Report extract

Energy security

Resource endowment

Ukraine has a century-long history of oil and gas production and possesses substantial conventional and unconventional hydrocarbon reserves, estimated at 9 billion tonnes of oil equivalent (Btoe). Natural gas reserves are estimated at 5.4 trillion cubic metres (tcm), with proven reserves of 1.1 tcm of natural gas, more than 400 million tonnes (Mt) of gas condensate and 850 Mt of oil reserves. The loss of jurisdiction over Crimea, whose significant offshore gas resources are no longer accessible to Ukraine, means natural gas reserve estimates must be revised downwards.

Hydrocarbon resources in Ukraine are concentrated in three regions: the Carpathian region in the west; the Dnieper-Donetsk region in the east; and the Black Sea-Sea of Azov region in the south. The Dnieper-Donetsk region accounts for 80% of proven reserves and approximately 90% of gas production, and the Carpathian region has 13% of proven reserves and 6% of production. The remaining 6% of proven reserves are in the southern region, where production is conducted both onshore and offshore on the shallow shelves of the Black and Azov seas. The aggregate production in this region is 5% of Ukraine’s total oil and gas production.

Ukraine has considerable unconventional gas potential in the form of coalbed methane in the main coal mining areas of eastern Ukraine and in two shale gas basins: a portion of the Lublin Basin, which extends into Poland, and the Dnieper-Donetsk Basin in the east. Coalbed methane resources are estimated at close to 3 tcm, and technically recoverable shale gas resources at 1.2 tcm (www.iss.europa.eu/uploads/media/Brief_11.pdf; www.globalsecurity.org/military/world/ukraine/energy.htm). The Ukrainian section of the Lublin Basin is large and reportedly has a higher average total organic content than the Polish section and lower average depth. The Dnieper-Donetsk Basin, which provides most of Ukraine’s conventional oil, gas and coal production, also has high organic content but is deeper.

Ukraine’s abundant coal reserves account for more than 90% of the country’s fossil fuel reserves. They include the full range of coal types, from anthracite to lignite, including thermal and coking coal. Reserves of anthracite and bituminous coal are estimated at 32 gigatonnes (Gt), and resources are estimated at 49 Gt, ranking Ukraine sixth in the world for hard coal reserves after the United States, China, Russia, Australia and South Africa. Reserves of sub-bituminous coal and lignite are estimated at 2 Gt (15th in global ranking of lignite reserves), and resources are estimated at 5 Gt; the government estimates 117 Gt of hard coal reserves (including sub-bituminous) and 8.6 Gt of lignite, and recoverable reserves at existing mines at more than 6 Gt – or around 75 years of production at peak levels.

Most coal in Ukraine is in the Donbass region (Donetsk Coal Basin) in eastern Ukraine in the regions of Donetsk, Luhansk and Dnipropetrovsk. There are two other smaller basins, the Lviv-Volyn Coal Basin in western Ukraine (this basin extends into Poland) and the Dnieper Coal Basin, a lignite basin in central Ukraine. Intensive mining for more than a century in the Donetsk region has exhausted the best deposits.

Ukraine has substantial renewable energy potential, including significant biomass resources and waste management possibilities, which remains largely untapped.

Energy security and diversification

Ukraine’s energy security was seriously challenged in 2014 following prolonged gas price negotiations with Russia, military action in the eastern part of the country and the loss of governmental authority in Crimea. Facing possible natural gas, coal and electricity supply shortfalls, and disruption risks in the short to medium term, Ukraine’s need for sound energy policies and measures is urgent.

Coal production in the Donbass basin has been severely curtailed. Damage caused to the coal mining and energy-intensive industries by military action in this region is immense, leaving many flooded mines and destroyed energy and transport infrastructure, and subsequent logistical problems. Coal supplies from the Donbass region to central Ukraine and to the thermal power plants stalled almost entirely in mid-2014 and in the winter of 2015 due to discontinued rail operations and damaged or destroyed roads and bridges. This destruction poses major, irreversible damage for the coal and industry sectors, and its impact on the country’s energy and economic outlook has yet to be fully assessed.

Ukraine is actively attempting to reduce its gas import dependency and diversify its supply sources and routes. The government has put numerous emergency measures in place to reduce gas demand, increase domestic gas production and expand reverse-flow import capacities from more competitive European markets. There is large scope for further domestic gas development, with estimates putting natural gas production at 27 bcm to 30 bcm by 2025.

