Ukraine: Kyiv Eyes Iran’s Gas For Use, Transit to Europe
By Roman Kupchinsky

The government of Ukrainian President Viktor Yushchenko is interested
in Iranian gas

Prague, 4 April 2005 (RFE/RL) — In early February, Interfax announced
that Ukrainian president Viktor Yushchenko will make an official
visit to Iran in the “first half of the year”. The topics to be
discussed during the visit were listed as bi-lateral relations and
joint projects in the energy sector.

The announcement of Yushchenko’s trip to Iran, coming so soon after his
inauguration, served to underscore the importance that Kyiv attaches
to finding alternative energy supplies while seeking to wean itself
away from its dependence on Russian oil and gas.

Teheran has been on the Ukrainian energy compass for the past few
years as a potential supplier of oil and gas. Kyiv also sees Iran
as a country where Ukrainian companies can provide considerable
expertise in energy related construction projects, and as a market
for oil drilling equipment and large diameter pipes. Ukraine also
sees itself as a possible transit route for Iranian gas destined for
European Union markets – primarily in Central Europe and Germany.

Iran, according to the International Energy Administration of the
United States ) has proven
reserves of 28 trillion cubic meters of natural gas. That is 18
percent of the worlds proven gas reserves and second only to Russia.
Around 62% of Iranian natural gas reserves have not been developed.

Ukraine also sees itself as a possible transit route for Iranian gas
destined for European Union markets – primarily in Central Europe
and Germany. As such Ukraine could earn considerable money on transit
fees, money which could in turn be used to purchase Iranian gas for
the Ukrainian domestic market.

During Yushchenko’s visit to Germany in March, Deutsche Bank agreed to
provide Naftohaz, the Ukrainian oil and gas monopoly, with a credit
line of $ 2 billion. The Ukrainian side will decide how this money
is to be spent and some analysts in Kyiv believe that it might be
allocated to renovating the aging Soyuz pipeline and preparing it
for the task of delivering Iranian gas to Germany.

The Turkmen Connection

Interest in Iranian gas was renewed in Kyiv after Viktor Yushchenko
was elected president and Turkmenistan unexpectedly raised the price
it charges Ukraine for natural gas in January by 32 percent, that is,
to $ 58 per 1,000 cubic meters.

Another factor contributing to interest in the Iranian route is that
the contract for Turkmen gas to Ukraine ends in December 2006. After
this date, Ukraine will be forced to buy Turkmen gas from Gazexport,
a subsidiary of Russia’s Gazprom.

On 28 March, RIA press agency reported that a Ukrainian delegation led
by Fuels and Energy Minister Ivan Plachkov and the head of Naftohaz
were given assurances by Gazprom head Alexei Miller, who stated: “We
support the Ukrainian side’s proposal to move to monetary payments
for the transit of gas through Ukrainian territory and to raise the
tariff rates to the European level.” Miller added: “Gazprom, for its
part, can fully meet Ukraine’s requirements in Russian natural gas
at European-level market prices.”

The Ukrainian side is approaching this promise with caution given
Gazprom’s past history of manipulating the gas market in order to
promote the Kremlin’s political agenda. There is also considerable
doubt that Gazprom is capable of meeting long-term commitments for
gas deliveries to the West.

On 6 March, IRNA press service reported that the Ukrainian deputy
minister of oil and energy held talks in Tehran with Iran’s Deputy
Foreign Minister for International Affairs Hadi Nejad Hosseinian during
the third meeting of the two countries’ energy commissions. At this
meeting, the Ukrainian side proposed buying 15 billion cubic meters
(bcm) of gas from Iran, to be delivered via a proposed pipeline whose
route has still not been agreed upon.

The currently proposed routes for this pipeline are:

-Iran to Armenia and then onto the Georgian port of Supsa, and from
there along the bottom of the Black Sea to Feodosia in the Crimea.
Once in Ukraine, the gas can enter into the Ukrainian “Soyuz” trunk
pipeline for delivery to the EU. According to a recent estimate done
by a Ukrainian energy think tank, the cost of this 550 kilometer
route would be some $ 5 billion and it would be able to transport
some 60 bcm per year.

– Alternately, the pipeline can run from Iran to Armenia then to
Georgia, on to Russia and end up in Ukraine. No cost estimate has
been announced for this route.

The IRNA report mentioned that Ukraine and Iran are to hold an
experts meeting in Tehran in May to discuss the financial aspects
and construction and implementation of the project as well as the
amount of gas to be exported. “Tehran and Kyiv will then make the
final decision” IRNA reported.

Two Powerful Opponents

Opposition to a Ukrainian gas deal with Iran is likely to come from
two countries – Russia and the United States.

On March 19, Interfax reported that Deputy CEO of Gazprom Alexander
Ryazanov stated that he does not consider the transit of Iranian gas
through Armenia to Ukraine and onward to Europe to be viable.

“I can’t even image how this could be done at all,” Ryazanov said,
adding that the Iran-Armenia-Georgia-Russia-Ukraine and Iran-Armenia-
Georgia-Ukraine transit routes mentioned in the press are unrealistic
and economically unsound.

Ryazanov did not specify why the routes were unrealistic and the
Ukrainian side is likely to view his objections as being more political
then economic.

The way the United States views the pipeline proposals are still
unknown. But in the case of a proposed gas pipeline from Iran to
supply Pakistan and India, the United States took a rather dim view.

Al-Jazeera reported on 19 March that “Washington warned Pakistan
not to go ahead with its Iran-Pakistan-India gas pipeline project,
saying that this project will strengthen Iran and thus negatively
affects the United States economically.”

It is likely that the Iranian-Ukraine pipeline project will be
discussed in Washington during Yushchenko’s first official visit as
president to the United States, which is currently underway (from 4
April to 7 April).

American concerns will most likely be centered on the potential
problems which could arise if the EU should become overly dependent
on Iranian gas, instead of being overly dependent upon Russian gas.

As an alternative route, the U.S. has been backing the idea of a an
energy corridor for moving Caspian basin energy to the West. That
corridor includes a gas pipeline which would by-pass Russia and
its pipeline system. The downside of this project is the role which
Turkmenistan would play in it and the reliability of its often erratic
leader Sapurmurat Niazov.

While the United States does not want to “strengthen Iran” it
has also been urging Ukraine to diversify its gas supplies. Given
Ukraine’s limited options for such diversification – the Norwegian
gas fields are rapidly being depleted and Ukraine’s demand for gas
is not decreasing — the Iranian pipeline might be one of the few
possible options open to Kyiv.