Second Kyiv Security Forum entitled "BLACK-CASPIAN SEA REGION AND EUROPEAN ENERGY SECURITY" took place in Kyiv on November 6-7, 2008. The Second Forum focused on strengthening cooperation within the Black-Caspian Sea region and the European Union states in the energy security field. The participants worked on identifying of common grounds for the convergence of interests within multiple national energy strategies within the Black-Caspian sea region and the European Union.
The Forum gathered around 300 prominent high-level officials, reputable analysts, business representatives and media from the Black-Caspian Sea region, the European Union, the USA and respective international and regional organizations. The event was held under the auspices of the Ministry of Foreign Affairs of Ukraine and was supported by the European Union Institute for Security Studies.
Second KSF provided foreign experts with in-depth information on particular initiatives of energy transit-countries and became an additional channel for coordination of conceptual approaches and positions, as well as joint actions of the states-members of the Krakow process before the next Energy Summit in Baku. Even though Forum discussions did not directly foresee the abrupt rise of tensions in 2009, however, politicians and analysts stressed those issues, the importance of urgent solution of which was confirmed during the Ukrainian-Russian gas conflict of the 2009. Discussions focused on the diversification of routes and sources of energy supply to Europe; on the significance of transition to post-oil economies; on the necessity of internal integration of energy markets and energy systems of European states and their connection to the Black-Caspian sea region states; as well as on the relevance of the Ukrainian gas storage capacity for European energy security.
We are happy to share presentations of the Second Kyiv Security Forum with you.
Speech of Arseniy Yatseniuk, Speaker of Verkhovna Rada of Ukraine, Founder of Open Ukraine Foundation
Dear Friends, good afternoon! I am pleased to see all of you already for the second time at the Kyiv Security Forum held by Open Ukraine Foundation. We are discussing a very interesting topic today, which is energy security. It would be natural if we discussed the issue of the global financial crisis, but there are so many experts discussing it, that, to my mind, the Forum would not bring anything particularly new to the crisis issue. The only thing that I should mention about the global crisis is - let us wish all of us and people working on the crisis problems that we manage to overcome the crisis in the shortest possible time and the world and Ukraine come back to their pre-crisis activities. Though, we understand that this remains questionable.
In any case, the energy issue is a part of any crisis including a financial crisis. Before the financial crisis came, there had been two other crises in the world – the energy crisis and food crisis. That is why the topic of the Second Kyiv Security Forum was chosen a year ago. Unfortunately, in recent times, energy ceased to be a commodity, it became an element of external policy. There was a strange correlation – the higher the oil price on the New York market was, the bigger the energy impact was on external policy aspects.
Today we have a totally different situation. The question is what should we expect in the future? One of the greatest challenges of the world has been the so-called energy independence. I will tell you what I think about it. Energy independence is nothing but a myth. It is impossible to be energy independent. All participants in the energy market are extremely dependent on each other: suppliers on transit countries, transit countries on consumers; it is a vicious circle. And in this circle we should develop an energy policy that we lack today and that we have to discuss today.
I will divide the energy security issue into some elements. Let us start from the first element – the financial element of energy security. Let’s go back to the year 1998. If I am not mistaken, one barrel of oil cost about $10. In July of 2008 the price for one oil barrel grew up to $148. Is it a normal situation for the globalized world? Is it a normal situation for the world economy? No, it is not. These are tremendous challenges that the world has faced and that Ukraine has faced. When the price of oil reached a critical level, it decreased to $60. What is next? I am sure that the price of $60 per one barrel of oil is a short-term phenomenon that is connected with a number of internal and external aspects. I think that during the second half of the year, the price of oil will be about $100. What should we do during this period? Should we bide for some time? No. It is not time for waiting. We should act. Now we have the best chance for energy dependent countries to develop their energy policy and make a constructive decision on what the world energy policy should be like, on what Ukraine’s energy policy should be like. I read a very interesting article in the Financial Times today. In a week, the International Energy Agency was going to publish a report on what the situation with oil will be by 2030. But for some unknown reason, the report has been published in the press today, a week earlier. In accordance with the IEA’s report, in 2030, the price of oil will grow up to $200. I doubt that, as nobody knows the way that the world economy will be developing up to 2030. Nevertheless, the trend is clear – the prices for energy carriers will be increasing.
What happened after the price of oil decreased to $60? Let us talk about the second element, which is the transport element of energy security. After the financial crisis and after the significant drop of energy carriers’ prices, all transport projects were frozen. If they were not frozen publicly, they were frozen in an unofficial way. In fact, on all the territory from Canada to Kazakhstan the intensive development of energy transporting corridors, which has been the case during the last 5 years, has been stopped. What will it lead us to? Of course, that will lead us to an inability to diversify energy supply sources, continuing dependence on the traditional suppliers and correspondent risks related to exploitation of the old transport corridors.
A very important issue which has not been discussed for quite a long time and that cannot be answered is: are there any rules for playing the transport market game? No, there are not. In its time, Ukraine urged for working out a kind of a transport document or a transport charter determining rights and obligations of transit countries. But this suggestion remains only on paper and should be discussed during our Forum as well.
The next element of energy security directly related to the price situation on the external market is the issue of renewable energy sources. This process has also stopped today. And it is clear for all of us that there is no sense, from an economic point of view, to develop any alternative or renewable energy sources when the price of oil is $60. It means that in a short-term perspective, we will face more problems: if the price of oil increases, and it is sure to increase, we will face the problems of dependence exceptionally on traditional energy sources.
The fourth thing that we should be of concern to us is production. The situation with oil production is not so bright. Oil production correlates with external oil consumption. Nevertheless, in accordance with the IEA’s data, production of oil, petroleum derivatives and energy products falls by 9% annually. In other words, every year there is a 9% production decrease. In the case of significant investments being made into this economy sector, we can reduce the production fall almost by 3%. So, the production decrease will form around 6% in this case. That means that sooner or later the world will face the problem of scarce energy resources. In its turn, it means that in the future there will be a dictatorship by some monopolist countries again, and we should start preparing for it already today.
How does energy security influence the global economy? How does the energy crisis influence the global economy? During the times when the prices were growing from $100 to $148, the OPEC countries made the most of the situation. According to different estimations, by 2030 the OPEC member states will get around $2 billion in additional financing. Two billion American dollars – that is a huge amount that may have significant impact on the global economy’s development. Today, energy consumption takes up to 1,2% of the world’s GDP. But we expect the consumption level to grow by 2030, and, correspondingly, the world will have to pay more. So, 2% of the world global GDP will be devoured by energy consumption. The situation will bear far-reaching implications, as the countries controlling the main world resource are getting fantastic profits. Of course, these profits are directed somewhere. These incredible profits will influence currency exchange rates, the value of different assets, prices for different goods and for different infrastructure projects that will or will not be financed by these countries. It is very important for us to ensure global security on the energy level. Just look at what is going on. Just yesterday, if I am not mistaken, there was an explosion on the Kherikhan-Jeihan oil pipeline. Some months ago, there was an explosion on the Baku-Tbilisi-Jeihan pipeline. Very often, for different reasons, the countries stop the work of these or other oil or gas pipelines and start repair works. What does it mean? It means that the energy sphere may directly impact global balances and global security. Transport corridors as well as energy market rules have direct impact on global world tendencies and the world’s security level.
