Ukraine is important to world energy markets because it is a critical transit center for exports of Russian oil and natural gas to Eastern and Western Europe, as well as a major energy producer (including nuclear power) and consumer in its own right.


Ukraine's economy, which was heavily weighted towards energy-intensive chemicals, metallurgy, and heavy machinery industries all geared to serving the centralized Soviet economy's large military establishment, continued its 7-year string of contraction in 1996, although at a relatively slower rate than in recent years. For 1996 as a whole, real GDP is expected to fall 1%, after declines of 12% in 1995, 23% in 1994, 14% in 1992 and 1993, and 12% in 1991. As a result of this collapse, economic output in Ukraine is now half or less compared to what it was in 1990 (although this does not take into account the emergence of a widespread "shadow economy," which may include 40% of Ukraine's labor force). Ukraine's budget deficit remains large (around $5.6 billion), the government owes about $1 billion in back wages to state employees, and corruption remains a serious problem. 

 Although most Ukrainians remain impoverished, signs of economic improvement have begun to appear in 1996, including a marked slowdown in inflation and a stable exchange rate. The Kuchma government's economic reform/privatization package (begun in November 1994) appears to be proceeding slowly, lagging behind even Russia, despite pressure (and large amounts of economic assistance) from the International Monetary Fund (IMF) and other western lenders to move more rapidly. To date, around 3,000 state-owned companies have been sold off to private interests, leaving around 13,000 large and medium-sized firms (and many more smaller companies) on state budget rolls. Ukraine also has received only small amounts of foreign investment (only about $1.1 billion as of November 1996 since independence in 1991). 

 Prime Minister Lazarenko, appointed by President Kuchma to replace Yevhen Marchuk in the spring of 1996, appears to be committed to economic reform and stabilization. On September 2, 1996, a new currency, the Hryvna, was introduced after a 3-year delay caused by serious macroeconomic difficulties, at an exchange rate of 1.76 per dollar. The Hryvna's predecessor, the karbovanets, had fallen to 191,000 per dollar prior to its replacement. In addition to the new currency, Ukraine's government has ordered a 20% cut in public-sector employees. 

 In July 1994, Leonid Kuchma defeated incumbent President Leonid Kravchuk by a narrow margin in a run-off election. Shortly after his election, Kuchma issued decrees which centralized his power and augmented his ability to pass economic reforms. In October 1994, Kuchma was able to pass Ukraine's first fully-supported reform package since its independence. The reforms were intended to reduce state subsidies, free prices, re-write the tax system, and begin privatization. Faced with increasing political pressure against his reform program, however, President Kuchma appeared to back off somewhat in July 1995 as he initiated a major cabinet reshuffling which left many radical reformers without ministerial positions. 

 Kuchma's reform package was the prerequisite for receiving a $4 billion aid package from the Group of Seven (G-7) and $730 million from the IMF. Additionally, the United States offered Ukraine $700 million, of which half is allocated for speeding Ukraine's nuclear disarmament. In early 1994, Ukraine signed a tri-lateral nuclear disarmament treaty with the United States and Russia and ratified START I unconditionally. Ukraine currently ranks as the third largest recipient of U.S. foreign aid. Ukraine is seeking an additional $400 million from foreign governments to meet the country's external financing needs in 1997. In late October 1996, the World Bank and the IMF said they expected to pledge $1.4 billion in additional aid to Ukraine, with $400 million more coming from the European Union, Japan, and the United States. 

 In March 1995, Ukrainian President Kuchma abolished the position of the Crimean presidency and annulled its Soviet-era constitution. In June 1996, Ukraine adopted its first post-Soviet constitution which, among other things, established Ukrainian as the official state language, but confirmed minority language rights and recognized autonomous status for the Crimean region. Tensions between Ukraine and Russia over the Crimean region -- and the Black Sea fleet based there -- flared after a military incident in March 1994. These tensions appeared to ease significantly, however, with the signing on June 10, 1995 of the Sochi agreement, which divided the fleet between the two countries. As of November 1996, however, the Crimea issue remains essentially unsettled. 

