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April 04, 2005

Ukraine: Kyiv Eyes Iran's Gas For Use, Transit to Europe

by Roman Kupchinsky

The government of Ukrainian President Viktor Yushchenko is interested in Iranian gas

Prague, 4 April 2005 (RFE/RL) -- In early February, Interfax announced that Ukrainian President Viktor Yushchenko will make an official visit to Iran in the "first half of the year." The topics to be discussed during the visit were listed as bilateral relations and joint projects in the energy sector.
The announcement of Yushchenko's trip to Iran, coming so soon after his inauguration, served to underscore the importance that Kyiv attaches to finding alternative energy supplies while seeking to wean itself away from its dependence on Russian oil and gas.

Tehran has been on the Ukrainian energy compass for the past few years as a potential supplier of oil and gas. Kyiv also sees Iran as a country where Ukrainian companies can provide considerable expertise in energy related construction projects, and as a market for oil drilling equipment and large diameter pipes.

Iran, according to the International Energy Administration of the United States (http://www.eia.doe.gov/emeu/cabs/iran.html) has proven reserves of 28 trillion cubic meters of natural gas. That is 18 percent of the world's proven gas reserves and second only to Russia. Around 62 percent of Iranian natural-gas reserves have not been developed.


Ukraine also sees itself as a possible transit route for Iranian gas destined for European Union markets -- primarily in Central Europe and Germany. As such, Ukraine could earn considerable money on transit fees, money that could in turn be used to purchase Iranian gas for the Ukrainian domestic market.

During Yushchenko's visit to Germany in March, Deutsche Bank agreed to provide Naftohaz, the Ukrainian oil and gas monopoly, with a credit line of $2 billion. The Ukrainian side will decide how this money is to be spent and some analysts in Kyiv believe that it might be allocated to renovating the aging Soyuz pipeline and preparing it for the task of delivering Iranian gas to Germany.

The Turkmen Connection

Interest in Iranian gas was renewed in Kyiv after Viktor Yushchenko was elected president and Turkmenistan unexpectedly raised the price it charges Ukraine for natural gas in January by 32 percent, that is, to $58 per 1,000 cubic meters.

Another factor contributing to interest in the Iranian route is that the contract for Turkmen gas to Ukraine ends in December 2006. After this date, Ukraine will be forced to buy Turkmen gas from Gazeksport, a subsidiary of Russia's Gazprom.

On 28 March, RIA press agency reported that a Ukrainian delegation led by Fuels and Energy Minister Ivan Plachkov and the head of Naftohaz were given assurances by Gazprom head Aleksei Miller, who stated: "We support the Ukrainian side's proposal to move to monetary payments for the transit of gas through Ukrainian territory and to raise the tariff rates to the European level." Miller added: "Gazprom, for its part, can fully meet Ukraine's requirements in Russian natural gas at European-level market prices."

The Ukrainian side is approaching this promise with caution given Gazprom's past history of manipulating the gas market in order to promote the Kremlin's political agenda. There is also considerable doubt that Gazprom is capable of meeting long-term commitments for gas deliveries to the West.

On 6 March, IRNA press service reported that the Ukrainian deputy minister of oil and energy held talks in Tehran with Iran's Deputy Foreign Minister for International Affairs Hadi Nejad Hosseinian during the third meeting of the two countries' energy commissions. At this meeting, the Ukrainian side proposed buying 15 billion cubic meters (bcm) of gas from Iran, to be delivered via a proposed pipeline whose route has still not been agreed upon.

The currently proposed routes for this pipeline are:

-Iran to Armenia and then onto the Georgian port of Supsa, and from there along the bottom of the Black Sea to Feodosia in the Crimea. Once in Ukraine, the gas can enter into the Ukrainian "Soyuz" trunk pipeline for delivery to the EU. According to a recent estimate done by a Ukrainian energy think tank, the cost of this 550 kilometer route would be some $5 billion and it would be able to transport some 60 bcm per year.

- Alternately, the pipeline can run from Iran to Armenia then to Georgia, on to Russia and end up in Ukraine. No cost estimate has been announced for this route.

IRNA reported that Ukraine and Iran are to hold an expert meeting in Tehran in May to discuss the financial aspects and construction and implementation of the project as well as the amount of gas to be exported. "Tehran and Kyiv will then make the final decision," IRNA reported.

Two Powerful Opponents

Opposition to a Ukrainian gas deal with Iran is likely to come from two countries: Russia and the United States.

On March 19, Interfax reported that Deputy CEO of Gazprom Aleksandr Ryazanov stated that he does not consider the transit of Iranian gas through Armenia to Ukraine and onward to Europe to be viable.


"I can't even image how this could be done at all," Ryazanov said, adding that the Iran-Armenia-Georgia-Russia-Ukraine and Iran-Armenia- Georgia-Ukraine transit routes mentioned in the press are unrealistic and economically unsound.

Ryazanov did not specify why the routes are unrealistic. The Ukrainian side is likely to view his objections as being more political then economic.

The United States has not publicly stated how it views the pipeline proposal. But in the case of a proposed gas pipeline from Iran to supply Pakistan and India, the United States took a rather dim view.

"Washington warned Pakistan not to go ahead with its Iran-Pakistan-India gas pipeline project, saying that this project will strengthen Iran and thus negatively affects the United States economically," Al-Jazeera reported on 19 March.

It is likely that the Iranian-Ukraine pipeline project will be discussed in Washington during Yushchenko's first official visit as president to the United States, which is currently in progress (4 - 7 April).

U.S. concerns will most likely be centered on the potential problems that could arise if the EU should become overly dependent on Iranian gas, instead of being overly dependent on Russian gas.

As an alternative route, the United States has been backing the idea of an energy corridor for moving Caspian-basin energy to the West. That corridor would include a gas pipeline that would bypass Russia and its pipeline system. The downside of this project is the role that Turkmenistan would play in it and the reliability of its often erratic leader Sapurmurat Niazov.

While the United States does not want to "strengthen Iran," it has also been urging Ukraine to diversify its gas supplies. Given Ukraine's limited options for such diversification -- the Norwegian gas fields are rapidly being depleted and Ukraine's demand for gas is not decreasing -- the Iranian pipeline might be one of the few possible options open to Kyiv.
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