What should we do? First of all, I should say that there are no rules for playing the game on the energy market, common rules followed by everybody. That is why the number one priority for the WTO should be elaborating energy rules. The Energy Charter is a very good document, but, unfortunately, it is mostly a declarative document not covering the main resource-owning producer countries, main transit countries and main resource consumer countries. That is why working out energy market rules within WTO frameworks is a priority task for ensuring energy security.
The second issue is so-called energy separatism. In 1998, when the price of oil was $10 per barrel, nobody talked with the resource-owning producer countries. In 2008, when, the price of oil was $148, nobody talked with consumer states. And that vicious circle will be kept forever if we will not work to understand that the chain of supplier-transitor-consumer should be mutually beneficial for all of us. Within the framework of any international organization, regional or even global, we should harmonize the rules of the world energy market.
Concerning gas, it is a separate specific energy product that has considerable impact on Ukraine’s economy with no clear supply rules and no clear pricing rules. That is why we need to take a decision that gas is an exchange commodity; and if it is not possible to make it an exchange commodity, we should clearly identify pricing mechanisms for gas as it has become a very complicated political commodity.
There was an idea of establishing a gas OPEC. As an idea it is very interesting. However, I would like to underline that a gas OPEC should not form a new monopoly on world markets. Gas OPEC should integrate into the world energy sector and serve exceptionally as a mechanism of equal access for all energy market participants to energy resources but not as mechanism of OPEC’s dictatorship.
Let me once again turn to the Energy Charter. I would like to stress that a number of countries have not ratified the Energy Charter. That is why it is at least incorrect to suppose the Energy Charter, also for Ukraine, is an effective mechanism. Nevertheless, it does not mean that we should forget about the Energy Charter. It means that we should improve it by developing effective controlling and fulfilling mechanisms, by involving all the countries working on the energy market and enjoying their monopoly in one or another sphere into participation and ratification of the Energy Charter.
With regard to the European Union, unfortunately, the so-called Common Policy of the EU in the energy field has not been established yet. But we hope that when the Lisbon Treaty is ratified and when all the mechanisms of internal cooperation within the EU are installed, Europe will form its Common Energy Policy, and Europe will have clear approaches stipulating Ukraine’s active participation in the European energy policy.
And one more thing which concerns Ukraine. We should clearly understand that in the situation when price of oil is $60, everybody will talk with us. Today Ukraine has a very good chance to be not only a transit country but also a country that actively participates in different investment projects. Such projects should provide for EU’s, Russia’s, Turkmenistan’s, Uzbekistan’s and Kazakhstan’s participation. All the process participants may achieve success only in unity. In the other case, only a small number of people will derive benefit from the situation. But when the situation turns bad, everybody will feel that.
On Ukraine’s energy market, a lot has been done in the recent period. I would like to stress once again that it is necessary to revive the energy monopoly of Naftogas of Ukraine. That is the priority task that the government is working on and Ukrainian parliament supports this as well. We need direct contracts, direct relations with suppliers and consumers. Another issue is regulator. Ukraine needs a clear, independent and efficient energy regulator setting rules on electrical energy, gas and oil markets. I would like to emphasize that there is such a regulator but it lacks independency.
One more issue is related to production. Under the circumstances of the financial crisis, Ukraine is unable to finance production on its own. But Ukraine has conducted a series of tenders and if the tenders correspond to Ukrainian legislation and national interests in terms of involving foreign investors, involving internal resources, Ukraine should actively start working on the issue of extraction resources on its own territory and on the territories of neighboring countries.
As to energy saving, two years ago Ukraine occupied the first place in the world by energy consumption level (per $1 of GDP). In such a situation, regardless of the price of energy resources, we will not be able to survive. That is why the issue of energy efficiency, reducing the energy consumption level, is the priority task for the Ukrainian government, Ukrainian state and Ukrainian business as a whole.
That is a short plan that I wanted to present to you as a ground for discussion. I would like to stress once again that regardless of the energy price-drop, the energy issue remains acute. The energy issue and low prices for energy carriers is one more chance for energy-dependent countries to set the rules, to sign long-term contracts and ensure mutually beneficial interests for consumer countries, transit countries and suppliers.
I welcome you to an interesting discussion that we will have for the next 2 days. In a few days, the next Energy Summit will be held in Baku. And I hope that our Security Forum will prepare a positive foundation for the meeting in Baku.
Thank you for your attention. I invite everybody to the discussion!
It's a great honor to address the Second Kyiv Security Forum. I would like to thank the organizers, all those who were involved in the preparation of this important event, who did an excellent job of bringing together such a distinctive audience. Today's world highlights to all with short memories that security vacuum has consequences, which until they occur are impossible to predict. But let us look at the first lessons of a more constructive alternative: the current financial crisis and the role of the IMF, the World Bank, J7, and, of course, the EU. Imagine that less then a year ago, the IMF was a collective financial security apparatus whose very mission was questioned, and now it is playing a key role in a global crisis that was unimaginable just two months ago. All of these structures have been indispensable in this crisis. That is like a global front now.
There are numerous European specific structures that exist: from less ambitious frameworks so far, like the European Neighborhood Policy, to more, shall we say, enthusiastic efforts, like …you name it. Whether born out of crisis, or through thoughtful vision, the true utility of these frameworks and alliances is not apparent until they are immediately required. And then their presence or lack thereof is simply afeta compli.
It is my role as the Deputy Prime Minister for European Integration and it is my responsibility to lead the government of Prime Minister Tymoshenko in areas of cooperation, direction and legislation in Ukraine’s role as a critical partner within Europe and within the EU.
As with political and military security in this region, there is a security vacuum that exists in energy sector. More often then not the focus is on Ukraine. So, clearly, other nations represented here have been vulnerable also. Our neighbors and partners here know this all too well experiencing very frequently the same problems. This very Forum attempts in a very concrete way to manage one element of the situation - the transit space, and the government of Ukraine supports these efforts. There have been numerous calls for the collective energy security arrangements. And Prime Minister Tymoshenko said that the goal would be that no country would be left alone to deal with a problem which affects everyone. Interdependence is the order of the day and we must deal with this issue today on a multilateral basis. The same words apply to the global credit crisis. As we have seen, no country can withstand these problems alone. Whether through coordinated multinational interstate cards, or coordinated global liquidity infusions, we are all interdependent. The same holds for the natural gas and the broader energy spectrum.
