UKRAINE: Gas Pipeline Technical Capabilities

UNCLAS SECTION 01 OF 03 KIEV 000386

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TAGS: EPET ENRG RS UP
SUBJECT: UKRAINE: Gas Pipeline Technical Capabilities

Sensitive But Unclassified. Not for Internet Distribution.


1. (SBU) Summary. Post met with Ukrainian technical experts
at Naftohaz and UkrTransGaz following the January 1-3 gas
shut-off to learn operational aspects of the gas crisis.
Interlocutors provided background on the gas system's
capabilities and parameters, and in detail described on
which lines gas was cut January 1 and how Ukraine worked
through the crisis by distributing the pressure decrease
throughout its system. According to the experts, the
January 4 agreement's price basket of $95/tcm and
1.60/tcm/100km was not economically justified, even if the
transit rate now was supposed to cover the purchase of
technical gas. All interlocutors stated Ukraine's gas
transit system was not damaged by January events. End
Summary.


2. (SBU) Econ Officers on January 6 met with Valery
Panasiuk, Chief of Naftohaz's Oil and Gas Measurement
Department, Feliks Sakadinets, Deputy Chief of Naftohaz's
Oil and Gas Transport Department, and Igor Ponomarenko,
UkrTransGaz Director of Foreign Relations. Panasiuk led a
wide-ranging discussion on Ukraine's gas transit system
technical capabilities and on events during the January 1-3
gas shut-off. Econ Officer, along with Staffdel Tillemann,
then met separately on January 18 with UkrTransGaz
representatives Myroslav Khymko, Director of the United
Dispatch Department, Valentyn Kolomieiev, First Vice
Chairman of the Board and Production Director, and
Kostiantyn Yefymenko, Member of the Board of Directors. Mr
Ponomarenko also attended the January 18 meeting. (Note:
UkrTransGaz is a wholly-owned subsidiary of state-owner oil
and gas monopoly Naftohaz. The subsidiary's operations
include natural gas transit, storage, and delivery in
Ukraine.)

General Characteristics
--------------


3. (U) Ukraine's gas transportation system consists of
36,500 km of gas pipelines with 11 inputs points to Ukraine,
4 outlet points to Europe, 71 gas pumping stations with
total capacity of 5.4 million kW, 12 underground storage
facilities with 34 bcm available storage capacity (total
capacity is about 50 bcm, but 16 bcm is required for
maintaining necessary pressure levels),1,405 gas
distributing stations, and a network of gas metering
stations.


4. (SBU) Originally built exclusively for transit purposes,
the pipeline system over time has become cluttered with
small branch lines that connect the system's main pipelines
with surrounding towns and villages. This now makes it
impossible to separate domestic gas supplies from transit
resources, the Naftohaz officials explained. To ensure that
correct amounts of gas transit to Europe, Naftohaz
'balances' its flow of incoming and outgoing transit gas by
using stored gas from underground facilities at Ukraine's
western border to add to export amounts and make up for
volumes taken out within the Ukrainian territory. The
system technically can maintain hourly balances of transit
volumes, but the minimum commercial period Naftohaz uses for
its accounting purposes is 24 hours. According to contracts
and technical agreements signed by Naftohaz and Gazprom, a
one-day accounting period runs from 0900 to 0900 the
following day, Kiev time, or from 1000 to 1000, Moscow time.
This time accounting explained why Gazprom chose 1000
January 1 to stop delivering Ukraine's gas supply, said
Naftohaz's Panasiuk; 1000 on January 1 corresponded to the
start of the new accounting year.

Technical, Fuel, and Pressure Gas
--------------



5. (SBU) Technical gas consisted of several components,
Panasiuk continued, the largest of which was fuel gas. Of
Ukraine's 6.5 bcm of technical gas, about 5.2 bcm was fuel
gas, which is used for fueling compressors at Ukraine's 71
gas pumping stations. Another one bcm of technical gas
remained in the system at all times to maintain pressure.
Most of the equipment installed at pumping stations was old
and ineffective. The maximum efficiency rate of the
stations' gas-fueled turbine engines was a woeful 40%. If
replaced with electric-powered engines, in addition to
saving fuel gas and reducing gas emissions to the
atmosphere, the minimum efficiency rate of engines could
reach 90%, the experts said. (Note: on January 18 Prime
Minister Yekhanurov noted that Ukraine used 7.8 bcm of gas
for production and technical purposes. He said this was "an
extremely large amount" [more than 10% of Ukraine's yearly
demand] and ordered Minister of Fuels and Energy within a
week to draw up plans to conserve at least 10% of the
amount, and to gradually convert Ukraine's transit system to
electricity-powered compressors.)


