Kiev wants Germany to modernize gas grid

BERLIN, Aug. 31 (UPI) -- Ukraine's President Viktor Yanukovych traveled to Berlin to offer Germany a key role in the modernization of the aging Ukrainian natural gas transit infrastructure but Kiev will have a hard time convincing the West to invest, an expert said.

"This offer comes several years too late," Alexander Rahr, a senior expert with the Berthold-Beitz-Center, a Berlin think tank, told United Press International in a telephone interview Tuesday. "Ukraine's role as a reliable transit country has been compromised after several gas conflicts with Russia, so this offer is not at all as attractive as it used to be."

It's not that Yanukovych isn't trying hard.

During a news conference Monday in Berlin with German Chancellor Angela Merkel, Yanukovych lauded Germany as "the leading nation in the European Union," adding that German companies could exert "real control and influence over our gas transport system" when taking up his offer. Ukraine doesn't have the money to modernize its grid alone -- its economy is in shambles and the national budget overstretched

Merkel, acting as the good host she should be, said she was confident that the German industry would be "very interested in investing in" the Ukrainian grid, through which nearly 80 percent of Russian gas exports to Europe are sent, satisfying one-fifth of the continent's demand.

Experts aren't so sure about that. Rahr, who attended a closed-door meeting with Yanukovych and German business leaders after the news conference, said the response of the German industry to Yanukovych's offer was "rather lukewarm."

German companies have already invested in Nord Stream and South Stream, he said, two Russian-European pipeline projects drawn up to bypass traditional transit countries such as Ukraine.

"Russia is pushing South Stream hard and is enticing firms with very interesting offers to enter the Russian up-stream market," he told UPI.

Moreover, Europe has pushed its own diversification project, the Nabucco pipeline and is investing heavily in an LNG infrastructure. Add to that the concerns about corruption and the legal system in Ukraine and it becomes clear that Yanukovych will have to sweeten his offer to Western companies even more.

But he can't commit too much. The Ukrainian parliament has the final say on giving up control of state-owned energy assets and lawmakers are unlikely to OK deals that compromise Ukraine's energy security.

There are other options. Yanukovych has in the past indicated that a consortium comprised of Naftogaz, Western companies and Russian energy giant Gazprom could take over the Ukrainian grid.

Gazprom is in a great negotiating position as it has control over how much Ukraine's state-owned utility Naftogaz has to pay for Russian gas -- a small gas bill from Russia is key to Ukraine's economic recovery. Gazprom has formulated an interest in taking over Naftogaz in return for cheaper gas but it's unlikely that Ukraine's parliamentarians would agree to such a deal.

Yanukovych has also tried to convince Russia to drop South Stream, intended to move 2.2 trillion cubic feet of gas per year from Russia under the Black Sea to Bulgaria and then on to Western Europe.

If South Stream is built (Nord Stream's construction has already started), then German companies might show even less motivation to modernize the Ukrainian pipelines, as Russia could shoot most of its gas exports through South Stream and Nord Stream and the prospects for a return-on-investment would drop.

"So it might make sense to lure German companies, which enjoy excellent business relations with Gazprom, into the (gas sector modernization) project and that way get the Russians on board as well," Rahr said. "But in any case, it's a difficult political balancing act for Yanukovych."