 Despite efforts to increase its economic independence, Ukraine remains heavily integrated into the former Soviet and Comecon economic spheres. Besides supplying most of Ukraine's energy needs, Russia accounts for about half of Ukraine's overall trade. Overall, former Soviet states account for nearly 60% of Ukraine's trade, with former Comecon countries accounting for another 10%. In October 1996, the Black Sea Cooperation Conference (which includes Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey, and Ukraine) signed a declaration pledging to build strong economic ties among the group. 


Four years after the breakup of the former Soviet Union (FSU), Ukraine remains highly dependent on Russia and Turkmenistan for its non-coal energy supplies. Although Ukraine ranks second among former Soviet republics in terms of energy production, it also ranks second in consumption, and has been a major net energy importer for many years (mainly oil and gas from Russia). Under the Soviet system, Ukraine would receive these energy supplies in exchange for agricultural and relatively low-quality heavy industrial goods (mainly iron and steel, heavy machinery, and bulk chemicals). Since independence, however, Ukraine's terms of trade have deteriorated to the point that it can no longer afford the energy imports needed to sustain its highly energy-intensive, Soviet-era economy. As a result, Ukraine has experienced severe energy shortages in recent years.

 To make matters worse, Ukraine's energy production has declined steadily since the 1970s. By 1995, in fact, total Ukrainian energy production had fallen to less than half its peak level reached in 1975. Coal production fell sharply, from 145 million short tons in 1975 to 91 million short tons in 1995, while oil and gas fell to less than one-third their 1975 peak levels. The only domestic fuel source, in fact, that increased between 1975 and 1995 was nuclear power, which expanded rapidly during the period. 

 To help remedy this situation, Ukraine is attempting to reform its energy sector and, according the International Energy Agency, taking "considerable steps" towards reversing a legacy of waste, mismanagement, and inefficiency. Among other steps, Ukraine has moved to create a competitive power supply market, break up its natural gas supply and distribution monopolies, and restructure the coal sector. 


After years of decline, domestic oil production met only 90,000 barrels per day (bbl/d) of Ukraine's consumption requirements of 415,000 bbl/d in 1995. To bridge the gap between production and consumption, Ukraine imports large quantities of Russian oil, mainly from West Siberia. As Russia gradually has reduced subsidies on its oil exports, Ukraine has accumulated an enormous debt to pay for these supplies. Consequently, Russia began to limit oil and gas shipments to Ukraine during 1994. In mid-1994, Ukraine gave Russia a 30% stake in Ukrneftegaz as a partial payment for its energy debt. In October 1994, Ukraine and Russia negotiated a friendship treaty which increased Russian oil exports to Ukraine to 400,000 bbl/d. 

In order to reduce its reliance on Russian oil, Ukraine has implemented a national energy program called "Oil Ukraine 2000." In 1993, plans were made to develop oil and gas resources in the Black Sea, and one of Oil Ukraine 2000's major projects is the proposed construction of a $2.5 billion, 800,000 bbl/d oil terminal near Odessa. This terminal would receive Bulgarian, Romanian, Turkish, and Middle Eastern oil imports through the Black Sea and would by-pass Russian supply routes. However, construction plans are meeting resistance from environmentalists and city officials who argue that Ukraine does not have the need nor the means to build such a large installation. 

Ukraine is also attempting to increase its domestic oil production, particularly in the Black Sea region near Crimea, which is believed to be potentially rich in offshore oil reserves. JKX Oil & Gas, a British company, has invested $8 million in a local joint venture, while Pecten (a U.S. subsidiary of Royal Dutch Shell), has placed a bid for a Black Sea shelf site. Also, in mid-November 1996, Fountain Oil Inc. And Ukranafta signed a joint venture to develop the Stynawske oil field in western Ukraine. Independent estimates are that Stynawske contains around 14 million barrels of remaining proven reserves. 

 In early December 1995, a dispute flared between Ukraine and Romania over the Island of Serpents, an area of potential oil and gas reserves straddling the border of the two countries. The tiny island was placed under Romania's jurisdiction under a 1947, post-World War II treaty, but was ceded to the Soviet Union in February 1948 under pressure from the Soviets. Now, Romania is seeking a share in oil and gas exploration on the island, which is under Ukrainian control. The dispute between the Ukraine and Romania threatens to block progress on a bilateral treaty between the two countries, as well as to place obstacles in the way of future NATO and European Union membership. 


