments of "oiland gas wars" it waged.Meanwhile, in April, 2009, Russia proposed to the

EU an alternative draft of an international agreementon energy - "Conceptual approach to a new legalframework of international cooperation in the energysector (goals and principles)". Even brief analysisof that project shows tbat it brings nothing new toapproaches to international energy cooperation. IS That iswhy representatives of the ED met the Russian initiativerather sceptically.12 S ee : S en ato rs se e e xte ns io n o f C orfu D ec la ra tio n in ad mis sib le . - R EG NU M N ew s A ge nc y, O cto be r 3 0. 2 00 7, ht tp : / /www. regnum. ru13 F or ins tan ce . the C orfu D ec la ra tion o f Ju ne 1 994 - ad op te d as a n in te rna l E U docum en t (no t pu blishe d) and ac tua lly in tend ed to res tric t expo rt 0 1 nuc l ea rm ate ria ls fro m R us sia to th e E U - is e xa min ed in s ec tio n 4 o f t his r ep o rt .14 R us sia 's G ove rn me nt a pp ro ve d d ra ft E ne rg y S tra te gy o f R us sia th ro ug h 2 03 0. - R osin ve st, A ug us t 2 7,2 00 9, I J I tpJ lwww. ros inves l . comlnews l58712115, R uss ia _ E U: D ip lom acy in th e zone o f ene rgy law vacuum . - FKNovos l i , Augu s t 1 t, 2009 , ht tp : / /www. fc in fo . ru / l l Jemes lbas i c lma/e r ia l sdoGumen l .asp? fo lder=4005&ma t lD : 22188116 C on ce ptu al a pp ro ac h to th e n e w le ga l fra me wo rk fo r in te rn atio na l c oo pe ra tio n in th e e ne rg y s ec to r (g oa ls a n d p rin cip le s). - O ff ic ia l w e b s it e o f th e R us sia nP r e s i d e n t , A pril 2 1, 2 00 9, h l tp i / k reml in . ru l texVdocS/2009 l041215303 .sh tml

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In response, at the May (2009) Russia-EU summit inKhabarovsk, Moscow decided to unilaterally put an end tothe discussion. "Russia is not a party to the Energy Charterand is not going to join the Energy Charter in its currentwording, - Dmitri Medvedev said at the summit. - Russiais not a party to the Energy Charter Treaty and will notemploy it, of which, relevant international communicationswere also made". InApril, 2009, Prime Minister Putin saidin Sofia that "the Energy Charter has not played its role",so, "Russia sees no sense in keeping [its] signature underthe Energy Charter".

On July 30, 2009, the Russian Prime Minister signeda Directive to notify foreign states of Russia's decision towithdraw its signature under the Energy Charter Treaty.Such was the end of many years of discussion on theCharter underway in Russia since December 17, 1994,when Russia signed it. The tough dialogue between Russiaand the EU about Russia's accession to the ECT, underwaysince January, 2000, also came to nothing.So, currently, Russia's energy cooperation with the EU

actually stays beyond any legal framework, and furtherintentions of the EU (or some of its member states) topromote the energy dialogue with Russia may lead toconcessions on the part of the Conununity, so that wholesub-sectors of the energy sector in separate countries mayfall its victim.1.3 DIVERSIFICATIONPROJECTS IN UKRAINE'SENERGY SECTOR

By contrast to the EU countries (including post-socialist), Ukraine is dependent on monopoly supplyof energy resources from the Russian Federation.Noteworthy, such situation has arisen recently: while inearly 1990s, Ukraine had direct contracts of gas supplyfrom Central Asian states, obtained Kazakh oil for refining(nearly 20%), nOW, its energy supply is 100% made upof Russian gas, oil and nuclear fuel. The situation withthe latter is especially tough, since, by contrast to oil andnatural gas produced in Ukraine, on a small scale though,it produces no nuclear fuel (although still preserves thepotential necessary for creation of its own nuclear fuelcycle elements).

In view of the tangled Russian-Ukrainian relations inall sectors (and first of all - in the energy sector), plansof reduction of energy dependence on Russia have beendeclared actually since Ukraine gained independence.However, the lack of funds, foreign political support,experience of transnational energy projects implemen-tation, absence, in some cases, of raw hydrocarbonsdeposits within economic reach and other factors hinderedimplementation of Ukrainian diversification projects.

The main negative factors hindering implementationof diversification projects also include existence ofstrong lobbyist groups in Ukraine defending Russianinterests in public discussions and on different levelsof state governance. Meanwhile, even the mostambitious diversification projects declared in the yearsof independence by all governments and separatestate institutions did not envisage complete refusal ofRussian energy resources. More than that, diversificationof "flows" in such projects did not exceed even half ofRussian deliveries, and it is traditionally considered thata new source of supply should not exceed 30% of totaldeliveries.

Diversification measures in the energy sector areconsidered in Ukraine's Energ~ Strategy through 2030(hereinafter - Energy Strategy) .:: For instance, the section"Provision of energy security" mentions among themain measures of country's energy dependencereduction "the diversification of external energyresources supply (natural gas, oil, nuclear fuel)" notingthe need to provide "not less than three sources of supplyof each kind of energy resources at 25-30% of the totalvolume".

Similarly, the document "Guidelines ofthe state policyin the field of provision of Ukraine's energy security"reads that reduction of energy dependence of the state isto be attained, in particular, through "diversification ofexternal sources of supply of energy resources (first of allnatural gas, oil and nuclear fuel), proceeding from the needto supply such resources from not Jess than three mainsources ... ".1STasks and plans of energy sources diversification arecontained in many other presidential and governmentaldocuments.However, the overwhelming majority of them remainsunaccomplished. Ukraine's Energy Strategy is obsoleteand requires revision, which became especially evidentduring the global economic crisis.Of course, supply diversification projects of hydro-carbons and nuclear fuel of non-Russian productionand creation, of nuclear fuel cycle elements requireshuge investments in construction of pipelines andauxiliary infrastructure, enterprises producing nuclearfuel and so on." Apart from significant financialresources, one should solve complex technical tasks,train relevant specialists, introduce new technologiesmeeting environmental requirements, etc. Meanwhile,Ukraine's energy sector actually has no own funds fordevelopment: in the recent years, Ncgtogaz UkrayinyNJSC has been on the brink of default, current rates ofelectricity generated by Ukrainian NPPs ensure minimumprofitability."