First, however, UkrGazVydobuvannya requires substantial investments to stabilise and possibly increase its own production (75% of its current fields are being depleted) using capital-intensive modern technology and equipment. As part of its agreement with the IMF, the Ukrainian government phased out residential gas subsidies by increasing the price for UkrGazVydobuvannya to full import parity (UAH 4 849/tcm) in May 2016 (http://www.kmu.gov.ua/control/ru/cardnpd?docid=249005214). The residential gas market was to be fully liberalised by May 2020 as a part of the Ukrainian government’s commitments under its Memorandum of Economic and Financial Policies with the IMF.

Regarding nuclear fuel supplies, traditionally provided by the Russian company TVEL, Energoatom has signed contracts with Westinghouse for fuel assemblies for some nuclear power reactors as part of Ukraine’s nuclear fuel supply diversification policy. At the same time, co-operation with TVEL is continuing.

Still a key transit country important to European energy security, Ukraine benefits from substantial transit revenues. Having the largest gas transit infrastructure in the world, Ukraine currently transports 82 bcm to 93 bcm of Russian gas per year to European markets, although a record low of only 60 bcm was transited in 2014. Overall, the volume of Russian gas being transited through Ukraine has dropped significantly from the 120 bcm per year (bcm/y) in the mid-2000s because of several factors, including stagnating demand in Europe and Gazprom’s export route diversification. In fact, Gazprom reduced transit through Ukraine from over 65% of total Russian gas exports to Europe in 2007 to below 50% in 2014; instead, it now delivers a portion of its gas to Germany, France and Belgium via the Nord Stream pipeline in the Baltic Sea. In addition, Gazprom’s 100% purchase of Gazprom-TransGaz (the gas transmission company in Belarus) at the end of 2011 should provide greater incentive for the Russian supplier to load the Belarusian Yamal or the Northern Lights routes, as transportation costs would be lower. The Slovak transmission system operator (TSO), Eustream, is planning for reduced volumes of Russian transit gas, as is the Czech TSO. Gazprom launched the TurkStream pipeline in January 2020, and if the Nord Stream II pipeline also materialises, Russian gas in transit through Ukraine will decrease much more, creating serious challenges for the system’s economic and technical operations. Reconfiguration of the entire gas transmission system would be required to enable Ukraine to handle much lower gas transit volumes and continue supplying all regions of the country in an efficient manner. The current Gazprom-NaftoGaz gas transit contract terminates on 31 December 2024.

In February 2018, the tribunal of the Arbitration Institute of the Stockholm Chamber of Commerce made its final ruling on the transit gas dispute between Naftogaz and Russia’s Gazprom. It decided to:

  • Award Naftogaz USD 4.63 billion for breaking its contract obligations to transit 110 bcm annually through Ukraine.
  • Reject Naftogaz’s claim of gas tariff revision specified in the contract as well as its transit contract revision claim based on European and Ukrainian energy and competition laws, noting that the implementation of regulatory reforms on Ukrainian territory is a task for the Ukrainian authorities.

The tribunal’s final December 2017 ruling on the dispute between Naftogaz and Gazprom over gas prices and contracted volumes also favoured Naftogaz but satisfied only part of its claims:

  • The tribunal completely rejected Gazprom’s take-or-pay claims to Naftogaz, amounting to USD 56 billion for 2012-17.
  • The annual contract volume obligation was reduced by more than ten times (from 52 bcm to 5 bcm), relative to Naftogaz’s actual import needs.
  • The price Naftogaz owed for gas supplied by Gazprom in the second quarter (2Q) of 2014 was reduced from USD 485/tcm to USD 352/tcm. Thus, the ruling rejected the contract’s oil products price peg (the latter price) in favour of the spot price at the closest European hub. Naftogaz also asked for a price review from May 2011, but the tribunal ruled for a price revision starting from 2Q2014. Naftogaz must redeem the arrears of USD 2.019 billion for gas supplied by Gazprom in 2Q2014.

On a net basis, Gazprom paid Naftogaz USD 2.6 billion in December 2019, which amounts to close to Ukraine’s total annual gas import needs or 7% of Gazpom’s European gas export revenue for 2017. The 2009 gas contract between Naftogaz and Gazprom stipulates that the Stockholm tribunal's decisions are final and cannot be appealed.

Because Ukraine’s refinery system dates to the Soviet era, total refinery capacity exceeds oil product demand by several times, and Ukraine has to meet most of its oil demand through imports. According to the 2018 energy balance compiled by Ukrstat, total final consumption of oil products was 10 599 thousand tonnes of oil equivalent (ktoe) while oil product imports were 10 365 ktoe. The State Fiscal Service (SFS) estimated the cost of oil product imports at USD 5.5 billion in 2018. SFS data also indicate that 38.7% of oil products were imported from Belarus, 37.3% from Russia, 10.3% from Lithuania and 14.2% from other countries in 2018. Given that Belarusian refineries depend on crude oil from Russia, Ukraine’s current oil product import mix puts the country at significant risk of an oil product supply shortage if Russia decides to provoke a crisis in the Ukrainian oil market.