Ukraine is the key transit route for Russian (and other FSU) oil and gas exports to Europe. In 1995, for instance, over 4 trillion cubic feet (Tcf) of natural gas transited Ukraine en route to Europe. The 2 main pipelines carrying this gas are: the Soyuz system, which transports gas from the Urals region; and the Urengoy-Uzhgorod system, which takes gas from Siberia. The Druzhba (Friendship) oil pipeline, which passes through Ukraine's territory, has a capacity of 1.2 million bbl/d. overall, including 500,000 bbl/d through Ukraine and 720,000 bbl/d through Belarus. To reduce its current 90% dependence on Ukraine as an export route for its gas, Russia announced plans in 1994 to increase gas exports to Europe through Belarus. 

Meanwhile, Ukraine aims to nearly double the volume of gas transiting its territory from the CIS (and thereby increase transit revenues substantially -- from about $1 billion currently). A $500 million plan to restructure and expand the country's pipeline system, to be funded by the World Bank, was agreed to in November 1995. Currently, Ukraine has about 4,875 miles of natural gas pipelines (along with 1,248 miles of crude oil and 1,193 miles of petroleum products pipelines). 

Refining & Downstream

Ukraine has the second largest potential refinery throughput in the FSU, with a capacity potential of 1.26 million bbl/d at seven refineries. However, capacity utilization is running around 25-45% (compared to 99% in 1989). Most of Ukraine's refineries date from before World War II, and are therefore relatively unsophisticated, with little capacity to process crude into valuable light products such as gasoline, diesel fuel, and kerosene. In December 1993, Ukraine adopted a plan which would either modernize refineries where economically viable or close or reduce operations in others such as the Odessa and Drogobych refineries. 

Ukraine's two largest refineries are Lisichansk and Kremenchug with capacities of 420,000 bbl/d and 315,000 bbl/d, respectively. While Lisichansk is the newest and largest refinery, it cannot process high sulfur grade crude oils. Lisichansk is slated as the first Ukrainian oil refinery to be put on the auction block. Kremenchug, which is the most sophisticated, contains all of Ukraine's cracking capacity, half of its hydro-treating capacity, and 35% of its reforming capacity. It is used to process heavier Russian crudes from Bashkiria and Tartarstan. In November 1996, Mitsui announced that it had signed a contract to upgrade Kremenchung. 


Ukraine is the largest importer of natural gas in the world. In 1995, natural gas accounted for about half of Ukraine's primary energy consumption, compared to 18% of its energy production. As with oil, Ukraine's natural gas production peaked in the mid-1970's at around 2.5 trillion cubic feet (Tcf), mainly from the Shebelinka field in eastern Ukraine near Kharkiv. In contrast, Ukraine produced only 0.62 Tcf of natural gas in 1995 -- or only 25% of peak levels. Despite this decline (caused by a combination of technical and economic factors), significant gas production potential may still exist in Ukraine, both in Shebelinka as well as in the Dnepr-Donets region. For now, however, Ukraine is forced to import about 80% of its gas supplies from Russia and Turkmenistan -- both of which have halted, threatened to halt, or reduced gas supplies periodically in recent years because of Ukraine's inability to pay. 

 In early November 1995, Russia signed an agreement with Ukraine guaranteeing continued gas shipments through 1996. The agreement also set tariff rates for Russian gas shipments through Ukraine to European markets. Russia's Gazprom has expressed interest in exchanging a portion of Ukraine's $1.5 billion gas debt for a share of Ukrainian pipelines and underground storage areas. Ukraine's parliament, however, has passed legislation which would roll back privatization of Ukraine's oil and gas industries, which could block any such exchange. 

 In part as an effort to reduce its dependence on gas imports, Ukraine is attempting to develop its indigenous reserves and increase the efficiency of consumption. A joint venture between U.S. company Marathon Oil and Ukraine's state-run company Ukrneft, for instance, aims to recover gas and condensate from Ukraine's Poltava region. Epic Energy sees "significant oil potential" in Ukraine and is attempting to secure $10 million in financing to develop the Aktash field in Crimea, along with other small fields. Ukraine's Chernomorneftegaz energy company plans to set up a joint venture with Shell by 1997 to explore for Black Sea shelf oil reserves. Ukraine is also attempting to reduce inefficiency in its gas consumption by introducing gas meters to residential consumers. 

