Investing in Ukraine

BENEFITS OF CONTRIBUTIONS TO UKRAINE'S STORAGE FACILITIES

ALESSANDRO BENEDETTI, SCHWARZFIELD, GENEVA

Ukraine's economy is hurting. Real GDP contracted by more than 6% last year and unemployment soared after separatists seized the south east of the country.

The affected provinces of Donetsk and Lugansk - which normally contribute about one-sixth of national wealth - saw industrial production slump by 85% and 60%, respectively.

Those Ukrainians who have kept their jobs have seen real wages fall dramatically as inflation has hit 30% and the currency, the Ukrainian hryvnia, has dropped steeply in value.

Ukraine must rebuild its economy if it is to meet the challenges ahead and prevent further destabilization of the region. Europe can help the rebuilding process by encouraging the Ukrainian government to reform its economy and eliminate corruption.

We can also help by investing in Ukraine's natural gas industry. The government announced in April that it was opening its energy sector to outside investors, potentially allowing Europe to reduce its reliance on producers in Russia, North Africa and the Middle East.

However, perhaps the biggest opportunity in Ukraine is to invest in the country's huge network of gas storage facilities, which are currently lying half empty.

Natural gas storage involves capturing and keeping gas in tanks and underground reservoirs until it is required. Storing gas ensures that any disruption to supply does not result in the lights going out across Europe. It also means that companies can buy gas when it is cheap (in the summer) and use it when demand is high, reducing the cost for consumers and smoothing price spikes.

Europe needs more storage facilities but is unwilling to invest the tens of billions of euros required to build such facilities locally. Instead, we can help Ukraine to fully utilize its existing storage capacity and, in so doing, provide the country with much needed income and industry.

Ukraine already has the third-largest storage facility system in the world at 32 billion cubic meters, far exceeding that of Germany, the second- largest storage system in Europe. But when Gazprom cut off supplies in January 2009, Ukraine had just two months-worth of storage to meet its needs. Storage reserves were only 51% full at the time.

Fully utilizing Ukraine's existing storage capacity would help Europe to protect itself from supply shortages and power blackouts. Most European countries possess limited storage facilities of their own and some, like the UK, have almost no reserves.

Experts have suggested that if Britain was forced to survive on its gas storage reservoirs, it could do so for only two weeks. If supplies were to be disrupted, nearly half of the UK's electricity generation would be switched off.

Consumers and governments across Europe are taking the supply of gas for granted, largely because of the enormous cost of doing anything to increase the security of supply.

It is estimated that EU states need 60 billion cubic meters of storage capacity if they want to reach an acceptable insurance capacity. But at a cost of €1 billion per billion cubic meters of storage, it is almost certain that such a massive project would raise tariffs on gas and increase household bills. Alternatively, governments would have to subsidize construction of these storage facilities but this would pull funds from other pressing needs.

The solution is simple. The storage facilities in Ukraine are already built and the country has an excellent transport system already in place. If Europe helps Ukraine to reach full storage, the gas can be kept there as a long-term safety net. It can be kept at very low cost for emergencies or to smooth demand spikes.

This is why Vladimir Demchishin, Ukrainian Minister of Energy, suggested in March that the EU should contribute some of the (far lower) costs of guaranteeing Ukrainian storage. He is right. In fact, under the right conditions, even Russia could benefit from Ukraine becoming a hub for gas storage.

Russia's attempt to launch a new 'South stream' supply route - through Bulgaria, Serbia, Hungary, Austria, Italy and Slovenia - came to nothing earlier this winter when it realized that the project would be hampered by cost and EU rules.

A new proposal, announced in December 2014, to partner with Turkey is likely to be hamstrung by capacity issues. At the streaming rates currently planned for this project, the Turkish pipelines would not be able to deliver anything like the volumes European consumers demand.

Russia would benefit from pumping more gas through the established pipeline system in Ukraine, while helping to rebuild Ukraine's economy could rehabilitate its reputation in Europe.

I have spent a number of years working in Ukraine and have come to know its energy industry well. I've seen the potential that exists in the country's existing natural gas infrastructure. Investing in Ukraine's storage facilities would benefit European energy consumers while also creating much needed industry for Ukraine's economy.

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