Thank you very much. It is a pleasure, Mr. Chairman and members of the committee, to testify at this committee today.
I work at the Peterson Institute for International Economics, an independent economics think tank. I have been dealing with Soviet Russia and Ukrainian economic affairs for the last 40 years. This is where I come from. I come particularly from two perspectives, one is the dysfunctionality of Gazprom, the Russian supplier to Ukraine, and the other is the dysfunctionality of the Ukrainian gas sector. That is where I think I can add something to all the knowledge the other witnesses have already provided you with.
The European oil market is well supplied and functions well. The same is true of the coal market in Europe, which is oversupplied, and the nuclear market is minor. What we are talking about really is gas, and specifically with regard to Canada LNG.
Starting from the Russian side, the Russian state-dominated natural gas giant Gazprom stands out as the possibly worst managed big company in the world. Its market capitalization has fallen by 77% in the last six years. Its price equity ratio is as low as 2.4. It should be worth three to four times more. The reason is that Gazprom is a company that does not allow its so-called shareholders to get part of its actual profit, apart from the dividends.
Each year it spends about $45 billion on so-called capital expenditures, which means plenty of large pipelines which make no commercial sense. In particular, Gazprom has built Nord Stream, the big pipeline through the Baltic Sea in order to avoid Ukraine. It has now started building South Stream, a large pipeline through the Black Sea in order to avoid or circumvent Ukraine. The clear intention of Russia is to abandon the relatively well-functioning Ukrainian gas transit system, and leave it unutilized.
The building of these pipelines has another purpose as well. It is to enrich the subcontractors. Out of this $45 billion in annual capital expenditure, $30 billion or so goes to what investment bankers delicately call value destruction, which ordinary people would call waste and corruption. Much of that money has gone to some of the Russian companies that the U.S. Treasury recently sanctioned for having financial connections with a top Russian official. In short, $30 billion or so effectively goes to kickbacks.
The other goal of Gazprom is geopolitical, to bully countries dependent on its gas supplies. Ten European countries receive 100% of their natural gas imports from Gazprom: Finland, Belarus, Estonia, Latvia, Lithuania, Czech Republic, Slovakia, Bulgaria, Moldova, and of course, Ukraine.
Of these countries, all but Finland have experienced sudden, repeated, impermissible cuts in their gas supplies usually caused by a combination of geopolitics and corruption. In particular, in January 2006 and again in January 2009, Ukraine and much of Europe suffered from Gazprom cutting its supplies.
The reaction to Gazprom's sustained cut in supplies in January 2009 was severe and persistent. Gazprom's exports to Europe fell by 21% from 2008 to 2012. Its share of EU gas imports fell from 32% in 2008 to only 25% in 2012.
Russia has been largely crowded out by LNG supplies of some 10% of total European gas imports now largely from Qatar.
The European energy market is not expanding. On the contrary, it has fallen by a few per cent in the last decade, and it's likely to be flat in the future as well.
The other aspect is what is happening inside Ukraine, and it has been quite dramatic. In 1989, Ukraine consumed 100 billion cubic metres of gas a year. Now that consumption has gone down to 50 billion cubic metres or so last year. Even so, Ukraine remains one of the least energy efficient countries in the world. The short of it is that Ukraine could cut its consumption to 30 billion cubic metres, if it became as energy efficient as Poland. Then we would have a very different situation. The fundamental problem is that the household price of gas in Ukraine covers only 15% of cost recovery. It's about to be increased by 50%, but that doesn't help much.
Another side of the Ukrainian gas market is that Ukraine was a major gas producer until the early 1970s, when its production peaked at 70 billion cubic metres a year, then production was sharply slashed to some 20 billion cubic metres a year, at which level it has stayed, because the Soviet authorities turned their focus to the giant gas fields in west Siberia.
Ukraine can increase its production of conventional gas with existing infrastructure. For example, Shell is working in this area. There's no reason to believe that they couldn't increase conventional gas production by 50% within five years or so with elementary order in a very disorderly gas sector.
In addition, Ukraine has plenty of shale gas potential. Both Chevron and Royal Dutch Shell have concluded product-sharing agreements with the Ukrainian government about the development of shale gas fields, Chevron in the west and Shell in the east of Ukraine. Both of them anticipate they could reach a production of five to ten billion cubic metres a year in a decade. Ukraine could reach gas balance in five years by doing elementary things, and it could be oversupplied with exports in five to ten years, thanks to shale gas.
The rest of Europe has also reacted to the Gazprom cut in 2009. Energy savings had already gone quite far, so that is not the key element. Instead, they've undertaken four major measures.
First, they accelerated the development of LNG infrastructure that has been discussed here before. Europe has now more than a score of LNG terminals and the LNG tanker market is oversaturated.
Second, they opted for all kinds of interconnectors so that gas flows in the existing pipelines can now easily be turned around in various directions.
Third, central Europe especially has increased gas storage substantially.
Fourth, the European Commission has reinforced its competition policy, launching its biggest case ever against Gazprom, and its whole business model is likely to be disqualified.
Then you wonder what the role of Canada would be here. In the short term, there's nothing Canada can do. In the long term, Ukraine should be in good order. We don't know what will happen with the dysfunctional gas production in Russia, but in the medium term, Canada could produce and export LNG and make a contribution to the market, even if most of this went to east Asia where the prices are the highest.
If Canada declares that it is intent on exporting LNG to the benefit of Ukraine, that declaration on its own will have a positive impact on energy security in Ukraine and the rest of eastern Europe.
Thank you.