17 T he E nerg y S tra teg y w as ap pro ved by the C ab ine t o f M in is te rs D ire ctive N o.14 5 o f M arch 1 5, 2 006 .18 P res id en t o f U kra ine D ecre e On N ation al S ecu rity a nd D efe nce C ou nc il o f U kra ine D ec is ion o f D ece mb er 9 , 20 05 O n S ta te o f E nergy S ecurity o f U kra inean d M ain P rin cip le s o f S ta te P olfcy in the F ie ld o f lis P ro vis ion N o.18 63 o f D ec em be r 2 7, 20 05.19 F un ds a re a lso n ee de d for: a n in crea se of u ra niu m extra ctio n; d ev elop men t 01 en te rp rises tha t w ill su pp ly co mpo ne nt p arts fo r th e fue l fa brica tion p la nt;p os sib le p artic ip atio n o f U kra in e in o pe ra tio n o f th e u ra niu m e nric hm en t e nte rp ris e in A ng ars K, e tc .20 A cco rd in g to th e p re ss se rv ice o f th e A cco un tin g C ha mbe r o f U kra in e th at a ud ite d Na ft og a z U k ra y in y N JSG , as of M ay, 2009, the com pany deb ts exceeded$4 .4 b illion . In 2 009 a lon e, it w ill ne ed $2 .2 b illion to rep ay o ve rd ue cred its an d in te res ts on the m, m ak ing m ore th an h alf o f the co mp any eq uity c ap ita l, w hichm ay ba r re paym ent a t its de bts . S ee : Naf togaz m ust pa y h al'! o f its ca pita l fo r c re dits . - Med ia I n te r na l/ on a l G r ou p , M a y 1 2, 20 09 , ht tp . / /www.mignews .com.ua2 1 T he de fic it o f N NE GC Ene rgoa t om fu nd s in 2 00 9, o n th e c on ditio n 01 th e c urre nt e le ctr iC ity ra te c on se rv atio n, w ill b e c lo se to $ 25 0 m illio n, w hile its c urre ntb ac klo g to th e R us sia n s up pl le r 01 n u cl ea r f ue l ( TVEL co mpa ny) fo r p rev io us ly de liv ered fu el m akes s om e $8 0 m illion . S ee : Energoa tom w ill ta ke cre dit to p ay toRUSS i an s . - E k on om i ch na P ra vd a, J un e 0 9, 2 00 9, h t t p j /www .ep ra vda . c om.ua

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DIVERSIFICATION O:F ENERGY SUPPLY IN THE EUROPEAN UNION, RUSSIA AND UKRAINE

As a. result, the national energy sector has actually lostthe potential not only for development but largely even formaintenance of the existing capacities. The main prob Lemsof Ukraine's energy sector (including its investment"hunger"Z2) include:wide use of archaic and obsolete equipment thatrequires replacement;large arrears. of energy enterprisesr'!low domestic prices and tariffs of energy resources;exhaustion of exploited deposits of hydrocarbonsand resultant need of development of new oil andgas fields, including Oil the shelf of the Black Seaand the Sea of Azov, which is much more costlythan development of land deposits.

Now, these and other problems are aggravated bythe world economic crisis that seriously delays almostall large-scale proj ec ts r-equiring significant foreigninvestments.However, despite all negative ci rcumstances , Ukrainepartially implemented two diversification projects:

in the oil sector - the project of the Eurasian oiltransportation corridor using the Ukrainian oiltransportation system "Odesa-Brody" (alreadybuilt but operated in the reverse mode);in the nuclear sector - the project of supply ofnuclear fuel produced by Westinghouse company(experimental fuel is now tested at power unit 3 ofSouth-Ukraine NPP). Proposals of the Russianside and Westinghouse company concerningconstruction of a nuclear fuel fabrication plant inUkraine are being considered.

In the gas sector, the issue of LNG supply to Ukraine isonly being considered now.Despite very slow implementation of those projectsand tough opposition of lobbyist groups, they need to beimplemented, to reduce I 0 0 % dependence on Russiandeliveries.illthe recent years, strategic and current energy interestsof Ukraine sometimes conflicted at implementation of

specific measures in the energy domain of the Russian-Ukrainian relations. Meanwhile, both the EU and Russiaexperience relations problems in energy sectors andpropose projects advantageous first of all for them.So,first., Ukraine, as an energy bridge between the EU

and Russia, should not just not cause conflicts betweenthem but conciliate and take into account the interests ofall parties.Second, although Ukraine's diversification policyis intended to reduce energy dependence on Russia, theRussian Federation was and remains Ukraine's strategicpartner in next to all energy issues. Energy relations arevital for both count r i es . For Ukraine - to provide thenational economy with energy resources , for Russia - topreserve and multiply proceeds from sale of hydrocarbonsin the EU and Turkey using Ukrainian transit pipelines,despite Ukrainian and Russian stand on other issues, firstof all, political, may be different.The main task of the Ukrainian energy sector, at least

in the midd l e run, lies not in implementation of large-scale international projects (e.g., projects of productionof hydrocarbons in other countries, as proposed by theEnergy Strategy) but inenhancement of its energy securityby introduction ofrnarket principles in tbe energy sector onthe basis of the EU experience and legislation, structuralreforms and enhancement of energy effectiveness of theenergy sector enterprises.International cooperation in the energy sector,including implementation of energy resources sup-pl y diversification projects, gives an effective tv 0. 1tv vppvse new challenges and threats, overcome theglobal economic crisis, ensure energy security, Sincepvwer engineering is of key importance for success-ful development of the economy and creation of fun-

damentals for enhancement of tbe m e quality in anycountry, further development of mutually advanta-geous inte-rnational cooperation in that sector on thebasis of equality and partnership, ensuring effective,reliable, environmentally clean and safe energy sup-ply, should provide the basis for dealing with thosethreats and challenges. -