What specifically can be done? Firstly, include Ukraine as a key transit space and other key transit space members in the current energy dialogue that exists between the EU and Russia. It is not unreasonable to suggest that the country that holds the majority of transit of gas shipments to Europe would be included in this dialogue, and other critical countries will be included as well. Secondly, establish a stronger energy policy framework of producers, consumers and transit space countries that would emphasize market transparency and access. The Energy Charter Treaty and its Transit Protocol are a good first step and provide a constructive conceptual framework. Initial focus would be on setting ground rules, harmonized contractual procedures, and agreed upon pricing points. Thirdly, institutionalize a forum for conflicts to be resolved collectively. When one member suffers gas interruptions due to the natural disaster or politically motivated reasons, members can meet to determine an appropriate course of action and respond to the crisis that affects everyone. What is clear, that without this type of framework for Europe, consumer and transit nations will remain divided in the face of sometime supply monopolies and possibly soon to be developed cartels.
It is the position of the government of Ukraine and part of its efforts to integrate more fully into the EU space, and the above points are pursued as part of our diplomatic agenda. We are pleased with the significant progress achieved with the implementation of the EU-Ukraine Memorandum of Understanding on the Cooperation in the Field of Energy. EU-Ukraine summit in Paris two months ago reaffirmed our joint strategic interest in energy cooperation. We will start soon negotiations of Ukraine’s accession to the Energy Community Treaty as part of extension of the common EU regulatory framework in the energy area. Modernization of Ukraine’s gas transportation system is an important item on our agenda. And we hope that the international pledging conference will be conducted hopefully next February. Nuclear safety cooperation is a good example of fruitful cooperation that requires positive continuation.
There are a number of problems and Speaker Yatsenyuk addressed them already. I would like to highlight just two. Underinvestment in the production of domestic energy resources is a clear problem that we have to deal with because Ukraine is the country rich in natural resources. To deal with that, we need various incentive programs for strategic foreign direct investments. Second problem, already touched upon, is extremely inefficient energy usage. Not just in industry but also among residential users. Therefore, we need energy efficient equipment and technologies. And this is again an invitation for investments and invitation for a greater involvement of the expertise that exists outside Ukraine, and outside this region.
At the end, I would like to add several specific remarks to the issue of the larger transit space. First, we understand Russian Federation’s fundamental interests in being a reliable energy supplier to Europe. And we strongly believe that democratic Ukraine governed by the rule of law, will provide many new opportunities for the cooperation in the energy sphere. Second, we are happy that RosUkrEnergo will be removed and new gas agreement will be reached in time so that there is not another crisis in 2009. Recently agreed principles between Ukraine and Russia on structured gradual transition to new prices on gas are important value-added developments to the energy stability of Europe. Transparent system of energy supply based on direct agreements between Gasprom and Naftogas is a system that European energy consumers can have faith in. Third, on Ukraine’s side, we as a nation need to show unity - it is time for unity, not for divisions. Ukrainian political turbulence, as sometimes it is elegantly called, unfortunately provides skeptics within some international constituencies with excuses to withhold support and solidarity. And finally, don’t bypass Ukraine. Yes, there are issues with transparency and inefficiency within Ukraine but it needs to more effectively integrate itself within the European energy infrastructure system. Bypassing Ukraine will make it much harder for Ukraine to reform. Greater diversity in energy supply and increased transparency in all of Europe’s energy contracts and policies is the only way that Europe can begin to end this age of energy insecurity. I think that these priorities should become an integral part of a more ambitious transatlantic transparency initiative as an element of renewed updated transatlantic agenda. The government of Ukraine and Prime Minister Tymoshenko have been advocating for these measures for many years now. The government and I, as a member of the Cabinet, responsible for these activities within the EU integration framework, support these measures. We look forward to working with you on these mutually beneficial and very much needed efforts. Thank you.
I wish to extend my warmest greetings to the participants of the Second Kyiv Security Forum. The focus of this meeting is a very important one: the Black and Caspian Seas Region and European Energy Security. It is with deep regret that I am unable to join you today in Ukraine's beautiful capital.
It is fitting that this Forum takes place in Ukraine, which is a neighbor of strategic importance for the European Union, and key partner in the region. Ukraine's role in the development of our shared continent cannot be overestimated. Her future affects our common future. I very much welcome Ukraine's leadership in addressing our shared challenge of energy security.
This is truly a shared challenge. There are concerns about security of supply in a world in which the available reserves are shrinking both in size and location, and in which more and more countries want to access them. As importantly, we must all recognize that our historical use of fossil fuels has led to the greatest current threat to our planet: Climate Change.
Something will need to change, and we need to change it together. The added incentive of Climate Change means we have to work even faster and harder. This is particularly crucial for the Black and Caspian Seas Region, with many of its countries heavily dependent on gas. We should make full use of our growing inter-dependence and pull our efforts together, thinking strategically and acting in unison. It is for this reason that the Czech EU Presidency will hold a summit meeting with the Caspian Sea countries and transit countries in the spring of 2009.
Last month's European Council confirmed once again that security of energy supply is a priority for the European Union and is the responsibility of all Member States. It called for accelerated work to face shared challenges. Next week, the European Commission will publish a Strategic Energy Review with a particular focus on supply security. A very important part of this work within the European Union will be the proper integration of the most isolated European countries into European electricity and gas grids. Looking to its partners, the European Union is committed to accelerating the development of relations with producer and transit countries, to secure the stability of supply and diversifying energy sources and supply routes.
We wish to see the European Energy Community extended to include Moldova, Turkey and Ukraine so that the European Union energy acquis applies across our neighborhood. This will bring transparency, and better regulated markets. This is in our interests and in our partners' interests. Accelerating regional co-operation is crucial in this context. Under the German Presidency, the European Union launched the Black Sea Synergy to promote regional co-operation. With the Eastern Partnership Initiative, we look forward to building further shared positive regional dynamics.
The European Union aims to develop alternative supply routes that are economically viable and which address anticipated future needs for fuel supply. Waiting for a specific need to arise means it will be too late -- we need to act now. The role of Central Asia will be even more important in this context.
Our partners know that the European Union is and continues to be to be a good customer. They also need to be able to deliver. Producer countries should invest in new additional production in time. We have urged our partners to open up their investment regimes to international investment and international knowledge. It is in their interests. The European Union's legal regime provides for certainty in contract and investor confidence. We recognize that many of the energy projects which we believe are necessary are difficult in terms of technology and very expensive. They will need major investment.
Given the increasing shared challenges, it is more important than ever that we talk to each other about energy policy and how we can address these concerns together. We need to use our inter-dependence to build trust and transparency, to better face our shared challenges. I therefore welcome the initiative of holding this Forum, and wish you luck in your deliberations over today and tomorrow.
Dear Mr. Speaker, dear Vice Prime Minister, dear Ministers, dear Ambassadors, dear colleagues and friends, I am really honoured to be invited to speak to this prestigious Forum. It’s a very urgent topic that we are discussing at the Second Kyiv Strategic Forum. And very emotional and interesting presentations before mine actually emphasised the importance and urgency of the issue.
