What can Ukraine learn from the US about energy reform?

During OPEC’s oil embargo in the 1970s, America learned what happens when a reliance on foreign energy meets geopolitics. Today the situation in my country — Ukraine — is even more serious. Our energy policy has long been linked with politics, and our dependence on Russian energy supplies has left us vulnerable to political blackmailing. Achieving energy independence is not just a matter of Ukraine’s economic viability; it is also a matter of national security, sovereignty, and survival as a state.

The Ukrainian economy runs on natural gas. Some 40 percent of the country’s energy consumption comes from natural gas, with at least half of our supply historically flowing from Russia. Before the Revolution of Dignity, our politicians used to compete over who would negotiate the lowest price with Gazprom, Russia’s state-owned energy company. Yet each time they succeeded, Ukraine was weakened.

The fact is that nothing is more expensive for Ukraine than cheap Russian gas. The artificially low prices distorted the market and stifled domestic production. Industry and consumer tariffs were further inflated by government subsidies that incentivized irresponsible energy consumption. Ukraine’s industry, hooked on the cheap energy, had no incentive to modernize. And its oligarchs made billions of dollars off shady energy schemes.

The status quo is no longer sustainable. Ukrainian taxpayers can’t afford the energy subsidies that benefit the rich and help perpetuate our addiction to foreign gas. Things, however, have started to change. As a Member of the Ukrainian Parliament and a Deputy Head of the Energy Committee, I’m very proud of the progress we’ve made since the fall of Viktor Yanukovych’s kleptocratic regime.

In July 2014, the Parliament passed a law to drive modernization in Ukraine’s energy transport infrastructure and bring in foreign investment. Four months later, the Cabinet of Ministers introduced progressive tariff increases. We’ve made headway on energy subsidies too, which were already halved for Ukraine’s industry and are moving toward market pricing for households.

We also took major steps to reform Ukraine’s state-owned energy companies. In March 2015, the Parliament introduced stronger competition and transparency requirements. In April, our Parliament passed major legislative change to remove the monopoly status for Naftogaz, Ukraine’s state-owned oil and gas company, enabling the transition towards a modern energy market. Naftogaz — formerly a hornet’s nest of corruption — saw its leadership replaced by a young, professional, and reform-minded team, who have worked tirelessly to diversify supplies. In a span of few months they had achieved a key milestone: in May our gas imports from Europe surpassed those from Russia.

This transformation of Ukraine’s energy sector is unprecedented. What we’ve achieved would’ve been unimaginable less than two years ago, yet we have a long journey ahead of us. A two-pronged approach is what Ukraine needs to wean itself off a Russian energy addiction, the perils of which have become blatantly apparent. It is basic economics. We must reduce consumption by motivating responsible consumer behavior and investing in energy efficiency. Simultaneously, we must stimulate and incentivize domestic energy production be it from conventional or unconventional sources.

This means that one of the best ways to help Ukraine is to invest in its energy sector. To better facilitate this, our first priority should be revisiting the country’s tax structure and removing market distortions in domestic energy production. This, and other modifications, will need to done carefully in order to avoid unnecessary disruptions for current investments. Further, given that most of the existing oil and gas fields are state-controlled, we must introduce competition and, if need be, consider privatization. Reviewing and adjusting production-sharing agreements will also be critical, allowing companies to transition from joint-partnerships with Naftogaz toward independent agreements and special permits.

In the coming months, it will be up to our legislative process to determine the exact changes and specific details. Yet we clearly have to find a better balance between fulfilling our fiscal needs and creating a welcoming investment environment.

America learned from its past and is well on its way toward energy independence. What we have set out to do in Ukraine is no less ambitious and perhaps even more momentous for our country. We are certainly swimming against the current and many vested interests would like to see our efforts fail. But failure is not an option. Ukraine, with trust and support from its partners, will continue transforming its energy sector in the spirit of transparency and open competition.

This article is published in collaboration with The Huffington Post. Publication does not imply endorsement of views by the World Economic Forum.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: Olga Bielkova is a Member of the Ukrainian Parliament.

Image: A worker walks past pump jacks on an oil field owned by Bashneft company near the village of Nikolo-Berezovka, northwest from Ufa, Bashkortostan. REUTERS/Sergei Karpukhin