2 2 T lle e co nom ic cris is c aus ed a th re e-to ld d ec lin e o f in ve stm en ts in U krc ain e in th e 1 " q uarte r 0 1 2 00 9: fo re ign d ire ct in ve stm en ts (F OI) to ta lle d $ 1'.1 8 b illio n,fa llin g tre e-to ld o ve r th e y ea r ~ to 3 6.2 % 0 1 th e FOl in th e 1 " q ua rte r 012008 . F O I m ain ly c arn e to th e f in ance sec to r - $284 .4 m il lio n , a n d r ea .! e st at e -$236 mil l ion; in du stry re ce iv ed o nly $ 78 .3 m illio n (6 .7 %). S ee : Fu l l f OI . - UANEWSB/Z , M a y 1 8, 20 09 , htlp./ luaneVis./Jiz2 3 Fo r ei gn d e b ts o f e n e rg y e n te r pr is e s s u b or d in a te d 10 th e Ministry o t Fu e l a n d En e r gy U k r ai ne as of M ay 1 ' .2009, total led $947 mil l ion, totalcents w i th a c c ou n to f in de bte d lo an s - $ 1.5 b ilH o n. F or m o re d eta il s ee : In fo rm atio n-a na ly tic al s tu dy 0 1 t he s ta te 0 1 U k ra in e's e ne rg y s ec to r 0 1 . N o .3 6 6 . .- S cie nm ic -T ec hn ic al U n io no f Powe r r nen a n d E le c tr ic ia n s o f U k ra in e , C e n tr e o f Publ iC I n fo rma ti on o n Fue l an d Ene r gy Se c to r P r o b lems , K yiv , 2 00 9, p .7 .

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D iversification of sources and routes of gas supply in Eurasia as a factor of energy security pursuesthe goals of: (a) reduction of risks and minimisation of accidents effects at gas infrastructure facilities;(b) promotion of competition among exporters through the establishment of the gas market; (c) a decrease ofpolitical influence of the monopoly or large supplier andlor transit countries.

Currently, the Eurasian gas market is developi ng, lrnplementing new gas supply projects under the influenceof a number of global (external) and internal negative factors.' The main external factor is the current globaleconomic crisis; internal factors include political and economic contradictions between the main actors ofthe Eurasian gas market - Russia and the EU. and a certain conflict of interests among some EU countriesregarding the dependence on deliveries of Russian energy resources. In the Eurasian gas space, Ukraine isplaying rather a passive role, due to the lack of political will and resources.

This section briefly describes the positions of the Eurasian gas market actors regarding diversification ofsources and routes of gas supply and the main diversification projects touching the interests of Ukraine.

2.1 SPECIFICITY OF SOURCES ANDROUTES OF NATURAL GAS SUPPLYDIVERSIFICATIONDiversification of sources and routes of gas supply

has a number of specificities stemming from its physicaland process properties and conditioning prevalence of itstransportation by pipelines (by contrast to oil). This is oneof the reasons for difficulties in establishment of not onlythe global but also the common European or Eurasian gasmarket.The gas infrastructurein general and transnational gaspipelines in particular require much higher investments,compared to the oil pipeline infrastructure and oilpipelines. So, as we noted above, to minimise risks forlarge investments, the gas industry rests on long-termcommitments of the consumer - which, in turn, closelyties it to the supplier.Development of liquefaction/regasification techno-logies at the end of 1950s paved up the way for productionofliquefied natural gas (LNG) and its transportation by sea.Hence, LNG gives an additional opportunity of sourcesaud routes of gas deliveries diversification, usually used bycoastal countries that develop the relevant infrastructurefor LNG shipment/acceptance and build (freight) methanecarriers for its transportation.

Now, despite the rather high value of liquefaction!regasification technologies and equipment, LNG providesan economic alternative to ga transportation by pipelines,first of all, at large distances. Pipelines remain the mainand most common method of gas transportation.Diversification of sources and routes of gas supplywas the core principle of rapid growth of gas consumptionin Western Europe (Insert "Diversification of sourcesand routes of gas supply to Europe"). West Europeangovernments encouraged consumption of gas because ofits high process and environmental properties as a fueland a raw material. So, the EU agreed to gradually raisegas imports, first, from the USSR and then - from Russia,under long-term contracts. ow, there is no document inthe EU or an EU member states limiting the share of theRussian gas in their balances. Spain alone legislativelyestablished the ceiling of gas imports from one sourceat 60%.2 Nevertheless it may be assumed that therequirement of diversification of gas supply sources beganto be formed amidst fears in the West of growing influenceon the USSR on the EU gas supply. Next, developmentof market relations prompted development 0f new sourcesand routes of supply.The past decade saw several conflicts of Europeancountries with gas suppliers ," Especially acute was a seriesof gas crises in 2004-2009, involving partial or full stoppage

1 "E uras ia n ga s m arke t" _ a co nve ntio na l te rm tha t e na ble s a na ly sis o f th e c orre la tio n a mo ng th e k ey p ro je cts 0 1 n ew g as p ip elin es , in clu din g in U kra in e'ssp he re 0 1 in te re sts . A s w e kn ow , th ere is n o w orld m arke t o f g as (e xc ept liq ue fie d n atu ra l g as), o nly re gio na l g as m arke ts a re a ctive .2 D iffe ren tia t ing R ea lity from Rum ou rs : Som e Cons ide ra tio n s on the A lle ged R estr ic tio n s on N a tura l G as Im po rts from R uss ia . Pape r basedon inpu t from M em be r S ta te s . - Eu r op e a n C omm i s si on . 2 00 3 D ece mb er 18 , ht tp : //ec .europa .eu lenergy li n temat ionaVb i la te raCcoopera t i on / russ ia /doC/ i ssues /gaz_ impor tpd f3 Fo r in s tance , in 2007 , S pa in and A lgeria had a p ric e d ispu te in connec tio n w ith de l i v e rie s o f A lgeria n gas unde r a con tra c t s ig ned ye t in 1995 tha t d id no tta ke in to a cco un t d ep en de nce o f ch an ge s in th e w orld ga s p rice s o n p rice s O f o il. S ee : S pa in a nd A lg eria c lo se to s olv in g e ne rg y d is pu te . R ep ort. - M&G, Ju l 3 0,2007 . h t tp . l /www.mons te rsandc r i t i cs .com

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of Russian gas deliveries via Belarus and Ukraine (that alsohit the EU countries). Such developments prompted the EUcountries to focus their policy of energy supply security,i.e., search for new sources of gas supply, development andimplementation of new gas pipelines projects.So, it may be concluded that diversification processesin Europe were taking place over past 40 years, but becameone of the main elements of the energy security and linesof the energy poLicy mainly in the current decade.

