Oleg Savitsky, Strategic Adviser at Razom We Stand

This article originally appeared in LigaNet

In the early 1990s, Ukraine and Norway both possessed significant oil and gas potential, but had very different political and economic institutions. Ukraine’s history of oil and gas production goes back further. The first World Petroleum Congress was held in Lviv in 1877, and in the 1970s Ukraine was producing significantly more gas than Norway. Unfortunately, for over seventy years – including the period of peak production – Ukraine’s oil and gas sectors served the militarised Soviet economy. In 1991, Ukraine finally gained independence, but the sector’s dependence on Moscow and Soviet-era approaches largely remained.

By that time, Norway was already a prosperous democracy with strong state institutions. It retained control over resource policy, established clear rules for private capital, maintained significant state involvement in production, and introduced high taxation on oil rents. In 1990, parliament established a state oil fund. The rationale was simple: non-renewable resources should be converted into the state’s financial capital, rather than being squandered by the current generation.

Ukraine took a different path. In the 1990s, gas became one of the key sources of oligarchic capital. Administratively set prices, opaque calculations, middlemen and imports from Russia created a huge disparity between the real cost of gas and the prices charged to different consumer groups. Arbitrage between subsidised gas for households and more expensive gas for industry proved particularly lucrative.

This model enriched politically connected business groups, hindered the modernisation of domestic production and deepened dependence on Russia, whilst state-owned companies became loss-making. By 2014, Naftogaz’s deficit, according to Chatham House estimates, had reached 5.7 per cent of GDP. Russian aggression demonstrated that dependence on imported gas was not only an economic problem but also a security issue.

Following the Revolution of Dignity, the old, opaque model underwent its most significant dismantling. Ukraine moved to market-based pricing, reformed Naftogaz, introduced more transparent procurement, separated the gas transmission system operator and ceased direct imports of Russian gas. This was a genuine structural break.

However, the habit of using state-owned energy companies as a tool of social policy has not disappeared. The most striking example is the PSO mechanism in the natural gas market.

The stated motivation: to protect the population and district heating companies from sharp price spikes.

The problem is that social policy is not funded directly from the budget, but from the balance sheets of state-owned production companies. Domestically produced gas is supplied at regulated prices, whilst at the same time Ukraine has to import gas from Europe at market prices.

This system has two long-term drawbacks. Consumers have less incentive to invest in energy efficiency, whilst producers have fewer resources for geological exploration, the construction of new wells, modernisation and the reduction of technical losses. If the state wishes to support vulnerable groups, a more economically transparent model would be targeted assistance from the budget, rather than hidden subsidies via cheap state-supplied gas.

In a popular article ten years ago I wrote that the energy sector should be viewed not as a system for supplying the cheapest possible resource, but as a key sector for the structural modernisation of the economy. Over the years of the war, this argument has become even more relevant.

The results of the two models are clearly visible today. By the end of 2025, the Norwegian Government Pension Fund had assets of around 21.3 trillion kroner. This wealth was not created by oil and gas alone: the decisive factor was how the state managed its resource rent. Norway also has the world’s lowest methane emissions intensity from oil and gas production and the lowest technological losses.

Ukraine, by contrast, continues to lose the value of its own gas in two ways: financially — due to the administrative undervaluation of its price — and physically — due to leaks, outdated equipment and inadequate control of methane emissions. Ukraine still has the second-largest proven gas reserves in Europe (around 1.1 trillion m³), second only to Norway itself.

This comparison does not mean that Ukraine can literally follow in Norway’s footsteps. Geology, the country’s size, the Soviet legacy, occupation and war create entirely different conditions. At the same time, natural resources do not make a country rich in and of themselves. They amplify the effects of strong or weak institutions.

In Norway, resource rents are channelled through taxes, state ownership and dividends; they are accumulated and invested in the future. In Ukraine, for much of its independence, it has been channelled through administratively set prices, cross-subsidisation, political interference and non-transparent schemes.

Geology has provided both countries with resources. It is the institutions that have produced different outcomes. Norway has made losses and emissions costly. Ukraine has made gas itself cheap.

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This material has been produced with the financial assistance of the Ukraine2EU Programme. The views and opinions expressed are the sole responsibility of Razom We Stand and do not necessarily reflect the position of the Ukraine2EU Programme or those of the European Union.