Challenges for energy security in the recent years are truly becoming global. We are all facing rapid changes in energy environment.
Energy price environment has become very volatile.
Producing countries seek stronger participation down-stream.
Global energy demand is more and more driven by the rapidly growing economies outside the traditional OECD area.
We see greater state involvement in the global energy markets.
Environmental protection which used to focus on prevention of pollution is now increasingly focusing on reducing global green house gas emissions and mitigating their climate change impact.
It has become obvious that our current policy course is not sustainable. The problem is not that sources of energy are unavailable. But there is a real risk that our use of these resources which have been the engine for so many improvements in human welfare could ultimately propel us towards environmental degradation and conflict. It does not have to be that way. But putting the global energy economy on a secure path of development will require renewed and joint efforts from governments and international organizations.
Meeting policy goals in relation to energy security therefore requires recognition of our interdependence in matters of energy, and the understanding that genuine security and stability need to be based on mutual benefits and advantages all along the energy value chain.
I would like to underline the importance of an inclusive debate involving all participants in the energy value chain - the producers, the consumers, the transit countries. It is also my personal conviction that current tensions in international energy market can be attributed at least in part to poor communication and information, and a lack of transparency over policy intentions and actions. Channels for dialogue are therefore very important.
The balance of benefits and advantages between producers and consumers of energy is not a static one. High energy prices in recent years have strengthened the position of the relatively small number of resource owning and exporting countries. The consequent concern that energy could become even more of a strategic and political commodity than it has always been has prompted a variety of supply and demand-side measures in consumer countries, designed to lessen dependence on energy imports. Such measures can improve efficiency or increase diversity of supply but in a world where technology is locked into the use of hydrocarbons, they are not likely to alter the underlined facts of mutual dependence between buyers and sellers for the next couple of decades at least.
In my view it would be a mistake if current challenges led to the emergence of new barriers to international trade and cooperation under the banner of energy independence.
Given the global distribution of energy resources, current technologies and projections of demand, the priority for policy makers should be on how to manage interdependence most effectively. And how to create functioning and balanced international frameworks that can mitigate the associated risks.
A starting point is to find common principles that can underpin international cooperation. For the Energy Charter, these are expressed in a political Declaration of 1991 signed by almost sixty countries around the world. These countries include major energy producers as well as transit countries and net energy importers all of whom have subscribed to the following core principles:
national sovereignty of energy resources, respect for contract in property;
stable and open frameworks for flows of energy capital, technology and investment;
an orientation towards market solutions;
non-discrimination;
transparency;
energy efficiency and sustainable development.
How do these principles play out against the current debate of energy security and climate change? The first point is to underline that the main mechanism for managing interdependence is of course through the operation of the international energy market.
The main task for governments must be to ensure the operation of international market mechanisms by putting in place predictable, transparent and non-discriminatory conditions for trade and investment. In this way, they can help to ensure that flows across borders of capital investments, of technology and ultimately of energy itself, are directed to the most efficient way. More broadly, governments have to create an environment that will allow the right mix of new energy technologies to emerge for use of fossil fuels alternative energy sources.
While some interests are shared by all countries, each player along the energy value chain has interest that need to be taken into account.
The reality demonstrates that there is a mismatch between security of supply and security of demand. Within existing technology limits, a resource owning state can secure physical supply. Security of supply implies that an exporting state keeps its promises linked to supply deals and backs them and does not misuse its sovereign position to interfere with supply deals.
Looking at the other end of the energy chain, an energy importing state cannot guarantee physical demand which is ultimately the result of individual consumer decisions. However, exporting states, will at least ask for predictability of the market framework, and the rules under which energy is imported into the country. Long term contracts with the minimum pay provision were and still are successful model of a fair balance between security of supply and security of demand. In addition to the efforts of national governments, an interdependent energy world needs international institutions to promote coordination and to provide a stable framework for cooperation. This is precisely why we see that Energy Charter Treaty occupies such a valuable and distinctive place in the international legal architecture. It demonstrates that it is possible to bring a large, diverse group of countries together, with the legally binding framework on the basis of common principles and mutual interest.
The Treaty is a unique legally binding, legally based multilateral mechanism for cooperation in the energy sector which brings together producers, consumers and transit countries without any discrimination. Its key strength is in protecting investments and encouraging flows of energy, investment capital and technology across member countries to mutual benefit. It provides a serious foundation for harmonizing the interests of all participants, gives us - so to say - a universal alphabet for energy cooperation. Of course, the Energy Charter is the product of the collective wisdom, and it can function effectively only through collective efforts of its member states. I highly appreciate the remarks of Mr. Speaker about the Energy Charter and we usually highly value those advices and remarks. So, we will take a note of that and work on them. We believe that Ukraine is a very important player in Energy Charter process and highly appreciate your country’s professional and effective participation in the Charter process.
Let me take a moment to present a Charter’s distinctive contribution to the international energy security. The need for massive investment to meet future energy demand is well documented. But in time of global financial crisis and of extreme volatility of energy prices, this represents an extremely difficult and dangerous challenge. Uncertainty about future return of capital is a very bad thing for investors, certainly, when investments, it is the case in energy, are huge and made on a long term basis. This will in no doubt scare not only the traditional actors of the energy sector but also the financial community, which in the past was positive and is now disconcerted. Low prices, if permanent, will jeopardize some existing investments, and can put a hold to planed major ones.
These investments nevertheless are absolutely necessary for the decades to come. Their cancellation or even postponement will endanger the security of supply and in consequence the economy as a whole. In this gloomy context, long-term decisions in the energy sector need assurances that contracts and property will be respected. The Energy Charter Treaty’s original binding mechanisms for investor protection including the tested option of investor-state arbitration, are designed to provide this legal security.
The promotion of reliable transit is a key component of the Charter’s work. The Charter has become a leading intergovernmental forum for exchanging information on issues such as access to transit pipelines, tariff setting, congestion management, and investment in new transit infrastructure. The Charter’s work on energy efficiency is based on a special protocol which is carefully crafted by the member states.
Additionally, the Charter’s work brings an important element of transparency to Eurasian energy markets. The Charter provides an accessible multilateral policy forum for a very diverse group of countries, provides a valuable platform for a regulatory dialogue on issues effecting the movement of energy across Eurasia.
We are optimistic about the potential international energy cooperation. There are nevertheless significant challenges ahead. And we need to ensure that policies pursued by governments and international organizations provide the right bridge to a sustainable energy future, so, that energy can continue to be synonymous with human development and opportunity. We need “win-win” solutions in the energy cooperation, and not a zero-sum game. Mutual benefit, recognition of and respect to each other’s interests will secure not temporary but long term and stable solutions.
Honorable guests, Ladies and Gentlemen, friends and colleagues: good afternoon. I would like to extend appreciation for invitation to speak to such a distinguished audience – it is both privilege and pleasure to talk about wide-range possibilities of energy cooperation in the Black Sea Basin, an emerging region with a growing geo-strategic importance.
