U.S. Energy Companies Could Help Ukraine Win Energy Freedom And Neuter Russia

When the chief executive of Ukraine’s Naftogaz was in Washington last week, he spoke with Exxon Mobil and Halliburton
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about investing in his country. Indeed, Ukraine could become a natural gas powerhouse — a pivotal pathway to winning membership in the European Union and defanging Russia.

Russia has long had a firm grip on Ukraine politically and economically — specifically concerning natural gas. Well before the war, Ukrainians sought to break this broad stranglehold, resulting in the 2014 overthrow of a Russian-backed president. And now Ukraine is vowing energy independence. But its future power lies in becoming a net exporter of natural gas to Europe.

“For years, Russia has manipulated energy in Ukraine to keep us dependent. This year, we are targeting our self-sufficiency — to produce as much gas as we consume. We plan to increase our gas production by 1 billion cubic meters, allowing us to avoid imports. It is absolutely possible,” says Oleksiy Chernyshov, in an interview.

Naftogaz is Ukraine’s largest state-owned energy company, developing oil, natural gas, and some renewables. It produces, refines, distributes, stores, and sells natural gas. It kept 12.5 million Ukrainians warm this winter while Russia waged its war, knocking out electrical grids and central stations.

Ukraine has Europe’s third highest natural gas reserves, behind Norway and the United Kingdom, with 905 billion cubic meters. It produced 70 billion cubic meters in the 1960s and 1970s, falling by more than half in 1991 when Russia shifted production to Siberia. Now it is less than 20 billion cubic meters, adds Chernyshov, with Naftogaz accounting for 75%-80% of that. With an end to war and more foreign investment, Ukraine could achieve energy freedom.

However, none of this happens overnight. Ukraine had to import 2 billion to 5 billion cubic meters to sustain its people and economy this winter, relying on domestic production for the rest. Ukraine has been a throughway from Russia to Europe. As such, it has several natural gas pipelines with a 146 billion cubic meters capacity annually. It also has 31 billion cubic meters of storage. While it needs about half of that, Europe could access the balance. Interestingly, some of the Russian natural gas is still flowing through Ukraine. While Ukraine no longer consumes it, it is committed to servicing its European allies.

“Cheap gas comes at a price — dependence on Russian gas, which it has weaponized against Europe and Ukraine,” says Chernyshov. “In a couple of years, Ukraine will produce more, which Europe can substitute for Russian gas.” Russia has diverted some of that fuel to support its war effort in Ukraine, which caused prices to spike and a legal dispute over payments due. That transit contract expires next year.

Ukraine’s natural gas reserves and storage helps Europe

Europe is whittling down its Russian natural gas dependence. It had been at 40% of its imports a year ago. Now it is between 10% and 20%. Europe could turn to Ukraine to replace even more — with the help of foreign investment. Meanwhile, the United States has supplied about 3.5% of Europe’s gas and now provides 40%. That’s 56 billion cubic meters exported in the form of liquefied natural gas by Cheniere Energy, Shell, and TotalEnergies. Europe has built 23 LNG terminals.

In 2014, Ukrainians ousted Russia’s puppet Victor Yanukovych leading to Russia’s invasion and annexation of Crimea. Western Europe promised economic retaliation but didn’t follow through. The continent said the same after Russia poisoned opposition leader Alex Navalny, who is now wrongly imprisoned. Russia was kicked out of the Group of Eight (now seven) for that. But cheap energy almost always trumps such outrage.

When President Putin invaded Ukraine in February 2022, however, he didn’t expect the West to have staying power. He miscalculated. Putin not only wanted power over Ukraine, but he also wanted control over the country’s natural gas pipelines. As it turns out, Russia is taking hits on the battlefield and in the energy markets. Europe is not just cutting Russia out of its lucrative natural gas market; it also killed Nord Stream 2 — 55 billion cubic meters of pipeline that would have doubled Russia’s capacity to the continent.

“Russia has to pay us back for all the damages it has caused,” says Chernyshov. The world has witnessed attacks on nuclear power plants — an odd target given that the deadly radiation could flow north into Russia. “Russia has tremendous resources, and it will always have them. The civilized world will expect Russia to provide for itself — an energy behemoth that will remain formidable. But Ukraine is now a candidate for the European Union” — helped tremendously by its natural gas reserves and storage.

Turning point in Ukraine’s history

USAID and Europe are providing humanitarian aid to the Ukrainians. Before the invasion, the U.S. government agency helped counter disinformation and prevent cyber attacks. In 2015 and 2016, Russia attacked the Ukrainian power grid through internet intrusions. Now it is doing so with missiles.

In the short term, Ukraine must use mobile generators and battery storage to harden its distribution system. In the mid-term, engineers will connect Ukraine’s network to Europe’s fortified high-voltage transmission system — with an eye long term to create a self-healing grid. But challenges abound, such as aligning the “frequencies” of every electric generator that feeds into the network, says an engineer and industry advisor, Massoud Amin.

That brings us back to CEO Chernyshov’s visit to Washington. While Ukraine has the third highest proven reserves in Europe, U.S. corporations have the technical expertise to produce that gas and ensure Ukraine reaches its potential: horizontal drilling, hydraulic fracturing, and 3D seismic services. Companies are naturally concerned about the war, necessitating discussions with U.S. government officials about introducing “special war-risk mechanisms.”

“This is a great moment in Ukrainian history. Ukrainian President Zelenksy has led the fight to protect our country. Emotions are high,” says Chernyshov. “We are motivated to develop an independent and prosperous Ukraine, and we appreciate the support from the United States. We are more motivated than ever to produce energy — oil and gas — to fight against Russia and be admitted to the European Union. We want to win.”

Ukraine’s energy independence will give it peace of mind. But with foreign investment, it could become a net energy exporter, replacing even more Russian natural gas — a weapon that effectively neuters its nemesis.