On March 16, 2014 a disputed and tendentious referendum in Crimea provided the expected result: 97% of the people living in Crimea (including those of Russian citizenship) supported the idea of Crimea becoming a part of Russian Federation. Next day the Crimean authorities adopted a Declaration of Independence. And on March 18, 2014 the president of Russia, Vladimir Putin, recognized Crimea as a sovereign and independent state. The same day Putin officially approved the annexation of Crimea (http://www.kremlin.ru/acts/20605).
The Crimean question has been widely discussed in all world media. Indeed such a great violation of international principles and norms in the 21st century was hardly predictable. The Crimean question as a part of a largerpolitical puzzle between the West and Russia leaves more questions than answers. Though most scholars have focused on the ethnic and language differences in Crimea, the energy context is mentioned less frequently. In my opinion when we talk about a “petro” state like Russia energy context is of crucial importance.
What is the importance of Crimea in energy terms?
First of all, Crimea as a part of Ukraine possesses high energy potential. Its estimated energy reserves are about 45 trillion cm of gas. Indeed this number is especially striking when taking into consideration that shale gas reserves in Ukraine by comparison contain just 3,6 trillion cm of gas. Nevertheless the situation is far from being straightforward and has many loopholes.
Most of the estimated reserves are located in the offshore fields of the Black Sea. Therefore, the issue of extraction and transportation of these reserves is rather complicated and environmentally risky. But the entrance of such internationally recognized companies as ExxonMobil, Shell, and Chevron prove that these reserves are worthy of exploration. One could argue, however, that even though these reserves for Ukraine are quite significant, Russia possesses much greater and cheaper resources in Siberia. From one perspective, indeed the transportation network of Russian energy resources is well developed and Crimean energy resources seem like a small reward for a state already so well endowed.
On the other hand, to benefit fully from energy reserves in Crimea, Russia would need considerable investments and Western companies are unlikely to participate under the terms of international isolation (Shell has already announced its withdrawal). With the current turmoil in Ukraine and so far internationally unrecognized status of Crimea as part of Russia, Russia’s investments will have dubious grounds, at least in the short-term perspective. But even the current uncertainty leaves Crimean energy resources under the control of President Putin, rather than the Ukrainian authorities.
Among other important energy assets in Crimea are the largest solar power plants in Ukraine. Built by Austria-based Activ Solar in 2011, these plants include Perovo power plant (105MWp) and Okhotnikovo power station (82,6 MWp). These solar power plants were part of a national energy project aimed at producing energy from clean sources like the sun. If the Crimean authorities decide to nationalize these plants, they will cease to receive the most generous feed-in tariff, equal to 0,34/kWh, from Ukraine. Regardless of their high potential, renewable resources, like solar energy, have never been a priority for Russia and therefore their activity may be suspended.
A spokesman for Activ Solar did not deny that uncertainties around the political situation in Ukraine had caused the disruption of the company’s activities (http://www.photon.info/photon_news_detail_en.photon?id=84728). Apart from the unstable situation in Crimea, Activ Solar is risking the loss of other assets in Mykolaiv and Odesa. Because of allegations that company members used the connections of Sergiy Klyuev (a close ally of Yanukovych and a member of Party of Regions) to enrich themselves at the state’s expense, Activ Solar is being investigated concerning money laundering and financial crimes by the USA and Liechtenstein (http://www.reuters.com/article/2014/02/26/us-ukraine-crisis-corruption-lawyer-idUSBREA1P26920140226). If a connection between the son-in-law of Sergiy Klyuev, who is the head of Activ Solar in Ukraine, and the former governmental officials is found, Activ Solar’s assets in Ukraine may be frozen as a part of sanctions imposed on the members of the former government.
How much energy does Crimea consume?
On average Crimea consumes around 1,5 bcm of gas annually. A daughter company of Naftogaz, Chornomornaftogaz, controls gas extraction in the peninsula. A rapid increase in gas extraction took place from 1,05 bcm in 2009 to 1,65 bcm in 2013 (http://www.chernomorneftegaz.com/index.php/ru/novosti/press-relizy/924-chernomorneftegaze-prosit-ubrat-ognevye-tochki-s-magistralnogo-gazoprovoda-vysokogo-davleniya). These numbers indicate that Crimea may become energy independent if the capacity of the underground storage is increased, and thus the extra volumes of gas needed in winter could be taken from the storage. Moreover, in the Energy Strategy of Ukraine the plans to increase gas extraction in Crimea were forecasted to reach 2,5-3 bcm of gas annually. This would also mean that Russia could increase its exports of gas to other countries.
