Chronicles of War: Ukraine’s natural resources

APRIL 2022

The war for Ukraine’s future

Russia’s motives for invading Ukraine are diverse and widely debated. They range from the strategic reconfiguration of the Europe’s security architecture to revisionist historical claims made by the Russian leader. Energy security also looms large, in particular Russia’s determination to ensure the continued flow of oil and gas to European markets. The narrow focus on oil and gas infrastructure, including pipelines, and transit fees reveals only part of Russia's geopolitical calculation. While some?analysts?believe that Russia has no intention to make a land grab to secure Ukraine’s fossil fuels, the far bigger prize may be the extraordinary riches both above and below ground in Ukraine itself, including hydrocarbons, rare earths and agriculture.

Home to some of the largest energy, mineral and agricultural assets in the world, Ukraine has repeatedly attempted to increase its energy security by diversifying supply sources and routes away from Russia. It launched oil and gas privatization efforts in 2013, but these were stymied by Russia’s 2014 annexation of Crimea and military intervention in Donbas. After launching a new energy strategy in 2017 and accelerating licensing of mineral extraction in 2021, Ukraine’s moves were thwarted by Russia’s invasion in 2022. Ukraine’s formidable farming output has likewise been set back, both through the targeting of land and assets, as well as occupation of ports.

The geographic focus of Russia’s engagement in Ukraine is hardly coincidental. Indeed, the Dnieper-Donetsk region accounts for 80 percent of conventional oil, gas and coal production and reserves. The majority of critical minerals, especially its 22 rare-metal formations, are likewise found in regions such as Donetsk, Dobra and Kurta Balka. Although one of Ukraine’s key crops - wheat and beets - are mostly produced in the central and southern areas, a number of crucial outputs such as corn, barley, sunflower oil are harvested in eastern and southeastern Ukraine. The 2022 war is not only disrupting production of these resources, it is also shutting down access to inputs, the export of outputs, and future investment.

The land, and what’s beneath it

Figure 1.?Russia’s military operations are presently concentrated in east and south of the Ukraine where the majority of Ukraine’s oil, gas, rare earth mineral and agricultural are located (source).

A hydrocarbon grab

Russian-Ukrainian relations are profoundly shaped by energy-related calculations, not least the transit of Russian fossil fuels via Ukraine to European markets. Even in the midst of escalating war and mounting sanctions, Russia’s gas producer, Gazprom, is shifting tens of millions of cubic meters of natural gas to Europe. Hundreds of thousands of barrels of oil and gas are moved across Ukraine through the Bratstvo, Druzhba, Soyuz and Ukrtransafta pipelines for which the country earns billions of dollars in transit fees. The chief reason for Russia’s backing of the now terminated Nord Stream 2 was precisely to circumvent Ukraine’s 28,000 miles of pipeline.

While Ukraine is not a major energy exporter and is in fact heavily dependent on imports of energy to meet domestic demand, the country is home to?sizable reserves?of gas and coal. Before the 2022 invasion, Ukraine imported roughly 83 percent of its oil, 33 percent of its natural gas and 50 percent of its coal. It met around half its energy needs through coal as well as 4 nuclear power plants and 15 VVR pressurized nuclear reactors. Yet Ukraine may have the second largest natural gas deposits in Europe, some 1.2 trillion cubic meters of proven reserves (and possibly up to 5.4 trillion cubic meters). Ukraine also has up to 37 billion tons of coal reserves and 148 coal mines, among the largest in the world.

Russia's military encroachments in eastern and southern Ukraine since 2014 and most recently in 2022 mean that Moscow has taken control of two thirds of the country’s maritime area and an estimated 80 per cent of its oil and natural gas deposits in the Black Sea. Some estimates suggest there could be as much as 2 trillion cubic meters of gas under the Black sea and in Ukranian waters. After the annexation of Crimea and before the invasion of 2022, Ukraine’s state energy company, Naftogaz,?was preparing?to explore 32 blocks. Russia appears to be making plans to integrate them into the Russian supply chain on which Europe currently relies.

Ukraine’s hydrocarbon wealth

Figure 2.?Most of Ukraine’s known oil and shale gas reserves are located in the east and south of the country, and in?adjacent?off-shore zones (source).

A rare earth bonanza

Ukraine is also a potential critical mineral superpower, ranking fourth globally in terms of total assessed value of natural resources. Ukraine is home to 117 of the 120 most used minerals, with 97 identified minerals of high value across at least 8,700 surveyed deposits. While the total output in 2021 was roughly $15 billion, with its titanium, iron, nickel, lithium and noble gasses, the total assessed value could be as high as $7.5 trillion. Not surprisingly, many international and domestic companies have slowed or ceased mining activities in Ukraine since the onset of war.

