Liquefied natural gas (LNG) is rapidly changing the structure of the global gas industry. Flexible in transportation, safe in use, and competitive in supply, LNG today has already won more than 40% of the physical volume of world gas exports and is expected to reach 60% by 2040. In 2020, the development of the LNG market underwent significant transformations, as the COVID-19 pandemic posed a challenge to the global economy.

3. Authors:
Nataliya Katser-Buchkovska, Andrian Prokip, Iliya Kusa
Editor:
Tetyana Torchylo
CONTENTS
INTRODUCTION
GAS SUPPLY IN UKRAINE AT THE
TURN OF 2020: STATE, THREATS, AND
PROSPECTS
LIQUEFIED NATURAL GAS MARKET
AT THE TURN OF 2020. GLOBAL AND
REGIONAL CONTEXT
ECONOMIC EVALUATION OF LNG
PROJECT COMPONENTS FSRU
SUMMARY
LINKS

4. LNG import
INTRODUCTION
01

5. Liquefied natural gas (LNG) is rapidly changing the structure of the global gas industry.
Flexible in transportation, safe in use, and competitive in supply, LNG today has already
won more than 40% of the physical volume of world gas exports and is expected
to reach 60% by 2040. In 2020, the development of the LNG market underwent
significant transformations, as the COVID-19 pandemic posed a challenge to the global
economy. The pandemic forced the world’s leading countries to rethink the role of coal
and, instead, prioritize more environmentally friendly fuels, including natural gas. The
United States of America, the European Union, and Asia’s most developed countries
are already incorporating general decarbonization trends into their legislations by taxing
industrial CO2 emissions and supporting low-carbon business. One by one, financial
corporations refuse to invest in environmentally harmful projects. Due to the counties’
and regions’ active switching from coal to more environmentally friendly fuels, the
world’s energy sector will undergo even more significant changes in the future. In this
process, natural gas will play the role of marginal fuel, facilitating the transition from
coal to renewable energy sources and being a partner of green energy by firming it.
Ukraine is not yet a full-fledged player in the LNG market, despite all the prerequisites
for this. With a favorable geographical location in the heart of Europe, a well-developed
infrastructure for gas transmission and distribution networks, a significant economic
growth potential, modern maritime infrastructure, a security need in diversifying gas
supply routes, and an urgent necessity to replace coal generation, the state should be
interested in identifying its supply routes as soon as possible and in using opportunities
to develop its own LNG regasification infrastructure.
The development of Ukrainian LNG infrastructure is important primarily from a
geopolitical point of view. Through reverse supplies from Slovakia, Hungary, and
Poland via existing gas transport corridors, Ukraine, on average, imports between 10
and 14 billion m3
of gas 1
. In the medium term (5-7 years), Ukraine can diversify gas
supplies by establishing LNG routes through the infrastructure of neighboring countries
or by building its own infrastructure. Among Ukraine’s potential partner countries are
Lithuania, Poland, Turkey, the United States, Qatar, Azerbaijan, Croatia, and others.
LNG is a new global gas trend, and it can play an essential role in strengthening
Ukraine’s geopolitical position in the region. High-quality LNG infrastructure is needed
to increase regional cross-border trade, competitiveness, and flexibility in the energy
market. It is crucial for Ukraine to build regional political, economic, and security
alliances based on joint infrastructure projects with partner countries. Restructuring
the energy sector, strengthening LNG trade with other countries, and establishing new
supply routes – all these tasks require time and precise diplomatic work, significant
private investment, and close public-private partnerships.
The use of LNG will also allow Ukraine to reap economic benefits, which is especially
needed in times of economic downturn. Seasonal volatility of the LNG price in the
spot market, growing demand and trade volumes, as well as instability in the oil market,
make LNG financially attractive for Ukraine.

6. LNG import
The development of LNG infrastructure will be an essential step towards
decarbonization. Ukraine’s energy sector is currently at a dangerous crossroads. While
the prospect of focusing on traditional sources looks attractive during the economic
downturn, further investment in fossil fuels will have a negative economic effect in the
medium term. Natural gas is the most environmentally friendly fossil fuel to replace
coal and firm green energy production. Besides, as the fight against global warming
intensifies, more and more countries are trying to minimize the carbon footprint in the
LNG trade, so even cleaner technologies will soon emerge, potentially reducing the
carbon footprint of the LNG infrastructure.
This study was initiated by the Ukrainian Institute for the Future, a leading Ukrainian think
tank that analyzes major political and economic trends in the country and formulates
strategies for key reforms and is supported by the International Renaissance Foundation.

8. LNG import
02
GASSUPPLYINUKRAINE
attheturnof2020:
STATE,THREATS,AND
PROSPECTS

9. Natural gas has always been a vital energy resource in Ukraine. Even though the
reduction of its industrial consumption, economic slowdown, the partial substitution
with other types of energy resources, and, to some extent, the energy efficiency
improvements resulted in the overall gas consumption decline in recent years, today, gas
still plays an important role in the national energy balance: 26.3% in the total primary
energy supply and 27.3% in the total final consumption of energy resources.
Graph 1. Energy balance of Ukraine 2009-2019 2
Total primary energy supply
Total final consumption
Generalcharacteristics

10. LNG import
The state-owned companies of the Naftogaz group remain the key players in natural
gas production. Thus, the largest companies in terms of production in 2019 were
Ukrgazvydobuvannya (14.9 billion m3
), DTEK (1.66 billion m3
), Ukrnafta (1.2 billion
m3), UNB (0.74 billion m3
), Burisma (0.7 billion m3
), Smart Energy (0.37 billion m3
), PPC
(0.28 billion m3
), Geo Alliance (0.21 billion m3
), and KUB-GAS (0.13 billion m3
).3
Besides, Naftogaz is the key Ukrainian gas trader. According to Naftogaz’s 2019 annual
report, in 2018, the group’s share on the Ukrainian Energy Exchange (UEEX) was only
2%; in 2019, however, Naftogaz alone was responsible for over 40% of the UEEX
transactions. 5
Graph 2. Dynamics of gas production in Ukraine, 2015-2019 4
Graph 3. Top-20 largest natural gas traders in Ukraine

11. As of 2019, the balanced (production) subsoil reserves of natural gas in Ukraine were
882.6 billion m3
. The reserves could provide Ukraine with gas for 42 years ahead
(assuming the fixed production rate). 6
Ukraine annually produces only 2.4% of its
total natural gas reserves, while developed countries produce about 6% per year. 7
By the Order of the Cabinet of Ministers of Ukraine from 28.12.2016 № 1079-p, the
government approved the Concept to Develop Gas Production Industry of Ukraine
by 2020, which was aimed to increase gas production and attract investments in the
industry. However, the concept was never really implemented.
According to Ryder Scott Company’s calculations, Ukrgazvydobuvannya’s confirmed gas
reserves are 276 billion m3
, about 30% of Ukraine’s total subsoil reserves. 8
In addition,
it is critical to note the annual growth of production and technological costs (PTC) of
Ukrgazvydobuvannya. While in 2016, PTC was 0.7 billion m3
, at the production level of
14.5 billion m3
, in 2019, they rose to 1.2 billion m3
, at 14.84 billion m3
level. 9
Among everything, 2020 was marked by the conclusion of seven production sharing
agreements (PSAs), competitions held a year earlier. These are Buzivska, Berestyanska,
Balakliyska, Ivanivska, Sofiivska, Zinkivska, and Uhnivska sections, with a total area of
over 7,000 km2
. The companies undertook to drill more than 30 wells; the guaranteed
investment in these projects will be at least $355 million.10
The accomplishment is very promising for the industry, as transparent competitions
and the establishment of favorable conditions for the winners will attract investors
with a clearly defined list of investment commitments and work programs to develop
large-scale and complex projects. Thus, the concluded agreements will allow to achieve
reliable cooperation, stable flow of investments, job opportunities expansion, and
development of the country’s gas potential. The conclusion of seven deals was also a
positive shift compared to the results of 2015 when Shell and Chevron canceled their
PSA projects. It is also worth mentioning the decision of the Cabinet of Ministers to sell
the Yuzov section of Naftogaz, which promises to expand the development of one of the
largest deposits in Ukraine in the coming years.
For a long time, the development Dolphin offshore gas field remained uncertain.
Located in the northwestern part of the continental shelf of the Black Sea, with an area
of 9.5 thousand km2
and total reserves of 286 million tons of conventional fuel, the
field was especially important for Ukraine. Finally, in 2021, Naftogaz received 20 special
permits to use the subsoil of the Scythian field and the Dolphin field for the next 30
years. 11
Despite the significant role of gas in Ukraine’s energy sector, our domestic production is
insufficient to meet local needs. Over the past three decades, Ukrainian production has
been about 20 billion m3
per year, while domestic consumption was almost 30 billion m3
of gas per year. That is why Ukraine has been and remains dependent on gas imports.

12. LNG import
Graph 4. Dynamics of volumes of consumption and import of natural gas
in Ukraine 1999-2019 12
In addition, given the decarbonization trend of the next 20-30 years, the demand for
fossil fuels is expected to fall sharply. Consequently, falling demand would decrease
global gas prices and economic incentives to invest in extractive industries.
Besides declining exports, gas-producing countries will face a rapid reduction of
investment in fossil fuels. International financial institutions are already refusing to
finance oil and gas production, redistributing capital in favor of renewable energy and
hydrogen. Thus, taking the current trends into account, the question of increasing gas
production’s feasibility in Ukraine remains open.