In September 1996, Ukraine signed an economic cooperation agreement with Iran and Turkmenistan which calls for Turkmenistan to supply natural gas to Ukraine, which in exchange sends inorganic fertilizers and other goods to both Turkmenistan and Iran. Iran then will pay Turkmenistan in part for the gas supplied to Ukraine. 

In September 1996, accusations surfaced that Prime Minister Lazarenko, formerly deputy prime minister in charge of energy, improperly helped United Energy Systems (UES) of Dnepropetrovsk (Lazarenko's home region), to dominate the sale of natural gas in Ukraine. In the winter of 1995/1996, Lazarenko had pushed a reorganization of the country's gas sector which parceled out gas distribution among eight regionally-based wholesalers, including UES. Following this, UES expanded rapidly, including into the Donetsk region, where the provincial governor, Vladimir Shcherban, resisted. Following a strike by Donetsk coal workers demanding back pay, an apparent assassination attempt was made on Lazarenko on July 16, 1996 as he drove to Kiev's airport for a flight to Donetsk. 


Coal, the only energy resource which Ukraine possesses in abundance, accounted for around half of Ukraine's primary energy production in 1995. Although Ukraine contains large coal reserves (primarily in the eastern Donets Basin), national coal production has fallen sharply since the late 1980s. Most of Ukraine's coal mines have passed their geological peaks while remaining exploitable seams are deep, inaccessible, and expensive to mine. The coal industry, which employs 1.1 million workers, is highly politicized and heavily reliant on high government subsidies. 

 To reduce the cost associated with using coal as an energy source, the Ukrainian government decided in 1994 to raise household coal prices by 90%, and to reduce subsidies to 20% or less (compared to 60%-65% previously). Factories are already charged world prices for coal. In addition, Ukrainian government officials announced in May 1995 plans to shut 19 inefficient and unprofitable mines in the first such mass closure since independence. It is likely that an additional 50 coal pits will close during 1996, causing over 20,000 job losses. In September 1995, three major coal mining associations in the eastern Donetsk region merged in a step towards restructuring Ukraine's coal industry. 


While Ukraine traditionally was a net exporter of electricity to the FSU and Eastern Europe, in the last several years it actually has been forced to import electricity because of a precipitous decline in electric power production. Overall, Ukraine generated about 180 billion kilowatthours (bkwh) of electricity in 1995, a 15% decline from 212 bkwh in 1994. With about 60% of Ukraine's electricity generated by fossil fuels (the other 40% being produced by nuclear and hydroelectric plants), this production decline has been exacerbated by problems in obtaining natural gas, oil, and coal supplies. 

Fuel for Ukraine's 15 operating nuclear reactors, on the other hand, is being supplied by Russia (through 1997) in exchange for the return of Soviet nuclear missiles to Russia for dismantling. On June 23 1996, Ukraine's state committee on the use of nuclear power (Goskomatom) agreed with Russia on a contract in which Russia will export nuclear fuel to Ukraine over the next 10 years. This last-minute agreement averted closure of Chernobyl due to lack of fuel (on June 22, Chernobyl's Unit 1 was stopped briefly, and Unit 3 lowered to 50% of capacity). Ukraine currently owes Russia about $800 million for nuclear fuel. 

 Another reason for the decline in Ukrainian electric power production in recent years has been a growing number of defaulting electricity consumers. A report in mid-1996, in fact, stated that 40,000 businesses owed $1 billion in energy bills, representing 30% of the electricity they consumed. Also, about 35% of Ukrainian families receive their electricity free by law. Largely as a result of this situation, the Ukrainian Ministry of Power Engineering and Electrification has described itself as bankrupt. 

While overall electric power generation has declined, nuclear power has increased its share of Ukraine's total electric production mix in recent years, expanding from 22.5% in 1989 to around one-third in 1995. Chernobyl, Ukraine's largest nuclear power plant (and the only one to use older, relatively dangerous RMBK reactors), alone accounts for about 5% of Ukraine's electrical needs. Since the 1986 accident in which unit 4 of the reactor released massive amounts of radiation, clean-up and maintenance costs (including upgrades to units 1-3) have consumed an estimated 15% of the Ukrainian government's annual budget. In addition, approximately 2.7 million residents claim "victim" status because of the disaster and receive substantial benefits from the government. 

