2005: THE YEAR IN REVIEW: Energy crises escalate through end of year (01/15/06)

2005: THE YEAR IN REVIEW

Energy crises escalate through end of year

On May 16 Prime Minister Yulia Tymoshenko picked a fight with the Russian Federation over gasoline prices, leading to a series of energy crises that would end up plaguing the Yushchenko government through the end of year, long after her dismissal from the prime minister's position.

She accused Russian oil companies of conspiring to sabotage the Ukrainian economy and the Yushchenko government of hatching a fuel crisis in which they inflated gas prices between 10 and 15 percent.

Three Russian oil companies control 90 percent of Ukraine's market, Ms. Tymoshenko pointed out. Just when the new government came to power, she said, this "cartel conspiracy" raised prices for oil products significantly higher than what had been agreed to.

After resolving the price increase by negotiating set prices with Ukraine's three refineries, oil producer TNK-BP responded with hostility by shutting down oil production in Ukraine immediately, she said, breaking its agreement precisely on the government's 100th day, May 3. Despite signed contracts and active pumps, Russian oil suppliers ceased deliveries to the massive Kremenchuk refinery on May 7 and suspended oil pumping for five days.

"It's an absolutely artificial crisis, which for an entire week was a full blockade," Ms. Tymoshenko said.

Ukraine is undertaking numerous initiatives to reduce its dependency on Russian companies for oil and gasoline, Ms. Tymoshenko said. She urged simplification of import procedures and the tax system in order to open the Ukrainian market to other nations' oil products. A government project is under way to construct a new oil refinery in the Odesa Oblast to process strictly non-Russian oil, Ms. Tymoshenko also announced.

In response to the oil shortage, the Verkhovna Rada passed on May 17 government-proposed amendments to several laws to cancel import duties on high-octane gasoline and diesel fuel.

In early June Russian officials already began warning Ukraine that the price for natural gas could increase by the year's end from the current $50 per 1,000 cubic meters to $160.

Then, in late July, Gazprom chairman Aleksei Miller informed Ukrainian energy officials that natural gas prices could spike in order to match world market prices and provide more revenue to finance Gazprom's activity. The proposed price at the time was still in the range of $160 per 1,000 cubic meters, which even at that level was exaggerated and impossible, said Volodymyr Saprykin, an energy analyst at the Razumkov Center for Economic and Political Studies in Kyiv.

Gazprom triggered a major crisis on December 14 when it announced that it would not give Ukraine discounted rates under its current contract and threatened to cut supplies altogether if new terms weren't reached by January 1. In what was widely perceived as Russia again pressuring Ukraine, Gazprom boosted natural gas prices for Ukraine to the European level of $220-$230 per 1,000 cubic meters from a rate of $50 per 1,000 cubic meters.

President Viktor Yushchenko said Russia used the latest gas negotiations as an instrument of political pressure, but reassured Ukrainians that the issue would soon be "yesterday's problem." The Ukrainian government insisted on a step-by-step shift from barter transactions to money payments for natural gas.

Gazprom representatives accused Ukraine of dragging negotiations out after Ukraine had rejected a price of $160 per 1,000 cubic meters offered earlier. "Ukraine has wasted time in these talks and now there can be no talk about $160," said Oleksander Medvedev, Gazprom's deputy board chairman. "The market situation has changed."

Russian President Vladimir Putin asserted that Ukraine could afford market prices given that it has received money from privatizations and Western loans.

"We've got a contract with the Russian monopoly [Gazprom]," said Mykhailo Volynets, a member of the Ukrainian Fuel and Energy Complex in the Ministry of Heating and Energy. "According to this document, the [gas] price is unchangeable until 2009. I am sure that Ukraine will sue Gazprom based on this document," he added.

Meanwhile, President Yushchenko said it was necessary to launch a new energy concept for Ukraine and increase domestic oil and natural gas production on the Azov and Black Sea shelves. "My aim is to provide for the absolute energy independence of Ukraine," Mr. Yushchenko stated.

The gas crisis escalated after Prime Minister Yurii Yekhanurov returned from a failed December 19 meeting in Moscow with his Russian counterpart, Mikhail Fradkov. At a press conference in Kyiv the next day, Mr. Yushchenko accused the Russian state-controlled natural gas monopoly, Gazprom, of blackmailing the Ukrainian government. "You know, one has to be absurd in resolving this problem by resorting to such [methods] ... it's blackmail."

Rather than pursue further political negotiations, the Ukrainian leadership said it would turn to the Stockholm International Arbitration Court, Mr. Yekhanurov said at the December 20 press conference.

The Russian government offered Ukraine another way out of the crisis, expressing interest in a Russian-Ukrainian natural gas consortium that would give it co-ownership of Ukraine's transit pipelines, the Russian daily newspaper Kommersant reported. Mr. Yekhanurov rejected this plan, instead offering to pay market prices for natural gas as part of a gradual shift from barter transactions to cash payments during the next two or three years.

As threatened, Gazprom cut natural gas supplies to Ukraine on January 1, 2006.

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