Ukraine to cut gas imports from Russia by 66% within 5 years: PM

Kiev (Platts)--30Aug2011/1129 am EDT/1529 GMT


Ukraine plans to cut Russian natural gas imports by 66% within the next five years, replacing it with domestic energy resources, like shale gas and coal, Prime Minister Mykola Azarov said Tuesday.

The plans for drastic reduction in gas imports come as Moscow and Kiev have failed over the past 18 months to reach an agreement on lower gas prices.

"We set a very ambitious task for ourselves," Azarov told a local government in the Kharkiv region, according to a report by Pershiy state-owned television.

Ukraine plans to import 40 billion cubic meters of Russian natural gas in 2011, up from 36.5 Bcm in 2010, according to the energy ministry.

Azarov's comments underscore Ukraine's worsening relations with Russia as Moscow has repeatedly refused to re-negotiate a controversial 10-year gas agreement signed in January 2009.

The agreement, negotiated by then Prime Minister Yulia Tymoshenko and her Russian counterpart Vladimir Putin, set gas prices the current government considers to be too high.

Azarov has repeatedly complained that Ukraine pays some of the highest gas prices in Europe, while at the same time is the closest country to the source of gas and also buys more gas then any other country.

Tymoshenko is currently on trial in Kiev for negotiating the controversial gas agreement, and is facing up to 10 years in prison if the court finds her guilty.

BEING DRIVEN INTO A CORNER

Meanwhile, Russia's refusal to renegotiate the agreement may prompt Ukraine to abrogate the agreement by appealing to international courts, Azarov has recently warned Putin, according to Korrespondent weekly magazine report on Monday.

"You are driving us into a corner from which there is only one way out abrogating the agreement," Azarov told Putin, according to Korrespondent, which interviewed Azarov.

This is not the first time that Azarov has threatened to abrogate the agreement, but it is the first time that the issue has been raised directly with Putin.

Dmitry Peskov, Putin's press secretary, on Monday said that Moscow was not aware of any final decision by Ukraine to cancel the agreement legal proceedings, Interfax reported.

Putin in April 2010 suggested merging Gazprom and Naftogaz Ukrayiny as a result of which Ukraine would own 6% of the combined company, de-facto surrendering control over its gas pipelines to Gazprom.

Ukrainian President Viktor Yanukovych quickly rejected the merger plan as unfair.

SHALE GAS

Ukraine plans to use a number of measures to reduce the imports of Russian gas, including energy saving technologies and extracting more energy resources domestically.

Ukraine plans to start shale gas production within years and the government hopes this measure alone would reduce gas imports by 5 Bcm/year, Kommersant daily recently reported citing a government source.

Ukraine is believed to contain between 1.5 trillion and 2.5 trillion cubic meters of shale gas, Vadym Chuprun, the deputy head of Naftogaz Ukrayiny, said in June citing preliminary results of a survey that had been financed by the US government.

COAL

Coal-bed methane output would reduce the imports by another 4 Bcm/year, while gas produced from Black Sea shelf would reduce imports by 7 Bcm/year, Korrespondent reported.

Ukraine also plans to build a liquefied natural gas terminal on its Black Sea coast to enable imports of up to 10 Bcm/year of LNG from countries, like Azerbaijan.

Ukraine also plans to boost domestic coal output to replace expensive natural gas that is widely used in power and heat generating, and steel industries, with the measures capable of saving up to 8 Bcm/year.

Ukraine has enough coal reserves to satisfy domestic demand for the next 400 years, according to the government.

--Alexander Bor, newsdesk@platts.com

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