This Forum justly serves as an illustration to an apparent fact that Energy is a key area of cooperation in the backdrop of the 21st century within which the world’s economic regions are interdependent for ensuring security and stable economic conditions. Indeed, once again, we speak about stability and sustainability, and to us, Georgians, these words for the duration of recent months have grown in their meaning and value even more. Acquiring sustainable, competitive and secure energy is essential when world energy consumption is expected to rise and energy supply theme is meant to dominate as a foreign policy tool in the hands of some of the large states. It is foreseen that in about 30 years around 70% of European Union’s energy requirements, compared to 50% of today, will be met by imported products – some from regions, as we witnessed quite recently, threatened by instability.
European energy security is facing a set of serious challenges connected to Europe’s dependence on definite source of energy and the need for diversifying energy supply sources. The problematic aspects of European dependence on Russian energy turned into no-secret during the Ukrainian gas crisis in January 2006, and have been subsequently reconfirmed by Russian energy diplomacy against other independent countries. In this regard, the considerable oil and gas resources in the Caspian region, primarily in Azerbaijan, Kazakhstan, and Turkmenistan, constitute the most accessible alternative energy supplies for Europe. With current World economic crisis, it becomes more obvious that Russia as a dominant supplier is less likely to fill future European demand due to a lack of domestic investment in new energy projects and infrastructure. The EU needs to develop an active strategy for securing access to the energy resources of the Caspian region, and handling existing competition for these.
Georgia at present hosts three new independent oil and gas pipeline outlets from the Caspian Basin: the Baku-Supsa and Baku-Tbilisi-Ceyhan crude oil pipelines, and the South Caucasus – Baku-Tbilisi-Erzurum natural gas pipeline.
The Baku-Tbilisi-Ceyhan (BTC) oil pipeline currently transports around 1 million barrels per day and comprises more than 1 percent of the world’s total crude oil supply. Baku-Supsa pipeline is in a fully functional state and together with Georgian Railway is ready to contribute to the development of a Black Sea Basin’s Midstream Capacity. It should be noted that both BTC and Baku-Supsa pipelines are comfortably available for significant throughput upgrade in a short term.
The South Caucasus Pipeline takes on output from Giant Shah Deniz field. Additional compression can boost pipeline throughput considerably to 20 billion cubic meters per year to accommodate the second generation investment plans for Shah Deniz. Gas from lower gas horizons in the Azeri Chirag Guneshli oil field and other Caspian oil and gas fields that are currently in their development phase will increase the gas volumes through the Southern Caucasian corridor and relieve upward price pressure in downstream markets.
Associated gas volumes from the giant Kashagan offshore field of Kazakhstan that is operated by a consortium of international oil majors lead by ENI, and Block 1 offshore of Turkmenistan being developed by the National Oil and Gas Company Petronaz of Malaysia could well justify further midstream investment in a Southern gas corridor to forge the link between significant Caspian gas volumes and downstream markets in Central and Eastern Europe.
Un-doubtfully, Georgia’s location can accommodate gas imports through its territory onward to South Eastern Europe or across the Black Sea to the Ukrainian market and further downstream to Central Europe.
As part of the European Union Neighborhood Policy Energy Cooperation Project, Georgia participates in the study on the “Feasibility aspects of a Trans-Caspian-Black sea gas corridor”. The goal of this project is to investigate opportunities for gas transit from Kazakhstan and, possibly, Turkmenistan across the Caspian Sea to Azerbaijan and Georgia and through the Black Sea region to EU consumer countries. The meeting of beneficiary countries and representatives of European commission was held in the fall 2007 in Brussels. Meeting was convened to discuss study results and to adopt future steps of cooperation in this direction for 2008-2009.
In order to strengthen the energy security of the region, Georgia is also involved in the “Euro-Asian Oil Transportation Corridor” project (EAOTC). The EAOTC project is of high importance in increasing and strengthening the energy security of the participating countries through the establishment of a reliable route for the transportation of hydrocarbon resources from the Caspian region to international markets via the territories of Azerbaijan, Georgia, Lithuania, Poland and Ukraine.
We hope that future development of the project shall result in the successful establishment of the Corridor for the transportation of the hydrocarbon resources from the Caspian Sea region to the International and European energy markets through the territory of Georgia and the participant states.
Georgia, in cooperation with the countries of Caspian-Black Sea-Central Asia region has the best opportunities on the way of creating the Common Energy ring with the EU countries and with other countries of the World Community.
Another important project is White Stream project to transport Caspian gas via Georgia and the seabed of the Black Sea to Europe. This pipeline project could encourage investments in Caspian gas field development by diversifying export options and transport routes directly to European Union territory. The proposed pipeline would branch off from the Baku-Tbilisi-Erzurum main pipeline, once the second and third phases of field development are reached at Azerbaijan’s Shah-Deniz field. Initially named GUEU (Georgia-Ukraine-European Union), this project envisaged a seabed pipeline from Georgia to Ukraine, with options to continue towards EU territory.
Also, in a little bit longer perspective, Georgia will be part of the NABUCCO pipeline serving as a host country to transport natural gas from Caspian region to Turkey and onward to Austria, via Bulgaria, Romania, and Hungary. NABUCCO Natural Gas Pipeline project will certainly contribute to the energy security of Europe as it is expected to meet 10% of the EU demand in 2015 with its full capacity reaching 31 bcm per annum. But the EU has to show its determination for NABUCCO Pipeline initiative, prospects of which are being currently undermined by the interference of existent suppliers. It is our assurance that NABUCCO will serve as a guarantee for affordable, secure and uninterrupted flow of hydrocarbon resources into European market. Although capacity of the pipeline is far from meeting the EU's overall energy need, - the mere existence of it as an alternative route could give the EU leverage it needs in its negotiations with traditional suppliers and help create a more competitive energy market. EU’s determined and well-defined support to NABUCCO will also add to the stability of transit states of Caucasus already in a short term, as it will bring to end speculations about the sustainability concerns of the region.
Georgia is strengthening Power interconnections with its neighboring countries as well. Considering that Turkey is expected to become the primary export market for Georgian electricity, for both local consumption and transit to Europe, new transmission line projects are being planned with the aim to expand the transit potential of our country.
In 2009-2011 Georgia plans to construct a new 500-400 kW high voltage power transmission line to Turkey in order to expand the country’s transit and export capacity. MOU between the government of Georgia and Turkey on construction of a 500-400 kV power transmission line connecting Georgia and Turkey was signed. In the first half of 2008, several agreements were signed between the state energy companies of Georgia, Turkey and Azerbaijan on the implementation of the project’s technical and financial parameters. KFW, EBRD та EIB are financing the project. Also NIF (Neighborhood Investment Fund) has assigned 8 million EUR to it.