Ukraine is reported to have only small stocks of oil (exact levels are a state secret), and there is no emergency oil supply legislation in place that would regulate the use of strategic oil stocks in the case of supply disruptions. The country would benefit from gradually building up oil stock reserves to the equivalent of at least 90 days of net imports or 61 days of inland consumption by 2025. This level is similar to the oil stockholding commitments of IEA member countries, except that the IEA has a collective action mechanism. 

Energy infrastructure and investment

Ukraine’s transmission network, made up of 220‑kilovolt (kV) to 750‑kV lines, is more than 22 000 km long, and the total length of the distribution network is more than 1 million km. Total installed generation capacity in 2013 was 56 GW, made up of 64% thermal power plants, 25% nuclear and 10% hydro. The remaining 1%, offset by some hydro storage, is accounted for by solar, wind and other small generators.

Most thermal plants burn coal, but a portion (about 5.4 GW) burns gas or oil and is used at peak demand times. Four nuclear plants with a total of 15 units account for 13.8 GW of installed capacity. Several large run-of-the-river and pumped storage hydropower stations with capacity of 5.9 GW along the Dnieper and Dniester rivers play an important role in electricity system operations, compensating for ageing thermal plants’ lack of flexibility.

Large investments are needed to modernise Ukraine’s generation capacity, particularly hydro and thermal power plants, to remove bottlenecks in high-voltage transmission capacity and to reduce distribution system losses.

In the hydro sector, UkrHydroEnergo, the state-owned company that manages the Ukrainian power grid, operates nine hydroelectric stations on the Dnieper and Dniester rivers with a total capacity of 5 900 MW. Long a supporter of modernising and expanding Ukraine’s large hydro capacity, the World Bank sponsored the replacement of turbines in the Dnieper and Dniester river plants as part of UkrHydroEnergo’s programme to increase the safety, efficiency and capacity of its hydroelectric system.

The extension of the Dniestrovski hydropower plant on the Dniester River was completed in 2016, adding 324 MW of capacity, and a second hydropower plant could also be built on the Dniester. In total, a further 3 000 MW of capacity could be added in this sector if financing is available, and another 600 MW of small hydro generation could be developed.

Though decisions on constructing new nuclear units were expected by 2018, none had been made as of April 2020. EnergoAtom has indicated that it will put out a tender to international vendors for a standard Generation‑III/III+ plant, but a large share of the supply chain for the plant’s construction is expected to be allocated to Ukrainian industries.

According to the Ministry of Regional Development, Construction and Housing, Ukraine has 33 122 km of heat transmission and distribution networks. Transmission pipelines total roughly 3 500 km (pipes with a diameter of 125 millimetres [mm] to 1 400 mm), and distribution pipelines (diameter 50 mm to 800 mm) are owned by municipalities and total 20 800 km. In addition, there are 12 400 km of industrial pipeline networks.

District heating system capacities in Ukraine are excessive, and their technologies are inefficient and outdated; capital stock is in a critical state, with most assets close to or beyond the end of their design lifespans. Energy losses are considerable (hence much gas is wasted) and operating costs are high, largely due to inadequate maintenance.

This overcapacity, lack of maintenance and insufficient investment in system upgrades means losses are considerable. Most boilers have low efficiency factors, resulting in heat losses of 10% to 15%. While insufficient metering does not allow for accurate calculation, losses in the distribution network, mainly due to leaks and a lack of pipe insulation, are estimated to be around 17% but could be considerably higher. Leaks also mean water must be added more frequently, constituting an extra cost for the heat supplier. In modern networks of comparable size, losses are typically less than 10%. Breakdowns are also frequent in Ukraine’s district heating systems, estimated at more than 1.6 breakdowns per km of network in operation, which is approximately ten times higher than in well-maintained modern systems. What is more, up to 70% of delivered heat is lost in the end-use phase because building insulation is insufficient and heat delivery cannot be adjusted to consumer requirements.

When it gained independence from the Soviet Union in 1991, Ukraine inherited a gas transportation system that is a uniquely dense network of multiple primary and secondary pipelines, coupled with major storage facilities. This enables the diversion of gas flows through other pipelines should an accident or failure occur.

The system encompasses 38 600 km of pipelines: 22 200 km of main transmission pipelines and 16 400 km of distribution pipelines. It is powered by 72 compressor stations, with a total capacity of 5 443 MW. It can transport up to 80 bcm/y for domestic consumption from indigenous and imported sources and can transit up to 142.5 bcm/y of gas from Russia and Belarus to European countries.

