Coal, Shale Oil, and the Costly Mirage of Ukraine’s Energy Independence

August 2, 2011
James George Jatras
Deputy Director, AIU

The tragic deaths of dozens of Ukrainian miners in two separate accidents at coal mines in the Lugansk and Donetsk regions, and the injury of many others, demand a full investigation into the failures that led to the disasters. But whatever the findings of responsibility for loss of life and limb, they will do little to comfort the families who have lost their irreplaceable loved ones. Memory eternal!

President Viktor Yanukovich is to be commended for cutting short his vacation in Crimea to hasten to the sites of the mining tragedies and for demanding a full investigation of the causes. But in addition to unearthing the facts about the disaster, the government should re-examine the strategic direction of an energy policy centered on the dubious gambit of achieving national energy independence. Specifically, as noted by Ukrainian Journal, “plans by the government to expand the coal mining sector as a way of reducing dependence on imports of expensive natural gas from Russia” should be subject to an exacting reexamination as part of the mine inquiry.

The Geopolitics of Shale Gas from a U.S. Perspective

Reducing “dependence on Russia” is also the leitmotif of another of Kiev’s energy priorities, natural gas from shale oil. This is the subtext of Shell’s interest in investing up to $1 billion: “Ukraine, which depends on imports of Russian gas, is searching for alternative sources of energy and has recently investigated the idea of developing shale plays in the country’s eastern Donbas region as well as in the Carpathian mountains in the west. According to data collected by Naftohaz Ukrayiny, U.S. geologists estimate that Ukraine may have as much as 1.5 to 2.5 trillion cubic meters of shale gas.”

Shell, no doubt, is interested primarily and properly in the commercial value of the venture. But in light of strategic thinking in the U.S. the political aspect of potential shale gas development in Ukraine should not be lost on anyone. According to “Shale Gas and U.S. National Security,” a July 2011 study from the (former U.S. Secretary of State) James A. Baker III Institute for Public Policy at Rice University, shale gas should be seen as a key tool in maintaining and even extending America’s post-Cold War global hegemony, especially at Russia’s expense.

The Baker Institute study is long on geopolitics and short on commercial appeal. Like the Washington-supported Baku-Ceyhan (existing) and Nabucco (fictional) oil pipelines, shale gas development is seen as the answer to political problems, not economic ones. For example, consider the following excerpts from the Baker Institute study, with comment from AIU:

  • (Page 9) “Rising shale gas supplies have . . . already had geopolitical implications. For example, it has played a key role in weakening Russia’s ability to wield an ‘energy weapon’ over its European customers by increasing alternative supplies to Europe in the form of LNG displaced from the U.S. market.”

    AIU comment: For the authors of the report, Russia’s selling its gas to European customers constitutes an “energy weapon,” but evidently American efforts to undercut Russia’s market to achieve geopolitical goals are not any kind of weapon.

  • (Page 45) “Europe’s high dependence on Russian pipeline natural gas supplies made it difficult for certain European leaders to engage in diplomacy objecting to Russia’s invasion [sic] of Georgia in 2008 and weakened their support of the shaky election of pro-Western Ukrainian president Viktor Yushchenko, who was negatively targeted by Moscow for his anti-Russian stances. A more diverse energy supply for Europe enhances U.S. interests by buttressing Europe’s abilities to resist Russian interference in European affairs and help border states in the Balkans and Eastern Europe assert greater foreign policy independence from Moscow. U.S. coalitions with European nations are an important element to U.S. national security, including efforts to combat terrorism and prevent humanitarian crises. An energy-independent Europe will be better positioned to join with the United States in global peacekeeping and other international initiatives that might not have the full support of Russia.”

    AIU comment: Of course, the important factor here is not Europe’s energy independence but dependence on countries within the U.S. geostrategic orbit, like Azerbaijan, Georgia, Turkey, and Iraq. This makes it harder for U.S. allies in Europe to resist Washington’s pressure to participate in future misguided “initiatives” on the model of Bosnia, Kosovo, Iraq, Afghanistan, Libya, perhaps soon Syria, the wisdom and even legality of which Russia has had the bad manners to dispute. Moreover, the reference to “border states” suggests a new dividing line in a Europe that excludes an alien Russia.