13. The collapse of the Soviet Union and the declaration of independence forged new
political and economic conditions for Ukraine. Suddenly Ukraine had to shift to the
different rules in the economy and adapt to the new interstate relations.
The abolishment of the production and logistics chains between the former Soviet
countries became one of the most critical causes of the economic crisis that caused
the recession of 1991-1994. As a result, there was a shortage of liquid funds to pay for
energy consumption. Moreover, the government struggled with rapid change in the
economic model – from administrative command to the market transitioning and did
not fully understand that the incoming energy resources would come at a price and the
price would be much higher than before. At first, the authorities did not understand
what for and later were not ready to bring the gas price to market levels for both
household and industrial consumers.
Lack of market understanding laid the preconditions for the growing debts in gas
payments and the first gas conflicts between Ukraine and the Russian Federation. A
few years later, Russia realized that the energy lever was the most effective tool to
pressure neighboring countries and force them to be loyal to the Kremlin.
Ukrainian debts for Russian gas began to accumulate already at the end of 1991,
immediately after the collapse of the USSR. It was also during that time when the first
reports from the Russian side about the intention to cut off gas supplies appeared.
However, no actual steps were undertaken. Russia’s threats did not change the
situation, and Ukrainian debts continued to accumulate.
On August 20, 1992, Russia and Ukraine signed the agreement, according to which
the former agreed to supply 70 billion m3
of natural gas to Ukraine for domestic
consumption and 100 billion m3
of gas to transit to other European countries. 13
Consequently, these and subsequent debts, which accumulated in the form of technical
loans, were restructured into the public debt of Ukraine with a plan for its further
repayment (such debt restructuring mechanisms were used during 1993-1995).
However, the payment mechanism remained flawed, and in August 1993, Russia cut off
the gas supply for 11 days.
HistoryoftheUkrainianGas
IndustryandUkrainian-Russian
GasRelations
Gas relations with Russia after Ukraine’s
independence

14. LNG import
Ukraine’s trump card, of course, was in transit, and as a result of intergovernmental
negotiations, gas supplies were restored. As Ukraine lacked funds for the full payments,
Russia offered to lease the Ukrainian gas transmission system (GTS), yet Kyiv did not
accept the offer.
The debt for gas supplies also did not play in Ukraine’s favor in the summer of 1993,
during the division of the Black Sea Fleet. At Russia’s request, the issue of repaying gas
debts was at the top of the agenda. To sign the Massandra Accords, Ukraine had to
cede to Russia a significant part of the Black Sea Fleet’s property as a way to repay gas
debts. This agreement was the first manifestation of the critical importance of the gas
issue for Ukraine’s national security, integrity, and sovereign policy. However, energy-
related matters continued to be underestimated in domestic and foreign policies.
In early 1994, Russia suspended supplies to Ukraine for several days due to a rapid
increase in debt and, as compensation, in turn, unsuccessfully demanded ownership of
gas assets. However, later Ukraine had to agree to compromise, thus agreed to transfer
for temporary use a part of the Black Sea Fleet’s infrastructure and abandon some of
the claims during the dispute over the division of Soviet property abroad. As of the end
of 1994, the debt to Gazprom was already over $2 billion. 14
Gas conflict of 2005-2006
In 2004, Ukraine signed a five-year contract to supply gas from Central Asia for
$50 per thousand m3
. However, the Orange Revolution rapidly changed Ukrainian
political elites and shifted the foreign policy direction away from Russia, changing
the gas supply’s political and economic conditions accordingly. Thus, in December
2004, Turkmenistan demanded an increase in gas prices from Russia and Ukraine from
$44 to $60, and by December 31, unexpectedly, it stopped supplies altogether. The
negotiations with Ukraine followed immediately, and soon the price was agreed at
$58. Besides, countries agreed that the gas would be supplied by the newly formed
company Rosukrenergo. Supplies from Turkmenistan to Russia resumed only in May
after both sides agreed on price terms. 15
In 2005, the Ukrainian side finally abandoned the idea of a tripartite consortium (it
was supposed to consist of Ukraine, Russia, and a European country – for example,
Germany), which emerged during Leonid Kuchma’s presidency. The consortium would
own and operate the Ukrainian GTS. The renunciation of this idea put an end to
Russia’s intentions to continue using the Ukrainian gas route only. Instead, it created
an incentive for Russia to consider the construction of gas pipelines bypassing Ukraine.
This became a new page in Russia’s use of political instruments for influence. The
refusal also triggered Russia to discredit Ukraine as a reliable supplier in order to gain
support for the construction of new gas pipelines in Europe.
After Ukraine rejected the idea of a consortium in the summer of 2005, the Russian
Duma voted to set European gas prices for some post-Soviet and post-socialist
countries, including Ukraine. This was another attempt to acquire influence over
Ukrainian GTS. It sang with the period of rising prices for oil and other energy sources,
so the gas price for Ukraine became 3-4 times higher than for some European
countries.

15. In the first quarter of 2006, Gazprom bought all the gas available for pumping in
Turkmenistan and demanded Ukraine to pay $230 per thousand m3
for the supplies.
Ukraine refused, and so on January 1, 2006, supplies ceased. Therefore, Ukrainian
transit to the EU and other countries was sharply reduced: Austria, Italy, Poland, France,
Hungary, Slovakia, and Romania – all reported declining shipments.
European discontent hastened the resolution of the dispute. Gazprom and Naftogaz
settled the problem and signed a 5-year contract, which established Rosukrenergo as
the gas supplier and banned gas re-export. Rosukrenergo was supplying a mixture of
gas from Turkmenistan, Kazakhstan, Uzbekistan, and Russia. Ukraine and its companies
did not directly contract gas from these countries, as Gazprom-Export carried out
the operation. Accordingly, the price was tied to the conditions set by the supplier
countries. Naftogaz and Rosukrenergo have set up a joint venture, Ukrgaz-Energo, to
supply gas to large consumers within Ukraine.
Gas conflict of 2008-2009
Despite the signed contract, Ukraine was not entirely satisfied with Rosukrenergo’s
participation in supplies, mainly due to Ukraine’s debts to Gazprom. The split in political
elites on this confrontation led to a new, even sharper round of gas wars between
Ukraine and Russia. At the end of 2007, Russia planned to increase the price for gas
supplies to Ukraine by 38%. 16
Later, after a break of almost two weeks in gas transit,
the parties signed a contract with gas prices tied to oil and take-or-pay commitments.
Kharkiv agreements of 2010
The globally increasing energy price also affected the price for gas imports under the
current contract. This prompted Ukraine to seek additional gas price discounts. Under
the Kharkiv agreements ratified in April 2010, Ukraine received a 30% discount on gas
to extend Russia’s lease of the Black Sea Fleet. 17
Obviously, after the annexation of Crimea, Russia refused to provide a discount on
gas to rent the Black Sea Fleet. This was, in fact, the second high-profile case of when
miscalculations in the country’s energy policy affected national security.
Stockholm arbitration and supplies from the EU
In April 2014, Prime Minister Arseniy Yatsenyuk announced Naftogaz’s intention to
file a lawsuit against Gazprom in the Stockholm Arbitration Court. The Russian side
demanded payments for insufficient gas extraction, which under the terms of the 2009
contract was to amount to 52 billion m3
. In addition, the announced price of gas for
current supplies in the second quarter of 2014 under the contract was $485 and was
higher than the price for neighboring European countries. Since November 25, 2015,
Ukraine began to import gas exclusively from the EU. 18

16. LNG import
In late 2017, the Stockholm Arbitration Court ruled in favor of Naftogaz: Gazprom is
obliged to pay $2.56 billion, including the offset of $2.1 billion, which Naftogaz received
as gas supplied in 2014.
The fine has also been the subject of controversy between Naftogaz and Gazprom.
The main concern was that it would affect the future of the transit contract, especially
considering the construction of bypassing routes: Turkish Stream 2 and Nord Stream 2.
The launch of these pipelines could deprive Gazprom of the need for Ukrainian transit.
The situation was complicated by the unbundling process that began in 2017. Under
the Association Agreement with the EU, Ukraine pledged to implement the EU’s Third
Energy Package, which, among other things, required the separation of gas transmission
system operators from gas companies. 20
Hence, Ukraine started the largest energy
reform since its independence: separating the transit system from Naftogaz, i.e., creating
an independent operator. The unbundling had to become a proxy for competition, as all
traders would have equal access to the market, and was aimed to help improve Ukrainian
GTS and overall facilitate the transportation process.
On the eve of 2020, the parties – Naftogaz, the newly created Transmission System
Operator of Ukraine (TSO), and Gazprom – agreed and signed a five-year transit
contract. The parties renounced mutual claims, and Gazprom paid Naftogaz $2.91
billion by the decision of the Stockholm Arbitration Court (the result of the claim and
the accrued penalty). 21
On December 30, 2019, the parties signed three documents: the agreement between
Gazprom and Naftogaz on the organization of transportation, the transport agreement
between Naftogaz and TSO, and the inter-operator agreement between Gazprom and
TSO. The contract provides for at least 65 billion m3
of Russian gas transit in 2020 and
40 billion m3
annually during 2021-2024.
Table 1. Volumes of natural gas imports to Ukraine by directions in 2014-2020,
billion m3 19

17. For comparison, in 2017, transit amounted to 93.5 billion m3
, and in 2019 –
89.6 billion m3
. The rule “pump or pay” meant the irrefutable payment of the minimum
volume of transit even at lower physical volumes of pumping 22
.
On January 1, 2020, one day after the signing of the agreement, Naftogaz’s subsidiary
Ukrtransgaz transferred control of the transit system to the TSO, which became the
property of the Mahistralni Gazoprovody Ukrainy and, accordingly, the Ministry of
Finance of Ukraine. The acceptance-transfer act consisted of 47 thousand units, the
book value of which amounted to more than 32 billion hryvnias. Thus, on January 1,
2020, Ukraine concluded the unbundling 23
.
Unbundling not only separated suppliers from transit but also laid the foundation for a
gas market. Since August 2020, gas prices in Ukraine are determined by competition.
Importers, traders, and extractive companies supply gas to the market, the TSO, and
the Underground Storage Operator (UGS) transport gas. Gas supply companies and gas
distribution companies buy gas at the market and deliver it to end consumers. At the
same time, the National Commission for Regulation of Energy and Utilities (NCREU)
monitors compliance with the rules and the functioning of the market.

18. LNG import
At the end of 2020, the Verkhovna Rada also voted in support of the bill that allowed
TSO to gain access to the gas exchange, which would allow companies to buy gas quicker
and at a better price. Such an exchange increases the liquidity of the gas market, which
was another requirement of the EU’s Third Energy Package.
Graph 5. Gas market functioning scheme 24

19. The signing of a five-year transit contract postponed the problem of GTS’s urgent
restructuring. However, the reduction of transit volumes compared to the design
capacity urged its modernization and the search for alternative use options. In addition,
the GTS’s future after the expiration of the current transit contract is unclear. It is also
essential to study the existing opportunities for GTS, including LNG supply and further
expansion.
General characteristics of Ukraine’s GTS
Ukraine'sgastransmissionsystem
anddiversificationofnaturalgas
supplyroutes
Map 1. Ukraine’s GTS 25

20. LNG import
Features 26
:
total length of gas pipelines – 37,933,360km:
main gas pipelines – 22,202,788 km
main gas pipelines-branches – 13 339,922km
distribution gas pipelines – 2,390.65 km
number of UGS facilities – 12
projected active volume of all underground storage facilities – 30.95 billion m3
Table 2. Design parameters of UGS 27

21. Map
2.
Gas
transmission
infrastructure
of
Ukraine:
results
of
work
in
2010-2019,
billion
m
3
28

22. LNG import
Under such conditions, the main priority of the Ukrainian GTS should be transiting and
ensuring reliable gas supplies to the domestic market with a minimum level of investment
and costs. At the same time, it is necessary to carry out repair and re-equipment of
the worn-out equipment and preservation or decommission of not loaded segments
of GTS. Given the growing demands of contractors on the efficiency and quality of
transportation services, it is necessary to increase the overall operational efficiency
of the GTS. Ukraine and TSO must pay additional attention to setting favorable for
European consumer transport tariffs, which would be lower than the tariffs of bypass
pipelines.

