Ukraine’s Energy Future

Ukraine Business Forum

Ukraine’s Energy Future

Yuriy Boiko

Remarks Yuriy Boiko, Minister of Fuel and Energy of Ukraine, delivered during the Ukrainian Business-Forum at the Waldorf-Astoria in NYC, December 6, 2006.

Dear Friends,

Thank you very much for finding the time to join us today. I am happy to be back in the United States and to be here as part of the new government led by Prime Minister Viktor Yanukovich.

The Government, together with President Yushchenko and our partners in Parliament, are united by our commitment to fulfill all the potential that our country and people represent.

We are also united by a commitment to be a strong partner in our common quest for peace, prosperity and democracy around the world. Because of the trends in global energy, our role as a reliable energy partner is important to everyone.

Consider these facts:

  • Global energy demand is growing, and it is expected to increase by 60% by 2030, partly due to the emerging economies, especially China and India.
  • Hydrocarbon reserves are declining in Europe, which is the largest importer and second largest consumer of energy in the world. Today the EU imports about 50% of its energy. Without policy reform, this will rise to 70%. The percentage for natural gas will be even higher.
  • The price of hydrocarbons is rising. As we all know, oil prices have increased more than six times over the past seven years.

This is why building a strong, reliable energy economy that brings supplies from the East to consumers in the West is a cornerstone of the broader strategic agenda for our country and for our relations with our partners.

In order to achieve this goal, Ukraine is reforming its economy to be more compatible with the European Union. We are modernizing our industry to consume less fuel even as we grow our GDP. And we are strengthening long-term, strategic partnerships with Russia, and Black Sea and Caspian states whose energy supplies are crucial to the global energy balance.

Building a transparent, vibrant and effective environment for investment and business expansion is key to our strategy. And for that reason, I’m especially pleased to have the chance to be with you today and exchange ideas.

One of my jobs as Minister is to help ensure that our energy reforms are moving in a direction that promotes business expansion and adds to the welfare of our people while at the same time maximizing our common energy security. You can play a part in that process. Working together, we can ensure:

  • That Ukraine really is “open for business”;
  • That all of our investments are protected by the rule of law and an independent, fair judicial system;
  • That our government policies support investment and encourage economic growth; and
  • That we maximize Ukraine’s potential as a strategic and reliable energy partner.

Let me outline briefly the 4 key pillars that create the framework of our Energy Strategy and share a few ideas about how we can work together to fulfill its potential—to all our benefit.

The first pillar of our strategy is a commitment to deepen our overall collaboration with the European Union, including in the energy sphere.

We all face the same overarching energy challenges in the 21st Century, namely increasing the diversification of energy suppliers, ensuring energy transit security, and finding and developing alternative energy sources.In this context, we are working at senior levels with our EU colleagues to develop the enormous potential of our country to improve the reliability of supplies to energy consumers in Europe by uniting more effectively the energy resources and transport infrastructures of Central Asia, Russia, Ukraine and the European Union.

As you know, Ukraine’s relations with the European Union are expanding. Our energy relationship is governed by the Memorandum of Understanding in the Field of Energy which provides a comprehensive framework for collaboration and which we updated on September 14 to add financial support for energy sector priority projects transport projects from the EBRD and the European Investment Bank.

Ukraine also aspires to join Energy Community Treaty and has already been granted observer status during the ministerial meeting in Skopje November 17.

Diversifying supplies of hydrocarbons and their supply routes into Ukraine is a priority issue, as is the creation of transit routes to the EU through Ukrainian territory. In this context, the development of the Odessa-Brody-Plodsk oil pipeline is most important. We must also synchronize our electricity system with Europe’s and develop alternative energy resources.

I am glad to report that our relationship with the EU foresees further political and financial support to Ukraine’ for the multibillion infrastructure energy projects, a number of which are presented to you here today.

