Energy and the Ukrainian Economy: Obstacles and Opportunities Ahead
The gas standoff in January 2006 between Russia and Ukraine resulted in a price increase for imported gas that has raised fundamental questions about the future of Ukraine's economy and energy security. Stepping back from the day-to-day headlines, this CERA Private Report discusses the relationship between energy and the Ukrainian economy over the longer term.
* Ukraine's overall energy situation has not altered fundamentally since 1991. Notwithstanding its economic collapse in the 1990s and economic rebound since 2000, Ukraine has remained an energy intensive importer of oil and gas. This continuity reflects the enduring concentration of Ukrainian industry in the production of ferrous metals and other heavy manufacturing.
* The effects of rising energy prices will be felt over the medium to long term. The strength of the global metals market has led to a recent surge in Ukraine's commodity exports; this has buoyed industrial growth and overall economic growth in 2006. As a result, the Ukrainian economy does not appear to be facing an imminent crisis. However, rising gas prices are likely to diminish the cost-competitiveness of Ukraine's heavy industries going forward
* Ukraine will be unable to meet all its energy needs by increasing domestic oil and gas production. Although Ukraine is home to substantial oil and gas resources, the basins are relatively mature and the majority of resources yet to be found are very small plays. More exotic prospects such as coalbed methane are still costly and technologically remote.
* Ukraine's fuel mix will shift further toward gas over the next 15 years. In the period out to 2020, oil use is expected to rise moderately; nuclear and hydropower generation is likely to remain flat; and coal use is expected to contract slowly. Gas will continue to account for the majority of Ukraine's energy imports.