DIVERSIFICATION OF SOURCESAND ROUTES OF GAS SUPPLY TO EUROPEIn 1 96 0-1 97 05 , th e d em an d fo r g as in G erm an y, F ra nc e a nd Ita ly

fa r exce ed ed the ir do mes tic p ro du ctio n, m ak ing th em to im port it.T he N eth erla nd s, a lte r th e d is co ve ry o f th e g ig an tic G ro nJ ng en fie ld ,4b eg an e xp ortin g g as in s ig nifica nt v olu me s, m ain ly to G erm an y.

Tha t period saw grow th o f gas p roduc tion and la rge-sca lecons truc tion o f na tiona l and transna tio na l gas ne tw orks . Thefirs t tran sn atio na l g as tra nspo rta tio n sys tem s w ere la id from theNe the rlands ; la te r, the w orld la rges t gas trans it sys tem from theU SS R to C en tra l a nd W e st E uro pe an c ou ntr ie s w as b uilt.

F rom la te 196 05 , Sov ie t gas was supp lied to the fo rm e rsocia lis t coun trie s. The firs t gas was de live red from the USSRto C ze ch os lo va kia b y Bratstvo gas p ipe lin e in 1967 ; la te r, th e gasp ip elin e w a s e x t e n d e d to A ustr ia (B aum garte n, 1 96 7) and F ra nce( 19 8 4) . T h at g a s t ra n sp o rt at io n s ys te m c ar rie d 1B CM of g as in 1 96 9,a nd n ea rly 8 0 B CM 3 0 y ea rs la te r. S im ulta ne ou sly w ilt '! Bra ts tvo , th eN orthern corrid or w as bu ilt to sup ply ga s to R om an ia an d B ulg aria(1 974 ). la te r-to T urke y (1 98 7) a nd G re ec e (1 98 8).

O th er g as p ip elin es fr om th e U S SR fo llo we d. F or in sta nc e, Y am a l-E urop e tra nsco ntin en ta l g as p ip elin e su pp lied g as v ia B ela rus toP ola nd (1 99 6) a nd t u r t n e r to G erm any (19 97). S ta rtin g fro m 1 98 5,th e W e st E uro pe an m ark et o f g as b ec am e th e m ain s ou rc e o f in co me sfro m g as e xp orts fo r th e U SS R (s urp as sin g th e E as t E uro pe an ).

R ed uc tion o f the E U g as d ep en de nce o n th e U SS R, sou gh t b y th eUSA ,5 was f aC il it a ted b y th e d is co ve ry o f Trol/l1eld in N orw ay (1 97 7),fo llo we d b y d eliv erie s o f g as fro m A lg eria a nd G re at B rita in . It m ayb e s ug ge ste d th at th e firs t lim ita tio ns 0 1 g a s v olu me s s u p pu ed fro mon e so urce w ere im posed ag ain st "S ov ie t" gas d eliV erie s to th e E Ucountr ies.

T he co ns um er c ou ntr ie s w id ely u se d a va ila ble p os sib ilit ie s fo rd iv ers ific atio n o f g as s up ply s ou rc es . F or in sta nc e, F ra nc e in 1 96 0ss ig ne d co ntra cts o f g as s up ply fro m A lg eria a nd th e N eth erla nd s, in1970s - from the U SS R, in 1980s - from No rw ay .

In tro du ctio n o f L NG te ch no lo gie s w id ely e xp an de d th e g eo gra ph yo f W es te rn E urop e g as sup plie rs a nd ga s trad e in ge ne ra l. T he firs tm etha ne carrie r w ith L NG arrived in G re at B rita in in 1 95 9 tra m th eG ulf o f M ex ico ;6 five ye ars la te r, A lge ria s ta rte d to sup ply LN G 10F ra nc e. W ith lim e, E gyp t, L ib ya , O m an , Q ata r a nd N ig eria jo in ed th ec lu b o f L NG su pp lie rs to E uro pe .

H ow ev er, p ip elin es re ma in ed th e m ain m eth od o f s up ply . In 1 98 1,Ita ly w as the firs t to lay a long-d is tance deep sea gas p ipe lin e bys ta rtin g c on str uc tio n o f Transmed g as p ip elin e fro m T un is ia to Ita ly( co m ple te d in 1 98 3).

2.2 INTERESTS OF EURASIAN GASMARKET ACTORS REGARDINGDIVERSIFICATION OF SOURCESAND ROUTES OF GAS SUPPLYAs we mentioned above, many EU countriesannounced and are implementing projects of sources androutes of gas delivery diversification - by gas pipelinesand LNG terminals. The main actors of the Eurasian gasmarket are the countries - large consumers, suppliers(producers) and tansiters of gas on the continent. Theyinclude, first of all: the EU and West European countriesas a whole (mainly, consumers and tansiters of gas);Baltic, Central and East European countries (tansitersand consumers); the largest Eurasian suppliers of gas -Russia and countries of the Caspian region and CentralAsia (Azerbaijan, Iran,' Kazakhstan, Turkmenistan,Uzbekistan).Analysis of the interests of those Eurasian gasmarket actors in new gas pipeline projects shows thatthose interests lie mainly in the promotion of their ownprojects, not always backed with resources (raw materials)and commercially tbe most attractive, compared toalternatives. The latter proves excessive politicisation ofgas supply issues, so, it may be assumed that quite a fewof the proposed diversification projects are only elementsof a political play and will not be implemented even in aremote future,Ukraine's position regarding diversification ofgas supply sources bas its specificity. First, despite theworld largest reserves of gas in the neighbour countries(first of all - Russia) and a ramified network of mainpipelines for its supply to the Ukrainian territory, theRussian-Ukrainian relations in the gas sector were and