  • (Page 45, note 26) “Germany opposed sanctions against Russia in the aftermath of its invasion [sic] of Georgia, and German Chancellor Angela Merkel traveled for meetings to St. Petersburg, Russia in December 2008 and made it clear in a joint press conference that Germany opposed placing the Ukraine and Georgia on the path to NATO membership, despite American pressure (emphasis added) in the opposite direction. http://www.stratfor.com/weekly/20081006_german_question . Other European nations, including Italy, also failed to condemn the Russian military action.”

    AIU comment: Almost exactly three years ago, Washington’s erratic favorite Mikheil Saakashvili launched an attack on South Ossetia, killing Ossetian civilians and Russian peacekeepers. When Russia responded in force, some of America’s NATO allies had the temerity to resist “pressure” from Washington to aggravate the situation, perhaps in part because they had other sources of energy than the ones the U.S. preferred. Even worse, Ukraine’s and Georgia’s membership in NATO – which might have turned the 2008 clash into a global conflagration – are no longer acceptable to some of Washington’s key allies.

  • (Page 48) “The Nabucco pipeline project has been discussed for over a decade as a further solution to diversifying the EU’s access to diverse natural gas supplies from Central Asia and Iraq. An intergovernmental agreement for the project was signed by Turkey, Romania, Bulgaria, Hungary, and Austria in July 2009, and was intended to both reduce Europe’s dependence on Russian gas as well as create new transportation outlets for Caspian resources, thereby strengthening the political (emphasis added) links between the Caspian nations and the EU. . . . However, the high expense of the project and doubts about the viability and timing of gas supplies have presented the project with substantial obstacles. But given the possible scenarios for the rise of alternative supplies to Europe as shale gas production accelerates, it becomes further unclear whether the Nabucco project will make either geopolitical (emphasis added) or commercial sense.”

    (AIU comment: Like its companion, Tbilisi-Baku-Ceyhan, Nabucco never made commercial sense but was only concocted as a “political” and “geopolitical” alternative to South Stream (incidentally, not even mentioned in the Baker Institute study). With approaching collapse of the Nabucco project – and with most of the countries bullied by Washington into providing lip-service to Nabucco now jumping aboard South Stream – shale gas is now floated as a kind of technological substitute for Nabucco to achieve the same geopolitical ends.)

‘Fracking’: Another Chernobyl In the Making?

What the Baker Institute report does not examine in any detail is the potential environmental impact of “fracking,” the advanced technique of injecting toxic substances under high pressure into the gas-bearing substrata to extract natural gas from “fractured” shale rock. Fracking is essential to exploiting discoveries from exploration in Ukraine and elsewhere, if the gas recovery is to be economically viable. Indeed, from a purely economic perspective, it’s fair to say that fracking is shale gas. As put by one energy industry investment expert: “Without fracturing, there is no unconventional gas production – and without production from these fields, the nation’s dependence on foreign energy would send gas prices and energy bills soaring.”

While even some environmentally conscious U.S. states, notably New York, are trying to press ahead with fracking-based shale gas exploitation, others such as neighboring New Jersey are raising legal barriers to it. So are some European countries, notably France:

“New Jersey and France don’t have much in common, but one thing they agree on is that hydraulic fracturing, which injects chemicals into the ground to extract natural gas from shale rock, pollutes water supplies and should be banned. The New Jersey legislation states that fracking

‘ . . . has been found to use a variety of contaminating chemicals and materials that can suddenly and in an uncontrolled manner be introduced into the surface waters and groundwater of the state.’

“For New Jersey, the ban is not much of an economic sacrifice because the state doesn’t possess any Marcellus shale rock located deep enough to drill anyway. But the story is much different in France, which has shale oil and gas fields that ‘are potentially some of the most promising in Europe.’ Despite the economic potential, the French legislature passed a law that gives energy companies two months to declare what type of drilling techniques they will use in areas [for which] they have received drilling permits. If a company doesn’t respond or answers that it plans to use fracking, French regulators will revoke its drilling permit.

“France’s eco-friendly legislation reflects the strong green movement in Europe right now and follows Germany’s decision to ban all nuclear power by 2022. The French Canadian province of Quebec has imposed a moratorium on fracking since March pending a detailed environmental review.