23. Integration of the GTS of Ukraine in the network of
neighboring European countries
The bandwidth of the Ukrainian GTS interconnectors with Poland, Slovakia, Hungary,
and the reverse capability can potentially increase the reverse’s bandwidth. Today, the
total capacity of the exit points from the GTS to the EU is 456.9 million m3
: 29
to Poland – 14.5 million m3
to Hungary – 40.2 million m3
to Slovakia – 281.9 million m3
to Romania – 95.1 million m3
To improve Ukrainian energy security, ensure gas supply diversification, and integrate
domestic natural gas market into the Energy Community’s market, GAZ-System S.A. and
the TSO joined efforts in analyzing the effectiveness of the project on the gas pipeline-
interconnector Poland-Ukraine.
The planned gas interconnector includes constructing the DN700 Germanovichi-
Strachotcin gas pipeline (72 km) and the DN1000 gas pipeline from Germanovichi to
the Polish-Ukrainian border (1.5 km) on the Polish side, including a border measuring
station and a compressor station in Strachotsyn. The entire investment includes three
main parts: linear infrastructure, production infrastructure, and data management and
collection system (SCADA). The gas pipeline will connect the Germanovichi junction on
the Polish side with the TSO of Ukraine in the area of the Bilche-Volytsya underground
storage facility on the Ukrainian side and is designed to work in both directions.
The construction of the main gas pipeline-interconnector Drozdovychi-Bilche-Volytsia
with the following characteristics is defined as the main variant of expansion within
Ukrainian borders: length – about 100 km, conditional diameter – 1000 mm, working
pressure – 7.4 MPa. Capacity:
in the direction Poland-Ukraine: Q = 5-8 billion m3
/year
in the direction Ukraine-Poland: Q = 5-7 billion m3
/year.
The project is included in the ENTSOG Ten-Year Development Plan for 2015-2025 and
in the list of Projects of Common Interest of the Energy Community (PMI). 30
To make a final decision on the project, operators are preparing for a binding procedure,
“open season” (pre-sale of capacity), which will assess the demand of participants in
Ukraine and Poland’s natural gas markets and the economic feasibility of the project.
This procedure is entirely in line with European best practices for pre-allocation of
capacity.

24. LNG import
Possibilities of supply of regasified LNG from Poland to Ukraine are confirmed. Currently,
Ukraine can accept up to 6.6 billion m3
of gas per year in the interruptible capacity
mode. 31
Poland plans (in case of Ukraine’s request) the same capacity for 2021-
2022. TSO will consider gas supplies from other countries after the expansion of the
interconnector through Romania.
Poland
To deepen the integration of the GTS of Ukraine and neighboring European countries,
the TSO of Ukraine and the Polish operator GAZ SYSTEM agreed on the terms of
cooperation at the connection points of the GTS Germanovichi and Drozdovichi, which
are entirely based on EU legislation. Germanovichi connection point can carry out virtual
reverse operations, while allocations are made according to the operating balancing
account, which is not reset every month. 32
The construction of the Poland-Ukraine interconnector is another important project
for Ukraine. After the agreement between the Polish company PGNiG and American
companies on the purchase and possible supply of American liquefied natural gas to
Poland, the Poland-Ukraine interconnector can be used to further supply this gas to
Ukraine.
The existing gas pipeline Komarno-Drozdovichi was built in the 70s and today is not
reliable enough; therefore, the new interconnector could be viable. In the medium term
(after 2024), it is advisable to consider the construction of an interconnector with a
capacity of 8.5 billion m3 per year (in Ukraine / Poland). This project is also a matter of
national energy security.
The project might see a green light due to the US’s commitment, which is confirmed by
signing a tripartite Memorandum on gas cooperation between the US, Poland, and
Ukraine. The Memorandum should result in a regional structure between Ukraine and
Poland. This will help reduce dependence on gas supplies from Russia and facilitate the
management of critical gas deficiencies (for example, due to extremely low temperatures
and hence peak gas consumption in Europe). The structure can become a hub for gas
exports to neighboring countries.
Among other things, Ukraine and Poland discuss the possibility of increasing gas supplies
to Ukraine up to 6 billion m3
per year after the launch of the Baltic Pipe gas pipeline
(approximately the end of 2022) and the expansion of the Swinoujscie terminal, from
where, through the Germanovichi gas pipeline, the gas will be delved to Ukraine.
Hungary
The TSO of Ukraine and the Hungarian Operator FGSZ have agreed to cooperate at the
connection points Beregovo and Beregdarots. The cooperation will be based on the
standard business rules, which comply with cross-border cooperation and EU legislation
rules. 33
Romania
Romanian Operator TRANSgaz and TSO of Ukraine signed an agreement on
cooperation according to European rules. The agreement provides for the possibility

25. of free transportation of gas from Southern Europe via Bulgaria, Romania, Ukraine to
Moldova with a capacity of 17.8 million m3
per day. Romania will remain a transit route in
all scenarios, but its role will diminish after the launch of the Turkish Stream. 34
Moldova
To fully unblock the Trans-Balkan Gas Corridor, the TSO of Ukraine and
Moldovatransgaz, together with Moldovagaz, signed an inter-operator technical
cooperation agreement. This document allows transporting gas between Ukraine
and Moldova in both directions through underground storage facilities Oleksiivka,
Hrebenyky, Ananyiv, Lymanske, Kaushany. In addition, the parties signed an agreement
on gas transportation by Ukraine and Moldova for consumers in the border areas.
Moldova has already made shipments to store gas at Ukrainian UGS’s facilities. 35
The signed Memorandum of Understanding on cooperation in gas security, although
not legally binding, should strengthen energy security in the region. It must eliminate
and prevent an energy crisis and effectively mitigate possible interruptions in natural gas
supply, particularly to protected consumers on both sides of the border.
Both Ukraine and Moldova are highly interdependent when it comes to securing gas
supplies. The structure and configuration of the natural gas transmission network
determine Moldova’s dependence on natural gas flows through Ukraine. At the same
time, consumers in some Ukrainian regions depend on natural gas flows through Moldova.
Russia
On December 30, 2019, in Vienna, the TSO of Ukraine signed an inter-operator
agreement with Gazprom (Operator of the Russian GTS). The agreement guarantees the
extension of Russian gas transit through Ukraine for five years and can be prolonged for
another ten years. The minimum volume of transit for 2020 is 65 billion m3
per year and
secures the minimum of 40 billion m3
annually for the next four years.
Slovakia
On December 31, 2019, the TSO of Ukraine signed a technical cooperation agreement
with the Slovak operator EUSTREAM. The agreement concerned the connection points
Uzhhorod-Velke Kapushany and Budintse. The conclusion of this agreement meant
that the TSO of Ukraine signed international documents with all neighboring operators –
Poland, Hungary, Romania, Moldova, Slovakia, and Russia. 36
In addition, the potential introduction of a virtual connection point between Slovakia and
Ukraine will have a positive impact on the economies of both countries. The virtual point
will not only help increase gas transportation, which in turn will increase budget revenues,
but will also ensure uninterrupted transportation and decrease CO2
emissions by reducing
the use of fuel gas for compressor stations.
The issue of auction-based capacity allocation at the state border, which the EU’s Third
Energy Package requires, also remains relevant today. If Slovakia introduces transparent
and fair competition, it will positively affect the economies of both Ukraine and
Slovakia.37

26. LNG import
Assessment of the scale and consequences of the complete
cessation or significant reduction of gas transit to Ukraine
In case of ceasing the transit, the TSO of Ukraine 38
provides the following steps:
with the annual volume of gas consumption in Ukraine within 35 billion m3
per year
to ensure a reliable gas supply to Ukrainian consumers to compensate for seasonal
and daily fluctuations sufficient filling of Ukrainian UGS at the level of 47.5-55%
(14.7-17.0 billion m3
active gas excluding 4,662 million m3
of non-reversible active
gas, which technologically performs the functions of a buffer);
to ensure a reliable supply of natural gas to national consumers in the winter
(February-March) and secure that active gas reserves in UGS are formed in a way
that guarantees the daily withdrawal of UGS in this period at 133 million m3
per
day, while the active gas in UGS will remain at 13 billion m3
. Technical measures to
increase the daily productivity of gas storage facilities have also been developed
and implemented;
taking into account the need to meet the demand of Ukrainian consumers in
the withdrawal season, UGS of Ukraine will able to provide consumers of other
countries with free storage of 14-16 billion m3
.
The problematic regions that may be left without gas are those that rely on Russian
supplies (the city of Vovchansk with a population of 20,000 in the Kharkiv region and
two other settlements), the South of Odesa region, and some settlements in the east of
the country.
It would seem that problems may arise in countries that simultaneously depended on
the supply of Russian gas and its delivery through Ukraine, namely: Greece, Bulgaria,
Romania, Serbia, Bosnia and Herzegovina, as well as Moldova, whose government
cannot resolve the issue of Transnistrian gas consumption debt repayment. However,
the launch of the TurkStream will allow shipping gas directly to Turkey, as well as to
other the countries of Southern and Southeastern Europe (since the beginning of the
year, gas has been flowing to Greece and Northern Macedonia). TurkStream will be a
key route for natural gas to the region, bypassing the Trans-Balkan gas pipeline.
Thus, we can assume that Russia is changing its transit partner from Ukraine to Turkey.
If Nord Stream 2 is commissioned and both branches of TurkStream (15.75 billion m3
per year) are fully operational, Russia is unlikely to extend its transit contract with
Ukraine under current conditions. 39
Since January 1, 2020, gas transit through Ukraine in the Balkan direction via the Trans-
Balkan gas pipeline is carried out only to cover the needs of Romania and Moldova.
Bulgaria (which also started receiving part of LNG gas from Greece last year) and
Turkey do not receive gas through Ukraine anymore. Therefore, the gas pipeline will
work in reverse mode, which became possible after the re-equipment of the system.
The decrease in transit volumes and transit revenues may cause more than half of the
export gas pipelines to become idle/underloaded. To transport gas to all regions within
the country, it will be necessary to maintain the system’s functioning at a sufficient
level, which will cause a significant increase in gas prices.