remain problem-hit. The "gas factor" is used by Russiafor solution of other problems of bilateral relations andhas become a "classic" means of political pressure onUkraine. Meanwhile, possessing (theoretically) the bestconditions for cooperation with Russia in the gas sectorand some trans it comm itrnents to the EU, Ukraine shoul dcherish mutually advantageous and partner Russian-Ukrainian cooperation.Second, so-called "gas wars" of Russia with Ukraineand Belarus make the EU and Russia alike to study andimplement projects of bypass gas pipelines going aroundthe territory of Ukraine and Belarus (tbe main transitorsof Russian gas supplied to the EU). To be sure, in suchconditions, the overwhelming majority of projectsdeveloped in Eurasia proceed from the interests that mayrun contrary to the interests of Ukraine as a transitor ofRussian gas.Third, among many gas pipeline projects implementedorproposed to be implemen ted inEurasia, there are actual Iyno projects Ukraine could join to diversify sources of itsdelivery for domestic needs.

4 T he fie ld o f 2 .6 trillion cum of g a s w a s d is co ve re d in 1 95 9 in th e p ro vin ce o f G ro nin ge n. S ee : D ev elo pm e nt o f C om p etitiv e G a s T r ad in g in C on tin en ta lE u ro pe . H o w to a ch ie ve w or ka ble c om p etitio n in E ur op ea n g as m a rk ets ? - lE A I nf or m at io n P a pe r, M a y 2 00 8, p .l1 , ht tp : / /www. lea .o rg / textbase /papers /200Blg a s_ tr ad in g . pd f5 In e arly 1 98 0s , th e G o ve rn m en t o f th e F ed era l R e pu blic o f G e rm a ny lim ite d th e s ha re o f S o vie t g as in th e n atio na l g as b ala nc e by 3 0% . S e e: D e ve lo pm en to f C om pe titiv e G a s T r ad in g in C o nt in e nt al E u ro p e. H o w t o a c hie ve w o rk ab le c om p e tit io n in E u ro p ea n g a s m a rk et s? - lEA I nf or m at io n P a pe r, M a y 2 00 8, p .1 7,ht tpJ lwww. iea .o rg ! textbase /paperS /200B/gas_t rad ing .pd f6 L a te r, a fte r d is co v8 J )' o f s ig n if ic an t r es er ve s in t he N o rt h S e a, G r ea t B r ita in r efu s ed f ro m im p o rt s 01 g as a nd re su m ed it o nly a fe w y ea rs a go .7 Ir an . p o ss es sin g s e co n d w o rld la rg e st g a s r es er ve s, is a p o te n tia l la rg e s up p lie r.

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In the period of independence, several diversificationpipeline projects were proposed in Ukraine (deliveries o fIranian gas, the Whi te S t ream, etc.), but fer different r easonsthey were net seriously treated by potential partners. Thisis mainly attributed t o r ea so n s beyond r ea sonab l e centrcl-the remcteness o f d ep o sit s, c om ple x it y and high valu e o fpipeline pro jec t s , lack o f the coun t ry ' s resources, lack o fpolitical and economic support abroad.

Fourth , supply of LNG - now, a traditional for theEU way of gas supply sources diversification - is notpracticed in the CIS states, including Ukraine, on the oneband, due to the existence of a ramified network of mainpipelines, on the other - because of the absence of therequired technologies and equipment. Meanwhile, today,LNG and regasification technologies are readily availableon the market, and any country can use them - if it has thefunds (in the c on dit io n s o f Ukraine, also the po l it ic a l w i ll )(Insert "LNG supply to Europe").Fifth, d iv er sific at io n o f gas supply sou rces withoutsolution of ether problems of the energy sector

dealing with gas supply will net substantially enhanceUkraine's energy security. The following lines ofstructural r e f o rms are relevant here: a large decrease ing as c o ns um p tio n by all categories o f consumers a t theexpense of energy-saving technologies and equipmentintroduction; an increase in domestic production of gasthrough creation of a favourable investment climate inthe branch; diversification of the energy balance at theexpense of partial replacement of gas with coal andelectricity, use of renewable and alternative sources ofenergy, etc.European Union. Currently, the EU is the largestimporter of gas seeking to diversify the sources and routesof supply, in particular - to reduce dependence en Russian

gas. Meanwhile, there are different approaches in theEU as to the expediency of implementation of some gaspipeline projects, witnessing differences in the nationalinterests in the energy se cto r, S o , the EU intention toenhance reliability of gas deliveries in the conditions ofRussian-Belarusian and Russian-Ukrainian gas conflictsmay be undermined by the desire of some EU members toget orders for its industry and /or proceeds f rom transit ofRussian gas. Fer instance, Germany supports the Russianproject of the NOI ' d Stream gas pipeline, opposed by theBaltic countries and Poland (and some other states) tbatpropose, instead of No rd S tr eam , building a gas pipelinefrom Russia across their territory (fer instance, the Ambe rgas pipeline project),EU interests in gas supply sector:

enhancement of gas supply re l iability using existingsources and routes;diversification of s ou r c e s and rou re s of gas supplywith access to gas sectors of Central Asian states, toreduce gas dependence on Russia;s implementation

of a project o f gas deliveries from the Caspianregion;development of LNG admission infrastructure;further l iberal isation of the gas market ande x te ns io n o fs om e requirements to market ac tor s tothird countries active ell the EU gas market.Ukraine. Ukraine is one of the largest consumersand t ransi tors ofRussian gas (first of all, bought by Russia inCentral Asian countries"). At that, it is short of fundsand foreign political support for implementation of newprojects .o f gas supply f rom a l te r n at iv e sources.

