Bilateral ties between Moscow and Kyiv took another tumble in early June when Russia demanded that Ukraine halt oil exploration in parts of the Black Sea, claiming the work was illegal because a territorial dispute over the area has not yet been resolved. According to a statement issued by the Russian foreign ministry, the activities of Ukrainian energy companies in certain areas of the sea: “are of an illegal nature and must be halted. The areas in question are the subject of a negotiation process between the Russian Federation and Ukraine on the demarcation of the continental shelf and exclusive economic zones in the Black Sea.”
Moscow and Kyiv have long been locked in dispute over territorial waters around the Kerch Strait, a waterway at the northern end of the Black Sea which separates Ukraine’s Crimean Peninsula from the coast of southern Russia. However, while there are apparently genuine territorial concerns underpinning this latest protest, many analysts see the warning as another sign of heightening political tension between the two neighboring post-Soviet countries amid Russian opposition to Ukraine’s NATO membership bid and disputes over the price at which Russia sells gas to Ukraine. Kyiv politicians have placed high hopes on the ability of untapped Crimean reserves to help make the country far more self-reliant in the energy sector, while the Kremlin is keen to keep Ukraine as dependent as possible on its Gazprom deliveries.
Ukrainian exploration firms protest their innocence
Russia’s official protest claims that the Ukrainian companies, together with the participation of companies from “third countries,” are currently engaged in developing offshore oil and gas fields in the Black Sea, including the so-called Subbotin Structure and Pallas High fields. Ukrainian government officials denied the allegations of wrong-doing, stating that the Subbotin Structure is actually located within the Ukrainian part of the Black Sea continental shelf, while the Pallas High field - although it is located on both Russian and Ukrainian territories - has not been explored by the Ukrainians because it is 500 metres deep and at present Ukrainian energy exploration companies have neither the equipment nor the technology to work at such a depth. Chornomornaftogaz, Ukraine’s only company exploring oil and gas deposits in the Ukrainian part of the Black Sea shelf, had even suggested earlier the Russian giant Gazprom explore the Pallas High together with it – an offer which Gazprom ignored.
Moreover, Ukraine and Russia have not signed any agreements which would ban Ukraine from exploring oil and gas fields in the Black Sea, nor have Ukrainian diplomats received from Moscow any respective documents to stop the Black Sea oil drilling. “As everybody knows, Russia and Ukraine are still involved in negotiations on the delimitation of the Azov and Black Sea international borders between the two countries as well as the demarcation of the Kerch Strait itself, but neither side has ever reached any agreement that would forbid exploring in the areas close to those involved in the dispute,” commented Vasyl Kyrylych, Ukraine’s Foreign Ministry spokesman. Mr. Kyrylych added that in 2007 it was actually Russia which started issuing licenses to launch the one-sided gas and oil exploration of the Black Sea area, forcing Ukrainian officials to request that Russia refrain from doing so by referring to the sites’ close proximity to Ukraine’s borders.
Politics and petroleum
Ukrainian analysts assessed the Russian demand as another example of the Kremlin’s gesture politics and dismissed it as being legally without foundation. “The Russian Foreign Ministry’s information department has been cooking up such statements on a regular basis over the past few months. They do not necessarily have their facts grounded nor do they have any legal authority. The ministry is simply following the Kremlin’s general party line to apply pressure towards Ukraine. This policy has also featured information attacking the Ukrainian people in response to Kyiv’s decisive steps toward Euro-Atlantic integration,” said analyst Valeriy Chalyi, deputy head of the Kyiv-based Razumkov Centre for Economic and Political Studies. “Any disputable issue in terms of Russian-Ukrainian demarcation policies is subject to consideration by the existing special commission, not the Russian Foreign Ministry’s information department,” he added before predicting this dispute would not be the last of its kind to come out of the new Medvedev administration.
Market forces and price wars
Volodymyr Omelchenko, an energy expert with the Razumkov Centre, said that if the gas price Ukraine pays is to be based to the European formula from 2009 onwards, then Russia would effectively lose an important instrument which it has repeatedly used to exert pressure on the Ukrainian government. In anticipation of this, Mr. Omelchenko argues that Russia is currently looking for any other possible instruments via which to maintain its historic dominance in Ukraine. “If Ukraine pays for gas based on the European formula, Russia won’t be able to use its gas price demands to dictate to Kyiv any more and is looking for other mechanisms to preserve its influence on Ukraine. The latest statement summarises the state of the two country’s tense bilateral relations at the current stage,” he commented. Mr. Omelchenko added that the gas fields mentioned in the Russian protest are not actually thought to contain large amounts of gas reserves in their deposits. “These volumes are not decisive for Ukraine. It might add 1 billion cubic metres annually to the 20 billion which Ukraine currently extracts on its own,” he explained.
The Vanco scandal and Russian interests
The Russian protest statement did not specify whether the Kremlin’s objections applied to US firm Vanco Energy, which had been granted a contract by Ukraine to develop an area of just under 30,000 square kilometres at the northern end of the Crimean Black Sea coastline. Vanco Energy has said it would spend as much as USD 3 billion on developing the project, starting with a USD 190 million investment in the first three years.
Despite seeking to reduce its dependence on Russia for energy, Ukrainian government officials last month tore up Vanco’s contract to drill in the Black Sea, citing national security issues and suspicions of murky dealings involving members of the previous government, after it came to light that the Vanco Prikerchenska Production Sharing Agreement also involved three other investment partners. One of these previously undisclosed partners is Donbass Fuel Energy, a subsidiary of System Capital Management, which is owned by Ukraine’s richest man Rinat Akhmetov. Another partner is Shadowlight, an investment company belonging to the Russian businessman Evgeny Novitsky, who Ukraine’s premier Yulia Tymoshenko suspects to be close to Gazprom. Mrs. Tymoshenko’s office has stated that it is concerned about the possibility that Novitsky, or indeed Vanco, would at some stage in the future look to sell their share to Gazprom, which would further increase Russia’s hold on Ukraine’s energy sector.
Mr. Omelchenko of the Razumkov Centre did not rule out that this latest Russian protest might be a direct response to the Vanco cancellation scandal, commenting: “the interests of certain groups have been definitely damaged by the Tymoshenko government’s decision to break the contract,” but he argued that this would only have been a secondary consideration far outweighed by the political motives which increasingly cloud all aspects of bilateral relations.