27. Even though the transit issue might seem unstable, it is not yet critical:
Turkey is a critical partner (strategic partner, hub, new field). The country is
neither a member of the EU nor a party to the Energy Community but has
already reduced domestic gas consumption, specifically the consumption of
Russian gas. In addition, some sources claim that there is a high probability that
the contract between Gazprom Export and the Turkish company BOTAŞ will not
be extended at all after April 2021; 40
There is a significant decline in gas production in Europe (the Netherlands,
the UK). 41
Therefore, the demand for gas transit from Russia to its consumer
partners in Europe may increase. Given the capacity of bypass pipelines and the
lack of their ability to respond to gas consumption peaks in specific periods of
time, Ukraine’s GTS (and its UGS) may remain an essential corridor for transit;
The specifics of bypassing pipelines commissioning present a certain timeframe to
find a new route of gas supply;
Within the next ten years, the transit agreements of Russia with Romania
(2023), Bulgaria (2030), and Poland (which has already announced its intention
not to extend the contract with Russia since 2023) are going to expire. With
a far-sighted policy, this situation can be used to meet the needs of European
gas consumers by offering them to use extensive Ukrainian system of main gas
pipelines and the largest underground storage facilities in Eastern Europe;
The possibility of alternative use of the GTS of Ukraine to support its efficient
operation (pneumatic transport, gas storage in pipes, etc.);
Although the Trans-Balkan Pipeline has already been launched and transit
through Ukraine has, as expected, decreased significantly, representatives of
the TSO announced that they consider utilizing the old Trans-Balkan Pipeline
infrastructure and creating a new corridor for gas supplies from Bulgaria, Turkey,
and Greece to Ukraine in the amount of up to 15.8 million m3
per day. 42
02
03
04
05
06
01

28. LNG import
The idea of building LNG terminals in Ukraine was related to the intention to diversify
the supply of resources and reduce dependence on Russia. With each of the gas wars
described above, Ukraine’s desire for energy independence became more apparent, and
construction of the LNG terminal was getting more and more attractive.
The idea to build a liquefied gas regasification terminal was first voiced in 2006.
Naftogaz was considering an option of building a plant on the Black Sea coast that
could receive gas from Libya and Egypt and later liquefy it for supply to Ukraine’s
gas transmission system. Later, Ukraine also considered gas supplies from Azerbaijan,
specifically from the Shah Deniz 2 field (it was under development at the time). In 2009,
the Ministry of Fuel and Energy even set up a working group to develop the idea of an
LNG terminal. At that time, the cost of construction was estimated at $2.5 billion. 43
The idea got a second wind at the end of 2010 after another gas war with Russia raised
the price to $250 per thousand m3
. 44
In December, the government has officially
created the “National project “LNG-terminal” enterprise. At that time, Ukraine planned
to supply liquefied gas from North Africa and Azerbaijan to substitute Russian gas.
Two years later, after the price of Russian gas reached a record $430 per thousand m3
,
Ukrainian authorities stated that they had found an investor who was to lead the
construction consortium and attract new investors.
The project was thoroughly planned. The gas liquefaction plant was to be located in
the South of the Odesa region. Authorities planned to lease a vessel to Excelerate
Energy to transport Ukraine’s imported gas. A floating installation of FSRU with a total
capacity of over 5 billion m3
was supposed to store and regasify natural gas as early as
2015. The project also accounted for the onshore terminal for LNG reception, which
was supposed to start operating later. According to the drafted Energy Strategy of
Ukraine until 2030, in 2015, the country’s demand for gas imports was to range from
33.7 to 34.3 billion m3
. In 2020, thanks to the LNG project, Ukraine was to import 27.1-
29.2 billion m3
. 45
The terminal could cover 15 to 35% of Ukraine’s gas needs, costing Ukraine €60 million
(according to plan, the remaining €800 million for terminal and an additional €130
million for the gas pipeline between the plant and the network were supposed to be
covered by investors). 46
Implementing the LNG terminal project with a capacity of
10 billion m3
is still economically justified given the current volume of gas imports and
price before the collapse of the markets in 2019.
Development of the project and selection of the location required Ukraine to hold
conceptual design works, which would have allowed to determine the preparation of
the basic design of the LNG-terminal and the technical conditions of previous technical
solutions. The terminal production equipment list with division into the sea and coastal
parts were also determined.
HistoryofLNGterminals
constructioninUkraine

29. During the final project development, it will be specified, taking into account the
conditions of a selected location.
As of 2021, the status of the National Project “LNG Ukraine – the creation of
infrastructure for the supply of liquefied gas to Ukraine” at the state level remains
uncertain.
In 2015-2016, Naftogaz and its enterprises were not involved in the project
implementation. However, Naftogaz took the opportunity to submit proposals to the
relevant ministries to resume the project. To adjust the organizational structure of the
LNG project and its resuscitation, the Cabinet of Ministers of Ukraine (CMU), by order of
August 5, 2015 №826-p, decided to assign the state enterprise “National project “LNG-
terminal” to the Ministry of Economic Development and Trade of Ukraine. 47
Also, the Action Plan of the Ministry of Energy on implementing the Program of CMU
and the Sustainable Development Strategy “Ukraine 2020” in 2015 provided: to develop
and submit to the Cabinet of Ministers of Ukraine a draft order of the CMU for approval
of the LNG terminal project. According to the Plan, during the preparation of this
concept, the results of negotiations with Turkey on the issue of the unimpeded passage
of the Bosphorus by tankers should be taken into account. 48
Some domestic private and foreign companies (USA, Turkey, and others) remain
interested in building an LNG terminal in Ukraine. Aware of the importance of the
LNG project to ensure the energy security of Ukraine, the Ministry of Energy and
Naftogaz, within its competence, in a great degree contributed to the implementation
of constructive proposals and measures that will facilitate the implementation of such
projects.
Thus, in 2014, Ukraine started cooperating with private Ukrainian investors, who
planned to implement an alternative project to construct a floating LNG terminal
(floating storage and regasification unit, FSRU) in the waters of the same Yuzhny port.
However, the project is currently suspended due to declining interest, primarily because
of the uncertainty around the Bosphorus Strait. At the same time, Ukraine must have
studied the interest of companies and the possibility of organizing the supply of LNG
within the Black Sea basin, which would allow to avoid the problem of the Bosphorus.
To this end, in July 2015, the Naftogaz signed a Memorandum of Understanding
with the American company Frontera, which expressed interest in investing in the
construction of an LNG terminal in Ukraine and organizing supplies to the LNG terminal
obtained from its exploration and production sites in eastern Georgia. 49

30. LNG import
Floating storage and regasification unit (FSRU) as a concept was developed in 2005
under the pressing need to address the problem of storage and regasification of LNG.
The first considered FSRU was not a new unit but re-equipped from an existing carrier.
These first FSRU projects had shorter delivery times compared to terrestrial terminals.
For most operating FSRUs today, there were compelling reasons: some were
politically motivated, while others were incentivized by location, schedule, civil safety
requirements, or environmental constraints. These factors were decisive for the choice
of FSRU compared to terrestrial LNG terminals.
FSRUs are not substitutes for terrestrial solutions but rather complementary options.
In general, ground-based LNG terminals are more versatile, often performing LNG
transshipment, ship bunkering, and LNG tanker loading systems, which may be
necessary for some markets and infrastructure systems.
Over the past few years, several projects have used a different technology – floating
storage units (FSU). These units are only suitable for storage. The regasification system
is installed either on the pier, a separate floating regasification barge (FSRB), or on the
ground terminal.
If Ukraine builds its own gas storage and reception facilities on the Black Sea coast, the
state being landlocked has great potential for developing the LNG supply market. For
the last ten years, one of the main projects is the “Yuzhnyi” Terminal project, which
includes constructing storage facilities and the lease of a floating regasification platform
(FSRU). The analysis of the current and projected gas market shows that Ukraine has a
strong base for its consumption in the industrial and housing sectors. Using a floating
LNG regasification platform in Ukraine is currently justified, given the estimated cost of
such a project and the possibility of renting an LNG vessel.

32. LNG import
03
LIQUEFIEDNATURALGAS
MARKETattheturnof2020.
GLOBALANDREGIONAL
CONTEXT

33. The development of liquefied natural gas began with the construction of an experimental
plant for the production and storage of LNG in 1912 in Virginia (USA). 50
This was an
installation that allowed liquefying natural gas to parametric values, which are still used
today. As this installation was experimental and the beginning of the First World War
significantly slowed down the study of liquefaction technology, this plant was able
to start operating at full capacity only in 1917. Experiencing a global boom in fossil
resources, including natural gas, there was no need for logistical flexibility. The situation
changed with the outbreak of World War II, which led to problems with the delivery and
provision of energy resources to the allies under all embargoes and restrictions of their
own food bases.
The East Ohio Gas Company (EOG) pioneered global solutions, building a liquefaction
and regasification plant in Cleveland, Ohio, in 1941, just after a subsidiary of Hope
Natural Gas Company in West Virginia had successfully tested a pilot project. The plant
operated successfully for three years, but in 1944, according to a report from the US
Bureau of Mines, the tanks with LNG failed. As a result of the malfunction, significant
volumes of gas and steam leaked from the tanks, causing a series of explosions and
started a fire that engulfed nearby houses. Overall, the fire killed nearly 130 people and
caused at least $6.8 million in damage. 51
After this incident, the US stopped developing
LNG projects for six years to improve the conditions of storage, transportation, and,
above all, security.
In 1959, Methane Pioneer delivered LNG from Lake Charles, Louisiana, to Canvas
Island in England to develop commercial LNG delivery options, demonstrating for the
first time that LNG could be safely transported across the ocean. 52
After the first
seven successful LNG shipments, the British Gas Council decided to import LNG from
Venezuela. However, due to the discovery of deposits in Libya and Algeria (later, the first
world’s first commercial liquefaction terminal was built in Arzew, Algeria), it was decided
to import LNG from Algeria, which became the world’s first commercial LNG exporter
(1964). So, LNG supplies to the United Kingdom could not compete with deposits
discovered in the North Sea. 53
Later, Japan entered the liquefied natural gas market, first importing LNG from Alaska
in 1969.54
In the same year, trade relations between Algeria and France, Libya and
Italy, and Spain also began, so the first contractual trade relations were concluded. The
development of the LNG market in 1972 led to the expansion of the trading zone, which
the United States, with its four regasification units, joined later. In 1973, the Pacific
region began to play an important role when Korea and Taiwan joined as importing
countries. The first operations to import LNG from Brunei to Japan were underway. 55
Since 1991, the LNG market has been rapidly growing. This was especially true for
Australia, whose export capacity expanded significantly due to the discovery of the
Darwin gas shelf.
Generaloverviewoftheworld
LNGmarket