I believe workshops at this Forum will serve as an effective platform for reemphasizing that the EU has to show its determination and leadership for the realization of the projects mentioned in my speech. As for the political realm – the EU should speak with a single, consolidated voice to show support to the states of Black Sea and a Caspian Sea Basins. Their adherence to the Western principles and their overall economic and political stability is crucial for the sustainable future of the whole continent. Diversified hydrocarbon supply sources and diverse supply routes of transportation simply serve as a vehicle to achieve this goal. My country gives its full support to regional transit initiatives and declares readiness to serve as an open platform for all projects that contribute to the overall security of the Region. Georgia has lived through August 2008 events. Its statehood survived, course of action and adherence to western democratic principles was sustained despite fears by many, and implementation of governing policy geared towards bringing our country closer to European Community continues ever more rigorously. We believe that full benefits of the realization of our aspirations can only be attained with strong and unwavering support from the EU and wider International Community. Political Stability and Economic Security are the key values that will serve as two main pillars in the process of Integration of our regions in the large European family, eventually marking a new era of cooperation in Tomorrow’s World.
Mr.Speaker, Mr.Deputy Prime Minister, dear organizers, dear ladies and gentlemen! Once a doctor, an architect, a politician discussed over the oldest profession in the world. A doctor said: “It’s clear - it’s my profession. Because if a woman was created from the bone of Adam...” “No. no”, - opposed the architect. It’s my profession. Because before this medical operation, it was a chaos and the world was created due to design of architect.” Just politician was quiet and silent. They wondered his opinion. And he replied: “My dear friends, to your mind who created this chaos?”
Dear ladies and gentlemen, who created this energy chaos we face today? Is it unavoidable for citizens of Ukraine or any other country to pay more and more for energy supply? Is it determined that the people of Ukraine and the EU will have just the increase of energy prices? Do not think so, not only because the decline of energy resource prices today despite the forecast of Gasprom of doubling or tripling of the gas prices till the end of this year; do not think so because energy monopolies propose different tariffs to countries dependent on their foreign policy. As I saw in one Ukrainian newspaper the caricature: price of $400 per 1000 cubic meters of gas if you will not stop to criticize Russia on events in Caucasus; $ 300 per 1000 cubic meters, - if you recognize Southern Ossetia and Abkhazia; and $250 - if you will express negatively and publicly that Ukraine is not joining NATO.
Recently one Lithuanian official was asked by a journalist “Do you dream about improvement of relationships with Russia?” “Yes, I do. Yes, I dream”. “How much it could cost?” – “Nothing”. “But how it could be nothing?” – “To dream always costs nothing”. However beautiful the dreams, you should occasionally look at the reality. And what is reality? – The reality is very rich political, cultural, historic, economic relationship of cooperation with Russia. Sincerely speaking, it is always much better to have rich and happy neighbor than to have poor, angry, unreliable and hostile enemy. Anyway, it is clear that in a long distance the gap of demand and supply of energy resources will increase globally, in the EU, in regions and in countries. Consequently, the prices on energy resources should increase as well. Additionally, taking into account financial crisis, climate change, coming food crisis, we are getting very dark picture. Are we able to avoid such situation? The best reply was done by Winston Churchill, former Prime Minister of Great Britain: “Optimist is everyone who in difficulties is finding excellent opportunities.” Is energy independence of Ukraine or the EU a good opportunity? To my mind, it’s nothing else, but just nice illusion. No country, including Russia, is energy independent. Russia, for example, needs to get technology and equipment for oil and gas sector. Energy suppliers and energy consumers are highly interrelated, like couples, like wives and husbands, and if we have a hole in the ship we are sinking together.
To increase energy security, - is this a real plus, a real opportunity, - due to innovation, due to research, in energy sector? Yes. Sweden, for example, will stop crude oil import in 2020. Again - due to innovation, due to research. Germany in 2020 will satisfy its needs on 27% and this is just the beginning. Is this creativity? Yes. But not so called creativity, when politicians try to get more and more energy resources from Middle East, from Russia or Iran. The best scenario for improving energy security is Common EU energy policy. The EU should speak with single voice. Common EU energy policy is not a front line, is not against Russia or other countries. If energy suppliers are united in OPEC, why the EU is unable to buy gas collectively? Today the EU Common energy policy is still weak. For very simple reason, - because the EU is still weak in the energy sector. We could strengthen energy security due to transatlantic cooperation. Especially taking into account newly elected President Mr. Obama, already sometimes called as Mr. Globama, because of his willingness for whole world. But anyway, there are a lot of skeptics on efficiency of transatlantic cooperation on energy matters. Another joke - recently it was discussed among Mr.Barroso and Secretary General of NATO Mr. Scheffer - how soon NATO and the EU will get its former power? The dispute was so harsh that they decided to invite God. So, Mr.Scheffer asked “To your mind, when we will regain our power, our influence in the world?” God thought a little bit and answered “Yes, NATO will regain its power. But not during your life-time.” The same question was put by Mr. Barroso. God replied “Yes, the EU will regain its influence, its power, but not in my life-time”.
Anyway, it’s clear that NATO and the EU are most powerful institutions in the whole world. And jokes that Russia became already informal EU leader of energy matters are groundless. In order to increase the level of energy security, Common EU energy policy is developing on following directions. Diversification of supply, - previous speakers spoke about it a lot.
Efficiency of energy consumption, especially among newcomers; alternative energy, renewable energy and solidarity principle of all the EU countries started to be implemented quite dynamically. And it could be confirmed in a case of Lithuania. As you probably know, before Big Bang, before the acceptance of 10 newcomers to EU, European Commission challenged 3 major problems. Two of them were directly directed to Lithuania. Firstly, it was closure of Ignolina Nuclear Plant; secondly, it was Kaliningrad transit; and thirdly, it was Cyprus problem. Why closure of Ignolina was such a great problem? Before that it was closure of Barsabak nuclear plant in Sweden, few enterprises in Germany, the same decision was made for Bulgaria, Slovakia. The simple answer: because Ignolina Nuclear Plant looks much larger comparing with all these nuclear plants. Let me say briefly what we intend to do till 2020. Firstly, Lithuania is under preparatory process to build up regional nuclear plant with co-owners of Poland, Lithuania, Latvia and Estonia. The capacity will be 3400 mega Watt and we expect to introduce that in 2016-2017. Secondly, Polish-Lithuanian power-bridge (the capacity 1000 mega Watt) should be introduced in 2012-2013. Thirdly, power-bridge, Sweden-Lithuania with capacity again 10 00 mega Watt and the exploitation should be ready by 2016-2017. Of course, we have great intentions to have power-bridge Ukraine-Belarus-Lithuania, and we will start our negotiations. It should be mentioned as well, power bridge Finland-Estonia (3050 mega Watts) which started to work in 2006, and it will be tripled probably till 2012. We have several other projects like LAG terminal, gas underground storage and so on. AS you can understand these projects are very costly, are very expensive and we will be completely unable to realize that without EU support from structural funds. The last but not the least project is renovation of multifamily buildings and the cost will be more than $16 billion. And of course again we would be unable to realize such kind of projects without EU support. Lithuania is paying great attention to efficiency, to savings of energy and we expect that in 2020 20% of our energy needs will be satisfied due to renewable. And finally, I feel myself in Kyiv like at home. We have a lot of commonalities, a lot of common things. E.g. the most popular sport in Ukraine and in Lithuania is - telephone calls. Let’s communicate more and more. It gives us opportunity to get synergism, cooperation on energy matters. Better future is knocking on our doors. Be ready to everything and everything will come.
