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Tools for Ukraine’s post-war energy recovery: LNG?

As Western battle tanks make their way to Ukraine in a potentially pivotal moment for the country’s defence against Russia, speculation on the shape of Ukraine’s reconstruction continues to grow. Indeed, energy and its supply are undoubtedly an unavoidable theme in such discussions.

Contrary to most import-dependent countries in Central and Eastern Europe (CEE), Ukraine has been able to meet around 70 per cent of its natural gas demand via domestic production over the past few years – with a “relatively steady” production throughout the ongoing war. Since 2015, Ukraine has plugged its relatively small natural gas deficit via imports from Poland, Slovakia and Hungary – following Kyiv’s decision to stop gas imports from Russia.

Increased demand in the post-war landscape

Despite possessing a diverse range of energy sources, natural gas is an important element in Ukraine’s energy sector. Whilst this particular fossil fuel has a relatively small share in power generation (although it could grow after 2030 to back up intermittent renewable energy and offset the shrinking share of coal generation), natural gas plays a “critical role” in household and district heating, according to data from the US think-tank, Center for Strategic & International Studies (CSIS). Approximately 80 per cent of Ukrainian households rely on centralised gas supply and more than half use centralised water supplies that are heated by gas.

As highlighted by the US think-tank, the role of gas could “change substantially” in line with the country’s post-war recovery and an expected increase in household and industrial demand for this fossil fuel. This spike in demand also translates to an increase in imports: Ukraine will already need to import an estimated 5 billion cubic metres (bcm) of additional natural gas to refill its storage levels to 14 bcm ahead of the next winter season, according to the International Energy Agency.

More broadly, CSIS said that Ukraine’s gas sector will continue to provide “a lifeline” in rebuilding the country’s post-war industry, bolstering energy security and supplying vital revenues for the state.

Does LNG have a long-term future amid the gas demand increase?

Ukraine, similarly to the EU, has in the past expressed interest in the potential role of LNG – with the pre-war proposals for an LNG terminal in Odesa being emblematic of this. Despite the ongoing armed conflict, this interest continues to grow. In November 2022, Roman Storozhev, the President of the Subsoil Users of Ukraine Association, said that the construction of an LNG terminal and port facility is a key area that ought to be considered in Ukraine’s post-war energy system.

Talks and early plans for an LNG terminal in the Odesa region picked up steam in the early 2010s. However, the project was resumed – and yet again suspended on numerous occasions due to insufficient investments and presumably the deteriorating security landscape in the country.

The prospects for the potential construction of Ukraine’s first-ever LNG terminal appear more complex, outside the remit of national security and securing investors. As Şükrü Boğut, Senior Energy Advisor at USAID Ukraine, tells CEENERGYNEWS, Turkiye plays a major role in such a development: “Prospects of any LNG terminal construction in the Black Sea region depends on Turkiye’s approval of LNG vessel traffic in the Bosphorus [Turkiye]. Currently, the policy is not allowing LNG tanker transits due to safety.”

Despite the geographical challenges arising from the Bosphorus strait, natural gas is nevertheless expected to play an increased role in the Ukrainian economy. Not least due to the expected increased demand in providing heating to householders and industry, but – as highlighted by the CSIS analysis – it could also back up renewables and provide “a bridge” for hydrogen development.

In the context of reaching net zero by 2050, Mr Boğut believes that LNG can play a long-term role in Ukraine’s energy strategy: “Yes, absolutely. According to pre-war statistics, Ukraine needs about 10 bcm of gas annually. Only sources are increased domestic gas production and expanded imports from the EU neighbour countries.”

At the same time, USAID’s Senior Energy Advisor notes that climate commitments and the EU’s CBAM (Carbon Border Adjustment Mechanism) are disincentives to further hydrocarbon-based fuels in Ukraine. However, as he adds: “Ukraine’s resource base biofuels is huge and is subject to further development for energy and hydrogen production.”

Strategic energy ambitions amid a continued full-scale war

Since 24 February 2022, Ukraine has continued its efforts in the diversification of gas supplies via existing LNG infrastructure in Europe. In June 2022, the Ukrainian Naftogaz, the country’s predominant gas supplier, signed an agreement with the Canadian Symbio Infrastructure for the purchase of LNG and green liquid hydrogen from Quebec in 2027, with an import terminal to be picked in a mutually agreed European transit country.

Naftogaz’s Foreign Communications Lead, Vladyslava Smolinska, confirms the country’s growing interest in LNG and its role in Ukraine’s post-war landscape due to two key factors:

“First, Ukraine has the second largest untapped gas reserves and third largest proven gas reserves in Europe. Naftogaz is working to increase its gas production. And in the future the company expects to be exporting its gas to Ukraine’s European partners,” Ms Smolinska tells CEENERGYNEWS.

“Second, Ukraine has an advantageous location. Having not only a developed gas pipeline infrastructure but also an LNG terminal will help Ukraine become a world’s gas hub. This will benefit our partners as it can simplify their gas import; and will benefit us as it will bring new investment into Ukraine, and support its post-war energy infrastructure renewal,” she adds. “Therefore, for sure LNG will play an important role in Ukraine’s post-war energy policy.”

In terms of developing infrastructure, Ms Smolinska says that building an LNG terminal is considered to be one of the “strategic projects” for Ukraine and Naftogaz. “However, due to the full-scale invasion by Russia as well as resulting security concerns at the moment we can not talk about a specific location or timing of the project,” she notes.

Looking at Ukraine’s increased demand for gas in the coming months, the role of LNG becomes clear. At least for now, this role looks to be facilitated via existing infrastructure in Poland, Lithuania or Germany, as the development of domestic infrastructure – whilst being a strategic ambition – remains elusive.

In addition, notwithstanding Naftogaz’s interest in LNG imports, the state-owned company also faces financial challenges stemming from last year’s debt default and limited access to international capital markets, as a result. On this point, the CSIS analysis noted that some LNG suppliers will not sell gas directly to Ukraine under long-term contracts due to Naftogaz’s credit risk and high political risk. Here, the European Bank for Reconstruction and Development and the Export-Import Bank of the United States play an important role in facilitating Ukraine’s gas supplies.

Can Ukraine’s hydrogen potential unlock its strategic ambitions?

Alongside the challenges for Ukraine’s LNG development emerging from the geographical, financial and security spheres, the global phase-out of fossil fuels by 2050 may be another major obstacle standing in the way of building new LNG infrastructure

However, Europe’s appetite for hydrogen and biomethane – and Ukraine’s major potential in this field – may present a key opportunity for Ukraine’s ambitions for new gas infrastructure from a long-term perspective. Just last week, the EU entered into a “strategic partnership” with Ukraine in the area of developing renewable gases via a memorandum of understanding.

As part of the new “strategic partnership,” both sides agreed to cooperate on, among other things – developing the needed infrastructure for the development of renewable gases. If Kyiv can capitalise on its hydrogen potential amid increased external interest, Ukraine’s post-war recovery may see the development of an LNG terminal that can be compatible with renewable gases. In such a scenario, natural gas could fulfil its role as a “bridge” to the development of hydrogen, as pointed out by the Center for Strategic & International Studies. Indeed, whilst conversion of LNG infrastructure is technically challenging – with the right financing framework and an innovative environment, it certainly is possible.

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