34. LNG import
Since the beginning of the 21st century, the LNG market has been growing rapidly,
so, during 2000-2011, the growth averaged 7.5% per year, reaching more than
300 billion m3
at the end of the period. 56
As of 2019, the global LNG market volume was about 483.4 billion m3
.57
The
development of LNG trade has forever changed the state of the natural gas market,
effectively merging regional markets into global ones and intensifying competition.
According to the results of 2019, the share of LNG in the total international trade in
natural gas for the first time was a record 11%, and it is expected that by 2035 this
share will increase to 18%, replacing domestic production and traditional gas.58
This
year’s developments marked the sixth consecutive year of continuous growth in this
segment. According to some estimates, by 2040, the demand for LNG may double.59
Naturally, such growth in the LNG market was accompanied by growing investment. In
2019 the total investments in this industry reached a record $50 billion. 61
Within the decade-long timeframe, LNG production and consumption has changed
significantly:
the number of LNG importing countries increased from 23 in 2009 to 42 in 2019;
the number of producing countries is now 20 62
;
In addition, even lower-carbon solutions are gradually emerging in the gas markets.
Graph 6. Dynamics of LNG trade capacities and number of involved countries 60

35. Map 3. Regional retrospective and perspective of LNG exports 63
Map 4. Regional retrospective and perspective of LNG imports 64
LNG trends in 2019-2020 and supply/demand forecasts

36. LNG import
Graph 7. Key LNG exporters and importers, 2019 65
The global leaders in LNG exports in 2019 were Qatar, Australia, the United States,
and Russia. 66
It is the latter two countries that have significantly strengthened their
positions in the run-up to 2020. By 2022, Qatar, Australia, and the United States are
expected to be the largest LNG exporters with a total market share of over 50%. 67
The key regional segments of the global LNG market are Asia-Pacific, North America,
and Europe.
The Asia-Pacific region is the largest and the most dynamic one. Qatar, a global leader
in LNG exports, has a production capacity of 77 million tons per year. 68
Since the
mid-1990s, the country has focused on gas exports, building more terminals for its
liquefaction and storage tanks. Qatar has long been a major supplier of LNG to Europe.
However, the country’s share of the global LNG market is gradually declining due to the
emergence of other players and their growing capacity. Other key players in the region
are Australia, Malaysia, Indonesia, and Algeria.

37. The American region is another significant segment of the global liquefied natural gas
market. The United States occupies a special place here. At the beginning of the year,
the Energy Information Agency expected that gas exports from the United States
would double in 2021. 69
However, the energy crisis and falling demand for energy are
likely to worsen this forecast.
Since 2018, the growth of LNG exports from the United States has been mainly due to
new gas liquefaction facilities. As a result, the United States ranked third in the world in
terms of LNG exports. 70
Although exports of LNG and natural gas somewhat weakened in 2020 as a response
to declining global production, it is already clear that economic recovery will take place
under the auspices of cleaner fuels. Thus, the demand for natural gas and LNG will
grow along with the demand for renewable energy sources.
Due to the forced delay in foreign funding caused by COVID-19, LNG supplies until
2025 will be determined by extraction from projects currently in operation or under
construction. The gradual commissioning of new capacity should balance supply and
demand, and therefore would mean more stable prices over the next 3 or 4 years.
International experts predict that under the baseline scenario, the demand for LNG
will increase to 475 million tons in 2025. The supply of projects in operation and
under construction will be about 465 million tons. So from the planned projects will
be enough to get only 10 million tons, equal to 5% of the capacity promised by foreign
investment in 2020. Under the minimum scenario, demand in 2025 can be covered by
the capacity that existed in August 2020. An additional 85 million tons will be needed
at the highest demand, i.e., 45% of the capacity to which investments were directed in
2020. 71
China, South Asia, and Southeast Asia are expected to be the primary sources of
demand growth.72
The formation of new markets and the use of LNG for transport will
significantly contribute to demand growth.

38. LNG import
The geopolitical component of their competition intensifies gas races between the
various countries of the Asia-Pacific region.
As US global influence diminishes and regionalism grows in international relations,
Southeast Asia is gradually becoming a new epicenter of geostrategic competition. On
the one hand, there is a competition among regional states that are still looking for their
place, and on the other hand, there is a competition between the global players: Russia,
China, India, USA, Great Britain, France, etc.
Scientific and technological progress and the transformation of the world economy,
which bring financial technologies and geo-energy to the fore, are exacerbating the
struggle for global logistics chains and maritime communications. The Indian Ocean is
home to critical maritime communications and logistics hubs through which liquefied
gas and oil enter the market. Thus, the Indian Ocean can be seen as one of the main
battlefields for the world’s dominance for decades to come.
South Korea and Japan find themselves in a situation where China is actively expanding
its influence in the region, and the United States is reluctant to support traditional
alliances. This forces Tokyo and Seoul to look for their places in the regional order,
maneuvering between Washington’s new policies and Beijing’s growing political
influence. The vacuum created by the declining presence of the United States in
Southeast Asia is forcing many countries to compete. In 2019-2020, relations between
South Korea and Japan deteriorated, one of the reasons being the control over energy
supply channels.
The crisis of global leadership has also affected the positions of Indonesia and Malaysia.
Both countries are uncertain of their future foreign policy. They are forced to balance
between the United States, which intends to rely on them, leaving the region to its
allies Japan and South Korea, and China, which continues its investment activities
through numerous multimillion-dollar projects under the global Belts and Roads Initiative.
Indonesia’s geopolitical rupture was evident during last year’s fateful general election,
when President Joko Widodo, after being elected, was forced to share power with his
main rival, Prabowo Subianto, appointing him Minister of Defence to maintain a balance
of power between pro-Chinese and pro-American forces. In Malaysia, a similar “house of
cards” faltered in early 2020, when Prime Minister Mahathir Mohamad abruptly resigned
and failed to secure the transfer of power to his ally, Anwar Ibrahim. Therefore, the
future of the political configuration in Kuala Lumpur remains unclear.
Australia is also experiencing its own regional crisis. The United States is getting shut
within its internal problems, unwilling to devote many resources to supporting its
extensive network in Asia.
Politicalandeconomic
struggleintheLNGmarkets

39. So Australians feel that they need to take the lead in the region, at least at the level of
the “Five Eyes” countries (the USA, Canada, Australia, Great Britain, and New Zealand).
The country is also divided between the need to address domestic issues left after the
2018-2019 political crisis and engaging in competition between the United States and
China.
The western part of Asia, the Middle East, is characterized by its own confrontation,
which significantly impacts energy relations in the region.
The first is the conflict between the Gulf monarchies, which has been going on since
2017, when Saudi Arabia, the UAE, Egypt, Bahrain, and Kuwait imposed a total blockade
on Qatar and severed ties with the emirate accusing it of financing terrorism. The Gulf
monarchies are actively preparing for a post-American order, when the United States,
which no longer has such an enormous need for Middle Eastern oil, will gradually reduce
its presence in the region. This forces local countries to rearm and intensify competition
between them for strategic resources and alliances. The situation is complicated by the
recent discovery in the UAE of vast natural gas deposits, which in total can make up to
80 trillion m3
. 73
Secondly, there is the confrontation over gas deposits on the Cypriot shelf in the
Eastern Mediterranean, which has involved Turkey, Israel, Cyprus, Egypt, Italy, France,
Greece, Lebanon, and Libya.
Together with the Black Sea Basin, the Eastern Mediterranean forms one of the
world’s most potent logistics hubs, a place where trade routes are enriched by dozens
of languages, religions, and ideologies intersect. To this day, much of the world’s trade
between West and East is through international maritime arteries in the Eastern
Mediterranean, and access to the Black Sea opens up additional markets by connecting
North and South.
Today, this region is part of the southern zone of the European Union’s influence and
therefore occupies an important place in its foreign policy. The Eastern Mediterranean
(or the Levantine Sea), with its energy resources, logistics, and geostrategic value, is the
object of geopolitical confrontation between several blocks of states, both regional and
global.
The prize for control over this region is enormous. Those who control the Levantine Sea
dominate major oil and gas routes from the Middle East to Europe, including the Suez
Canal, the Red Sea, the coast of Cyprus, and the straits of Bosphorus and Dardanelles.
The importance of this region for the world has increased sharply due to recent changes
in the international system and the gradual drift of world politics towards “realpolitik”:
a narrow egocentric interpretation of national interests, as well as the intensification of
the struggle for strategic resources, including the old resource bases such as gas, oil, and
coal.

40. LNG import
European Union is the second world’s largest natural gas consumer, after the USA 74
.
At the same time, the EU is highly dependent on gas imports and is actively decreasing
domestic gas production.
EuropeanLNGmarketatthe
turnof2020
Graph 8. Dynamics of LNG share in EU natural gas imports and total gas
consumption 75
Graph 9. Dynamics of EU natural gas imports in terms of supply sources 76

41. For the most energy-dependent European countries, LNG infrastructure was mainly an
instrument to guarantee market competitiveness and a way to prevent the monopoly
of specific large suppliers, like Russia. Consequently, LNG infrastructure was also a tool
to mitigate price increases caused by those dominant suppliers (this is evidenced in
particular by the level of utilization rates of the EU, which was at the level of 25-30%).
In some cases, the low bandwidth capacity of interconnectors with gas transmitting
systems of neighboring countries, like Spain, made LNG the primary source of gas
supply. Hence, as of 2019, 36 LNG terminals were operating in the EU, and 27 more
were either planned or under construction.
Graph 10. Structural dynamics of EU natural gas imports 77
Graph 11. Dynamics of average monthly regasification terminal utilization rates
in the EU and in some significant LNG importing countries 78

42. LNG import
Graph 12. Operating and planned LNG terminals in EU as of 2019 79
By the end of 2018 and during 2019, the total volume of LNG increased. For instance, in
2019, EU imported 108 billion m3
of LNG, which was 75% more of what was imported
previous year. This was primarily due to the following factors. Firstly, in early 2019,
Asian market saw a decrease in gas demand, so the region became less appealing to
exporters.