 In October 1994, Ukraine accepted an international proposal to close Chernobyl. In December 1995, as part of memorandum of understanding (MOU) the G-7 pledged $3.4 billion toward closing the plant by 2000. This would include construction of an additional sarcophagus around unit 4, as well as $360 million for safety upgrades and decommissioning of Chernobyl's two operating reactors. In October 1995, Prime Minister Marchuk reaffirmed the country's commitment to closing Chernobyl by 2000, and denounced continuing reports to the contrary. Marchuk added that despite Chernobyl's closure, Ukraine plans to increase overall nuclear power production, including 2 new reactors currently under construction and due to come on-line in 1998. Recently, Ukrainian officials have expressed frustration that promised international assistance has not been forthcoming, and have vowed to reconsider their agreement to close Chernobyl unless this situation improved. 

 In September 1996, an independent panel of experts was appointed by the European Bank for Reconstruction and Development (EBRD) and the European Commission (EC) to assess whether completion of two 1,000 megawatt nuclear reactors, Khmelnitsky 2 and Rovno 4 (at an estimated cost of about $1 billion) would represent the least-cost option for meeting Ukraine's electricity demand following the anticipated closure of Chernobyl. The panel is scheduled to submit its conclusions to the EBRD and EC by November 29, 1996. Ukraine is insisting on foreign financing to complete Khmelnitsky 2 and Rivne 4 as a precondition for agreeing to close Chernobyl. 

For now, Ukraine is insisting that it requires at least 2 of the 4 units at Chernobyl to meet Ukraine's electricity needs. At present, the No. 2 reactor is closed (since a fire in 1992), while the No. 4 reactor has been shut down since 1986. With the No. 1 reactor scheduled to be taken off line at the end of November 1996, Ukraine is considering restarting reactor No. 2 in 1997, despite opposition from Western governments, which have urged Ukraine to focus instead on energy conservation and efficiency. Also, conversion of Chernobyl to a gas-fired combined-cycle plant or a circulating fluidized-bed combustion station is being considered. 

 On October 10, 1996, the World Bank approved a $317 million loan to Ukraine to help develop a more competitive electricity market as well as to increase efficiency at thermal power generation plants. In September 1996, Ukraine released a summary of its medium-term plans for the country's power sector. These plans include: lower subsidies; privatization of thermal power generation and distribution companies; and establishment of a stronger regulatory body (on October 21, Ukrainian officials announced plans to form a powerful Nuclear Energy Ministry). 

 Ukraine's nuclear power plants often experience minor accidents and shutdowns. On November 15, 1996, the No. 1 reactor at the Zaporozhskaya nuclear power plant was shut down after officials detected steam coming from pipes carrying coolants. According to a spokesman for Ukraine's State Nuclear Committee, no damage to the plant or radiation release took place in this incident. Zaporozhskaya, which consists of six reactors, experienced seven failures during the first half of 1996, with none resulting in radiation leaks. On October 15, 1996, a leak in an air valve prompted the shutdown of the No. 1 reactor at the Khmelnitsky plant. 


President: Leonid Kuchma 
Independence: December 1, 1991 (from Soviet Union) 
Population (7/95E): 51.9 million 
Location/Size: Western edge of former Soviet Union/233,090 square miles, slightly smaller than Texas 
Major Cities: Kiev, L'viv, Odessa, Kharkiv, Donetsk 
Languages: Ukrainian (official), Russian, Romanian, Polish 
Ethnic Groups (1995E): Ukrainian (73%), Russian (22%) 
Religions Ukrainian Orthodox, Ukrainian Catholic, Protestant, Jewish 
Defense (6/95): Army (212,600), Air Force (151,000), Navy (16,000), Paramilitary forces (66,000) 


