EU cautiously backs Ukraine's gas reform

International lenders and the EU have pushed for reform in Ukraine's energy sector, with the country's economy avoiding collapse last year only due to foreign aid.

Some 80 percent of Russia's gas exports to Europe transit Ukraine through its pipeline system. There were two major gas supply disruptions in 2006 and 2009 following pricing rows between Moscow and Kiev, giving the EU a strategic interest in the former Soviet country.

Last year, the EU commission pledged financial aid, together with the World Bank, the European Investment Bank and the European Bank of Reconstruction and Development, pending the passage of this gas law which was blocked in the Parliament amid bickering between the ruling parties.

The country's energy minister, Yuri Boyko, thanked the EU for its "input" into the new legislation, which is inspired by the bloc's energy regulating framework adopted in 2003. The EU has since adopted another legislative package with a greener focus, such as energy saving measures in buildings.

Energy efficiency a foreign concept

In Odessa, however, energy efficiency is a foreign concept. In hotel rooms, visitors find the air conditioning switched fully on, while the heater in the bathroom – plugged to the public gas heating system – is also on. Gas is cheap and it shows.

According to statistics from the International Energy Agency, Ukraine is four times more energy-consuming than EU countries in relation to the gross domestic product. Russia, famously known for its waste of energy, is only three times more energy-consuming.

"The incentives are all wrong. Ukraine buys more gas than it needs, because the politicians are elected depending on those purchases," says Valery Borovyk, head of Alliance New Energy of Ukraine, a group promoting energy efficiency.

Viktor Yanukovych, the pro-Russian president, earlier this year signed up for cheaper Russian gas in return for a 20-year lease on a military port of Sevastopol where Moscow keeps its Black Sea fleet.

Industrial and private consumers alike get subsidised gas, rather than state aid targeting only households with low incomes. Murky traders often purchase the gas at low internal prices only to sell it abroad for lucrative profits.

Meanwhile, a recently passed gas reform law only touches upon the smart use of energy. Offshore oil and gas exploitation in the Black Sea, a terminal for liquified natural gas and two more nuclear plants are the priorities of the government when it comes to reducing energy dependence:

And there is still the concern that Ukraine's big asset - the transit pipelines to Europe - will no longer be needed if Russia goes ahead with its South Stream pipeline through the Black Sea. Moscow already has pipelines under construction in the Baltic Sea.

"We are aware of the alternatives to bypass Ukraine, but we have to ensure our own security," Mr Boyko said.

Experts speaking at the conference had little sympathy for Ukraine's troubles. "It is Ukraine's own choice to buy Russian gas at subsidised prices, instead of going for the market price," said John Roberts, an energy analyst from Platts.

He admitted that a sudden increase in gas prices would have hit the population in the short term, but in the longer run it would have allowed Ukraine more leverage in negotiating with Russia as a commercial partner, not a recipient of subsidies.