43. Graph 13. Change in the structure and volume of LNG supply to the EU in
2018-2019 82
The LNG suppliers turned towards Europe, where the price conjuncture for gas remained
stable. Secondly, the important factor for the growth of LNG volumes was that the EU
expected the transit negotiations between Ukraine and Russia to fail, which would mean
a temporary interruption of gas transit through Ukraine. Therefore, European countries
utilized all the possible gas supply routes to fill their own gas storages and prepare for
the upcoming gas crisis in 2019-2020.
Between mid-2018 and November 2021, LNG exports from the US to the EU increased
by almost seven times; from the beginning of 2018 till November 2021, 33% of LNG
exports from the United States went to the EU only 81
. Therefore, besides the two
reasons for the LNG volume increase described above, it is crucial to highlight political
motives. With some EU forces promoting the completion of the Nord Stream 2 pipeline
(especially Germany), the increase in gas imports from the United States seems like an
attempt to make the US more loyal to the project and prevent further sanctions against
the pipeline.
However, in some cases, the growth of the LNG industry in the EU was due to the
fundamental intentions of abandoning Russia as a gas source. This was the case for
Poland and Lithuania 83
. Poland has, in fact, made a political decision to give up Russian
gas. In Lithuania, this was due to the diversification efforts, and since 2019, the country
received LNG supplies from Russia based solely on financial grounds.
Today, the leading importers of LNG in Europe are Spain, France, Great Britain, Italy, the
Netherlands, and Belgium.

44. LNG import
Graph 14. Dynamics of LNG import by EU countries 84
The traditional LNG suppliers to the EU are Qatar, Nigeria, and Algeria. American
and Russian LNG supplies also grew together with the increasing importance of
LNG in Europe since 2019. Russian LNG has a relative advantage in terms of a short
logistic route. According to the International Gas Union, because of the logistics and
development of LNG projects (Yamal, Arctic LNG, Baltika), Russia would continue to
strengthen its presence in Europe 85
.
European LNG market during COVID-19 pandemic and its
post-pandemic future
The COVID-19 pandemic has led to a partial reduction in energy demand and prices and
has therefore jeopardized the LNG trade sector, which has grown steadily over the past
six years. As a result of the pandemic and quarantine restrictions globally, there has been
a decline in energy demand and prices.
The European market was not an exception. The decline in gas demand in the first
half of 2020 was about 8%, but the LNG trade sector itself did not suffer significant
losses during this period 86
. Regasification capacity utilization in Europe remained high,
and during some months of 2019 (in Lithuania and Poland), even broke records. This
could have been due to the winter preparations and stocks accumulation in gas storage
facilities, which in 2020 showed a record load for the past ten years. Such load hence
established a more attractive price for suppliers to the European market compared to
the Asian. This has become one of the factors for replacing pipeline gas with LNG. In
particular, LNG supplies from the United States replaced part of the pipeline supply from
Russia. However, Russian companies have also managed to increase LNG supplies to
Europe, almost entirely compensating for the decline in pipeline supplies.

45. Graph 15. Dynamics of natural gas supplies to Europe for six months in
2019-2020 87
Graph 16. Dynamics of LNG intake in European gas networks 88
However, at the end of the summer, there was an increase in gas prices in Asia, and then
supplies reorientated back towards Asia, so the supplies to Europe declined. In addition,
as of August 2020, European gas storage facilities were filled by 90% 89
, which also
helped reduce the demand for LNG supplies.

46. LNG import
Graph 17. Dynamics of LNG prices in September and October 2020,
USD/MMBtu 90
Graph 18. Historical dynamics and forecasts of profitability of LNG
trading operations 91
The recovery of natural gas prices will help restore the financial position of market
players and return to their expected profitability in 2021.

47. Figure 19. Forecasts of natural gas demand recovery after the COVID-19
pandemic 94
At the same time, the crisis has hit new investments in the LNG sector. Thus, the
restoration of investment attractiveness of the sector will lag far behind the recovery of
natural gas prices. 92
In addition, the impact of the pandemic on the LNG market will not
be the same. Producers and sellers will suffer the most, while the impact on importers
will be much smaller. Oversaturation of the market will delay the construction of new
capacities, but with the restoration of demand, consumers will immediately return to
importing the resource. At the same time, governments would likely have to intervene
to support and stimulate the construction of new LNG facilities, as the sector would be
able to recover only in 3-5 years fully.93
Billion
cubic
meters
Enduring pandemic
Single-wave
pandemic
Multi-wave pandemic

48. LNG import
LNG makes it easy to supply gas through virtual pipelines or in the form of regular
shipments via roads, trains, or canal barges; hence, the development of LNG
trade increases the number of supply options. Accordingly, LNG helps to increase
competition and reduce the possibility for key regional suppliers to abuse their
monopoly position.
Gas suppliers use virtual pipelines to expand their markets in areas that are either
uneconomical or too inaccessible to the pipeline. For example, in Argentina, Galileo
Technologies, rather than building expensive pipelines or use government subsidies,
uses Cryobox-Trailers to distribute LNG to customers in remote areas across the
country. Virtual pipelines operate in Australia, Canada, China, Europe, and the United
States and are studied in South Africa, Nigeria and Mozambique. Thanks to the
flexibility of LNG transportation, the Polish LNG PGNiG terminal in the Baltic Sea,
Swinoujscie LNG in 2016 provided consumers outside the national network with gas
by nearly 4,000 truck trips.95
Flexible in transportation, liquefied gas can become one of the tools to ensure
Ukraine’s energy security. The ability to transport gas in liquid form by tankers or
freight within the country opens up many new opportunities for Ukraine. With the
LNG project, Ukraine will be able to diversify its suppliers and become less dependent
on a single source of natural gas. Poland and Lithuania followed a similar logic when
they decided on building LNG terminals.96
They put the interests of their security
forth, understanding their geopolitical circumstances.
In the context of diversifying energy supply routes, Ukraine would also benefit from
joining the Three Seas Initiative (3SI), a European Union infrastructure project that
brings together 12 countries around the Baltic, Black, and Adriatic Seas.97
One of the
two main projects funded by the Three Seas Investment Fund is the connection of
the LNG pipeline with the sea terminals of Poland and Croatia. By joining the Initiative,
Ukraine would not only be able to lobby its interests in LNG but also gain access to
new waterways, such as the E-40, which connects the Baltic and Black Seas via river
arteries.
TherationaleofLNGdevelopment
inUkraine
Energy security

49. Global gas prices fluctuations as a key to the commercial
viability of the LNG project
With the development of the global spot market for natural gas, construction of the
new pipelines is becoming more of either a political or a geopolitical lever, as their
profitability decreases every year. Today, spot deliveries to terminals or transshipment
points are more competitive than contracted natural gas deliveries with fixed prices.
Therefore, in the new decade, the projects of terminals with subsequent regasification
of the resource with high liquidity will draw the most attention. Namely, these will be
terrestrial liquefied gas terminals with storage and regasification systems, as well as
FSRU.
Due to the mild winter and increasing supplies from the United States, 2020 began
with low gas prices. During the first weeks, Asian spot prices fluctuated at $5.15
per MMBtu 98
, while TTF contract prices fluctuated at $3.85 per MMBtu. Although
prices have been at record lows for the past decade, after China announced closing
its borders, gas prices have fallen even lower. So at the end of February, the price
fluctuated at the level of $2.70 per MMBtu. A few weeks later, when other countries
felt the effects of the pandemic, the price dropped even lower and in May reached its
historic low – $1.90 per MMBtu on JKM and $1.31 per MMBtu on TTF. 99
Prices continued to fluctuate low until August. By the end of the summer, the
quarantine restrictions eased, so the price gradually grew. In August 2020, the prices
of the TTF contract returned to the same level they were at the beginning of the
year. Even at the American Henry Hub, between June and October, prices more than
doubled. By the end of 2020, the natural gas price on TTF has risen to almost $7 per
MMBtu, and on JKM, it reached a record $20 per MMBtu. 100
This spike is associated
not only with recovery but also with abnormally cold winters in Asia and Europe. For
instance, the temperature in Beijing fell 4 degrees lower than usual, reaching -10
degrees Celsius, which is the lowest figure in 55 years.101
In addition, ice and strong
winds hampered LNG deliveries, further raising prices. On January 12, 2021, JKM
reached $32,494 per MMBtu.102
Although Europe is also experiencing colder winter
than usual, thanks to gas pipelines from Russia and Scandinavia, the price of the TTF
contract did not experience hikes like on JKM. However, cold weather still raised the
price to a three-year record – $7.8 per MMBtu.103
Graph 20. Dynamics of LNG price on JKM spot 104

50. LNG import
Global LNG production is projected to increase from 362 million tons in 2020 to 381
million tons in 2021 (+5%). 105
The most significant increases will occur in the United
States, Australia, Egypt, and other countries due to low prices reduced production
during 2020. Even if demand in Asia remains high, these additional supplies should be
sufficient to ensure market balance throughout the year. According to Rystad Energy,
this is confirmed by the current substantial lag in the forward price of JKM, which is
about $6 per MMBtu for next summer. Asian spot prices are expected to fall to $3.4
per MMBtu during summer and assuming the normal winter grow to $5.3 per MMBtu
by the 4th quarter of 2021. 106
Under such circumstances, Ukraine has an appealing
opportunity to benefit from the flexibility of spot LNG prices.
The International Energy Agency predicts that LNG will become the main driver of gas
trade at least until 2025. Total trade volumes will increase by 21% compared to 2019
(before the pandemic). In addition, Europe is expected to continue to be the second-
largest importing region, after Asia. 107
This, in turn, will mean even easier and cheaper
access of Ukraine to LNG, in addition to the ability to load the transmission system and
gas storage.
The COVID-19 pandemic has forced many countries to impose a lockdown and
introduce quarantine restrictions nationwide. These restrictions have led to a decline in
production in countries and, consequently, a decrease in demand for fuel production.
IHS Markit in early 2020 found that as a result of the pandemic, oil demand would fall
by 3.8 million barrels per day for the first three months and even faster afterward. 108
At the same time, the space for oil storage will be reduced. As a result, the price of fuel
in March has already fallen by 20% compared to last year. 109
For countries like Saudi Arabia, where oil production is the primary source of income,
such a price decrease was catastrophic, and it was critical to reduce production
immediately. Although oil production in Venezuela, Libya, and Iran has already dropped
due to US sanctions and political instability, their relatively small production decrease
has been offset by increased production outside OPEC: the United States, Norway,
and Brazil. That is why on March 4, 2020, a meeting of OPEC, Russia, and other oil-
producing countries was convened to reduce production. 110
As the unofficial leader of OPEC, Saudi Arabia has insisted on reducing oil production,
even though it would reduce the already historically lowest share of OPEC in world
oil production – 35%. 111
Russia, which had previously been an ally of Saudi Arabia,
insisted that the issue needed further study and was reluctant to reduce production.
Russia was aware that it was lowering the price of its own product by abandoning
cooperation, but it prioritized a political motive of destroying American oil producers. In
addition, since joining the alliance with OPEC in 2017, Russia for three years had been
pushing Saudi Arabia to be the world’s largest oil exporter. So, Saudi Arabia would be
responsible for taking up the first steps for the inevitable reduction in oil production in
the face of decarbonization.
As for the first time in many years, American exports were seeing rapid growth; hence
Russia’s cooperation was vital for Saudi Arabia. On Friday, March 6, 2020, Russia finally
refused to cut oil production, provoking Saudi Arabia to start a price war. The next
day, Saudi Arabia cut oil export prices by 10%, causing Brent to fall by almost 25%
overnight. 112
Although this was not a devastating blow to Russia, it did much damage
to its allies, Venezuela and Iran. The United States, Nigeria, Angola, and Brazil were
also affected, as a decline in price had severe economic consequences. Even for Saudi
Arabia itself, this risky strategy has had negative consequences.