The second pillar of our strategy focuses on creating a modern energy sector at home, in the context of a market economy that encourages investment and ensures financial stability as well as energy conservation and efficiency. These principles are laid out in Ukraine’s Energy Strategy through 2030 which was approved by the government in March of this year.

The Strategy forecasts cutting energy consumption by 50% by 2030 while tripling the GDP. This target will be met thanks to technological and structural cutbacks, as well as legislative stimuli. Within the next few years we want to cut gas consumption by 30% in metallurgy and 20% †in the chemical industry.

Also, Ukraine also aims at reducing of consumption of the imported energy, in particular gas. In this area, we plan to accelerate development of coal mining and nuclear power sector. By doing so, we expect to ease Ukraine’s dependency from imported energy to about 12% in 2030. National gas consumption is supposed to drop from today’s 56.4bn m3 to 9.4bn m3.

Ukraine is setting the stage for development of the nuclear power generation. Today, 15 nuclear power blocks are capable of generating 13.8mn KW. The Government plans to extend exploitation terms of the existing blocks, as well as to build new ones. Supposedly, Ukraine will have domestically produced uranium and zircon.

By 2010, Ukraine also intends to construct a centralized Spent Nuclear Waste Storage.

Coal consumption will rise dramatically in power generation. Its share in energy balance of the power plants will reach 80%.

Domestic oil and gas production will increase. Our 2016 target for oil is 2.4 million tones of domestically drilled oil per year, and by 2030 we expect to produce 28.5 billion m3 of gas. Plus, the strategy provides for modernization of oil refineries, with the aim to improve the depth of refinement to 90%.

Obviously, large-scale modernization will require multibillion investments in the sector. Our plans envision that we will attract capital from private investors, both domestic and foreign, profits of the energy companies themselves, state investments and from partners such as the World Bank, European Investment Bank and others.

The third pillar of our strategy for success is based on maintaining strong relations with Russia. Russia needs predictability from Ukraine, just as Ukraine and Europe need predictability from Russia. We acknowledge this interdependency and intend to use it to our mutual benefit.

I’m happy to report to you that today Ukrainian-Russian energy relations have been put on a sound footing. In October of this year, our governments reached important and mutually acceptable agreements on cooperation in the areas of oil and gas, nuclear energy and electric power. We have recently signed contracts which provide terms of gas supplies in 2007, as well as the increase of Russian oil transit through Ukraine.

We will continue to work with our
colleagues in Moscow to ensure that both sides are meeting their commitments and are doing so in a transparent way that contributes to increased regional energy security for exporters, transporters and consumers of that energy. Doing so is in everyone’s advantage.

Let me conclude by saying a few words about the fourth pillar of our Energy Strategy, building a real strategic energy partnership with the United States that brings tangible benefits to both sides. In this respect, we are interested in involving the American partners into the Eurasian Oil Transportation Project. This strategic corridor rests on the idea of transporting Kazakh oil to Europe through the Odessa-Brody-Plock pipeline. We look forward to collaboration with our US partners in a way that brings the maximum results.

Several weeks ago, the Ukraine-Poland Working Group has been created which will soon deliver a draft Agreement to be signed by two governments. This document aims at sending a clear message to private investors about the high-level support of the project.

We anticipate and hope that the American oil companies operating in the Caspian region will become interested in the Odessa-Brody project. In addition, we invite the American companies to develop oil deposits on the Black Sea shelf.

I am happy to announce that Ukraine is making solid progress on concluding its first Production Sharing Agreement in the energy field with our partners at Vanco. This agreement will speak to the interests of both Ukrainian and American partners, will be commercially successful and address Ukrainian and regional energy security requirements. It is my hope that this agreement becomes a model that we can replicate and build on with other partners in the future.

I want to end my comments with thanking you and thanking the American people for all the support you have given us during our early years of independence. You have shared your expertise, promoted our security and given generously through programs run by USAID, the Department of Agriculture and other agencies.

Your generosity and friendship are wise investments. They are also most appreciated, and on behalf of all of us I thank you very much.