This weekend Ukrainians head to the polls to choose the country’s sixth president. There are a record number of candidates, but it looks to be a three-person race at this point.
In a script that should be familiar to Americans, an anti-establishment candidate with no previous political experience has surged to the lead in the polls. Ukrainians fed up with the status quo have pushed actor Volodymyr Zelensky to the lead in the polls. Zelensky was preferred by 25.7% of respondents in a recent poll.
The other two leading candidates are familiar names on the international stage. Incumbent president Petro Poroshenko polled in second place, with 18.8% of respondents preferring him, while former Prime Minister Yulia Tymoshenko was preferred by 12.7% of recipients.
A candidate has to receive a clear majority to win the election outright. If that doesn’t happen, there will be a runoff on April 21 between the two leading candidates.
Differing Opinions on Energy Reforms
Zelensky’s ideas on the country’s energy sector are largely unknown, although he has promised to make energy reforms. The other two leading candidates, however, have significant experience — but different ideas — when it comes to Ukraine’s energy sector.
In the nearly three decades since gaining its independence, Ukraine has been a country constrained by a closed, non-transparent energy sector. As the country seeks to improve ties with the West and ultimately integrate into the European Union, it embarked upon a set of reforms aimed at creating a more transparent, market-oriented energy sector under President Poroshenko.
The direction of Ukraine’s energy policies is of great interest to observers in Brussels and the European capitals, as a stable and prosperous Ukraine would increase overall European energy security. But those reforms have become a lightning rod as the country gears up for the election on March 31.
President Poroshenko’s Reforms
The International Monetary Fund (IMF) and EU have provided financial aid to Ukraine since the economic crisis brought on following Russia’s annexation of Crimea in 2014. In exchange, both organisations have stipulated the need to bring Ukraine’s energy policies in line with those of EU countries.
The government’s refusal to raise energy prices – which had been kept artificially low since the Soviet era – had prompted the IMF to freeze aid in April 2017. Finally, last October, Ukraine announced that it had secured a new $3.9 billion stand-by aid agreement with the IMF, but the government had to raise household gas prices by nearly 25% to meet the IMF’s stipulations.
Although it was an unpopular move with Ukraine’s citizens, with natural gas prices rising drastically since 2013 for household and industrial users, the government warned that Ukraine’s financial situation was dire and that the country could become insolvent without continued financial assistance. President Poroshenko has credited higher prices in part for restoring profitability to the state-owned gas company Naftogaz, which produces about 80% of the country’s natural gas, and is the country’s biggest taxpayer.
Poroshenko’s reforms also impacted the country’s gas transmission system. Ukraine plays a vitally important role in transporting natural gas from Russia to the EU via the company, a role which has led to a number of disputes between Naftogaz and Russian natural gas giant Gazprom, the world’s largest natural gas producer.
Tymoshenko’s Campaign Proposals
Energy price hikes are never popular, and challenger Yulia Tymoshenko has gone so far as to call them a “genocide against the Ukrainian people.” Under Ukraine’s deal with the IMF, the price of natural gas for Ukrainian households was raised to $303 per 1,000 cubic meters from November 1, 2018. Tymoshenko maintains this price is far above the production cost for Naftogaz.
Tymoshenko’s background in the natural gas industry makes her a formidable voice on issues surrounding Ukraine’s energy policies and its relationships with outside stakeholders. In her campaign for the presidency, she has proposed to create a real gas market and to cut the price of natural gas in half for the population. That, however, is contrary to the IMF and EU’s requirements for future financial aid.
There is also another, more long-term downside: lower prices may also slow the development of Ukrainian shale gas resources that could greatly increase Ukraine’s energy security.
Energy Independence for Ukraine?
The U.S. Energy Information Administration estimates that Ukraine has 128 trillion cubic meters (TCM) of technically recoverable shale gas, the 4th highest of any country in Europe.
If these resource estimates prove to be correct, Ukraine has the potential to achieve the natural gas independence it has been seeking for years. In 2013, then-Prime Minister Mykola Azarov stated the country’s shale gas could be produced and sold to consumers at $120–130 per 1,000 cubic meters, a price consistent with spot prices in the US.
However, the main reason companies in the U.S. have been willing to make the investments into shale gas production is the promise of rising prices. Higher natural gas prices, or at least the belief that prices will be higher, has spurred significant capital investments into US shale gas fields. Holding prices artificially low would likely discourage similar investment into Ukrainian shale gas.
Populist promises are easy to make, but it is hard to see how Tymoshenko can reconcile the requirements of outside stakeholders – whose financial support is key for Ukraine’s economic survival – with her campaign promises to reverse major reforms.
In addition, such moves could slow the development of the country’s shale gas resources. Over the longer term, allowing natural gas prices to rise should stimulate investments into Ukrainian shale gas production and allow the country to become self-sufficient in natural gas. That, in turn, may cause natural gas prices to fall on their own – as they did in the U.S. after years of elevated prices led to a shale gas boom.
Robert Rapier has over 25 years of experience in the energy industry as an engineer and an investor. Follow him on Twitter @rrapier or at Investing Daily.