51. The only country that benefited from lower prices was China, which bought a record
amount of oil for storage.
One month later, on April 9, 2020, Russia and the OPEC countries agreed to reduce
oil production by 10 million barrels per day, which is approximately 23% of their
production. 113
Mexico was the only country that refused to cut production. The
situation stabilized after the United States offered to cut a third of what Mexico
needed.
Although the reduction agreement was signed, oil overproduction during the pandemic
and the price war between Russia and OPEC have already done a substantial amount of
damage for the industry, so on April 20, 2020, for the first time in history, the price of
oil fell below zero. However, eventually, the reduced production helped to stabilize the
price slowly. Almost a year after the reduction, as of February 2021, the oil price rose
to the level of 2017 and now fluctuates at $52.9 per barrel. 114
Natural gas prices usually have a positive correlation (interdependence) with the oil
price, as gas is often a companion in oil production, but between 2001 and 2020, the
correlation was at the level of 0.26, which indicates a weak dependence between
oil and gas prices. Given that fluctuations in oil prices will continue, gas will be an
effective substitute for it in the long run.
Graph 21. Dynamics of changes in the price of natural gas (Henry Hub)
and oil (WTI) 115

52. LNG import
Growing demand for LNG under the decarbonization agenda
One of the reasons for the increasing LNG trade was the growing demand for natural
gas due to the environmental commitments of the primary consumers. International
Energy Agency predicts that natural gas will be a key marginal fuel for the global
transition to clean energy. 116
Compared to other types of fuels, natural gas is one of the most eco-friendly choices for
the transition to clean energy production. To produce 1 MMBtu of energy, natural gas
emits only 53.1 kg of CO2
, half of what is emitted by coal. Since 2010 switching from
coal to gas helped to prevent nearly 500 million tons of CO2
emissions. Even accounting
for all the methane International Energy Agency estimates that 98% of all gas in use
today is environmentally safer than coal. Moreover, switching from coal to gas associates
with a 50% decrease in emissions for electricity production and more than 30% for
heat. 118
Countries that are actively developing sustainable energy resources often face the
firming problem. Solar and wind power plants do not have a stable production and
change during seasons and on a day/night basis. LNG as a substitute for coal would be
able to firm the production from the renewables. Considering the economic recovery in
2021 and 2022, it is clear that there is an approaching large-scale green stimulus policy,
which promises to impact demand and trade in natural gas and LNG significantly.
The leading countries worldwide have already made critical decisions that promise
to change the investment portfolios in the energy sector. For instance, the Biden
administration made the USA rejoin the Paris accord and expects to transit to renewable
power generation by 2035. In Europe, under the Green Deal umbrella, countries pledged
to decarbonize their economies by 2050. To do so, the EU plans a massive addition
of renewables, an increase in energy efficiency, and by 2030 a development of green
hydrogen technology. 119
Japan and South Korea are to phase out coal by 2030 and
reach carbon neutrality by 2050. China plans to do the same by 2060. 120
India also
agreed to reduce its carbon footprint by increasing non-fossil fuel production by 40% by
2030. 121
Graph 22. CO2
emissions from different fuels 117

53. Graph 23. Comparison of carbon pollution using liquefied and pipeline natural
gas, as well as coal 122
The US will have the greatest medium-term impact on demand for natural gas from
decarbonization, as EU plans already reflect ambitious climate policies and reductions
in harmful production, and mass coal use in Asia requires significant growth in gas and
renewable energy.
At the same time, the introduction of LNG supplies is not a panacea for harmful
emissions. Natural gas liquefaction procedures and gas transportation are rather energy-
intensive processes, accompanied by emissions of pollutants, including greenhouse
gases.
As can be seen from the graph, LNG is not better than conventional natural gas in terms
of emissions. However, given many advantages in terms of flexibility and storage life,
LNG can and should be considered a marginal electricity and heat production source
that is more environmentally friendly than coal.
In addition, as the fight against global warming intensifies, more countries are working on
tracking and minimizing the carbon footprint in LNG trade. Recently, the first long-term
ten-year contract for the supply of LNG was signed, which provides for the monitoring
of pollution in supply between Singapore and Qatar. 123
At present, it is only a matter of
monitoring pollution, and not, for example, paying for measures to prevent it. However,
pollution in the process of LNG transportation may receive even more attention in the
future.

54. LNG import
At the same time, the practice of supplying LNG with carbon footprint compensation
is beginning. For the first time, the French company Total delivered to China “carbon-
free” LNG. 124
The amount of carbon pollution caused by this supply was offset by the
purchase of CO2
emission certificates from a forest restoration project in Brazil, which is
an accomplice of China.
Demand for natural gas in Europe is likely to decline after 2030 due to the announced
decarbonization policy implementation, notably the Green Deal of 2019 and the
Hydrogen Strategy approved in 2020.
Nevertheless, greening trends can become an incentive for the development of LNG
infrastructure. This will be the case if convenient and affordable technologies are
developed to transport liquefied hydrogen, which is expected to be a key element
in achieving Europe’s carbon neutrality target by 2050, as well as for other major
developed countries that have stated the same intentions – Japan, South Korea, and
China.

55. Nowadays, Ukraine has access to LNG via the infrastructure of the neighboring
countries, such as Lithuania or Poland. In fact, Ukraine has already imported some of
LNG via the Polish terminal.
In developing its own LNG terminal, Ukraine (terrestrial or floating platform) faced the
problem of obtaining permits for tankers to path through the Bosphorus strait and the
relevant approvals from Turkey. Therefore, the successful implementation of such a
project is possible only through an alliance directly with Turkey or important strategic
partners of this country, which are also important players in the natural gas market –
Qatar and Azerbaijan.
Keymarketplayers
thatdetermine
Ukraine'saccess
toLNGmarkets
USA
Imports from the United States through Poland are one of the primary, realistic scenarios
that require the cooperation of three parties. On August 31, 2019, Washington, Warsaw,
and Kyiv signed an intergovernmental agreement on cooperation in questions of
natural gas supply. The terms of the agreement were supposed to promote reform
of the Ukrainian gas market, increase resource imports from Poland, and increase US
exports. Already on September 9, 2019, Ukrtatnafta purchased more than 6 million
tons of liquefied gas from the American company Enterprise Products Partners. It
was envisaged that the final agreements would include a long-term contract for the
supply of LNG from the United States to Ukraine, gas storage in Ukraine’s underground
storage facilities, as well as construction and exploitation of the necessary infrastructure
between Poland and Ukraine.
Under these agreements, the United States planned to supply the Ukrainian hub
through Polish terminals with up to 6-8 billion m3
of LNG annually to further transport
gas to European countries. On May 27, 2020, the Government of Ukraine approved
a memorandum of cooperation with the American company Louisiana Natural Gas
Exports on the supply of 5.5 billion m3
annually. However, in September 2020, the
American company abandoned the cooperation with Ukraine. Therefore, the project was
suspended until a new supplier is selected.

56. LNG import
Poland
The Polish LNG terminal started operating in July 2016. The design capacity is
5 billion m3
of gas and is expected to expand the capacity to 7.5. 125
The main purpose
of the terminal was to reduce the dependence on supplies from Russia. Before launching
the terminal, Poland signed a 20-year gas supply contract with Qatar. Besides, in 2018,
Poland signed a 20-year supply contract with the United States. In 2022, the contract
for the supply of gas from Russia expires, and Poland has no intentions to prolong the
agreement, thus refusing Russian supplies. Poland’s PGNiG has invested in several
Norwegian offshore gas fields, and the Polish government sees them as a strategic
opportunity to further reduce its strong dependence on Russian gas. 126
The share of gas imports from Russia decreased from 67% in 2018 to 60% in 2019.
However, at the same time, the share of LNG imports increased from 20% in 2018
to 23% next year. In 2019, PGNiG imported 3.43 billion m3
of liquefied natural gas
to Poland, which is a quarter more than a year earlier. 127
LNG imports from the
United States, Qatar, and Norway increased by approximately 0.7 billion m3
(after
regasification) in 2018. Imports from Russia in 2019 amounted to 8.95 billion m3
compared to 9.04 billion m3
a year earlier. 128
Such dynamics mark a clear shift towards
diversification of natural gas supplies to Polish consumers. In 2016, Russian gas
accounted for about 89% of total imports, but supplies from Russia have been steadily
declining every year while LNG imports have grown. The total volume of PGNiG gas
imports in 2019 reached 14.85 billion m3
, which is 1.32 billion m3
more than in 2018. 129
In 2019, Ukraine signed a memorandum on tripartite cooperation in the energy sector.
According to this document, Ukraine will have access to American LNG, which will
diversify a significant share of natural gas supplies. By 2021, Poland is expected to be
able to supply 6 billion m3
of gas to Ukraine. 130
This will happen after constructing a
liquefied gas terminal in Swinoujscie, the modernization of interconnections between
the two countries, and the subsequent construction of the Baltic Pipeline, which will
connect Poland with Norway. Provided an uninterrupted supply of LNG, Ukraine will
be able to develop its gas hub through UGS facilities. Accordingly, the state will achieve
energy independence and become the leading guaranteed natural gas supplier, or the
so-called buffer, which has a significant natural gas reserve.
As early as November 19, 2019, a vessel carrying American liquefied natural gas to
Ukraine arrived at the liquefied gas reception and regasification terminal in the Polish
port of Swinoujscie. According to media reports, the tanker brought 75 thousand tons of
liquefied gas, which was 100 million m3
after regasification. 131
Ukraine has embarked on the path that Poland is already confidently following,
abandoning Russian gas and dynamically increasing LNG imports. Between 2016 and
2018, the share of LNG in the structure increased from 8.5% to 20%, respectively. Since
the launch of the terminal in Swinoujscie, PGNIG has received 70 batches of LNG with
a total volume of 7.5 billion m3
after regasification. 132
In 2018, PGNIG accepted only
one gas supply from the United States; by the end of August 2019, this number had
increased to six supplies.
In the future, to expand cooperation in diversification in the context of ceased natural
gas transit through the territory of Ukraine, and to expand the capacity of the Ukrainian
gas transmission system the interconnector “Poland-Ukraine” will be constructed. If the
Baltic Pipe was completed, it could provide additional volumes of natural gas imports
without excessive price increases.

