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. Last Updated: 07/27/2016

Ukraine Expanding Energy Diversification

BRUSSELS — Ukraineis working to become anenergyhub, producing its own gas, developing storage and importing from both theEuropean UnionandRussia,Ukraine's visitingenergyminister said.

TheEuropean Unionis pressing for agreements to be sealed withUkraineby the end of this year as both parties seek to diluteRussian dominance as a gas supplier.

ButKievis torn between EU cooperation andRussia's promise to cut its gas bills in return for control of its pipelines.

At the end of April,Ukraine's governmentasked parliament to lift a ban on the privatization of stateenergyfirmNaftogaz, which includes pipelines that pump Russian gas toEurope. That could allowKievto sell or lease them toRussia's gas export monopoly Gazprom.

Ukraine'sEnergyMinisterEduard Stavytskyand EUEnergyCommissionerGuenther Oettingerraised the possibility of a three-way relationship at talks in Brussels on Friday.

"Ukraineis really trying to consider its geopolitical situation and to establish a gas hub, so we will be able to do spot purchases incentral Europe," Stavytsky said.

Guenther Oettingersaid he believed EU firms were willing to buy intoUkrainianinfrastructure. He did not name potential investors, butenergyfirms were at the closed-door talks, including ExxonMobil andRoyal Dutch Shell. None were immediately available to comment.

Stavytsky said $550 million was needed to modernizeUkraine's infrastructure, of whichNaftogazcould provide $240 million, while the rest would come from loans.

Since late last year, technology allowing pipeline flows to be reversed has allowedUkraineto import some gas from EU nations, includingHungaryand from GermanyviaPoland. In addition,Slovakiais seeking to develop reverse flow technology, with a test expected this month, Oettinger said.

As theEuropean Commissionseeks to expand its internalenergymarket, it has also been working to developUkraine's extensive gas storage, which could ease any supply shortages.

Ukrainealready has storage of 31 billion cubic meters and Stavytsky said it was seeking to increase it to 50 bcm, compared with 95 bcm for theEuropean Unionas a whole.

In the past, gas flows to theEuropean Unionhave been disrupted because ofUkraine's quarrels withRussiaover how much it has to pay for its supplies.

TheEuropean Uniondepends onRussiafor about a quarter of its gas, more than 60 percent of which passes throughUkraine.

All parties are seeking to broaden their options, andRussiahas built pipelines to bypassUkraine.

It wantsUkraineto join itsCustoms Union, whileUkraineand theEuropean Unionare debating a free trade and political association deal.

It could be signed later this year, but theEuropean Unionsaid it is conditional on improved human rights and addressing "politically motivated convictions," a reference to the jailing of former Prime MinisterYulia Tymoshenko, PresidentViktor Yanukovich's arch rival.