– The Caspian Energy Space is an alternative to Russian energy dominance in the region
– Ukraine wants to become the lynchpin of a regional energy transit corridor
– Political and economic instability in the Ukraine could negatively impact the development of this energy transit corridor
From the Caspian to the Baltic
At a recent summit in Kyiv, seven former Soviet bloc states agreed to pursue a joint energy project bringing Caspian oil resources to Europe. The so-called Caspian Energy Space or Caspian Initiative is an initiative designed to reduce dependence on Russian energy dominance (both supply and transportation) in the region. It is hoped that cooperation between parties will also lead to improved technical proficiencies in production, transit and supply of energy resources. One proposal is to use an existing 670-kilometer (km) pipeline to pump oil originating from Azerbaijan and Kazakhstan via Georgia from Odessa to Brody, near the Polish border. Russia currently uses this pipeline to pump supply to Europe. The Ukraine wants to extend the pipeline through Poland to Gdansk. The Ukraine believes that this pipeline would make European Union customers less dependent on Russian supply and would be the shortest and most economical access to Caspian oil. However, an Odessa-Brody-Gdansk pipeline would aid the Ukraine greatly as the country would be able to capitalize on oil and transit fees. An added bonus would be the profits gained from oil refineries built along the route of the pipeline.
The plan would serve as a means for these states to reduce energy dependence on Moscow and the Russian sphere of influence as well as move closer to the West. To date, Russia and its energy companies have dominated the regional energy markets. Former Soviet bloc states have also seen their subsidized energy costs—a side benefit of their previous relationship with the Soviet Union and Russia, disappear as Russia continues to raise prices. Although Russia has been increasing prices across the board the Ukraine and Georgia have had the most tempestuous relationship with Russia over this issue. Russia has suspended gas supplies to the Ukraine previously, and has threatened to do so again over pricing and debt disputes. Many believe that Russia is now wielding its energy dominance as an effective foreign policy tool in addition to increasing its economic might by trying to dominate regional energy markets.
Additionally, European countries are nervous about energy dependency on Russia as well as Russian dominance in the Caspian and Central Asian energy markets. Officials from 30 other countries as well as international organizations also attended the summit—evidence that there are many parties interested in a diversified energy supply from the Caspian region.
The Ukraine as a Lynchpin
Although there is a great deal of interest in the ambitions of the Caspian Energy Space, the feasibility of this energy vision will have to be proven. Ukraine’s position as the lynchpin of this energy corridor could also be problematic. Instability in its government and a legacy of corrupt business practices with ties to politics could hamper the process. The energy sector in particular is considered corrupt and inefficient, characterized by a lack of transparency. Recently, the Ukrainian government reneged on an oil contract signed with a Texas company to drill in the Black Sea citing security reasons and previous murky deals regarding the signing of the contract. While many suspect that political infighting was the real cause for reneging on the deal, the Ukrainian government claims that they are protecting their national assets and promoting transparency. In a testament to preconceived negative notions shared by the international community, the US Ambassador to the Ukraine publicly criticized the Ukraine’s decision to renege on the contract.
The energy business can be very complex and involve many different partners in development and Production Sharing Agreements (PSAs). To develop the vision of the Caspian Energy Space, foreign investment and development will be crucial. If the Ukrainian government makes business difficult for these entities, then development of this regional energy transit corridor could ultimately be hindered or delayed.