Currency: Hryvna 
Official Exchange Rate (Sept 98): $1 = approx. 3.00 hryvna 
Gross Domestic Product (GDP - market exchange rates) (1996E): $48.2 billion 
Real GDP Growth Rate (1996E): -5% (estimates vary) 
Inflation Rate (1996E): 50-100% 
Trade Balance (1996E): -$1.9 billion 
Exports (1996E): $13.5 billion 
Imports (1996E): $15.4 billion 
Major Export Products: Coal, electric power, metals, chemicals, machinery, grain 
Major Import Products: Oil, gas, transportation equipment, machinery and parts, textiles, chemicals 
Major Trading Partners: Russia, Belarus, Moldova, China, Turkmenistan, Poland, Bulgaria, Romania, Germany 
External Debt (1/96): $9.0 billion (about 19% of GDP) 


Proven Oil Reserves (1995E): 595 million barrels 
Oil Production (1995E): 90,000 barrels per day (bbl/d), of which 64,000 bbl/d was crude oil 
Oil Production Capacity (1996E): 92,000 bbl/d 
Oil Consumption (1995E): 415,000 bbl/d 
Crude Refining Capacity (1/1/96): 1.26 million bbl/d 
Net Oil Imports (1995E): 325,000 bbl/d 
Major Oil Suppliers: Russia, Iran, Bulgaria, Romania 
Natural Gas Reserves (1993E): 69 trillion cubic feet (Tcf) 
Natural Gas Production (1995E): 0.6 Tcf 
Natural Gas Consumption (1995E): 3 Tcf 
Natural Gas Imports (1995E): 2.4 Tcf 
Coal Production (1995E): 91 million short tons (Mmst) 
Coal Consumption (1995E): 94 Mmst 
Electricity Generation Capacity (1995E): 54.2 gigawatts 
Electricity Production (1995E): 180 billion kilowatthours 


Total Energy Consumption (1994E): 6.8 quadrillion Btu 
Energy Consumption per Capita (1994E): 130.6 million Btu (vs. 328.5 million Btu in U.S.) 
Energy-related Carbon Emissions (1994E): 112.0 million metric tons (1.8% of world carbon emissions) 
Carbon Emissions per Capita (1994E): 2.2 metric tons (vs. 5.5 metric tons in U.S.) 
Major Environmental Issues: Air and water pollution, deforestation, radiation contamination in the northeast from the 1986 Chernobyl nuclear power plant accident 


Organization: Minenergo (government agency that oversees all of Ukraine's fossil-fuel-fired power plants, as well as its transportation and distribution systems); Ukrneft (national oil company and umbrella organization for other state-owned oil enterprises); Chernomorneftegaz (offshore production association); Ukrneftegaz (state oil and gas production company); Goskomatom (state committee responsible for the country's use of nuclear power). 
Major Oil/Gas Fields: Poltava-Province/Dnepro-Donetsk 
Basin, West Ukrainian/Carpathian Fields, Crimea, Arkhangelskoye (NW Crimea) Field, and the Sea of Azov 
Major Oil Ports (1992 export volumes): Odessa (245,000 bbl/d), Sevastopol (3,000 bbl/d), Feodosiya (20,000 bbl/d) Oil Export Pipelines Crossing Ukraine: Friendship (Druzhba) (1.2 million bbl/d), Eastern Products (30,000 bbl/d) 
Major Oil Refineries (1995 crude processing capacity): Lisichansk (481,973 bbl/d), Kremenchug (375,913 bbl/d), Kherson (172,707 bbl/d); Odessa (78,321 bbl/d); Drogobich (78,321 bbl/d); Nadvornaja (74,304 bbl/d) 
Major Foreign Oil Company Involvement: Elf Aquitaine, Gaz de France, Total, HyTEXplor Houston, JP Kenny Gas Export Pipelines Crossing Ukraine (Capacity): Northern Lights (0.8 Tcf), Progress (1 Tcf), Shebelinka (0.7 Tcf), Soyuz (1 Tcf), Urengoi (1 Tcf), West Ukraine (0.15 Tcf) 
Major Coal Fields: Donets Basin (Donbas), L'viv-Volhynian (West Ukraine), Dneiper (lignite basin) Nuclear Power Plants (Capacity): Chernobyl 1-3 (2,367 MW), Khmelnitski-1 (950 MW), Rovno 1-3 (1,762 MW), South Ukraine 1-3 (2,850 MW), Zaporozhe 1-6 (5,700 MW)