A Bad Case of Gas

By Walter Kish

The natural gas crisis continued to dominate the headlines these past few weeks in Europe as Russia and Ukraine prolonged their war of words in an increasingly bitter dispute that left most of Eastern Europe without the gas they so desperately need for winter heating.  Needless to say, each side blames the other for the impasse, and although most Europeans recognize that Russia is using this issue to exert political blackmail on Ukraine, their patience is wearing thin with both sides the longer the impasse drags on.

Russia needs Ukraine’s pipelines to supply their European customers, while Ukraine is dependant on Russia for some 80% of its own natural gas needs.  With some good will and under normal circumstances, a reasonable commercial deal that benefits both sides should be easy to arrive at.   Unfortunately, Russia has a more important political agenda – one that aims to punish Ukraine for trying to leave Russia’s embrace and align itself with Europe and the West.  Over the past few years, it has become obvious that Vladimir Putin is trying to reconstitute Russia as a major power in the world, using Russia’s bountiful petroleum resources as his primary weapon of influence.

Sadly, since independence, Ukraine has left itself vulnerable to this kind of economic arm twisting as a result of a glaring lack of any kind of coherent effort to modernize its energy sector and make it self-sufficient.  Ukraine depends upon natural gas for 49% or about half of its total energy needs.  Coal provides for 24%, nuclear power 14%, oil 12%, and hydroelectric 1%.  The over-reliance on natural gas is striking – Ukraine is the sixth largest consumer of natural gas in the world.  Annually, it uses more gas than Poland, Hungary, the Czech Republic and Slovakia combined! 

Although Ukraine does have its own sizeable gas reserves, its production falls far short of demand.  Ukraine produces about 20 billion cubic metres of gas each year while consuming about 80 billion cubic metres.  It imports the difference from Russia.  Although there has been much talk of increasing internal production, lack of political stability and will, as well as the large investment capital required, have resulted in very little concrete action in this regard.

The real issue with natural gas usage in Ukraine is that much of this consumption is wasted because of poor and outdated infrastructure.  A 2004 study showed that Ukraine’s ratio of energy usage to GDP ranked it as the most energy-inefficient country in the world.

A particular sore spot is the amount of gas used in residential heating of the large communal apartment blocks that provide housing to the vast majority of Ukraine’s population.  The Ukrainian government’s own research has shown that some 25% - 30% of the gas used in this heating is wasted. 

I know this from the personal experience of having lived in a typical Ukrainian apartment.  Heat was provided from a central boiler servicing several large buildings.  Regardless of prevailing outside temperatures, the heat generated was kept at a constant level and was often much more than required.  There were no individual thermostats in apartments, so tenants regulated the temperature by opening windows, allowing excess heat to escape.  

Lack of metering and billing for actual usage has led to some truly wasteful usage practices. Despite being aware of this colossal waste, the authorities have done virtually nothing to address this problem.

In 2006, the Ukrainian government adopted the “Energy Strategy of Ukraine for the period until 2030”.  It envisions doubling the production of coal and nuclear energy to reduce the dependency on natural gas.  Although commendable in terms of its ambition, there is little detail on how to fund the huge investments that will be required to implement it.  As pointed out in a study done in 2007 by the Oxford Institute for Energy Studies, there is little in energy strategy that addresses the potential of energy savings through better management of the demand side of the problem.  Experts have estimated for instance that the amount of gas used for residential heating could be cut in half by upgrading plant and implementing modern energy conservation technologies and methods.

In view of the continuing energy crisis, the Ukrainian government should make energy sector reforms its top strategic priority.  It is now far more than just an economic problem – it is a political problem that threatens Ukraine’s very sovereign existence.