In previous years, attempts to implement projects involving construction of LNG terminals ended in failure either because of scandals associated with the working style of the former head of the State Agency for Investment and Management of National Projects, Vladyslav Kaskiv, or because of the intransigence of Turkey, which did not give approve passage of oil tankers through its straits.
The current optimism regarding diversification of Ukraine’s sources of natural gas is linked to two factors. The first factor is the expected availability of liquefied natural gas in the Black Sea basin due to the operations of the Frontera Resources company in Georgia. The second is the cooling of relations between Turkey and Russia following Russian President Vladimir Putin's statement about on the Armenian genocide on 24 April 2015. Because of this statement or because of prompting from its overseas allies, Turkey has dramatically changed its policy regarding the "Turkish Stream" gas pipeline and refused to use it to promote the interests of Moscow.
Where Georgia gets the gas
On 17 July, the Naftogaz of Ukraine national energy company signed a memorandum with the American company Frontera Resources. Prime Minister Arsenii Yatseniuk immediately announced that the company would begin construction of an LNG terminal and supply natural gas to Ukraine. Many energy experts were surprised that the Americans were not counting on supply of liquefied natural gas from the traditional sources - Qatar, Egypt, and Algeria. Frontera Resources stressed that it had proven reserves of about 300 billion cubic meters of natural gas in Georgia.
The information available about the company in business sources in the United States confirms its claims. It began producing natural gas at the Mtsare Khevi gas field near the border with Azerbaijan last year, and it intends to intensify production in implementation of its strategy: to seek opportunities in known hydrocarbon-bearing basins around the world where historical geopolitical and/or economic situations may have caused significant oil and gas plays to be overlooked or underdeveloped, primarily in the Black Sea basin. Interestingly, United States Ambassador to Georgia Richard Norland inspected the company’s facilities three times in 2014 (in February, June, and November), as reported on the official website of the United States embassy.
In other words, Georgia has a chance to transform itself from a net importer of gas (from Azerbaijan) into a net exporter in the near future. Frontera Resources began operations in Georgia under former president Mikheil Saakashvili. Georgian citizen Zaza Mamulaishvili heads the company. However, according to energy expert Roman Rukomeda, most of the companies that have taken control of oil and gas fields in the Black Sea basin (especially on Black Sea shelves), including Romania, Bulgaria, and Turkey, are entities belonging to the Rockefeller clan in the United States. In Ukraine, this is manifested in the interest of Rockefeller’s ExxonMobil in deepwater gas fields around the Zmeiny Island (the project has now been canceled).
"I am confident that Frontera is also a Rockefeller entity. The total assets of the company were valued at only USD 19 million last year. In my view, this shows that it is not an independent player and that it is performing operations involving control of certain fields and projects on behalf of more powerful players that are not yet willing to come out of the shadows," he said.
To be able to export liquefied natural gas to Ukraine, the company will have to achieve large production volumes (it currently produces only 20 million cubic meters per year) and build an LNG terminal on the Georgian shore. All this will take at least five years. This terminal may also be used to export Azerbaijani gas.
How to convince the Turks
However, investors in the future terminal are unlikely to agree to rely on supplies from Georgia alone because ownership of oil and gas production sites in the post-Soviet world is conditional: for example, one can recall the story of Vanco Prykerchenska in Ukraine. The distinguishing feature of LNG terminals is precisely the freedom of choice of supplier. This means that during construction of the LNG terminal, it is worth trying to ensure that it is possible to purchase gas from other countries by solving the "the problem of the Bosporus."
The previous project for construction of a terminal at the Yuzhny port, which the TIS company presented last year, has been postponed. The official reason for the postponement was precisely the blocking of the project by Turkey. The TIS company’s General Director Andrii Stavnytser said in an interview that Ukraine’s southern neighbor was in this case defending the interests of the Russians, for which diversification of gas supplies to Ukraine is not beneficial.
One of the factors that could help convince the Turks is the American roots of Frontera Resources
Pilip Hrushko, the director of development at the TIS Terminal Group, told the Center for Transport Strategies that the group’s lawyers believe that Turkey has no right to prohibit the passage of ships through the Bosporus and the Dardanelles straits. "It is only necessary to file an application 48 hours before passage through the strait," the expert said. Claims of unsafe cargo are untenable because LNG is one of the safest cargoes: there have been no leakages or accidents involving gas tankers since the 1960s.
However, the Turkish side has many opportunities to block the passage of ships informally, and it was made clear to TIS that Turkey will use the relevant levers. "When they begin nitpicking about declarations that are improperly filled or find another reason to delay the passage of a ship for weeks… It becomes extremely unprofitable with such a cargo," said Hrushko. According to him, it is very difficult to build a terminal worth tens of millions of dollars in such a complex political situation in which Turkey does not communicate its official position.
One of the factors that could help to convince the Turks is the American roots of Frontera Resources. "Only the United States can press Turkey, but individual companies do not have enough power to resolve this issue," said Mykhailo Honchar, the head of energy programs at the Nomos center. However, much depends on the geopolitical situation.
Hrushko is not ruling out the possibility that the current cooling of Russian-Turkish energy cooperation will also help to unblock the project for supply of liquefied natural gas from outside the Black Sea basin in the future. "At least one year is necessary for the Russian position in the Turkish Ministry of Energy to weaken. It was extremely dominant, and we have not yet received signals that we can resume negotiations," he said.
Moreover, according to some experts, the position of the Turks could change if Turkish companies are offered a construction sub-contract or another form of participation in the project.
What to do with the gas
Thus, a potential resource base for the future of Ukrainian LNG terminal will emerges. What is more, the two projects that currently exist do not interfere with each other. "We are not competitors. They (Frontera Resources) are specialists in gas trading while we are in construction of terminals. We would be happy to cooperate with Frontera and receive its gas at terminals in the seaport. We will begin negotiations with them after a while," said Hrushko.
It now remains to understand how relevant and profitable the project will be. Ukraine needs additional gas because Gazprom regularly stops deliveries to Ukraine. Ukraine has not received Russian gas since 1 July and lives only on gas produced locally and gas supplied via reverse flows from the European Union. The demand for additional gas does not exceed 3-5 billion cubic meters per year, and this is precisely the capacity for which the LNG terminal was designed.
This demand can be met in three ways: construction of a terminal for receiving liquefied natural gas; expanding the capacity of the reverse gas pipelines supplying gas to Ukraine from the European Union, including from the future LNG terminal in Swinoujscie (Poland); intensification of domestic gas production through creation of conditions for investment in it. It is obvious that Ukraine should use all three methods.
As for the return on the investment the project, monitoring by the East European Gas Analysis center indicates that the price of Russian natural gas has not dropped below the spot prices at European port hubs receiving LNG in 2015 despite the discounts that Russian granted in the first half of the year. The price difference is small, but potential participants in the project are emphasizing that the effectiveness of the project will depend not only on it. The degree of government support (preferences, privileges, guaranteed rate, etc.) is also important.