Embracing Investment Opportunities For A New Energy Future

Ukraine: From gas transit to hydrogen exporter

By Oliver Rolofs  

The completion of the Nord Stream 2 Baltic Sea pipeline and the ambitious climate goals of the European Union offer Ukraine an opportunity to reduce its energy dependence on Russia and to strengthen its own sovereignty as an energy exporter in the future.        

On her farewell visit to Kiev this week, held on the eve of Ukraine’s 30th anniversary of independence from the Soviet Union, Chancellor Angela Merkel offered reassurances to President Volodymyr Zelensky that Ukraine would not suffer from the construction of Russia's Nord Stream 2 pipeline. But a big question mark remains as to whether the European Union and the United States will be able to prevent the pipeline from being used as a geopolitical weapon against Ukraine.  

Sanctions against Moscow, agreed by Berlin and Washington for this contingency, have had little effect on the Kremlin. Meanwhile, European gas tanks are running dry. Austria's natural gas storage facilities, for example, are the emptiest they have ever been. According to the Austrian Energy Agency, they are currently just 30 percent full, a decrease of one-third. In Germany, too, gas stocks are currently well below normal. This is due in part to the high demand from Asia and declining deliveries of liquid natural gas (LNG), which is associated with large price increases.   

An artificial shortage has also pushed up the gas price. Nord Stream 2 plays a central role here. According to the operator, the pipeline is 99 percent complete. The first deliveries to Germany via the Baltic Sea could come in October via the first strand of the 55 billion cubic meter pipeline. Although the line is not yet operational, Gazprom is already drying out the conventional transit through Ukraine. Despite the political guarantees given, the German-American deal creates risks for Ukraine that are already noticeable in gas transit. But there are also significant opportunities, not least for Ukraine to advance its energy transition and strengthen the country's sovereignty and future viability. For Ukraine, the completion of Nord Stream 2 will accelerate an inevitable modernisation. The European Union's ambitious plans to achieve climate neutrality by 2050 will lead to fewer natural gas imports from Russia. Climate change is creating new geopolitical realities which, over time, will cost Russia lucrative sources of income, as well as its most important means of power and influence.   

Nonetheless, natural gas is an important transition or bridging technology, especially for Europe, in order to accelerate the goal of a climate-neutral energy transition using new fuels such as hydrogen. In view of Europe’s difficult relationship with Russia, a new and attractive exporter is coming to the fore: Ukraine. Ukraine has so far not only been one of the largest transit countries for natural gas, but also has significant natural gas reserves that are the second largest in Europe. So far, Ukraine has relied on imports for a third of its annual natural gas consumption of 30 billion cubic meters. The domestic production deficit of 10 billion cubic meters is covered by imports from the EU, as the Ukrainian state gas company Naftogaz has not received any supplies from Russia since 2015. Nevertheless, Ukraine currently has the greatest growth opportunities in natural gas production across Europe: to cover its own energy requirements and to make its mark on the export market, Naftogaz recently acquired new licenses to increase its production volume. This includes thirty-year exclusive rights to a 30,000 square kilometre area with natural gas deposits in the northern Black Sea.  

Europe should take note. By supporting the sovereignty and energy security of Ukraine, the EU is also paving the way to a climate-neutral economy. What is preventing EU member states from expanding their hydrogen strategies to include new partners in the East? In the first instance, importing “blue hydrogen” could prove to be a valuable bridging solution for their own energy and mobility turnaround. It also has an edge on “green hydrogen”, which cannot be produced in large quantities in a climate neutral way, due to a lack of sufficient wind parks and sunshine. With blue hydrogen, resulting CO2 is captured and stored underground. In order to use a bridging function for low-CO2 hydrogen for Europe, Ukraine will provide the natural gas capacities and a pipeline network that can be upgraded for the transport of hydrogen. It will also offer the third largest storage area for CO2 in Europe.  

Meeting with their Ukrainian counterpart at the Crimean Platform Summit in Kyiv this week, the Energy Ministers of Germany and the United States reiterated their support for preserving Ukraine`s position as a gas transit route into Europe. But, it seems, both countries are just as serious about supporting the energy transition in Ukraine. Plans to establish a Ukrainian “Green Fund”, promoting energy efficiency and energy security, are a welcome first step. Germany has pledged to contribute at least $ 175 million as a grant to the fund and to support bilateral energy projects with Ukraine. Together, the US and Germany have committed to raise a total of $1 billion for the fund, with attracting private sector investment in Ukraine’s green energy future considered a priority.  

But this should just be the beginning. Investing in Ukraine’s energy infrastructure is a win-win – for Ukraine and for Europe. Climate change and the growing need for hydrogen in Europe have the potential to be a game changer for the continent. Let’s not miss this opportunity.