Interests of Ukraine in the field of gas supply:diversification of sources and routes of gasdeliveries;preservat i on of volumes of Russian gas t ra n sit t o theEU countries, Switzerland, Moldova, Bosnia andHerzegovina, Croatia, Serbia, Albania and Turkey,and in case of Russia's refusal from construction ofbypass gas pipelines - growth of gas transit withupgrade of the Ukrainian gas. t ra n s p o r t at i en system(GTS);

preservation of competitive advantages of theUkrainian GTS on the Eurasian market o f gastransportation services;integration in the EU gas market;renegotiation of contracts with Russia iGazpromOJSC) in the gas se cto r e n fair market, mutuallyadvantageous conditions, including ship or pay, inthe contract of transit services;development of the domestic gas productionsector through pursuance of an effective tax andinvestment policy.Noteworthy, those interests can be secured onlyon the condition of effective and reliable operation ofthe Ukrainian GTS by means ofits reconstruction andmoderni sation, adoption of the EU legislation (standards)in the Ukrainian legislation and establishment ofmutually advantageous and effective cooperation withRussia and ether countries possessing substantialdeposits of gas.

Russia. Russia, possessing the strongest gas productionpotential in Eurasia, is pursuing a policy of reductionof dependence on transit countries (and costs of transitservices) through implementation ofgas pipeline projects,including by sea - several times mere expensive thanland gas pipelines. The complexity and length o f m ost ofthe new gas. pipelines question the economic return andwitness domination of political considerations in thoseprojects.

As regards the plans of new gas pipelines construction,they are inconsistent with the present financial capabilities

a A lle r m any yea rs o f hes ita t io n , th e EU took a course to coope ra tion w ith Tu rkm en is tan m at has p rob lem s w ith obse rvance of hum an (ig h ls , bu t a lsos ub sta nt ia l h yd ro ca rb on r es er ve s. In parncular . af te r 1 1 y ea rs o f 1 ' 1 . 0 1 deba t e , European Par l iament on Apr i l 2 2 , 2 0 09 , a pp ro ve d a n ew tra de a gre em en t be tweenth e E U a nd T urkm en is ta n. 45 9 M Ps vo te d fo r th e d ocu me nt g iv in g E U c om pan ie s a cce ss to th e d om estic e n e r ~ w s ec to r o f T urk me nis ta n (1 62 M Ps vo te d ag ain stb ec au se 0 1 vio la tio ns o f h um a n r ig ht s in T ur km e nis ta n) . T he E U a nd E C lea de rsh ip h op es th at th is s te p wil l im pro ve re la tio ns w ith T urk me nis ta n, a nd n wil l a l te ra i l j o in Nab l l c co p ro jec t a s th e m ain ra w m ate ria l b ase fo r th e p ro jec t S ee : E U a gre ed w ith T urkm en is ta n g as d elive rie s b yp ass in g R uss ia . - Izvest ia , A pril 2 3,200 9 . ht tp : / /www. izvesf /a . ru l9 In 20 09 , a fte r a n a cc ide nt a t a g as p ip elin e in T urkm en is ta n, U Kra ine c on sum es m ain ly R uss ia n g as .

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to c ou ntrie s o bta in in g s ig nific an t v olu me s o f g as b y p ip elin es d oe s n otm ea n c om ple te re fu sa l fro m p ip elin e d elive rie s b ut o nly th eir p artia lrep lacemen t .

LNG SUPPLY TO EUROPEC urr en tly , L NG a cc ou nts fo r 7 $% o f th e w orld g as c on su rn ptlo n, a nd

accord ing 10 lE A e s tim a te s, it s s h ar e w ill g ro w to 1 6% b y .2 03 0.1 LNG p r iceis tra dit io na lly s om ew ha t h ig he r th an th ai o f p ip elin e g as , firs t o f a ll, d uet o th e e m plo yme nt o f e ne rg y -c on s um in g a nd e xp en s iv e lo w ,t em p er atu rete ch no lo gie s a nd e qu ip me nt. In th e p as t 1 0 y ea rs , d ec lin in g c os ts o f L NGinfrast ructure c o n s t r u c n o n a nd g ro win g p ric es o f n atu ra l g as tu rn ed L NGin to a g l obal ene r g y r e sou r ce th a t c a n u n it e c o u n tr ias n ot c o n ne ct s d b y g asp ip e lin es . In 2 00 8, L NG d e liv er ie s t ota lle d 2 7. 8% o f a ll g as s a l. es .2

L NG p ro vid es a n e co no mic a lte rn ativ e to p ip elin e tra ns po rta tio n o fn atu ra l g as , fir st 0 1 a ll , a t la rg e d is ta nc es . F all o f g as e xtra ctio n in th eN o rth S e a, g ro w th o f t h e c os t o f g as e x tr ac tio n, d er eg ula tio n o f t he E U g asm ark et c re ate d' n ew , m o re fa vo ura ble c on ditio ns to r L NG im po rts to th eE U . A ll t ho se fa c to rs , a lo ng w it h L NG s u pp lie rs p ra c tic in g a m ix ed m o de l o ftra de in L NG th at b ec am e m ore fle xib le th an ks to p ro du ce rs a llo win g fr ees a le , a lo n gs id e l on g -t erm c o nt ra c ts , p a ve t he wa y f or f U rt he r d 'e v el opm e n to f th at s ub -s ec to r o f th e g as in du stry in E uro pe .

In th e E U, as o f m id -2 00 9, 1 3 L NG te rm in als w ere o pe ra te d in s ev enc ou ntrie s ( tw o in T urk ey ), five te rm in als w ere b ein g b uilt o r p la nn ed ,c on stru ctio n o f 2 9 te rm in als w as c on sid ere d. T he s ha re o f L NG in lo ta limports 01 g as to th e E U m a ke s a lm os t 1 3% .

A ll in a ll, c on s tr uc tio n o f 3 3 terminals i s co n s 'i d er e d i n Eu r o pe , i n cl u di n go ne in U k ra in e ( M ap " LNG t e rm i n a ls in Europe") .T h e m a in s u pp lie rs o f L NG t o E u ro pe a re A lg .e ria , L i by a, A u st ra lia a ndU A E, d eliv erie s g ro w fro m a ata r.3 M ea nw hile , g ro wth o f L NG im po rts

LNG te rm in als In E uro pe

T e rm in als ,c o n st ru c ti on o f w h ic h i s being d i scussedo Term i na l s unde r cons t ruc t ion" * E x is 1 in g t e r m in a I sI--, U kra in e is c on s id e ri o g bui ld iog an LNG tsrm inat in 0 n e'" _ _ 'o f th re e lo ca tio ns , O Ch ak iv , P iv de nn yi p ort o r Feodos i ya .

