Since 1991, energy delivery and gas supplies have been an important factor in post-Soviet Ukraine’s relations with both Russia and the European Union (EU). Russia was and still is partially dependent on the Ukrainian gas transportation system (GTS) and has not been able to take full control of its energy relations with the EU. Since the 2004 Orange Revolution, geopolitical considerations rather than economic needs have motivated Moscow to build new pipelines specifically designed to bypass Ukraine, and thereby to get a freer hand in its dealings with its westernizing “brother nation.”
The completion of the first Nord Stream pipeline from Russia through the Baltic Sea to Germany in late 2012 lowered the role of the Ukrainian GTS for Russian energy exports to the EU. It provided a necessary pre-condition for Russia’s annexation of Crimea and covert intervention in Eastern Ukraine in 2014. The forthcoming possible launch of the Nord Stream II pipeline would erase any remaining Russian dependency on Ukraine as a transit country and could be a prelude to new military escalation between Moscow and Kyiv.
For many years, the Ukrainian transit corridor was crucial to Europe’s gas supply. The routes that pass through Ukraine to Russia and the EU have always been more than sufficient to deliver as much gas volume as has been necessary for Europe. The EU’s and Russia’s reliance on the Ukrainian GTS has provoked international geoeconomic interest in Ukraine since its emergence as an independent state in 1991.
Today, the eventual completion of the Nord Stream 2 via the Baltic Sea looks increasingly likely. If this pipeline were to start operating, the Ukrainian GTS would become largely unnecessary. A loss of most or even all Russian-EU transit could call the future of the entire Ukrainian gas infrastructure into question. Without the income from levies on the transit of Russian and Central Asian gas flowing through Ukraine to the EU, Ukraine may find that its gas transportation system is no longer economical.
If the Ukrainian GTS went out of business, this would have far-reaching implications for the EU’s energy supply, Ukraine’s relations with Russia, and larger European security issues. Many in Ukraine fear that the elimination of Russia and the EU’s dependence on Ukrainian gas transit will allow the Kremlin to provoke further instability in Ukraine. The Kremlin would feel more comfortable to intensifying its hybrid war with Ukraine once Russia is no longer dependent on Ukrainian gas transportation. This could escalate into a full-scale as well as open (and not merely covert, proxy, and paramilitary) interstate war against its Slavic neighbor.
At the same time, it is increasingly obvious that the role of Russian and Central Asian pipeline gas in the EU’s energy market will gradually decline. Alternative energy sources are becoming more widely used. Remaining gas demand will increasingly be met via diversified supply mechanisms, including Liquified Natural Gas (LNG) tankers. These factors will decrease the EU’s dependency on both the gas supply from Russia and the Ukrainian GTS. Recently, the adoption of the European Green Deal and a resulting acceleration of decarbonization have made this outcome more likely
However, Europe’s decarbonization plans may also be opening a new window of opportunity for Ukraine. In the best case scenario, an increasing demand for a variety of low carbon gases–such as biogas, biomethane, and hydrogen–could result in more energy collaboration between the EU and Ukraine. New joint projects for the generation and transportation of low carbon gas could become part and parcel of Ukraine’s future integration into European energy markets.
Ukraine has the potential to produce per year 7.5 to 10 billion cubic meters (bcm) of biogas and biomethane, which is approximately 25 to 30 percent of its own yearly natural gas consumption. As the production costs of such gas are relatively high, demand for this energy source may currently be low in Ukraine. Yet, it could be attractive for European customers today. The prices of these energy sources may be more acceptable in, and the nature of these gases will be more relevant, to the EU than they are currently for Ukrainian customers. Technically, these types of gas can be delivered through existing pipelines without much modernization, following a few legislative amendments that are expected to pass soon.
While exporting biogas is a short-term option, a promising long-term prospect is the generation and export of Ukrainian hydrogen. The European Hydrogen Strategy, as part of last year’s European Green Deal, stipulates that “the Eastern Neighborhood, in particular Ukraine, and the Southern Neighborhood countries should be priority partners.” The Strategy calls for the installation, within the EU by 2030, of 40 gigawatts (GW) of electrolyzers – specialized installations generating hydrogen – that, in their turn, need to use renewable or other low-carbon energy for their operation. (Such provisions are necessary to guarantee that, in the end, the exploitation of new energy sources is indeed contributing to environmental protection.) More electrolyzers producing another 40 GW are envisaged for the EU’s neighbor countries from which the EU could then import this green energy. It is planned that electrolyzers producing 10 GW out of the planned new 40 GW capacity will be located in Ukraine.
Despite the positive outlook for the development of Ukrainian hydrogen production for Europe, this plan is facing some challenges in Ukraine. First, the Ukrainian natural gas pipelines are so far not suitable to transport hydrogen. They would need modernization to be used for such a novel export function.
Some Ukrainian gas transportation companies are, in cooperation with various technical universities and other academic institutions, already investigating the possibility of transmitting hydrogen through the existing distribution grids. These Ukrainian investigations may be also of interest to other countries with similar gas transportation systems, especially those in post-communist Eastern Europe. However, significant investment in new hydrogen production and transit infrastructure will be needed soon in order to create and take advantage of a modernized energy transportation network.