Ukraine’s gas transportation system has the second-largest storage capacity in Europe, after that of Russia. Storage is key to the security and stability of domestic supply operations, and is critical to the gas transit system. The 13 underground gas storage facilities have a total working capacity of 30.9 bcm/y; UkrTransGaz operates 12 of these facilities.

Ukraine holds sizeable untapped reserves of unconventional oil and gas, and the government has vigorously pursued legislative changes, such as streamlining production sharing agreements (PSAs), to make these reserves attractive for investors. In June 2012, it offered tenders for the Oleska and Yuzivska blocks and the Foros and Skifska areas of the Black Sea shelf under PSAs, allowing for the exploration and production of natural gas, shale gas, tight gas, coalbed methane, crude oil and oil and gas condensates for a 50-year period. In August 2012, the government selected ExxonMobil and Royal Dutch Shell to lead development of the Skifska deep-water natural gas field offshore in the Black Sea, together with Romania’s OMV Petron and national joint stock company (NJSC) Nadra Ukrayny. No bids were submitted for development of the Foros field, and offshore projects have been halted indefinitely due to loss of jurisdiction in Crimea in 2014.

The Yuzivska block in eastern Ukraine has an area of 7 886 km2. The minimum investment required during the exploration stage is estimated at USD 200 million, and for the commercial production stage USD 3.7 billion; however, Royal Dutch Shell, which won the bid for gas development, decided to pull out of the project in 2015. Shell was motivated in this decision by the armed conflict taking place in Donbass, where the Yuzivska block is located, as well as by the sharp plunge in European gas prices that made costly shale gas development much less attractive. The Oleska block in western Ukraine covers an area of 6 324 km2: a minimum estimated investment of USD 163 million is required for exploration, and USD 3.13 billion for commercial production. As with Shell at the Yuzivska block, Chevron pulled out of the project due to increased geopolitical risks in Ukraine and the more than twofold collapse in gas prices in the European market. 

Ukraine’s main oil transportation system consists of 4 767 km of pipelines of up to 1 220 mm in diameter; 51 pump stations; and 11 tank farms with a total of 79 tanks, with a cumulative rated capacity of about 1 million cubic metres (mcm). Pumping stations have 176 units with a capacity of up to 12 500 mcm/hour and electric drive capacity of 356.5 MW. The throughput capacity is 114 Mt/y at the inlet and 56.3 Mt/y at the outlet. About 65% of the pipelines are between 30 and 40 years old; 27% are over 40 years; 6% are between 20 and 30 years; and only 2% are between 10 and 20 years old. In addition, there are 4 625 km of smaller oil product pipelines, mostly privately owned, though their level of technical operations is unclear.

Ukraine has seven refineries with a design capacity of 50.4 Mt/y, which is about four times larger than Ukraine’s oil product market. However, the vast majority of this capacity is not currently in use due to a combination of ageing infrastructure, poor economics and damage from warfare in eastern Ukraine. As of early 2017, Ukraine had only one operational refinery, Kremenchug, in addition to the Shebelinsky gas processing plant in the Kharkiv region, which also produces oil products.

Ukraine has three maritime oil terminals: Pivdenny, Yuzhnyi and Feodossia (in Crimea). The Pivdenny oil terminal is equipped with tanks that store up to 200 000 cubic metres (m3) of oil. The terminal can receive large oil tankers with a maximum deadweight of 150 000 tonnes (t) and maximum draught of 12.5 m. The Pivdenny port is designed to accept and discharge crude oil, which is transported by trunk pipelines. Oil terminal capacity is 25.5 Mt/y of crude oil and oil products. The Yuzhnyi terminal, with a capacity of 60 000 m3 and an average loading rate of 1 100 m3/hour, can accommodate vessels of 125 000 t and maximum draught of 13.8 m. Ukraine lost legal control of the Feodossia oil terminal after Russia annexed Crimea, and in response Ukraine has closed all sea ports in Crimea to international navigation.

The Euro-Asian Oil Transport Corridor (EAOTC) has been under consideration since around 2007, inspired by the Odessa-Brody oil pipeline and its proposed extension to Plotsk (about 371 km) and Gdansk, to supply Polish refineries. The Odessa-Brody pipeline has revived the concept of direct-mode use, and Sarmatia, a Polish-registered pipeline company, was designated to develop the extension. Sarmatia has brought together five shareholders to form a project consortium: Azerbaijan’s SOCAR, the Georgian Oil and Gas Corporation, Lithuania’s Klaipedos Nafta, Poland’s PERN Przyjazn S.A. and Ukraine’s Ukrtransnafta.