LNG SUPPLY TO UKRAINEC re atio n o f fh e L NG a dm is sio n in fra stru ctu re in U kra in e h as b othp o si ti ve a n d n e ga ti ve p re c o nd it io n s. T h e p o s it iv e o n es i nc lu d e: p os sib ility o f c oo pe ra tio n w ith n eig hb ou rin g c ou ntrie s (to s ha re g asde li ve r ie s a nd , r e sp ec t iv e ly , co s t s) ;

p os sib ility o f a g ra du al in cre as e in th e L N.G p la nt c ap ac itie s a t th ee xp en s e o f p ha s ed c o ns tr uc tio n ( fo r in st an ce , t he f ir st p ha s e 01 th eL NG p ro je ct c an h ave th e a nn ua l c ap ac ity o f 1 .5 S CM , th e s ec on d -a no th er 1 .5 S CM ):

LN G o ffe rs and tec hno log ies , and ava ilab ility o f se rv ic es o f gasc a rr ia g e b y t an k e rs :p os sib ility to e m plo y th e e xp er ie nc e o f c re at io n o f th e E U le gis la tio na nd s ta nd ar ds in t he L N .Gs e ct or :

a va ila bility o f s pe c ia lis ts in a llie d lo w -t em p er atu re t ec hn olo gie s w h oo n ly n e ed s om e r et ra in in g .Th e nega t i v e are:la c k o f i nd u s tr ia l L NG t ec h no lo g ie s u s a ge e x p er ie n ce ;

a bs en ce o f th e le gis la tio n a nd s ta nd ard s in th e s ec to r;l a ck o f sp e c ia l is t s ;

absence o f deep sea po rts fo r adm iss ion 0 1 m e th an e c ar rie rs up er ta nk ers w ith la rg e d ea dw eig ht (d ea dw eig ht is im po rta nt fo r1ra n s po rta tlo n costs) ,n ec es s ity o f d ee pe nin g o pe ra tio ns n t he s ele ct ed s ea p or I.

In th e re ce nt y ea rs , U k ra in e h av e re alis ed th at in a bs en ce o f r e a n s u cp ro je cts o f p ip elin es d iv ers ific atio n, d eliv erie s o f L NG re m ain th e o nlya l ternat ive.4 On July 14 , 2009 , the M in is try o f F ue l and E ne rgy hosteda m ee ting devo ted to construc tion o f an LN .G te rm ina l th at ga the redr ep re s e nt at iv e s o f SNCLa v a li n I n te r n at io n a l t n c. , M i ts u b is h i C o r p o ra t io n ,C h a ly k H o ld in g , G a p I ns a at , S a n ca k li G r ou p an d o m e r c om p an ie s. It w a sd ec id ed to se t up a w ork ing g roup fo r coo rd ina tion o f th e LNG p ro je c ta ct iv itie s in U k ra in e, to s tu dy t he is su es o f th e bu s in e ss R l a n de v e lo pmen t.d ra w in g lu nd s a nd w a ys o f t he p ro je ct im p le m en ta tio n.

C o ns tr uc tio n o f a te rm in al ( pla nt) fo r L NG a dm is sio n d oe s n ot re qu irep olit ic al s up po rt, a s tra ns na tio na l g as p ip elin e p ro je cts d o. O n ly fu nd 'sfo r c on stru ctio n a re n ee de d (th eir a mo un t d ep en d's o n th e c ap ac ity ),a gre em en ts w ith c om pa nie s s up ply in g L NG a nd e qu ip me nt, fre ig ht o rp ur ch as e o f m e th an e c ar ry in g ta nk e rs .. Th er e a re m a ny m a rk e t p ro p os also f LN G s a t e , t er m in a l c on s tr uc tio n s er vic es , f re ig ht ( or c o ns tr uc tio n) 0 1tankers, espaola l l y n ow , a l a lim e o f c ris is .

T h e p ro je ct c an b e im p le m en te d b ey on d s tr at eg ic p ro sp ec ts ( o ve r 15y ea rs ), o nly b ec au se o f th e la ck 01 f un d 's i n U k ra in e .6

1 S P S ta tis tic al. R e vie w o f W o r ld E n er gy , J un e 2 00 9, p .2 2- 30 , ht tp : / /www.bp .com2 Ib id. , p .30 .3 LN G in Eu rope . An O ve rv iew 01 E uro pe an Im p ort T er min als . K in g& S pe ld in g In te rn atio na l L LP , 2 00 8, p .1 24 , ht tp : / /www.ks law .coml l i b ra ry /pd f /LNG_ jn_Eu ropepd f4 L NG is o bta in ed b y c oo lin g n atu ra l g as to t 6 2"C . In th e liq uid fo rm , th e v olu me o f g as is 6 00 tim e s s m alle r, W h ic h p ro vid es m u ch h ig he re fle ctiv en es s o f itss to ra ge a nd tr an sp orta tio n. L NG is tr an sp orte d in th e s am e w ay a s o il, b y s pe cia l ta nk er s - m eth an e c arrie rs . In im p orte r c ou ntrie s it is k ep t in ta nk s, a nd a ts pe cia l t er m in als , L NG is h ea te d, r et ur nin g to I he g as eo us s ta te , a nd t he n p um p ed t o th e g as tr an s po rt atio n s y ste m .5 Minist ry 01 F u el a nd . E n e rg y a nd SNC L iM / li n d ete rm in ed p rio rit y lin es o f c o op er atio n, - I nfo rm a tio n- an a ly tic al p or ta l Ene rgob i znes , J uly 2 1, 2 00 9,h t tp j /www . .eb . c om .ua6 lrn ple ma nta tlo n o f a n L NG a nm is sic n p ro je ct in U kra in e w ill a ls o p os e a n o bs ta cle fo r th e R us sia n- Uk ra in ia n c on tr ac t o f g as s up ply th ro ug h 2 01 9, w ith itsf ar o ve rs ta te d v olu m es o f d eliv er ie s o f R u ss ia n g as a nd to ug h e c on om ic s an c tio ns e nv is a ge d fo r ils n on -a cm ls slo n.

