Putin’s war in Ukraine: The forgotten potential of Ukraine’s energy reserves.

Ukraine has extremely rich and complementary mineral resources in high concentrations and close proximity to each other. The country has abundant reserves of coal, iron ore, natural gas, manganese, salt, oil, graphite, sulfur, kaolin, titanium, nickel, magnesium, timber, and mercury...

Over the last several years, the future of the European energy supply has become an increasingly geopolitical topic. It has become more and more linked to the questions of security, competing gas transportation routes, and continuously tense Ukrainian-Russian relations. In late 2019, Kyiv concluded a new and beneficial transit agreement with Moscow for the transfer of Siberian gas to the EU, in part due to fresh US sanctions against Russia’s off-shore pipeline projects. This 5-year deal is currently securing the continued use of a part of Ukraine’s large gas transportation system, and as long as Gazprom’s Nord Stream II pipeline through the Baltic Sea does not go forward, the Ukrainian gas transportation system will have some prospect, use, and income.

These well-known confrontations and negotiations concerning different routes of Russian gas supply to the EU, however, diverted attention from the potential of Ukraine’s own gas and oil reserves, as well as the associated storage facilities. The considerable natural resources in Ukraine’s energy sphere remain underexplored and underused today despite the fact that their use could spur economic growth not only in the energy sector, but also in other industries of the country.

Untapped Potential

Excluding Russia’s gas reserves in Asia, Ukraine today holds the second biggest known gas reserves in Europe. As of late 2019, known Ukrainian reserves amounted to 1,09 trillion cubic meters of natural gas, second only to Norway’s known resources of 1.53 trillion cubic meters. Yet, these enormous reserves of energy remain largely untapped. Today, Ukraine has a low annual reserve usage rate of about 2 percent. Moreover, more active exploration may yield previously undiscovered gas fields, which would further increase the overall volume of Ukraine’s deposits.

In spite of this hopeful situation, Ukraine still depends substantially on gas imports. When the USSR started large-scale gas extraction in Western Siberia in the 1970s, much of the relevant expertise and capacity in the sector of Soviet gas exploration and production were transferred from the Ukrainian to the Russian Soviet republic and some other East European states. As a result of this outflow of expertise, Ukraine’s remaining gas resources have remained insufficiently developed, largely underused, and partly unexplored.

Until recently, Ukraine’s total average annual consumption amounted to approximately 29.8 billion cubic meters (bcm). Of this entire yearly need, approximately 14.3 bcm consists of imports. Thus, unlocking its unused reserves would provide for a revolutionary future for Ukraine’s gas sector and energy consumption.

Resolute development of the already explored and accessible Ukrainian resources could result in a substantial increase of Ukrainian gas production. The boost would not only enable the country to fully cover its domestic gas needs, but also make Ukraine largely self-sufficient from an energy perspective. In a best-case scenario, increased production could even allow Ukraine to start exporting gas to or via neighboring European states. This would be feasible because Ukraine’s substantial gas transportation system means that the necessary infrastructure is already in place to bring large amounts of gas to the EU.

According to some estimates, the EU will import around 90 percent of the gas it consumes by 2030. Thus, during the next decade, Brussels will be increasingly eager to diversify the origins and routes of the European gas supply. In this context, smaller or even prospective gas exporters like Ukraine become more attractive to policymakers in Brussels: such new participants in the European market would lower EU dependency on the large players in the field, thus strengthening the European negotiating position.

Despite the enormous potential of Ukraine’s energy reserves, there are non-trivial costs to developing Ukraine’s capabilities. According to an assessment study by the Ukrainian Institute for the Future, a transformation of Ukraine into a self-sufficient energy consumer and potential exporter would require a number of investments amounting to approximately US$19.5 billion. Of this amount, about US$3.5 billion are needed for developing gas fields and building pipelines, US$14 billion would have to be invested into oil extraction, and US$2 billion would go toward oil refining.

The overall size of the investment needed to achieve the goal of full energy independence constitutes a considerable amount compared to Ukraine’s relatively small state budget and GDP. Nevertheless, the sum only equals the approximate costs for current Ukrainian energy imports over the span of two to three years. Thus, the relatively high absolute cost would amortize itself quickly.

Moreover, financial investment in Ukraine’s energy sector is increasingly attractive. Over the last few years, Ukraine has (often under IMF pressure) gradually reduced distortive governmental interventions into the gas market. Kyiv has introduced market prices for households and no longer provides subsidies for all consumers indiscriminately. This relatively new domestic market should make financial engagement in Ukrainian gas production and exploration more attractive than it had been in the past, and the investment climate will improve once European energy markets recover in the aftermath of a likely global containment of the COVID-19 pandemic in 2021.

