Ukraine's plans for LNG imports face Turkish resistance

Wed Feb 6, 2013 12:55pm EST

* LNG is part of Ukraine's long-term gas supply plans

* Ukraine seeks alternatives to costly Russian gas

* Turkey opposes more LNG tankers through straits

By Pavel Polityuk

KIEV, Feb 6 (Reuters) - Ukraine's plans to replace imports of natural gas from Russia with cheaper liquefied natural gas (LNG) supplies via the Black Sea face resistance from Turkey, which wants to become a regional LNG hub itself.

"We understand the Turkish side's concerns ... (Increased) traffic through the Bosphorus has both pros and cons," Vladislav Kaskiv, the head of Ukraine's state investment agency, said in an interview.

"On the one hand this means increased economic activity; on the other hand there are environmental problems."

Turkey controls the Bosphorus and Dardanelles straits, which connect the Black and the Mediterranean seas, and has warned Kiev it may deny right of passage to LNG tankers bound for Ukraine due to congestion.

Turkey's energy minister, Taner Yildiz, said last May that Turkey was against Ukraine's proposed construction of an LNG terminal on the Black Sea coast. He cited increased tanker traffic through the Bosphorus as well as heightened environmental and safety risks.

Kaskiv said Kiev was determined to press ahead with its project to build an LNG terminal and had received a legal opinion from U.S. law firm Baker Botts that LNG tankers must be granted free right of passage in the Turkish straits.

"We must protect our national interests," he said. "The bottom line is: there are no legal issues, and the situation needs to be resolved politically on the bilateral level."

Ankara has suggested that the former Soviet republic buy LNG from one of Turkey's existing or planned terminals, shipping it via a route that bypasses the Bosphorus and Dardanelles.

RIGHT OF PASSAGE

But Ukraine views such projects as complementary and not as an alternative to building its own LNG terminal, Kaskiv said

Both Ukraine and Turkey are major gas importers and see potentially cheaper LNG as a way to diversify supplies.

Ukraine, however, has yet to build its first re-gasification terminal - a facility needed to receive LNG shipments - while Turkey already operates two.

Ukraine plans to start operating an LNG terminal in 2015 using a floating re-gasification facility offshore and complete the construction of an onshore facility by 2018, allowing it to import about 10 billion cubic metres of gas a year.

The LNG project became a source of embarrassment for the Kiev government last November when Kaskiv signed what he thought was a $1.1 billion deal making Spain's Gas Natural Fenosa its main investor.

But the Spanish company immediately denied that role, and Ukraine later admitted the deal had been signed with an middleman who had no power to do so.

Kiev also has yet to secure supplies of LNG for its terminal. Officials have mentioned Caspian nations such as Azerbaijan and Gulf producers such as Qatar.

No facilities have been built so far on the Black Sea to liquefy Caspian gas for shipment, which means that Ukraine would need to receive gas through the Bosphorus.

Apart from developing LNG, Ukraine is also hoping to tap potentially huge shale gas reserves to help it secure independence from Russian gas imports, which are costly and come with a heavy political price tag.

Ukraine relies heavily on Russian gas to heat homes and fuel the industrial sector. But Kiev says the current gas supply deal signed with Russia's gas export monopoly Gazprom in 2009 sets an exorbitant price for the fuel, at $430 per thousand cubic metres in the current quarter.

Ukraine's attempts to renegotiate the deal have failed so far, and a move by Kiev to cut imports by switching to coal was met last month with a $7 billion bill from Moscow for gas it did not use, citing a "take or pay" clause in the contract. (Writing by Olzhas Auyezov; editing by Richard Balmforth and Jane Baird)