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Why Ukraine needs Russia—for now, anyway

The leadership in Ukraine would love to be free of its dependence on Russia for energy supplies, but for a variety of reasons, reliance on its chief geopolitical antagonist to help keep the lights on isn't likely to end anytime soon.

Ukraine saw Russia annex one of its provinces this year and is combating a low-boil insurgency that's widely believed to receive material support from Russia; simultaneously, Ukraine is dependent on natural gas from Russian producer Gazprom. Natural gas accounts for about 40 percent of Ukraine's total energy consumption, according to the U.S. Energy Information Administration.

An employee tightens the valve on a pipeline at the Bilche-Volytsko-Uherske underground gas storage facility, the largest in Europe,  in the Lviv region of western Ukraine.
Alexander Zobin | AFP | Getty Images
An employee tightens the valve on a pipeline at the Bilche-Volytsko-Uherske underground gas storage facility, the largest in Europe, in the Lviv region of western Ukraine.

But experts say Ukraine has no real short-term energy options outside of Russian imports, even as Gazprom claims that Ukraine already owes it $2.24 billion from supplies delivered before April.

"It would be cheaper for Ukraine to just burn their furniture," John Kilduff, founding partner at commodities investment manager AgainCapital, told CNBC.

In its efforts to move away from Russia, Ukraine has tried to kickstart "reverse" natural gas flow trades with Western countries such as Slovakia. Such an arrangement would import natural gas into Ukraine from the west through pipelines originally designed to carry Russian oil from the east through Ukraine. However, those countries receive the majority of their gas from Gazprom as well. Slovakia alone imports about 168 billion cubic feet of natural gas from Russia per year.

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"On a purely infrastructural level, yes, it (reverse gas flow) is possible. The pipeline exists and the gas exists. It's more a matter of political will than technical ability," Blaise Misztal, director at Foreign Policy Project told CNBC. "How far is Europe willing to go to spite Russia?"

Misztal is not alone in believing that reversing gas flow is not the solution to Ukraine's energy problems, largely as a result of the geopolitical friction it could cause. Kilduff of AgainCapital told CNBC that the potential price increase as a result of reversing the flow and spiting Russia could be staggering to European consumers.

Russia last month signed a 30-year contract with China National Petroleum Company (CNPC) to supply 38 billion cubic meters (124.6 billion cubic feet) of gas per year to China. It's the largest contract Gazprom has ever signed.

Chris Kettenmann, chief energy strategist at broker-dealer Prime Executions, told CNBC that Russia still needs Eastern Europe as a customer, but the country faces no direct threats in the natural gas market.

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When a European consortium proposed a pipeline, the Nabucco, to deliver 23 billion cubic meters of gas per year from Turkey, Russia responded by designing the South Stream pipeline, which is expected to run from the Black Sea and deliver much greater volume than Nabucco can—63 billion cubic meters per year—to the same region. Nabucco has since become mired in delays.

Others have called for the U.S. to export its own natural gas to Ukraine. The U.S. is in the midst of a natural gas boom, and U.S.-produced gas is cheaper than European gas. But even if the U.S. cleared such exports, they wouldn't come online in Ukraine for a long time.

Keith Crane, director of the Environment, Energy and Economic Development Program at the Rand Corporation, told CNBC that the idea of the U.S. exporting gas is "just ridiculous" because it would be too expensive and would take far too long to bring to fruition.

Possible fixes for longer term

Even if the short-term looks difficult for Ukraine, there's possible relief in the long run. Both Crane and Kettenman stressed that Ukraine could greatly benefit from embracing its own shale gas as it moves forward in their hope to become self-sufficient.

"Ukraine could dramatically reduce their vulnerability by becoming more energy-efficient and pricing domestic natural gas at the cost of the resource," Crane said.

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"Shale will be used. We have acting contracts to explore our shale fields with western energy companies," Yuriy Sergeyev, Ukraine ambassador to the United Nations, said in a statement to CNBC. "By the way, the biggest shale field is located in Sloviansk, where Russian mercenaries are spreading chaos and terror."

A number of U.S. and European energy companies have recently invested in Ukraine's energy sector as well. Big names including Chevron have publicly stated that they plan to invest in Ukraine.

—By Karolina Chorvath, Special to CNBC.com

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