Russia Aggression Paves Way for Ukrainian Energy Coup: Interview with Yuri Boyko

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As Ukraine’s Crimean Peninsula is lost to Russia, with a referendum on the peninsula’s independence planned for Sunday and the specter of a Russian military advance on eastern Ukraine looming large, we are witnessing a crisis of international proportions. The key to this crisis is energy.

Russia’s aggressive move on the Crimea may in fact be the international catalyst Ukraine needs to pave its own energy independence - with a little help from its friends. As the standoff between pro-Russian and Ukrainian forces in the Crimea continues following the ouster of Ukrainian President Viktor Yanukovych, and as Western officials scramble to loosen Russia’s grip on Ukraine, energy independence is the critical axis on which it all spins.

There is a way out, former Ukrainian deputy prime minister Yuri Boyko tells Oilprice.com. U.S. gas could play a vital role in the end game for Kiev. There are two revolutions here that need to come together: the political revolution in Ukraine and the shale gas revolution in America. Where these two meet is where Russian dominance ends.

Yuri Boyko is the Former Vice Prime Minister for Energy, Space and Industry, as well as the former Minister of Energy and Chairman of the Ukrainian State Gas Industry.

Yuri Boyko is the former Vice Prime Minister for Energy, Space and Industry and the former Minister of Energy and Chairman of the Ukrainian State Gas Industry. Photo Credit: RIA Novosti.

In an exclusive interview with James Stafford of Oilprice.com, Boyko discusses:

•    How the American shale gas revolution could help Ukraine

•    The single most important weapon in Russia’s arsenal

•    Why Europe will be hesitant to sanction Russia over Crimea

•    Why we need to change the balance of power in Central Europe

•    Why America should export LNG to Ukraine

•    Why ‘reverse flow’ to Europe is important

•    How Europe can fight back

•    What Ukraine needs from Washington

•    Why the next big Gulf-of-Mexico style auction should in the Black Sea

Oilprice.com: The knee-jerk reaction would be that Russian aggression in the Crimea is a red flag for investors; but is it possible that we’re looking at a potential new opportunity here instead - perhaps a catalyst for a new era of Ukrainian energy independence?

Yuri Boyko: Absolutely. What Moscow wants out of all of this is to halt Ukraine’s European integration process and to delay its signing of the AA/DCFTA [Deep and Comprehensive Free Trade Agreement]. It would also like more control over key strategic assets, particularly the gas transit system. But Moscow’s actions in Crimea after the ouster of Yanukovych in February could very easily spur Ukraine’s move towards Europe and away from Russia. Now more than ever, the West - and Ukrainians themselves - see the need for energy independence and the connection this has to the Western world.

Oilprice.com: The shale gas revolution has changed the geopolitical landscape of energy for America - and perhaps for the world. What could this mean for Ukraine, its current crisis and threats emanating from Russia?

Yuri Boyko: I believe that with support from Washington and the European capitals, energy can be an important tool in preserving Ukrainian sovereignty in the face of the recent Russian aggression in Crimea and its threats against Eastern Ukraine.

This Tuesday Jan. 3, 2006 file photo shows a set of pipes in a gas storage and transit point in Boyarka, just outside Kiev. Russia's vigorous efforts to keep Ukraine within its orbit of influence stem from complex strategic, emotional and cultural issues. Ukraine serves as the main conduit for Russia’s natural gas exports to Europe, and the pricing disputes between the two countries have led to shutdowns in many parts of the continent. (AP Photo/Sergei Chuzavkov, File)

Ukraine’s new government in Kiev needs Washington’s support on energy as part of an overall effort that includes sanctions, both in the short- and long-term, in order to change the balance of power in Central Europe. Today, Ukraine produces approximately 35 percent of its natural gas supply, the rest coming largely from Russia. Last week, Gazprom again threatened to cut off the gas to further pressure Kiev and its European allies.

More specifically, we need support for efforts to ship LNG [liquefied natural gas] to Ukraine. Efforts were already underway to establish an American-made floating offshore terminal that could receive shipments. LNG arriving offshore Ukraine under an American-flagged vessel would be a powerful and important way to support Ukraine. The same should be promoted for Europe; America could become an exporter of gas to Europe to offset Russian influence.

Oilprice.com: What about Europe? What role can Europe play when it is also hostage to Russian gas?

