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Leigh Turner

Ambassador to Austria and UK Permanent Representative to the United Nations and other International Organisations in Vienna

Part of UK in Ukraine

15th February 2012

Ukraine: is discounted gas good?

Gas matters. The embassy follows closely talks between Kyiv and Moscow on gas supplies; and between the Ukrainian authorities and the IMF about prices for domestic gas. We care because these talks can affect security of gas supplies to Europe; the Ukrainian economy; Ukraine’s domestic politics; and international relationships. According to the International Energy Agency, global gas demand will increase by more than 35% between now and 2035. Gas is also one of the cleanest hydrocarbon fuels – and will play an important role as we work to minimise the impact of global climate change on economic growth and energy security.

The concept of discounted gas is important to understanding the debate about gas in Ukraine. There are two broad types. The first kind is gas which a country can persuade other countries to sell it at a discount, for whatever reason. The second type of discounted gas is that sold within a country when eg domestic consumers pay less than industrial users. This blog is about the first kind.

Gas is an unusual commodity. It is less fungible than other commodities and harder to transport than eg steel, coal or grain. Traditionally it’s been traded on long-term fixed bilateral contracts and transported by expensive, fixed pipelines. There is less of a world spot market for gas than there is for other commodities (but see below). Pipelines create powerful ties between producers and consumers, and difficult negotiations. Naturally, producers want the highest prices they can negotiate; consumers want the lowest. In the case of Ukraine, securing cheap gas supplies could potentially benefit the economy by reducing inflation; saving money to the budget; and making Ukrainian industry which uses gas more internationally competitive.

But there are problems in negotiations of this kind. The first is what Ukraine has to give up in return for securing potential discounted gas supplies. This is a familiar issue which is at the forefront of the minds of everyone engaged in gas negotiations, so I won’t go into it further here. A second issue is that, if most of Ukraine’s supplies come from a single supplier, that weakens Ukraine’s negotiating position. Some theorists argue that gas-importing countries can become “hostages” of their suppliers during price negotiations.

So what can Ukraine do? There is some good news. New sources of “unconventional gas” are diversifying supply around the world. It is becoming cheaper to transport gas by ship. Gradually, a spot market is developing, making it easier to secure gas more cheaply from alternative suppliers. These developments by themselves mean that Ukraine could, in theory, have a stronger negotiating position than in the past by diversifying gas suppliers. Ukraine could strengthen its position further by forging ahead with energy efficiency – thus consuming less gas; by encouraging domestic gas production; and by diversifying into energy sources other than gas.

Some of these measures have already been announced. But progress remains challenging. This is where the second type of “internal” discounting comes in. If domestic gas prices were increased, this would have a big impact on the willingness of consumers to invest in energy-saving technology and to turn down their thermostats. It would also give producers more incentives and resources to invest in exploration and exploitation of gas resources inside Ukraine. I hope to blog more about this shortly.

A rig and supply vessel at work by Associated Press

4 comments on “Ukraine: is discounted gas good?

  1. Maybe it is even more importantly to modernize the business practices of this large and non-transparent sector of the Ukrainian economy. Thanks and waiting on updates!

  2. Brave man Mr Ambassador. Domestic gas is a hot potato in Ukraine.
    Did you know that the average household in Ukraine pays just UAH 16 per month for the use of gas. (Remember there are no meters, unless you live in a new house/building). So everyone pays the same. Ukrainians have no ‘respect’ for utilities like gas and water etc. Moreover most apartments do not have thermostats. The only way to adjust the heat in winter in to open a window. LOL. ))

    1. Four years ago I was in a house in a small village in Ukraine and saw a meter. Eight and six years ago, the meter was not there.

    2. The majority of Ukrainian households (62,2% on January 1st, 2011) have a gas meter. The problem is that it is not profitable for oligarchs who control Ukrainian gas system to cover all households with gas meters, because household without meter pays twice better.

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About Leigh Turner

I hope you find this blog interesting and, where appropriate, entertaining. My role in Vienna covers the relationship between Austria and the UK as well as the diverse work of…

I hope you find this blog interesting and, where appropriate, entertaining. My role in Vienna covers the relationship between Austria and the UK as well as the diverse work of the UN and other organisations; stories here will reflect that.

About me: I arrived in Vienna in August 2016 for my second posting in this wonderful city, having first served here in the mid-1980s. My previous job was as HM Consul-General and Director-General for Trade and Investment for Turkey, Central Asia and South Caucasus based in Istanbul.

Further back: I grew up in Nigeria, Exeter, Lesotho, Swaziland and Manchester before attending Cambridge University 1976-79. I worked in several government departments before joining the Foreign Office in 1983.

Keen to go to Africa and South America, I’ve had postings in Vienna (twice), Moscow, Bonn, Berlin, Kyiv and Istanbul, plus jobs in London ranging from the EU Budget to the British Overseas Territories.

2002-6 I was lucky enough to spend four years in Berlin running the house, looking after the children (born 1992 and 1994) and doing some writing and journalism.

To return to Vienna as ambassador is a privilege and a pleasure. I hope this blog reflects that.