One of the reasons: Europe. Believe it or not, gas hungry Europe was a major exporter to Ukraine last year. Ukraine imports of E.U. natural gas rose 138% to five billion cubic meters (bcm) while Russian natural gas imports dropped by 44% to 14.5 bcm. Russia is still three times larger, but the share of Russian gas in Ukraine’s domestic market fell by more than a third, accounting for 34% of the total recently. In the first half of March, European imports accounted for 81% of Ukraine’s total.

Private sector drillers are doing better these days in Ukraine.

Private gas producers managed to increase production by 18% to 3.3 bcm last year while production by state-owned companies — namely Ukrnafta and Chernomorneftegaz — fell due to the occupation of Crimea. Nevertheless, Ukraine produced 20.5 bcm of gas in 2014, down 1.0 bcm compared to 2013. Private companies increased gas production by 18%, to 3.3 bcm. The volume of gas produced by state-owned Ukrgazvydobuvannya remained at the same level as 2013, or 15.1 bcm. Ukrnafta gas production fell by 10% to 1.7 bcm. And lastly, due to the occupation of Crimea, Cherno produced just 300 mcm of gas compared to 1.7 bcm in 2013, the company said. It was sanctioned by the U.S. last year, shortly after Crimea seceded from Ukraine.

The main reason for the divergence of performance, however, was the selling price of gas. State owned gas companies sell for around $20 per thousand cubic meters below the market rate. Most of Ukraine’s natural gas stays in the country to heat homes and power industry. The country is not yet an exporter, and may not be until it can develop some of its shale oil fields. Gas that gets shipped out of Ukraine is all Russian, traveling through three pipelines that eventually wind up in Ukraine or in European markets.

Ukraine’s dependence on that natural gas is dwindling. In fact, in 2013, Gazprom accounted for 92% of Ukraine’s gas imports. In 2014, it was 74%. Naftogaz’s contract is exclusive with Gazprom. It cannot import gas from any other company there. Of course, this is a problem for Naftogaz, and ultimately Ukraine, because the two have been at loggerheads for years. A Stockholm arbitration court is currently trying to weigh whether Gazprom overcharged Naftogaz on its 10 year deal.

The troubled relationship threatens Gazprom’s foothold in Ukraine.

“We are rather trying to bring it to normal commercial, market-based terms,” Naftogaz says about Gazprom. On Tuesday, Naftogaz said it was “hopeful” it could sign another gas deal with Gazprom following the expiration of the so-called Winter Package later this month. The European Commission will have to mediate.

Naftogaz CEO Andriy Kobolyev said, “The trilateral meetings are a vital part of the process to agree conditions for Russian gas supplies to Ukraine after March.”

Although the situation this year is better than the previous year, not least due to regular reverse gas flows, especially from Slovakia to Ukraine, a gas deal with Gazprom is still important, Naftogaz said. Gazprom adds liquidity and diversification to the local gas market.


“Gas from the European Union is currently offered at a lower price than gas from Russia, so from a commercial point of view, it makes more sense to source imports from Europe,” said Kobolyev. “If we can negotiate a satisfactory deal with Gazprom that makes Russian gas financially attractive to us, then we will be interested to source our gas from there as well. From a Naftogaz perspective, any decision we take is based purely on commercial principles.”

Recent discoveries of shale gas deposits in Ukraine provide the country with a possible means to diversify its natural gas supplies away from Russia, the U.S. Energy Information Administration says. In January 2013, Shell agreed to explore an area which the government estimates holds about 4 trillion cubic feet of shale natural gas in reserves. That project is on hold because of the political crisis now. Nevertheless, Kyiv energy plans include development of shale gas resources for domestic consumption and exports to Western Europe within five years.