Natural gas still plays a major role in Ukraine’s fuel-energy balance, representing more than 40% of the primary energy consumption. Ukraine has 39.6 trillion cubic feet (tcf), equivalent to 1109 billion cubic m (bcm), of natural gas reserves, from which roughly 0.64 tcf (18 bcm) was produced in 2001 and a similar amount in 2002. In 2001, the country consumed 2.6 tcf (73 bcm) of natural gas and 2.5 tcf (70 bcm) in 2002. In spite of a 4.1% GDP growth, gas consumption decreased by 1.2% compared with 2001. The domestic production of natural gas was 18.8 bcm (0.4 bcm above the 2001 level), ensuring only 27% of the country demand for natural gas and thus leaving a shortfall of around 73%. One onshore oil & gas field and one offshore gas field in the Sea of Azov were put into operation during 2002.
Historically, Russia has met Ukraine’s gas demand, partially through natural gas offered as payment in- kind for transiting its gas on to Europe, and partially through annual sales contracts. In the past few years, the missing volume of gas was imported from Turkmenistan (37%) and Russia (36%). In May 2001, Ukraine and Turkmenistan signed an agreement calling for Turkmenistan to supply Ukraine with 8.8 tcf (246 bcm) of natural gas between 2002 and 2006, and the agreement is expected to be extended through 2015.
The central region of Ukraine known as the Dnipro-Donets Basin holds a significant proportion of the remaining on-shore gas reserves with somewhat smaller amounts in western Ukraine’s Carpathian Region. Off-shore, according to Chornomornaftohaz, a division of Naftohaz Ukrainy, as many as 13 gas and condensate and dry gas deposits with a combined 2.6 Tcf (73 bcm) of predicted reserves are known on the continental shelf of the Black and Azov Seas.
Increasing Ukraine’s own production of natural gas is a central element of the government’s energy strategy. To deliver this strategy Ukraine needs both money and advanced technologies and this provides major opportunities for foreign investors.
Gas Transit to Europe
Ukraine's real significance to world energy markets is as an intermediary connecting Russia, the world's largest natural gas producer, with growing European markets. In 2002, approximately 4 tcf (112 bcm) of Russian and Turkmen natural gas transited Ukraine en route to European markets. This represented roughly 24% of OECD Europe's natural gas consumption, and 38% of imports.
Accordingly, Ukraine's natural gas infrastructure is of growing importance both to European consumers and Russian producers. In June 2002, heads of state from Ukraine, Russia, and Germany agreed to begin developing an international consortium to manage and upgrade Ukraine's natural gas distribution infrastructure. In October 2002, Ukrainian and Russian state-owned oil and gas concerns, Gazprom, and Naftogaz Ukrainiy, signed preliminary agreements, and in January 2003, the new company was registered in Kyiv, with each company holding 50%.
The partners are still considering several proposals for the structure and membership of the consortium. Germany's Ruhrgas has been present at the consortium's negotiations, but its role is as of yet undecided. Several other parties have shown interest in the consortium, including Gaz de France and the European Bank for Reconstruction and Development (EBRD). Ukraine has also suggested that Caspian Sea region producers Turkmenistan, Kazakhstan, and Azerbaijan be invited to participate.
In August 2003, the consortium agreed to its first infrastructure development project, the construction of a new 930-mile natural gas pipeline between eastern and western Ukraine with a capacity of roughly 1 tcf (28 bcm) per year. As conceived by the partners, the pipeline would allow Russian natural gas exports to Europe through Ukraine to increase by roughly 25%. The consortium is currently conducting feasibility studies and expects that once commenced, construction will take approximately two years.