Concerning electricity, Crimea is much more dependent on Ukraine, since 90% of its electricity comes from continental Ukraine, mostly from Zaporizhzhya and Kakhovka. The capacity of power stations in Crimea is enough to cover only one-fifth of the needs of the peninsula. Construction of the Crimean nuclear power station might have solved Crimea’s electricity death, but after the Chornobyl disaster of 1986, the construction was frozen. Therefore, the current authorities hope that Ukraine will not cut electricity. Moreover, they plan to build two steam electric power plants in the near future in order to meet electricity needs of the peninsula (http://ria.ru/interview/20140318/1000000049.html#13951378523113&message=resize&relto=register&action=addClass&value=registration).
It is highly unlikely that Kyiv will suspend gas supplies to Crimea as this would imply recognition of Crimea as a part of Russia. Therefore, formally raw materials supply will be provided under special terms for the occupied territories. Second, the possible suspension of gas supplies would provide Russia with a casus belli to take control over Kakhovka power station. Thus, as the current state of affairs shows, the interim government will try to avoid direct confrontation in Crimea.
What is the fate of Chornomornaftogaz?
The fate of Chornomornaftogaz is also under discussion. This company though itself not as attractive as Russia would like to think, is nonetheless of great interest because of the location and newly purchased rigs. Chornomornaftogaz coordinates operation activities of the part of Gas Transportation System of Ukraine located in Crimea. It controls over 1300 km of gas pipelines, one compressor station, and Glebov underground storage (capacity of 900 million cm, planned to be extended to 4 bcm). The recent purchase of two new rigs ‘Independence’ and ‘Petro Godovanets’ for around $100 million became well known in mass media under the title of ‘Boyko’s rigs’ (Vyshky Boika). They appear to be one of the most valuable assets in energy terms for Russia.
Vladimir Konstiantinov, the head of the Supreme Council in Crimea, already stated that Gazprom should be in charge of gas and oil extraction in Crimea (http://www.vz.ru/news/2014/3/13/676877.html). New oil and gas fields in Odesskoe and Bezimiannoe were taken under the control of Crimean authorities. The fate of Chornomornaftogaz is still unknown and in accordance with Aksyonov’s declarations it will be nationalized and then it will become an integral part of Gazprom. This move will raise the capitalization of Gazprom to $50 billion (http://forbes.ua/nation/1367447-kak-zelenye-chelovechki-podarili-chernomorneftegaz-gazpromu?utm_medium=social&utm_source=facebook.com&utm_campaign=kak-zelenye-chelovechki-podarili-chernomorneftegaz-gazpromu).
Meanwhile, Naftogaz brought an action against Chronomornaftogaz for 6,9 billion UAH obtained as an interest-free loan for the purchase of two rigs (http://ua-energy.org/post/42314). The hearings of International Arbitration might last for years. For the time being Crimean energy resources are in the hands of Gazprom’s representatives. Ukraine in its turn did not manage to secure and transport documentation on offshore explorations to Naftogaz. Therefore, de facto Russian control over Crimean energy resources deprives Ukraine of potential extraction of energy sources in the offshore fields, but it does not really change the current energy balance of Ukraine.
South Stream changing the route?
The discussions about South Steam changing its route deserve special attention. South Stream is not only an extremely expensive project (approx. $60 billion), but also very controversial as it does not meet the requirements of the Third Energy Package. Annexation of Crimea may bring about an alteration of the South Stream’s route. If it is constructed through Crimea along the formula ‘sea-land-sea’, then its initial price may be reduced by $20 billion. This option should not be excluded as Russia has already declared that in the fall of 2014 offshore section construction will start (http://www.energyglobal.com/news/pipelines/articles/Saipem_to_lay_first_offshore_section_of_South_Stream_148.aspx#.UywdVNzjA9U).
Gas cut offs?
The probability of Russia cutting off gas from Ukraine and disrupting supplies to European countries still exists. After the 2006 and 2009 gas crises Europe learned its lesson. European diversification plans are implemented with the assistance of Norway and Algeria. Therefore, though the EU still relies on Russia for more than quarter of its gas needs, as the winter season has passed already, the EU may use gas from the European gas storage facilities. The EU has already drawn its main conclusion, as announced by British Foreign Secretary William Hague: ‘We have started today discussing the longer term, the need to reduce European dependence on Russian energy over many years to come’ (http://www.reuters.com/article/2014/03/17/ukraine-crisis-britain-energy-idUSS8N0M700K20140317).
The United States in return has offered a $1 billion loan guarantee for Ukraine in case of gas cut offs. But the export of liquefied gas from the US will be possible only after 2016 at earliest. Meanwhile, Ukraine’s inability to pay on time for the consumption of gas and the increase of the gas price to $500 starting from April 2014 will leave Ukraine in a quite vulnerable position. The gas stored in the underground storages is depleting, and without it gas transit to European countries may be endangered. Therefore, regardless of the importance of Crimea in energy terms, the interim government will most probably dedicate its time to resolving the gas issue and securing gas transit to Europe.
The author is a PhD Candidate at Middle East Technical University in Turkey.