Moreover, the general organization of Ukraine’s entire gas system needs to be rethought and redesigned. The current volumes of gas consumption and transit are much lower than the previously installed capacities allow – a misbalance that raises the generic fix-costs and final price of the transportation and distribution services. For instance, overall gas transit in Ukraine amounted to 141 bcm during the year 1998, but was at only 55.8 bcm by 2020, meaning that much of the GTS remains unused. Based on existing contracts, the amount of gas transit may decrease further to 40 bcm annually by 2024. There is a similarly radical change in Ukraine’s own gas consumption. While Ukraine’s gas consumption had been 118 bcm during its first year of independence of 1991, this number declined to 50.4 bcm in 2013, and went further down to 31 bcm in 2020. However, it’s important to note that the latter number does not include gas consumption in the non-government-controlled parts of the Donets Basin and in occupied Crimea.
A second major challenge for Kyiv will be determining how to raise enough domestic and foreign investments to take full advantage of Ukraine’s high green gas generation and transportation potential. Above all, funding is needed to redesign and reconstruct the existing natural gas grids and prepare for the transmission of hydrogen. The production of hydrogen requires the construction of new facilities to produce it, preferably by using renewable energy sources to run the electrolyzing process.
A third challenge of Ukraine’s entry into EU’s emerging green gas market will be Kyiv’s energy relations and competition with Moscow. Presumably, the Kremlin will not wait for the EU’s demand for fossil fuels to decrease and for income from current Russian energy exports to the EU to shrink. Russia will also try to become a green gas and hydrogen exporter to the EU. There is a risk that Russia will draw on its experience conducting trade and (mis)information wars to limit Ukraine’s ability to supply hydrogen to Europe through defamation, subversion and intervention. This threat will become especially pertinent if the Nord Stream 2 pipeline is indeed launched, and the EU becomes entirely independent from the Ukrainian GTS. Russia cannot be expected to engage in fair competition with Ukraine and could even employ para- or regular military means – as it, in some ways, partly already does – to improve its position in the European energy market.
Still, trying to meet these three challenges could contribute to Ukraine’s energy transition and its emergence as a new green economy. Independent from geopolitical developments, the prevailing ecological, industrial, and technological trends are already dictating such a transformation. In particular, Ukraine's energy transition could help to compensate for the already predictable losses that Ukraine will incur from the decreasing importance of traditional natural gas transit. Helping Ukraine to adapt its GTS and production facilities to the demands of the European Green Deal is an opportunity for the EU to support Ukraine in the face of the Nord Stream 2. Kyiv will need outside support to redesign its gas transportation and distribution systems and to modernize existing gas production facilities and build new ones. Finally, Ukraine will need new transit and export agreements on supplying green gas to the EU, and possibly to other countries in non-EU Europe, North America, or elsewhere.
Strategic investment into Ukraine’s energy industry, including its low-carbon gas generation and transportation system would not only have narrowly geoeconomic, but also wider geopolitical implications. Assistance to Ukraine would help Kyiv contain the Kremlin’s ongoing attempts to unleash further socioeconomic instability in Ukraine. Moreover, Washington and London would be supporting the sovereignty and independence of a country that once possessed the world’s third largest arsenal of atomic weapons. Thereby, the two Western signatory states of the famous 1994 Budapest Memorandum, the United States and United Kingdom, would indirectly strengthen the world-wide nuclear non-proliferation regime.
A similar story goes for two other countries that, in the 1990s, had inherited as well as given up Soviet atomic weapons, and also received Budapest Memoranda. Belarus and Kazakhstan too have been subject to Russian – so far only verbal – irredentist claims. Support for Belarus and Kazakhstan’s sovereignties would, like in the case of strengthening Ukraine’s resilience, be beneficial to the functioning of the worldwide non-proliferation regime. Such an approach further applies to two additional official nuclear-weapons states, France and China, that also provided Ukraine, Belarus and Kazakhstan with their own governmental security assurances in December 1994. Any support that Paris and Beijing provide to former nuclear-weapons states that gave up all of their atomic war heads voluntarily would be a sign of support for the geopolitical logic behind the 1968 Treaty on the Non-Proliferation of Nuclear Weapons, one of humanity’s most important agreements.
However, the main issue is here the future relationship between the EU and Kyiv. By supporting Ukraine’s energy transition, Brussels could strengthen a country in which an entire revolution, the Euromaidan uprising of 2013-2014, was conducted under European flags. While the three-month Euromaidan protests were not exclusively about Ukraine’s geopolitical orientation, they began in November 2013 to secure Kyiv’s signing of an Association Agreement with the EU. Ukraine’s Western integration, in turn, was the pretext of Russia’s military aggression in Southern and Eastern Ukraine in 2014. The Kremlin has since been conducting its hybrid war against Ukraine as a form of punishment for Kyiv’s decision to adopt EU norms and values.
Finally, Germany could support Ukraine’s energy system to partially atone itself for the damage that it has done to the geopolitics of Eastern Europe with its two Nord Stream pipeline projects. Arguably, the full opening of the Nord Stream 1 pipeline in October 2012 was a necessary, though not sufficient, condition for Russia’s military attack on Ukraine, one-and-a-half years later. Until 2012, Ukraine had, through its control over a large part of Gazprom’s pipeline connections to the EU, considerable economic leverage vis-à-vis Russia which will be further reduced should Nord Stream 2 also go online. The United States, United Kingdom and Germany would do themselves and the world a service by taking advantage of Ukraine’s considerable potential to become a major low-carbon gas supplier for Europe and beyond.
Andrian Prokip is an Energy Analyst at the Ukrainian Institute for the Future in Kyiv, and Senior Associate at the Kennan Institute of the Woodrow Wilson International Center for Scholars in Washington, DC.
Andreas Umland is Research Fellow at the Stockholm Center for Eastern European Studies at the Swedish Institute of International Affairs, and Senior Expert at the Ukrainian Institute for the Future in Kyiv.