Exxon Mobil, Royal Dutch Shell and other major oil companies have already explored the Black Sea, and some petroleum analysts say its potential may rival that of the North Sea. That rush, which began in the 1970s, lifted the economies of Britain, Norway and other European countries.

When Russia seized the Crimean Peninsula from Ukraine on March 18, it issued a treaty of annexation between the newly declared Republic of Crimea and the Russian Federation. Buried in the document — in Article 4, Section 3 — a single bland sentence said international law would govern the drawing of boundaries through the adjacent Black and Azov Seas.

Dr. Ryan estimates that the newly claimed maritime zone around Crimea added about 36,000 square miles to Russia’s existing holdings. The addition is more than three times the size of the Crimean landmass, and about the size of Maine.

At the time, few observers noted Russia’s annexation of Crimea in those terms. An exception was Romania, whose Black Sea zone had been adjacent to Ukraine’s before Russia stepped in.

“Romania and Russia will be neighbors,” Romania Libera, a newspaper in Bucharest, observed on March 24. The article’s headline said the new maritime border could become a “potential source of conflict.”

The Road Ahead

Ukraine’s gas transportation system will continue to play a key role for the future of Ukraine’s energy sector. Ukraine has one of the most well-developed and all-encompassing gas transportation infrastructures of any country in the world, in terms of both domestic deliveries and export facilities. The Ukrainian gas transit system constitutes a heritage of the Soviet energy expansion to Europe, as a partial result of the German Neue Ostpolitik (New Eastern Policy) of the 1970s. For a long time, Ukraine served as the main corridor for the transfer of Soviet and later Russian as well as Central Asian gas to numerous European states. The current usage of this capacity is much lower than a decade earlier due to the completion of the first Nord Stream pipeline in 2012, the growing introduction of renewable energy resources, and the current economic downturn; however, Ukraine’s pipelines and compressor stations are still ready to be used, and have significant capacity beyond merely delivering Russian or Turkmen gas to the EU.

A significant part of the multidimensional Ukrainian gas infrastructure is the huge underground gas storage facilities that the country controls. Only partially used, Ukrainian capacities to store natural gas amount to more than 31 bcm. If fully exploited, Ukraine could hypothetically add almost one third to the approximately 100 bcm of storage space that EU member states currently hold as a whole. Thus, it is no surprise that the energy consultancy Wood Mackenzie recently suggested that Ukraine holds the key to Europe’s gas current storage crunch. As a result of the COVID-19 pandemic, world gas prices plummeted, but the EU’s storage facilities do not have enough space to take full advantage of the situation. To ease foreign concerns about investing in Ukraine, the country adopted some amendments to relevant laws and directives in late 2019—regulatory modifications that should make it easier for foreign firms to use available storage capacity. In response, during the first nine months of 2020, foreign energy firms pumped 7.9 bcm of gas to Ukraine for storage, an amount several times higher than the volume of foreign gas stored in Ukraine during the entire year of 2019.

Hydrogen is another new horizon for Ukraine’s underdeveloped energy industry. Today, various gas distribution companies are examining Ukraine’s pipeline capacities with the hope of converting some of the existing infrastructure to deliver hydrogen to their customers in the future. The EU has identified Ukraine as a priority partner for future collaboration in the use of hydrogen to enhance the Union’s energy supply and security.

Yet another energy form of high potential in Ukraine is biogas. Currently, the country has sufficient capacity to produce circa 10 bcm of biogas annually, a volume that is roughly equivalent to the amount of natural gas that Ukraine imports every year. In view of Ukraine’s currently growing agricultural sector, its capacity to produce biogas may grow further. This capacity is quite future-proof: mixing biogas with hydrogen generates biomethane, an environmentally friendly form of energy that does not contain carbon dioxide.

Boosting Ukraine’s domestic production of natural gas, biogas, hydrogen and biomethane would not only lower or even abolish Ukrainian dependence on energy imports. It would also create a new and potent export-oriented branch in Ukraine’s economy, while also providing impulses for stronger growth in other sectors. At the same time, the EU would benefit from a diversification of its gas supply sources, and from obtaining a new major energy partner in its immediate vicinity. Moreover, such cooperation would strengthen Brussels’ economic ties with Kyiv, and lower the need for Western support for the Ukrainian state. A resolute development of Ukraine’s untapped reserves in the production, export and storage of energy would be in the interest of all sides involved.