Dear Speaker, dear Vice Prime Minister, dear colleagues! I would like to pass to you sincere regards from H.E. Mr. Radoslav Sikorski, Minister of Foreign Affairs of Poland. He could not participate in the Forum, and entrusted me with the mission to be here and to underline the importance of it, as well as wish you productive discussions for today and tomorrow.
I would like to focus on the issue of energy security of Poland and Ukraine, and to discuss common challenges and interests. Energy security became one of the most important problems of the modern world – security of supply, transit, energy efficiency, supply diversification, energy-saving and reduction of hydrocarbon emission became the subject for discussion by the world leading politicians. The future of our civilization depends on effective resolution of these problems. I would like to stress that it concerns not only energy. Mr. Speaker has already mentioned the food and the financial crises. The threat of nuclear weapons proliferation is also very important. However, energy security is the most significant problem in the long term perspective.
Ukraine and Poland are connected by strategic partnership that includes economic cooperation. Importance of energy cooperation is conditioned by great importance of energy for economies of both countries, and also by the fact that energy cooperation among all European countries gains more importance. Our countries are the main economic and political players in Central and Eastern Europe. That is why our responsibility for the format of future energy security in the region is much higher, than any other countries’ from this part of the continent. Ukraine is important for Poland, as well as Poland is important for Ukraine, and Ukraine and Poland together are very essential component for European energy supply. Ukraine and Poland face not only modernization of their transportation systems, but also renewal of their energy systems. This also contributes to strengthening of energy security.
We also should pay attention to differences between our countries. For example, Ukraine consumes five times more natural gas than Poland. Ukraine consumes the same amounts of oil and coal as Poland. This leads us to two conclusions. First of all, from the socialist economy we have inherited the economy structure that is more unprofitable for Ukraine than for Poland. But Poland faced the gas market price challenge earlier than Ukraine. Valentyn Pavlov, former USSR Prime Minister, was our “teacher” in energy economy. He made us work by market prices some 20 years ago. At that time it meant recession, unemployment and other numerous crises for us, however, now, we know how to save energy and use it efficiently. Nevertheless, notwithstanding all the differences, we simultaneously develop similar strategies of our countries’ development and energy security strategies. Currently, Poland works on the energy policy strategy till 2030; this strategy is similar to the Ukrainian one. The strategy is aimed at decreasing dependency on external energy sources, even though it is impossible to achieve, however, energy sources should be diversified. This goal should be achieved by using our own energy resources and supply diversification. Poland pays much attention to the development of national coal resources which are almost the biggest in Europe, and remain the main fuel for electric power industry; they also ensure energy security of production and supply of electricity of Poland.
Considering the great importance of coal for Polish economy, generally, we would like to coordinate our plans with European climate package. That is a serous challenge for our energy policy for the coming years. An integral part of Poland’s energy policy is implementation of projects aimed at diversifying supplies of raw materials. It should be mentioned that Poland sees diversification in oil, gas and liquid fuel area not as just diversification of delivery routes, but also as diversification of technologies targeted at more efficient use of fuel. The planned diversification activities include construction LNG terminal, participation in construction of the gas pipeline that will enable Poland to receive natural gas from different directions. I mean construction of the gas pipeline that will connect Denmark and Poland; signing the contract on gas and oil deliveries from the Norwegian continental shelf. Besides, we should not forget about investments in the energy infrastructure, about use of European funds’ investments, and about legislative actions aimed at reducing investment obstacles and enhancing mechanisms of crisis management.
The Krakow Initiative, the Krakow process mentioned by Mr.Sokolovskyi, is another evidence of joint contribution of Poland and Ukraine to energy security of our continent. The 1st Energy Summit initiated by the Presidents of Poland and Ukraine, took place in May of 2007, in Krakow. The meeting was attended by Presidents of Poland, Ukraine, Azerbaijan and Georgia, as well as representatives of other interested countries. The following meetings in Vilnius and Kyiv were of more practical character. We have agreed upon the next steps that should be made within the framework of implementation of Summit resolutions. First of all, we have established an organization, joint company (Poland, Ukraine, Azerbaijan, Georgia and Lithuania), which coordinates and projects actions of our governments and our national oil-transporting organizations, as well as prepares legislative and juridical basis for this project. Secondly, after the Kyiv Summit, President Yushchenko enacted a Decree on termination of reverse oil delivery from Brody to Odesa, which meant that we would come back to the plans made in cooperation with Ukraine at the end of 90s. In other words, this part of the oil pipeline (from Odesa to Brody) should have been part of Trans-European Oil Pipeline from the Black to the Baltic Sea. Unfortunately, for unknown reasons, the Decree has not been fulfilled yet. Nevertheless, I hope that we will see some positive changes in this area soon. Enactment on oil supplies from Azerbaijan and Caucasus might be the next step. I think there are serious supply guarantees from this region via Slovakia to the Czech Republic. In Czech Republic, in Kralupy, there is an oil refinery owned by National Polish Corporate Group, which is ready to process Caucasian oil. One more oil refinery in Lithuania is also owned by the same National Polish Corporate Group. This Northern direction either via Poland or via Belarus should also be open.
During our common work of the last 16 months we have transformed the idea into practically completed concept of common energy corridor. This concept ensures simultaneous availability of several directions: Northern, Ukrainian direction – to Western Ukraine, Western direction – through Slovakia to Czech Republic, and North-Western, via Poland to the Baltic Sea. We would like the project to be launched in the shortest possible time. It should be stressed that Poland does not change its attitude to the project. One of the most important tasks of energy security of Poland is developing infrastructure for oil transportation from the Caspian region. Here Ukraine is Poland’s a natural partner. In this regard, I should mention finished yesterday negotiations of the intergovernmental working group on Baltic-Black-sea-Caspian energy transit space issues. This group works on optimal model of cooperation among the states of this region on resource delivery and transit from Caspian region to Europe. In a couple of days next Summit in Baku will be held. I am persuaded that even the Caucasian conflict cannot prevent us from fulfilling our plans on constructing the system that will decrease our dependency on the monopolists.
Let me summarize. I have already mentioned the differences between Poland and Ukraine. Nevertheless, we have more common interests than differences. In spite of the fact that the reform implementation, as well as transformation of the energy systems are on different levels in our states, Poland and Ukraine face similar challenges in the energy field. Moreover, both countries similarly define their tasks in this area; both countries are interested in effective cooperation for enhancing energy security. We will fight together against attempts of using energy as a weapon against us by any country. I started my speech from politics, and I will finish with it as well. Strengthening energy security is an integral part of state sovereignty and independence guarantees for the states of Central and Eastern Europe. I am sure that we have good perspectives for reinforcing our cooperation in this field. We should work together for strengthening our independence, our sovereignty. Thank you for your attention.
