Reviving the Coal Industry Could Be Key to Ukraine’s Short-Term Energy Security

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Coal has been characterized as many things. For some, it is a dirty word that conjures up images of hard labor, environmental degradation and black dust as deadly and sticky as the ongoing conflict between Ukraine and Russia. But for others, the combustible sedimentary rock remains a lifesaver—an inexpensive and plentiful source of affordable electricity and heat.

For Ukraine, and increasingly for the European Union, what had been the former is now looking more like the latter.

Notwithstanding its centrality to the global energy system, coal seems to have taken on renewed importance for the EU and Ukraine following the eruption of that country’s conflict with Russia. Russia’s cutoff of natural gas to Ukraine in June has jeopardized the country’s short-term energy supplies. And that came on top of the loss of natural gas sources in Crimea following its annexation by Russia in March.

Unless Ukraine is able to increase domestic natural gas production or find a new affordable source of natural gas, the country could be headed for “significant long-term difficulties,” warns Joe Parson, a France-based international energy relations analyst and founder of the website AnalyticalForecasting.com.

“No single producer can replace Russia’s [natural gas] supply,” Parson says. “Ukraine can survive without Russian natural gas if they increase potential LNG [liquid natural gas] terminals, increase shale production and increase efficiency standards from industrial energy consumers.”

For a country mired in a military conflict, and with a damaged economy and a notoriously inefficient energy sector, that may be easier said than done. And that is precisely where the country’s plentiful supplies of coal could come in as the warmer months end this fall.

Long considered the economic lifeblood of Ukraine’s eastern Donbass region, coal was one of the main reasons for the industrialization of eastern Ukraine in the late 19th century, says Stephen Crowley, a political scientist and chair of the Russian and East European Studies Department at Oberlin College in Ohio.

And while the Donbass’ economic influence has waned since the end of the Soviet Union, it is still ground zero for the country’s coal production. Considering that coal remains Ukraine’s second-largest source of electricity, the region’s economic importance may be set for a comeback as Kiev searches for a potential short-term alternative to Russian natural gas.

“Coal remains important in the Donbass because it provides coking coal for the integrated steel mills that are still important for the Ukrainian economy,” Crowley says. But, he adds, “coal is also important for Ukraine as a means of preventing over-reliance on Russian natural gas for energy and heating.”

Crowley speculates that “as the price that Ukraine pays for Russian gas increases, as it has since the conflict began, it [coal] will probably grow in importance.”

As in neighboring Poland, a country that, according to some estimates, obtains almost 90 percent of its energy from coal, Ukraine’s massive deposits could provide a potential fallback from the loss of other energy sources.

For years, the EU has been trying to wean itself off of Russian energy by improving its natural gas infrastructure and developing renewable sources of energy. More recently, Europe’s demand for—and extraction of—cheap coal has increased. Coal-producing EU members, such as Poland, the Czech Republic and Germany, have increased production in response to the continent’s thirst for cheaper energy. And as the Ukrainian conflict continues, the country’s coal could prove crucial both domestically and abroad.

A 2013 study by the World Energy Council concluded that Ukraine currently holds the world’s seventh-largest coal reserves. And while the study noted that “coal production in Ukraine halved over the last 20 years on the back of low demand and lack of investments into the sector’s development,” it also said that “Ukraine has a chance to restore former potential [by] implementing successful reforms.”

Thus, while the raw material may be there, several factors are working against Ukraine’s ability to increase coal extraction and energy production.

First, the military conflict with Russian-backed separatists in eastern Ukraine, as well as political tensions with the Russian government, has brought factions of the coal industry to a standstill. Several of the oligarchs who own the mines, as well as the miners themselves, have deep ties to Russia, Parson says. Indeed, beginning in late May, pro-Russian rebels began seizing Donbass coal mines. In late July, the rebels again disrupted mining by detonating explosives in the Skochinskiy mine, located in the heart of the Donbass region.

“With pro-Russian oligarchs at the helm, it should not be surprising that many of eastern Ukraine’s coal workers have joined the fight for autonomy from Kiev,” Parson says. “Ironically, people still think [the mines] are government-owned, so when a collapse or other catastrophe happens, they blame Ukraine instead of the Russian oligarchs who now own most of the mines.”

Crowley agrees, saying that Ukraine can cite the conflict with Russia “as a reason for a lot of the coal let-up.”

Another impeding factor has been the inefficiency of the Ukrainian energy market. Energy subsidies and a lack of competitive pricing have much to do with this inefficiency, Crowley says.

“What the IMF is telling Ukraine to do is to raise energy prices for household and for industry,” he explains. “In a purely economic sense, it makes sense because it will force people to be more efficient, to cut back and conserve. The political and social problem is that that would be hugely difficult to do without significant backlash because people’s standards of living are so low.”

Finally, infrastructure problems, both in extraction and in energy use, are also holding Ukraine back from maximizing its coal potential.

“Their coal mines need new equipment,” Parson says. “And investment from private companies could provide that.” Another challenging factor, he notes, is that even though coal is still important in Ukraine, “it is less profitable these days.”

Since Soviet-period households generally haven’t used individual heaters, Crowley says, “you got heating from a central heating station that was blocks away from your apartment building. So to have individual thermostats on a Soviet-era apartment block … they don’t have those things.”

But considering the cost of nuclear energy infrastructure, the market unpredictability inherent with oil, and the natural gas cutoff, coal may Ukraine’s best option, at least in the short term.

The key for Ukraine and for the Donbass region will be weathering the storm of the violent conflict while updating outdated infrastructure, increasing prices and raising standards of living. And that will be no easy feat, considering the myriad challenges facing the country. But Ukraine’s short-term future may depend on it.

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