“The energy industry dismisses environmental concerns about fracking, stating that current regulations are adequate to prevent water contamination. But many are not convinced by these self-serving assurances. For example, Democratic members of the U.S. House of Representatives released a report in April documenting that 650 of the 750 compounds found in fracking liquid are ‘chemicals that are known for possible human carcinogens, regulated under the Safe Drinking Water Act, or listed as hazardous air pollutants.’ Earlier in January, these same Democrats reported that energy companies including Weatherford (NYSE: WFT), Halliburton (NYSE: HAL), and BJ Services –since acquired by Baker Hughes (NYSE: BHI) – have continued to pump diesel fuel into the ground without a permit even after it was outlawed by the U.S. Environmental Protection Agency. Furthermore, a New York Times investigation recently discovered that the fracking process releases radioactivity into rivers as well as carcinogenic chemicals:

“Thousands of internal documents from the Environmental Protection Agency, state regulators and drillers show that the dangers to the environment and health are greater than previously understood.

“A list of the damning documents can be found by clicking here.”

[From “New Jersey and France Ban Natural Gas Drilling Based on Fracking,” Investing Daily, emphasis and links as in original.]

In short, in light of the dangerous methodologies that must be employed, shale gas is hardly a cost-free windfall for Ukraine, or for that matter for France or New York. That doesn’t mean that Ukraine shouldn’t take a hard look at shale gas as one possible option, if properly supervised and regulated. Given Ukraine’s economy, all potential sources of benefit should be put on the table.

However, the inherently hazardous nature of fracking means that the potential costs to Ukraine of large-scale shale gas exploitation are no less serious than those seen in the coal-mining deaths in Lugansk and Donetsk. Indeed, while coal-mining risks primarily affect those directly engaged on the work – the miners – the potential risks of fracking are those of poisoning the environment and people well beyond the work site. In this regard, the price of a fracking mishap potentially could approach that of a nuclear accident, with the kind of devastating consequences Ukraine knows all too well.

Staying Focused on Ukraine’s Options

Whether seen as a potential “Technological Nabucco” or a “Chemical Chernobyl,” it is clear that neither shale gas nor stepped up coal production is a panacea to Ukraine’s energy economic ills. While either or both may, on some level, be useful additions to Ukraine’s “economic toolkit,” the fact is, Ukraine’s economy and Ukrainian families need the economic benefits of sustained energy supply at cheaper prices. And they need it now.

The only way to assure that is for Kiev to abandon its non-economic flirtation with a neo-Orange geopolitical agenda emanating from Washington, which as the Baker Institute study proves is the real substance behind the shale gas initiative in Ukraine and other “border states” like Poland and Croatia (page 25). Ukrainians can’t eat shale gas geopolitics any more than they can eat the geopolitics of an unraveling NATO or of a nonexistent Nabucco.

With Germany’s phase-out of its nuclear program and the likelihood that other European countries will follow suit, Ukraine’s leverage now, before Nord Stream goes on line and possibly is expanded, is as good as it’s going to get. Ukraine needs to strike a deal with Russia on its pipeline network very soon if it wants stay in the European gas transit game. Ukraine can only guarantee its continuation as a player by coming to an agreement with Russia for long-term supply, encompassing:

  • Merger of Gazprom and Naftrogaz Ukrainy and upgrade of Ukraine’s pipeline system. (The cancellation of a Yanukovich meeting with his Russian counterpart, Dmitry Medvedev, due to this very issue, is not in Ukraine’s interest.) Gas for Ukraine at the required volume and price can only come from Russia or from Turkmenistan through Russia.
  • Cessation of Ukraine’s opposition to South Stream, which unlike Nabucco is set to become a reality.
  • Accession to the Russia-Kazakhstan-Belarus Customs Union as element of “grand bargain” between Kiev on Moscow

Such an approach hardly would undermine Ukraine’s prospects with Europe and in fact would enhance them, as the EU’s solid core (Germany and France) move to cut their own energy deals with Russia. While in the alarmed assessment of some in the U.S. that that development has contributed to revival of a “Russian-French-German axis that began to emerge in 2003 in opposition to the US-Iraq war” in the face of slipping U.S. security dominance in Europe and globally, it can only enhance Ukraine’s access to Europe as well as capitalizing on Russia’s burgeoning cooperation with China, India, Brazil and other non-Western, BRIC-oriented centers.