Yuri Boyko: Natural gas is the single most important weapon in Russia’s arsenal. It is President Vladimir Putin’s weapon of choice. Europe understands this all too well as most of its natural gas supply transits Ukraine, so supply disruption is used to influence events not only in Ukraine, but also Berlin, Paris and Brussels. This is why Europe will be hesitant to apply strong sanctions against Russia.

Oilprice.com: Where can Europe fight back?

Yuri Boyko: The U.S. needs to work with European allies to halt the construction of the South Stream pipeline which is planned to run from Russia under the Black Sea through Turkish waters, then up through Southeastern Europe and into the EU. It is majority owned by Gazprom, and like the North Stream pipeline under the Baltic, it was designed to circumvent and isolate Ukraine politically and economically from Europe.

We also need support for continued “reverse flow” sales of European gas to Ukraine. Ukraine recently purchased gas back from Germany that had transited Ukraine at a discount to the price charged Ukraine by Russia. This could include completion of the much-discussed Odessa-Brody pipeline for oil transit.

Russian Minister of Energy Alexander Novak (L) and Russian energy group Gazprom CEO Alexey Miller (R) applaud the start of the construction of the Bulgarian section of Russian gas giant Gazprom's South Stream pipeline on October 31, 2013 in Sofia. Bulgaria and Russia launched on October 31 the construction of the Bulgarian section of Russian gas giant Gazprom's South Stream pipeline. AFP PHOTO / NIKOLAY DOYCHINOV

Oilprice.com: Amid these defensive options against Russia, what is a longer-term plan for Ukraine, for Ukrainian energy, and for oil and gas wealth buried in Ukrainian shale?

Yuri Boyko: This is where the new Ukrainian government will play a critical role, providing policy, technical and financial guarantees for American and European companies to develop our substantial natural gas reserves.

Chevron and Shell are currently in the process of exploring the massive shale fields in both the east and west of Ukraine. But Ukraine also needs oil field service providers, technical expertise and education programs to expand our own domestic supply as in the U.S.

Again, this is where Washington can help, by sending advisors to Kiev, perhaps from DOE [Department of Energy] and FERC [Federal Energy Regulatory Commission], to provide policy guidance to our Ministry of Energy to improve the systems and functioning of government as it relates to licensing, regulation and development of Ukraine’s own oil and gas.

Beyond this, there is another interesting opportunity to offset Russian gas in Ukraine. What many people may not know is that Ukraine is one of the most efficient users of natural gas - especially in heavy industry in the country’s east. With a comprehensive energy efficiency assistance program, including experts from EBRD and other groups, further reduction of waste on an industrial level could offset a significant percentage of the gas purchased from Russia - by some estimates up to 10 percent.

Oilprice.com: What’s the next step? What should Ukraine’s new leaders be doing to get the shale ball rolling?

Yuri Boyko: Ukraine should launch a Black Sea and onshore auction process similar to the U.S. auction of offshore blocks in the Gulf of Mexico. Ukraine and seismic companies could conduct surveys of shale and the Black Sea and then sell that seismic data in advance of an auction. The auction and the sale of seismic data alone to prospective bidders would pay for the seismic imaging. The attraction of this would be significant.

And while the major oil and gas companies have an important role to play here, it’s important to understand that smaller, independent operators have an equally significant role to play: they are always drilling economic returns at rapid rates in Ukraine. And there is much more of that to be had.

In this Thursday, Aug. 18, 2011 file photo, the Prirazlomnaya platform is towed from Murmansk to an oilfield in the Pechora Sea, northern Russia. Russian investigators say they will file piracy charges against Greenpeace activists who tried to climb onto the Prirazlomnaya offshore drilling platform in the Arctic owned by the state-controlled gas company Gazprom. (AP Photo/Andrei Pronin)

Oilprice.com: What is the message that needs to be sent to Moscow, to Washington, and to Brussels?

Yuri Boyko: Our allies must meet this challenge with us on energy. We need to ensure that Russia understands that energy warfare can only be a short-term gamble.

Just prior to this crisis, as Vice Prime Minister, I traveled to Houston to promote Ukraine’s energy and space industry, and had the opportunity to meet senior American executives in the oil and gas industry. The exchange was instructive; it was evident that the U.S. has the knowledge and skills readily available that could help Ukraine take a step away from its energy dependence on Russia - the way  America is moving away from its dependence on the Middle East for oil.  Now Ukraine needs that knowledge, skill and investment for our survival as a nation.

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