Electricity

Ukraine’s electricity network is fully integrated and interconnected with those of its regional neighbours and runs in parallel with the Russian system. The exception is Burshtyn Island in the western part of the country, which is synchronised with the Central European grids and facilitates direct exports to Slovakia, Hungary and Romania.

Gas

The gas transmission system has many large entry points on the Russian-Ukrainian border, allowing both Russian transit gas and gas for domestic consumption to be dispatched to Ukraine’s eastern regions. Gas is injected from Ukraine’s storage sites into the east–west transit pipelines to make up for gas taken out at the eastern end for domestic use. Storage facilities hold gas from both domestic production and imported from Russia. Domestic and imported gas is put into Ukraine’s storage facilities between mid-April and mid-October and is withdrawn during the winter months. During winter peak times, Ukraine’s five storage sites at the western border can supply up to 40% of daily transit volumes.

Oil

Russian and Kazakh companies can transit crude oil through Ukraine via three pipelines: the southern branch of the Druzhba pipeline, which enters Ukraine from Belarus (Atyrau-Samara-Unecha-Mozyr-southern Druzhba); the Samara-Lisichansk pipeline; and the Nizhnevartovsk-Lisichansk-Kremenchuk-Odessa pipeline. Volumes of oil in transit through Ukraine have been decreasing steadily in recent years.

Outages in Ukraine’s electricity sector are rare, mainly taking place in rural areas as a result of unfavourable weather conditions and/or deteriorated distribution grids. In recent years Ukraine’s TSO and regional distribution system operators have taken measures such as constructing reserve lines and switching to ring connection schemes to eliminate electricity outages for end users.

Electricity transmission and distribution losses are 13% on average but have reached nearly 20% some years. Losses in generation, transmission and distribution are expected to increase without sufficient and timely investments in infrastructure. Each licensee reports to the National Energy and Utilities Regulation Commission on losses and outages on a regular basis, but quality-of-service standards related to outages have not yet been implemented by the regulator.

Natural gas transmission line losses have been estimated at 2‑3% of total transmission volumes, and losses on UkrTransGaz’s main pipelines are around 0.2%, which is a very good record. Technical losses in the electricity sector amount to 12%, while losses in gas are assessed at 2.3%. Reporting on losses and outages to the regulator and to the Ministry of Energy and Coal Industry is done by NaftoGaz on a regular basis.

Data on losses can vary considerably. For instance, network district heat loss was 16% on average in 2015, but some district heating companies noted losses of 40%. District heating systems in Ukraine have excessive capacity, and inefficient and outdated technologies: capital stock is in a critical state, with most assets close to or beyond the end of their design lifetimes. Energy losses are considerable and operating costs are high, largely due to inadequate maintenance. District heating companies consumed 5.8 bcm of natural gas for heat production in 2019 (down 0.2 bcm or 3.3% from 2018). Due to insufficient investment to modernise the district systems and improve end-use energy efficiency, more than half of input fuel is wasted.

By the end of December 2017, heat meter installation in buildings had increased to 90% from 32% in 2014,1 despite Ukraine’s commitment in the Memorandum on Economic and Financial Policies with the IMF in early 2015 to achieve universal gas and heat metering and move to universal consumption-based billing by 2017 (https://www.imf.org/external/pubs/ft/scr/2015/cr1569.pdf).

Emergency response

Emergency response policies and measures had been the responsibility of the State Emergency Service of Ukraine (until December 2012 the Ministry of Emergencies) until the country committed to build up minimum reserves of crude oil and petroleum products by 2020 under the Energy Community Treaty, in line with EU Directive 2009/119/EC. Ukraine’s downstream oil sector is now fully liberalised and the government has no right to interfere with oil business: it cannot distribute oil products produced by the refineries, which are marketed at their owners’ discretion. Ukraine is reported to have only small oil stocks, but the exact levels are a state secret and there is no emergency oil supply legislation in place to regulate the use of strategic oil stocks in the case of supply disruptions. Stocks are currently managed by Derzhkomreserv, the State Agency of Reserves of Ukraine.

Recent tensions with Russia and conflict with Russian-backed separatists, which provoked multi-level energy supply disruptions, triggered establishment of a Crisis Management Group under the prime minister’s office to address electricity and gas supply emergency preparedness, formulate emergency scenarios, define who qualifies as an “interruptible consumer” and conduct stress tests under various scenarios.

References
  1. NKREKP (2018), NKREKP Annual Report for 2017, NKREKP, Kyiv.