Lithium 

Ukraine’s breakaway territories in the Donbass region have abundant natural resources and, thus, make the area economically very feasible for the future. Lithium fields in Ukraine are concentrated in Zaporizhzhia oblast (Kruta Balka area), Donetsk (Shevchenkivske field), and Kirovohrad (Polokhivske field, Dobra area). 

However, no mining work is happening in the area currently. The Dobra and Donetsk mines were up for grabs and there has been cut-throat competition between Chinese Chengxin Lithium and Australia-listed European Lithium, and both the companies want a foothold in the European lithium industry. 

The companies are just two of a list of bids published online by the Ukrainian Geological Survey. Lithium chemicals are the main component of electric vehicle (EV) batteries. The majority of auto companies are looking at lithium reserves across the world. 

Titanium 

Some estimates indicate that up to 20 per cent of the proven world reserves of titanium ores are situated in Ukraine. But it is one of the few nations with a closed-loop production in the titanium industry – from mining and processing of the titanium iron ores to the producer of finished products. 

Interestingly, China was the largest importer of Ukrainian titanium iron ores in 2021, with Russia on the second spot (15.3 per cent), and Turkey ranked third (14.5 per cent). The one industry that could be majorly impacted should the Ukraine-Russia clash intensify, is the aircraft industry, mainly because titanium is an important component used in the manufacture of aeroplanes.

Boeing, in a statement on January 31, said that the tensions over Ukraine create an “adverse climate” for its business. In the event of economic sanctions, the supply chain for titanium could be affected, and furthermore, the ability to produce aircraft could be hampered. 

To illustrate, the US’ Boeing has broadened its titanium supply chain since 2014, when Russia was sanctioned for its annexation of Crimea from Ukraine, however, it is still heavily reliant on Russia’s VSMPO-AVISMA — world’s largest manufacturer of titanium — for the supply of the metal.

Food security 

Russian invasion of Ukraine means the former will rein in the exports, which will create food security issues as Ukraine is one of the largest distributors of wheat and corn. Grain exports are the mainstay of Ukraine’s economy. 

Much of the country’s corn and wheat are destined for Africa and West Asia, which are heavily reliant on imports for food items. Over 50 per cent of Ukraine’s annual corn and wheat shipments head to Africa or the Middle East. 

Global food security is the biggest concern if Ukraine’s exports are disturbed. Meanwhile, owing to distance, US wheat amounts to less than 10 per cent of what caters to those regions. Ukraine is aiming to clinch the third spot in wheat and fourth spot in corn this year, but the ranking could be missed due to the crisis with Russia. 

Race between Russia and the West for Ukrainian resources 

The US and Europe could be looking at food and energy security by trying to ensure Ukraine’s tilt towards the West, but will Russia allow it? The US has always been wary of Russia’s authority in Europe and the latter’s influence is only going to grow stronger now with Ukraine’s invasion, particularly in the Balkans, and if it is able to withstand global sanctions. However, Ukraine, which has the US’ support, can thrive and capitalise on its natural resources.

Could that be the US’ pretext to compete with Russia? While Europe depends on Russian natural gas, the US is trying to be a more prominent Liquefied Natural Gas supplier (LNG), even though the price of LNG would be substantially higher in price than that of Russian gas. 

The point that the US is aiming to make is to stop Russia from dominating Europe through energy dependence and what US Secretary of State Antony Blinken termed “weaponising heat” by controlling gas during winter months when Europe needs Russia to stay warm. 

Furthermore, fossil fuels are not infinite, which means Russia has to scout additional sources of natural gases to tap. The country has to look no further than to its west – Ukraine. All the strategic positions notwithstanding, to Russia and the West, Ukraine of the future is an untouched, untapped, natural resource hotspot. 

A foothold in the country would mean an economic driver, energy security, and a strong and secure strategic position. 

Studies by: Anatoliy Amelin | Andrian Prokip | Andreas Umland

Anatoliy Amelin is one of the co-founders of the Ukrainian Institute for the Future in Kyiv, and its Director of Economic Programs.

Andrian Prokip is an Energy Expert at the Ukrainian Institute for the Future in Kyiv, and Senior Associate of the Kennan Institute in Washington, DC.

Andreas Umland is a Senior Expert at the Ukrainian Institute for the Future in Kyiv, and Researcher with the Swedish Institute of International Affairs in Stockholm.

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