57. Poland is already building several interconnectors to expand the natural gas market, and
by 2025 it plans to build another terminal based on the floating FSRU platform.
In the context of climate change and declining demand for natural gas, Ukraine has
the opportunity to expand cooperation with Poland in questions of LNG development
agreements and reconstruction of gas pipelines in Ukraine to reduce losses to achieve
flexibility of the system as a whole.
Lithuania
Unlike Poland, Lithuania did not produce natural gas and was utterly dependent on
Russian supply. In 2014, the country started operating a leased FSRU floating plant in
the port of Klaipeda, with a capacity of 4 billion m3
per year and signed a 5-year supply
contract with Norway. 133
In 2016, the terminal reached economically justified levels of
capacity utilization.
In 2018, the volume of transshipment through the terminal doubled. In 2019, the
efficient operation of the Klaipeda LNG terminal lowered the price of natural gas for all
Lithuanian consumers and created benefits that outweighed the costs of maintaining the
terminal. According to the first half of 2019, consumers in Lithuania paid 30% less than
the EU average price. 134
Since the operation of the LNG terminal, the price of Russian
gas supplies to the country decreased by 50%. 135
Earlier, in 2014, Lithuania paid a 36%
higher price for Russian gas than the price on the border with Germany. 136
Lithuania mainly imported Norwegian LNG for domestic consumption, using one-fifth
to one-third of the terminal’s annual capacity (2.7 million tons of LNG), but in late 2017,
it began diversifying imports with the first US cargo. 137
In 2018, the Klaipeda terminal
proved its international importance: Lithuania transported most of its gas through Latvia
via a pipeline.
In 2020, the European Commission, the Seimas of the Republic of Lithuania, and the
government set a goal to continue operating the LNG terminal after 2024. 138
This
decision is based on global analysts’ forecasts of growing demand for natural gas in
Europe due to increased energy diversification and the development of clean energy
and fuel in the context of global climate change. It is clear that in some industries
(for example, maritime, freight and road transport), there are very few environmental
alternatives to natural gas, in particular LNG. In fact, natural gas also plays a vital role in
the European Green Deal, which aims to halve greenhouse gas emissions by 2030. 139
In 2019, the Polish oil and gas company PGNiG began working on the Klaipeda LNG
distribution station, which will promote the development of a small market for LNG
supplies in the Baltic States and Poland.
As of the beginning of 2021, the Lithuanian LNG import terminal in Klaipeda plans to
more than double LNG volumes and turn the Baltic port into a regional supply center. By
the end of 2022, Klaipedos Nafta AB will decide whether to purchase a terminal for the
import of FSRU from the Norwegian LNG Hoegh. 140

58. LNG import
Turkey
Turkey is one of the key countries, the rise of which was the most striking example of the
world system’s reformatting. Under the new world order and the global leadership crisis,
Turkey, led by President Recep Tayyip Erdogan, has begun to look for ways to adapt to
the changing international environment to gain a strong position in the new world arena.
To adapt to these changes, a state must find its geoeconomic niche to fill in and develop
its influence at the regional and global levels within it. This, in turn, requires significant
changes to the existing political system, the creation of a new institutional and
ideological base to mobilize supporters and consolidate power, and the development of
infrastructure to connect the country’s regions with the new technological base.
Thus, Ankara’s long and difficult path to this dream began, eventually bringing Turkey
first to the rank of a regional leader and then to the global level of political games
through searching for the niche in the global economy. One of such niches was the
gas transportation infrastructure. The development was inevitable, as the idea was
connected not only with the political desires of the Turkish elites but also with entirely
objective and natural tendencies.
Today, Turkey plays a central role in the gas projects of the Eastern Mediterranean and
the Black Sea region. Many of the actions taken by the Turkish authorities to promote
the development of gas fields and infrastructure through their territory are dictated by
domestic political necessity, the ideology of President Recep Tayyip Erdogan, and his
party. The development of a gas hub is also a promising and ambitious direction in the
context of Turkey’s regional policy, pursued by Erdogan’s government. The hub will also
allow the country to gain energy leverage over the region and possibly even establish its
own terms for natural gas transportation.
Building on the gas capacity and creating a hub is entirely in line with Erdogan’s neo-
Ottoman revisionist regional policy, which has been pursued for at least the past three
years. The politics aims to restore Turkey’s former power and influence over its “near
abroad” – the countries that were once part of the Ottoman Empire.
During 2016-2020, Turkey conducted three military interventions in northern Syria and
managed to create its own puppet enclaves within the occupied territories to pressure
the central government in Damascus. Meanwhile, in neighboring Iraq, Turkey has
established close contacts with local Kurds to ensure uninterrupted oil supplies from
the Kirkuk area. In 2017, official Ankara strengthened its alliance with the gas emirate of
Qatar, which allowed Turkish troops to deploy military bases on the emirate’s territory.
These actions have allowed Turkey to become one of the participants in the Ankara-
Tehran-Moscow geopolitical triangle in the Levant region. In addition, the Turkish
authorities are actively involved in the processes related to the militarization of the Red
Sea and the Eastern Mediterranean, where massive, currently undiscovered deposits
of gas and oil may be located. For President Erdogan, creating a gas hub in Turkey is a
mandatory part of the plan. It is a necessity that will restore the “greatness and dignity”
of the country and restore its respect for itself and others – something that Turkey,
according to presidential supporters, has lost after the World War I.
Accordingly, Islamist nationalism with a neo-Ottoman face, which became the basis of
Erdogan’s party ideology, has become a driver of the Turkish government’s ambitious
mega-projects to build gas infrastructure in the region, connecting Iran, Pakistan,

59. Azerbaijan, and Central Asia through Europe. The future of the gas supply map in the
Black Sea basin and the Eastern Mediterranean depends on how long these ideas persist
in Ankara and whether they will be shared by other political forces that may come after
Erdogan.
With control over the Bosphorus, which connects the Black and Mediterranean Seas,
Turkey is now the leader and the only player with a significant impact on the region’s
natural gas supply market. The country has several terminals and transshipments for
receiving natural gas tankers, the main ones being EgeGaz Aliağa, Botaş Dörtyol, and
Marmara Ereğlisi. Due to the increase in supplies and significant governmental interest,
Turkey is actively developing gas infrastructure, which in the future will become a full-
fledged hub of natural gas.
In particular, cooperation with Turkey by promoting its intentions to gain a foothold in
regional gas markets can contribute to greater commitment to Ukraine and ensure the
passage of liquefied natural gas vessels through the Bosphorus. At the same time, this
may require the assistance of critical geopolitical players or partners of Turkey listed
above. The deployment of the LNG platform in the Black Sea may later be part of the
increase in gas trade with Ukraine. This option will be particularly interesting under the
possible construction of a regasification plant in Georgia, which is still under discussion,
or in other countries.
In the short term, the option for cooperation may be to give Turkish companies access to
use Ukrainian UGS facilities.
The problem of shortage of underground gas storage facilities for Turkey is a critical
one, and the solution requires significant investments. For example, the project of UGS
capacity increase from 4 to 9.7 billion m3
would cost nearly $2.735 billion (co-financed
by the World Bank and other development banks). 141
At the same time, more than
30 billion m3
of Ukraine’s gas storage facilities could be useful for Turkey’s plans to
consolidate in the regional gas market. The success of such cooperation will ensure the
use of domestic gas transportation infrastructure and provide an opportunity to gain
time for the implementation of medium- and long-term strategies.
Qatar
Qatar is an important political ally of Turkey. The small gas emirate has always been at
the center of regional confrontation between various players in the Persian Gulf. Huge
gas reserves and a dominant position in the market allowed it to pursue a relatively
independent foreign policy. Many countries are not fond of this; they would have
preferred to control Qatar and its resources, as well as an incredibly powerful media
weapon, the international television channel Al-Jazeera.
The culmination of the conflict between the Gulf Arab monarchies was the diplomatic
confrontation of 2017, when Saudi Arabia, Egypt, Bahrain, Kuwait, and the UAE severed
ties with Qatar and imposed a total land, sea, and air blockade against it.
Qatar has managed not only to successfully withstand the blockade and pressure
but also to overcome the negative economic consequences, including maintaining its
position in the natural gas market. Firstly, the countries did not risk blocking Qatari gas
supplies to the market.

60. LNG import
Secondly, Iran and Turkey have provided substantial support to Qatar, allowing Qatari
aircraft to use their airspace to bypass Saudi Arabia and the Emirates. Thirdly, Turkey
deployed its military base in Qatar and began to play as a deterrent to prevent other
states from organizing a coup in Doha.
The situation in 2017 gave birth to a new strategic geopolitical alliance between Qatar
and Turkey, which, although existed before, got significantly stronger. Thanks to it,
both countries maintained their positions in the region and gained opportunities to
compete with neighbors. With Qatar's gas capacity and Turkey's transport and logistics
capabilities, the alliance has become one of the world's dominant gas markets. For
Ukraine, this means that all issues related to the prospects of importing Qatari liquefied
gas directly depend on Turkey's readiness and desire to open the Bosphorus strait.
Conversely, any issues related to obtaining Turkish permit to import liquefied natural
gas through the Bosphorus were often included in the package with the agreement to
import Qatari gas.
Today, Qatar still holds a leading position in the gas market. However, this situation will
likely change in the long run, given the recent discovery of new gas deposits on the
shelves of Cyprus, Egypt, Israel, Lebanon, the Red Sea, and the United Arab Emirates.
This means that the struggle for the gas market will intensify in the medium term, as
will competition between the Qatari-Turkish alliance and other countries, including the
already established Israeli-Egyptian-Cypriot energy union.
In the LNG market today, Qatar is among the undisputed leaders. On February 8, 2021,
Qatar signed an agreement to establish the North Field East Project, the world's largest
LNG project, which is projected to increase Qatar's LNG production from 77 to 110
million tons per year. The project will start operating in the 4th quarter of 2025. It will
consist of 4 LNG trains with a capacity of 8 million tons per year each, gas purification
plants, gas conversion into liquids, and helium processing infrastructure. In addition,
production will be accompanied by carbon capture systems so that the project will have
a minimum carbon footprint. From 2027, Qatar expects to increase production to 126
million tons per year due to the commissioning of the second phase of the project. 142
Ukraine's search for an alliance with Qatar could change Turkey's position on allowing
LNG tankers to pass through the Bosphorus. One of the options for such cooperation
could be a contract to import Qatari gas. However, a certain obstacle is that the
Turkish-Qatari alliance has a clear regional orientation against the Saudi-Emirati-Israeli
bloc, which is supported by the United States and some EU countries.