I’m honored to be here. Today we can speak as we can tell in great detail about energy security. And I will start with European energy security and speak a little bit as the Speaker has done on Ukrainian energy security. Both Deputy Ministers have pointed out the troubles, the problems and insecurities of supplies that effect Europe. This has been clear, it’s clear for Ukrainians since the beginning of 2006, it’s clear to Georgians that last month, last summer in August and it’s clear that it’s more important, than ever for you to mitigate your facts of dependency on one supplier.
European supplies have been interrupted on a number of occasions as we have heard this afternoon; and the best insurance against this supply interruption that we have also heard this afternoon, is alternatives, is diversification. Markets function best when there are alternatives, when there is competition. This includes competition among transportation, as well as suppliers, as well as consumers. We have some suggestions in this regard for European energy security. First, several people have already mentioned the Southern Corridor of supply. This would allow gas, in particular, but other resources, oil as well, to move from the Caspian region through the Southern Corridor into Europe. This includes options including the Turkish agreed Nabucco project, the Deputy Minister also mentioned White Stream. There are several alternatives which would give the opportunity for Caspian and other Eurasian countries to exert their independence and to increase diversity of supply through this transit network. The Deputy Prime-Minister urged us not to bypass Ukraine. We would agree with this suggestion.
A key part of this energy security, in particular, in the Southern corridor involves two countries – Turkey and Azerbaijan. They need to come to terms in order to make this real on gas transit that meet Azerbaijan’s commercial needs while still addressing Turkey’s legitimate security of supply concerns. And this need to happen at the top levels and so this is a very good Forum in which to make this point. Speaker Yatsenyuk has already mentioned importance of the EU policy, European policy in energy field. We certainly support European actions to create a unified energy market. And with the Deputy Minister of Georgia here, we will also point out the importance as re-establishing Georgia as a secure energy supplier, energy transit nation. We have concerns about the effect of the last summer’s incursion into Georgia on the investment in regional architecture, regional infrastructure, and so, we hope to see partner countries join us and others to reiterate the confidence in Georgia as a key energy transit nation and to assist in restoring its energy infrastructure.
Regarding Ukraine’s energy security - this is the issue that Ukraine has tried to address to greater or lesser degree over the 17 years of its independence. It also depends on diversification. Ukraine currently relies on one supplier for the majority of its natural gas, its oil and its nuclear fuel. Nearly total dependency on energy from one source clearly threatens Ukraine’s energy security. Today Ukraine has taken a couple of steps in diversifying its energy suppliers, increasing transparency in the sector, attracting much needed foreign investment, and developing alternative energy sources. But 17 years after independence, the energy economy of Ukraine is still a kind of frozen in elements of that Soviet time. Naftogas Ukraine contains many able and knowledgeable professionals. However, it probably has too many of them. It is the management. It does not have enough resources and operates under conflicts of interest. Price signals, - others have talked about the importance of price signals, that is the most fundamental element in the functioning market. This was confused in the energy sector in Ukraine. E.g., in its current form, the gas industry suffers under multitier pricing that reduces incentives to conserve a precious resource and that enables grey market trading. Gas from domestic Ukrainian production is theoretically earmarked for use by residential consumers and budgetary organizations while imported gas is meant to be used for industrial consumption. This scheme does not work. Well positioned parties use border arrangements and re-export schemes to profit handsomely while injuring the national welfare. Meanwhile, the domestic gas production is depressed by artificially low prices. The Speaker and the Deputy Prime-Minister had a conversation about another of these problems, about the transparency of the gas market.
On RosUkrEnergo – we were also glad to hear that RosUkrEnergo is being removed. This is clearly a step forward. Energy efficiency is important. The multitier wholesale gas pricing of domestically produced gas normally designated for public and health consumption, made it so that a grey market developed for domestic industrial users or export buyers who are unwilling to pay European prices. These illicit sales and fuel market corruption have muffled the market signal that would otherwise promote increased domestic production and decreased consumption. What is required, - is a serious pricing reform, based on a sensible, transparent and easily understandable rate methodology. That allows gas producers or sellers to recoup the costs plus a reasonable rate of return. Price formation in Ukraine will require capable and independent regulators. The Speaker has addressed this.
To operate in a publicly transparent fashion, so the interests of producers and consumers are adequately balanced and equally protected. Let’s be clear. Price reform will mean higher prices for all across the Ukrainian economy. And that means the potential for negative impact on the poor namely of those least able to pay those higher prices. Here, Ukraine should follow the example of other Eastern and Central European countries that have already undergone price reform. Energy efficiency programs can help reduce energy consumption of residential institutional buildings as of the first priority. Lending programs can be created or expanded. And strengthening them will allow Ukraine to borrow money in order to invest it upgrades to plants and equipment. Targeted assistance can be introduced to alleviate the burden of those people who are unable to pay the higher prices. The current system operates in the interests of well connected gas consumers and supports the poor. The IMF will provide an opportunity for Ukraine to make some of these changes and address some of these reforms. It also includes price liberalization to market levels by 2012. This reform will clearly take political will. The Deputy Prime-Minister has addressed the importance of political will in attacking all kinds of reforms. Political reforms are difficult to make, politically challenging to make, and so it is so important for the President and the Prime Minister and the Rada to be working together on these reforms. Unity will be important. The investment climate is important. For exploration of production of hard carbonates it leaves something to be desired. If natural resource endowment with the only relevant factor, Ukraine would be able to produce significantly greater qualities /quantities of oil and gas than it does today.
There are people in this room who have told us that the resources in the Black Sea are comparable to the Caspian Sea. But they have not been developed. Significant improvement in the business climate is required to attract the investment of billions of dollars needed from international energy companies for serious development. Ukrainian energy legislation and regulation will need to be updated to correspond with norms found elsewhere around the Globe. The updated system will need to provide for fair access to geological data, for transparent decision-making processes, for longer licensing periods, the use of model contracts, and truly competitive tenders. In other words, almost all of today standard practices which will optimize for insiders and those paying for inside access would need to be replaced with practices that will attract much needed foreign investments and technologies to Ukraine’s various energy sectors including hydrocarbons, nuclear, electricity and alternative energy. If Ukraine decides to proceed with these reforms, the picture gets brighter. There is a bounded potential for improvement in Ukraine’s position. Friendly governments and international institutions can help with capacity building for effective policies execution. The political will for energy reform is in place. Not only Ukraine would be helping itself but also through the energy sector reform it would be making the single and the most important contribution that Ukraine can make to the security of Europe. Thank you very much.
Speech
of Arseniy Yatseniuk, Speaker of Verkhovna Rada of Ukraine, Founder of Open
Ukraine Foundation 
