Ukraine looks likely soon to join the growing list of Azerbaijan energy export partners, as Baku continues to add to its findings of offshore natural gas.

Ukraine is preparing to build its first liquefied natural gas (LNG) terminal to reduce its dependence on gas imports from Russia, which has cut off gas exports to its southern neighbor three times in the past five years. A first stage of the project may be limited to a capacity of 5 billion cubic meters per year (bcm/y), but subsequent stages foresee that doubling to 10 bcm/y. Ukraine produces abut 20 bcm/y of gas and imports roughly 35 bcm/y from Russia.

Current Azerbaijan energy export partners

Azerbaijan already exports to Turkey and Russia and has the prospect of feeding the planned Nabucco pipeline through Turkey to Europe. It has promoted such projects for export of liquefied natural gas (LNG) as the Azerbaijan-Georgia-Romania Interconnector (AGRI) from the Georgian Black Sea coast to Romania, a project now in the feasibility-study stage, and the export of compressed natural gas (CNG) to Bulgaria.

These are in addition to such European-driven projects as the Italy-Turkey-Greece Interconnector (ITGI) and the Trans-Adriatic Pipeline (TAP).

At present, Ukraine imports about three-fifths of its domestically consumed gas from Russia, which continually forces the price upwards. That in turn increases the production cost of industrial goods in Ukraine, making them uncompetitive. The planned LNG terminal’s capacity is equivalent to almost 20% of the country’s gas balance, representing a “serious diversification of our gas import system”, according to the project’s head, Petro Miroshnikov, as quoted by Reuters.

Miroshnikov mentioned a cost of about US$4 billion for the project, for which a tender would soon be announced. Bloomberg News cited a cost of $1.3 billion but that would seem to cover only the first stage.

Ukraine as a potential Azerbaijan energy export partner

This is a serious move by Ukraine to limit its gas dependence. The government recently also signed a memorandum of understanding (MoU) with TNK-BP to spend from $1 billion to $2 billion to increase exploration for shale gas (gas trapped in layered rock) in eastern Ukraine; the technology is also gaining favor in other central and east European countries such as Hungary. If successful the shale gas project could end up producing 5 bcm/y.

Other potential sources of gas for the new LNG terminal, besides Azerbaijan, include Algeria, Egypt Libya, Qatar, and the United Arab Emirates. However, gas from Azerbaijan would travel the shortest route (one-third the distance from the UAE, for example). Possible locations for the terminal include Feodosia in Crimea and Ochakov in the Mykolaiv region, but at present the most likely place for it is the Yuzhnyi port near Odessa, not far from the southeastern terminus of the Odessa-Brody oil pipeline.

Last month, Azerbaijan President Ilham Aliev declared his government’s interest in assisting Ukraine to decrease its gas dependence, and last week, Aliev and his Ukrainian counterpart, Viktor Yanukovych, agreed in Kiev to establish a joint working group to draw up a strategic agreement to increase oil and gas supplies from Azerbaijan to Ukraine. Aliev noted that Azerbaijan had already supplied over 50 million barrels of oil to Ukraine this year, “and we expect to increase supplies in the future”.

Yanukovych for his part stated his interest in filling the Odessa-Brody Pipeline (OBP, also called Sarmatia) with Azerbaijan oil being pumped from the Black Sea to the Polish border. He even stated that “all of our subsequent steps will be aimed at filling the Odessa-Brody oil pipeline and having it operate” in the originally southeast-to-northwest direction. (Since construction, it has either lain empty or operated in the opposite direction for internal Ukrainian transportation, filled with Russian oil.)

Potential Azerbaijan energy export partners beyond Ukraine into Europe

This is remarkable in view of the fact that the OBP’s integration into a Euro-Asian Oil Transportation Corridor (EAOTC), with the participation also of Georgia, Lithuania, and Poland, was a project that the previous presidential administration of Viktor Yushchenko (with the agreement of then-prime minister Yulia Tymoshenko) had initiated and supported. In 2008, Tymoshenko had successfully blocked what she called the “shadowy privatization” of the OBP.

Yanukovych has not said so, but under the new parliamentary majority, and with the reversion of the political structures back to a president-centered rather than parliament-centered system in light of a recent Constitutional Court decision, he perhaps plans again the OBP’s privatization.