RAZUMKOV CENTRE NATIONAL SECURITY & DEFENCE No ..6,2009 13
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of the country and development of gasfields, while thedecline of gas consumption in Eurasia (including Russia 1 0 )due to the global economic crisis questions not only theplanned terms of implementation of ambitious Russianproj ects but also the economic rationale of some of them,for instance, Blue Stream 2 and South Stream.Inthe years to come, one should expect a strong dec!ineof gas sales, both inside and outside the country; the figuresof 2008 may be surpassed only in 5-7 years (Table "Gasales by Gazprom in 2008-2012" 1 1 ) .

Gas sales by GSZpronl In 2008-2012,BCM- -A c t u a l fo recas t2008 2009 2010 lOll 2012

T o ta l d e li ve ri es . i nc lu d in g : 5 65 4 9 7 51 2 5 2 9 53 8 in R us sia 32 7 29 2 30 2 31 1 31 4 fo r ex po rt 23 8 205 210 21 8 22 4In the conditions of the world economic cnS1S,the EU plans of fundamental reduction of all energyresources consumption, possibility of greater utilisationand expansion of the existing gas pipeline systems, firstof all, Ukrainian (as the most economic way to increasegas deliveries), impracticability of participation in jointmanagement of the Ukrainian GTS (due to the legislativeban and unreadiness of Ukrainian society) Russia ispursuing rather an adventurous, in the present conditionsand aggressive policy in the gas sector, to a large extentaimed against Ukraine.Pur thermore , the sharp reduction of Russian gasconsump t i on , re-export or resale of imported gas (fromCentral Asian states, later - from Azerbaij an) inflict seriouslosses on Gazprom, making it to reduce production of gasthat brings real revenues to it and proceeds to the Russianstate budget (through payment of duties).Despite all that, the Russian leadership, pursuingits geopolitical goals, is trying to solve three strategictasks:a) promotion of the South Stream. and Nord Streamprojects, including by defamation of Ukraine in theeyes of the EU leadership, attempts to present it asa state unable to ensure reliable transit of Rus ianga to Europe;b) participation of Gazprom in one or another

organisational-legs Iform in the management of theUkrainian OTS;c) growth ofinfiuence on the Ukrainian authorities forattainment of its political and economic goals in theEuropean space.

Now, Russia is trying (with Italian and, possibly, Frenchsupport) to tum South Stream into a Eurasian mega-projectof the century and have it on the list of the EU priorityproj ec t s , For instance, the draft document "General schemeof gas sector development through 2030" formulates oneof th e goals of that gas pipeline as follows: " ... to minimisevolumes of transportation of Russian natural gas bythe territory of foreign states at the expense of possibletransfer of export deliveries of gas from the "Ukrainiancorridor't.F

Commissioning of th e South Stream gas pipelinewill reduce pumping of Russian gas via Ukraine morethan two-fold, and with implementation of theNord Stream project, can totally stop gas transit viaUkraine.However, full-scale implementation (regardinggas vo lumes and terms of commissioning) of Russianbypass gas pipelines seems unlikely. Nevertheless, inthe long run, Ukraine may face a serious decrease in thetransit of Russian gas - unless a mutually acceptable

compromise in the EU-Ukraine-Russia gas triangle isfound.Interests of Russia in the field of gas supply:

diversification of gas export routes for reductionof transit risks;guarantee of unconditional state sovereignty overnational energy resources;preservation of monopoly of p r o cu r emen t andtransportation of gas from the CIS states (first ofall, Turkmenistan, Kazakhstan and Uzbekistan;also from Azerbaijan) to Europe;growth of influence on gas sectors of the CISstates;growth, in a longer run, of imports of gas fromCentral Asian states by means of upgrade of theexisting and construction of new gas pipelines;control of transit (first of all, gas transportation)systems carrying Russian gas and gas from the CISstates;outstripping competing gas pipeline projectsthrough implementation of its own, despite eventhe lag in preparation of the ra w material base fortheir filling;access to the gas transportation infrastructureof the countries transiting and importing Russiangas;promotion of the eastern direction of gas supply(including LNG).1a

Turkmenistan. Turkmenistan possesses the secondlargest gas reserves in the CIS and has agreements of

10 I n J a n u ar y -M a r c h, 2009 , E uro pe re du ce d g as c on su mp tio n b y 5 .4 % , com pared to the firs t qua rte r o f 2008 . d e cr ea S il lg i m po rt s b y 1 3 .7 % and expo rts- by0 .9 % . G a zp ro m , w ith its in flex ib le p ric ing po licy and gas w ars , 10s1 m os t o f a ll- its losses in tha t lim efram e h it 38% on the W es t E uropean and 43% - Cent ra la nd E as t E uro pe an m ark ets . Gazp rom y ie ld ed to N o rw e gia n Sla lo i /Hydro , German E .O n R u h rg a s an d Wintersha l l . a nd F re nc h GD F S u ez . S ee : H ry b N . . H av ry sh o .E uro pe s witc he d to its elf. G azp ro m is lo sin g m ark ets. - K o mm er sa nt U kr ain a, June 15 ,2009 , ht tp i /www.kommersan t .ua11 Sou r ce : T ig hte ll b elts . - Vedomos t i , Apr i l 2 7, 2 0 09 . ht tp : / /www.vedomos lL ru12 G en era l sc he me o f th e g as s ecto r d eve lo pm en t th ro ug h 2030 (d ra f!) . - M os co w. 2 0 08 . p .3 3 3.13 O n Feb rua ry 19 , 2009 , the firs t tanke r w ith LN G le ft R ussia fo r Japan . R ussia becam e the 15 '" LN G producer in the w orld .

14 RAZUMKOV CENTRE NATIONAL SECURITY & DEFENCE No.6,2009
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DIVERSIFICATION OF SOURCES OF NATURAL GAS SUPPLY IN EURASIA

different levels for gas supply to the EU, Russia, Iran,China (a gas ~ipeline being built), Pakistan and India (viaAfghanistan). ~The u

nationa security & defence 2009 no. 6

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