According to the Oil and Gas Journal Ukraine has roughly 40 trillion cubic feet (Tcf) of natural gas reserves, from which roughly 0.68 Tcf was produced in 2005. In 2006, Ukraine produced 0.67 Tcf and consumed 3.1 Tcf of natural gas, making it the former Soviet Union's largest natural gas net importer (2.4 Tcf, or 78 percent of consumption, see Fig. 2). Ukraine is the sixth-largest consumer of gas in the world and consumes more gas than Poland, the Czech Republic, Hungary, and Slovakia combined. Since the early 1990s, Ukraine’s usage of natural gas as a share of its total energy consumption has increased by 10 percent to comprise over half of Ukraine’s energy usage (see Fig. 5).

Ukraine holds 1.1 Tcf of natural gas in storage, and in January 2006 Prime Minister Yekhanurov announced a plan to increase the capacity at Ukraine’s 13 existing storage facilities to 1.2 Tcf by 2009. The six major facilities, most of which are depleted gas fields, are located in the provinces of Lvov, Kiev, and Chernigov. Ukrainian storage is held by Naftogaz Ukrainy, RosUkrEnergo and Ukrgazenergo, with a few small contracts with other companies. Ukraine can withdraw gas at around 7.1 Bcf/d (200 mmcm/d).

Ukraine plays a significant role as an intermediary connecting Russia, the world's largest natural gas producer, with growing European markets. Also, as gas exports from the Caspian to Europe and Russia grow, Ukraine serves as the largest market for this natural gas. UkrTranzGaz estimates that in 2006 approximately 4.5 Tcf (128.4 Bcm) of Russian natural gas transited Ukraine en route to Europe or to be consumed domestically. In 2007, Gazprom and Naftogaz Ukrainy have agreed to transit roughly 4.1 Tcf (116.8 Bcm). According to Gazprom, sales to domestic consumers in Ukraine in 2006 totaled 2.1 Tcf (59 Bcm). The remainder, around 2.4 Tcf (69.4 Bcm), is sold to other consumers that are connected to Ukraine’s transit lines. Some of these countries are entirely dependent on these natural gas for their gas consumption. (see Table 2).

Europe’s dependency on natural gas exports from Russia drew worldwide attention in January 2006 when a longstanding dispute over price and payment mechanisms in the in-kind agreements caused Gazprom to shut off gas supplies to Ukraine. Supplies to Europe were also affected. Eventually, Russia’s natural gas company agreed to sell its natural gas to RosUkrEnergo, a Zurich-based trading company, 50 percent-owned by Gazprom, at the market price of $6.51/mcf ($230 per thousand cubic meters). RosUkrEnergo will acquire some of the natural gas from Kazakhstan and Turkmenistan (see Table 3).

In the past, Russia partially supplied Ukraine by offering natural gas as payment in-kind for transiting Russia’s gas onwards to Europe, and partially through annual sales contracts. In the past few years, Turkmenistan has become Ukraine's largest source of natural gas imports through long-term contracts. Under a deal signed in late October 2006, RosUkrEnergo will supply Ukraine with at least 1.9 Tcf or 55 billion cubic meters (bcm) of Turkmen gas in 2007 at $130 per thousand cubic meters (mcm). Gazprom buys gas from Turkmenistan at $100/mcm and sells it to RosUkrEnergo, which then sells it to Ukraine. Russia pays Ukraine natural gas transit fees of 7.3 cents per thousand cubic feet per 100 miles, a 47 percent price increase from 2005. The contract is subject to renegotiation in October 2007 and each year afterward.

There are a few potential problems with the Ukrainian-Russian natural gas agreement. First, Turkmenistan will need to increase its natural gas exports to Russia from 1.4 Tcf in 2006 to 1.8 Tcf in 2007, at the same time that its domestic natural gas production is declining at around 3 percent per year. Also, the deal has solidified Russia’s commitment to a contract price with Ukraine that is still below full market value. The agreement also does not address Ukraine’s high level of energy intensity or the country’s need for energy diversification, and it leaves the country’s economy vulnerable to natural gas price increases. Natural gas accounted for 46 percent of the country’s primary energy consumption in 2004.

Ukraine's aging natural gas infrastructure is a concern both to European consumers and Russian producers. Some of the pipes in the Ukrainian network have been in operation for 20-30 years, and repairs are rarely carried out because of a lack of available funds. In addition to pipeline disrepair, capacity utilization is a problem. Roughly 1.4 Tcf per year of spare capacity is available on the system. An additional 1 bcf/year could be added through rehabilitation and upgrades of the existing infrastructure.

Map 2: Existing Gasfields and Pipelines Delivering Natural Gas to Europe

The fragile state of Ukraine’s critical natural gas transport infrastructure was highlighted this year by a powerful blast that destroyed a 50-yard stretch of the Brotherhood pipeline, a major carrier of Russian natural gas to Europe. Russian gas continued to flow via a bypass pipeline.

In 2004, Ukrainian and Russian state-owned oil and gas companies, Naftogaz Ukrainy and Gazprom, established a joint venture (JV) to manage and upgrade Ukraine's natural gas distribution infrastructure. After a couple years of delay, in February 2006, the JV announced the beginning of construction of the first stage of a natural gas pipeline that will increase Ukraine’s transport levels to Western Europe by around 25 percent. The construction of the $2.2-2.8 billion pipeline from Uzhorod (on the border with Slovakia) to Novopskov (in eastern Ukraine) will be completed by 2009. Construction of the initial section of the pipeline was postponed from 2005 to February 2006 and will take approximately two years to complete. The completed pipeline will have a capacity of up to 670 Bcf per year. The project’s financing faces challenges from Gazprom’s efforts to obtain a stake in the Ukrainian pipeline network.