While far from the top echelons of rare earth producers, Ukraine is believed to have the largest supply of recoverable rare-earth resources in Europe. Over 20 of the 30 most “critical minerals'', including rare earths, are located there. Unconfirmed?reserves of lithium?could also potentially be the largest in Europe - including in Kruta Balka, Dobra and Shevchenkivske. Geographically, most?rare earth deposits?appear to be concentrated in Kruta Balka in Zaporizhzhia, Shevchenko in Donetsk and the Polokhivske fields in Dobra, Kirovohrad. The largest and most important reserves include beryllium, niobium and tantalum.

Ukraine’s rare earth deposits

Figure 3.?Rare earth mineral reserves and deposits are located in the east and south central regions of the country.?source.

Agricultural slow-down

The Russian-Ukraine war will fundamentally affect the production and export of food to the world, especially to vulnerable countries. In 2021,?Ukraine supplied?12 percent of global wheat, 16 percent of corn, and 18 percent of all barley and over 46 percent of sunflower seed and safflower oil production. The total value of exports in 2021 were $27 billion, including over $7.6 billion in sales to the EU, $4.2 billion to China, $2 billion to India and $1.5 billion to Egypt and Turkey. The largest earnings were in relation to corn ($5.8 billion), sunflower seeds ($5.7 billion) and wheat ($5.1 billion). The war is not just affecting planting, but also the types of crops harvested.

There are competing estimates about the extent of the impact of the war on Ukrainian production in 2022. Much depends on how long the war proceeds and what areas are affected. Some crops are likely to be more affected by the war than others. For example, roughly 30 percent of corn production is in Kyivska, Chernihivska, Sumska, and Kharkivska regions, all areas occupied during the war. About 30 percent of wheat production is concentrated in Donbas, Zaporizka, Khersonska and Odeska regions, all areas affected by fighting with Russian forces in 2022. The agricultural minister has said that crop sowing areas could halve in 2021 from 15 million hectares to 7 million hectares. Farmers could sow just 3.3 million hectares of corn compared to 5.4 million hectares in 2021.

Farming requires labor, assets and infrastructure - all of which have experienced damages during the Ukraine-Russia War. Indeed, reports are emerging that farmers lack fuel and have had much of their equipment equipment. The?price of fertilizers, many of which are sourced in Russia, have also skyrocketed. The demand for food has not just sent shares rising for produce, but also for?farm equipment and agricultural machinery?makers. What is more, Russia has already started to?slow or ban exports?of key inputs, including sunflower seeds. This could result in a drop in Ukrainian oilseed output by 40 percent.

The Russian military has also?purposefully destroyed?warehouses and agricultural machinery in Kyiv, Chernihiv, Kherson, Kharkiv and Zaporizhzhia. A prominent example is in Donetsk, where?Harveat, one of Ukraine’s largest agroholdings, has lost control of over 98,000 hectares and has just 22,000 hectares in Kyiv. The company had planted 38,000 hectares of winter wheat and just applied fertilizer to 40 percent of the area, but harvests may not be possible. Agrogeneration, another producer, has reported similar challenges in Kharkiv. A range of?large landholders?are reporting potential losses, and are also signaling defiance against Russia by providing humanitarian and food-related assistance.

Ukraine’s bread basket

Figure 4.?Ukraine’s wheat production is located in the east and south central regions, currently the main effort of Russia’s military operations during the spring planting season.?source.

Implications for global commodities

Russia’s 2022 invasion is crippling larger segments of the Ukrainian economy with far-reaching global consequences. Not only are areas of major hydrocarbon extraction, mineral exploitation and agricultural production materially affected by the fighting, they are also being impacted in terms of future productivity and investment. While future production and export is constrained by infrastructure and sanctions, by securing and occupying strategic reserves, Russia is positioned to achieve a high degree of leverage over a significant share of global commodities. This applies not just to fossil fuels and food, but also to strategic minerals on which the green energy transition relies.

SecDev Group is actively monitoring trends and dynamics of hydrocarbon, rare earth and agriculture production and transfers in Ukraine and the wider region. It is mapping Russian military advances and territorial claims in the east and south of Ukraine against a large geolocated dataset of known and suspected reserves of oil, gas, coal, water, critical minerals, rare earths and agricultural products to quantify current and future risks. SecDev is also monitoring damages to existing extraction and transportation infrastructure - from pipelines and refineries to railways and ports - to assess supply chain vulnerabilities in the short to medium term. By leveraging geospatial analytics, public and grey source data, and key informants, SecDev is assessing the productivity of existing wells, pipelines, mines and harvests, as well as movement of imports and exports by land and sea in real-time.?As the battle of Donbas begins in earnest, a closer inspection of what’s at stake in the region is more important than ever.

SecDev?is a global leader in?all-source analytics?delivering?intelligence-as-a-service, and?strategic forecasting?powered by?data science-on-demand.

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SecDev Chronicles of War

A special research series from SecDev tracking key issues of strategic importance and global importance in the Russian Ukraine war.

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Demoralization

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Vox Populi

What do Russians think of the war in Ukraine? Opinion polls under authoritarianism are a mixed measure at best. But that doesn't make them irrelevant. [Download]

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