6. (U) Under Addendum Four from 9 August 2004, Panasiuk
explained, Russia paid Ukraine $1.0935/tcm/100km for
transit, and Ukraine at its own expense covered the purchase
of technical gas. The new transit fee of $1.60/tcm/100km,
fixed in the January 4 agreement for five years, was set at
a level to include payments for purchasing 6.5 bcm of
technical gas.

New Transit Rate is Not Justified Economically
-------------- -


7. (SBU) Naftohaz's experts said the transit rate of
$1.60/tcm/100km was a political decision and not a rate
justified by costs. In the past, the price of gas supplies
for Ukraine and the fee for transit across the country had
been proportional to one another. The price of $50/tcm
corresponded to $1.09/tcm/100km transit fee, while the price
of $80/tcm, which was used before 1999, had corresponded to
the $1.75/tcm/100km rate (Note: the proportion, in both
cases, was approximately 46:1). The experts added that the
purported $50/tcm price was thus misleading, as the
Ukrainian side had only cared about the relation of gas to
transit prices. They added that it was Gazprom who
initiated the drop from $80/tcm to $50/tcm in 1999,
apparently to reduce its Russian taxes. Based on this
proportion, which had not included the cost of technical
gas, the Naftohaz experts thought the correlation (59:1)
between $95 price and $1.6 seemed illogical.


8. (SBU) According to Panasiuk, Ukraine never truly had paid
$50 for Russian gas. Given the additional cost of technical
gas, which was paid for by Naftohaz, the real cost of gas
for Ukraine had been closer to $80 when the transit fee was
$1.09/tcm/100km. $50 was, however, the benchmark used for
calculating how much Russian gas Ukraine would receive as in-
kind transit payment according to the following equation:
110 bcm (transit amount) x 1200 km (weighted average
distance of transportation) x 1.09/tcm/100km (transit rate)
/ $50/tcm. (Note: the 1200 km weighted average pipeline
distance quoted by Panasiuk is significantly different from
the Deutsche Bank estimate of 879 km, which has been used in
some Washington analyses)

Ukraine's System Continued to
Operate after Pressure was Reduced
--------------


9. (SBU) The successful operation of Ukraine's gas pipeline
system, explained Feliks Sakadinets, Deputy Chief of
Naftohaz's Oil and Gas Transport Department, required a
certain baseline pressure throughout. If pressure decreased
to a critical level, compressors at gas pumping stations
either consumed all the gas to continue the compressor's own
operations or "fell apart", i.e. broke down. This would not
only have meant no gas supply for Ukraine, but also no gas
exports moving through the Ukrainian system to Europe.
According to Panasiuk, when Russia stopped fuel supplies to
Belarus in 2004, the Belarusian system `fell apart' very
quickly, within one day. Panasiuk and Sakadinets estimated
that if Russia stopped supplies to Ukraine, the Ukrainian
system could keep transit gas flowing for about 2 days.
Panasiuk said Ukraine on January 1-3 had been able to
continue operations even at lower pressure and keep
servicing transit volumes because of the pipeline system's
interconnected pipelines that cross one another at multiple
points. When Russia shut off supplies to certain pipelines
January 1, Ukraine opened connections between crossing
pipelines, and this allowed Ukraine to equalize the pressure
in pipelines throughout the system, which alleviated the
pressure fall in the Russian-targeted pipelines and kept
pressure in these pipelines from reaching a critical level.
However, several pumping stations located along pipelines
near the affected Russian input points had to be stopped to
prevent breaking equipment. This was done, Panasiuk said,
in a methodical manner because Naftohaz had been ready and
planned for it. Panasiuk added Ukraine had compensated for
gas it had to withdraw from the system for its own
consumption by adding gas from storage facilities near its
western borders to export lines. The Naftohaz officials
expressed skepticism about some reports of gas delivery
drops in Western Europe. For example, they said Italy was
reporting drops of 14 percent in deliveries on January 1,
but added, "our gas would still have taken four days to get
there."


10. (SBU) In a separate meeting January 18 with UkrTransGaz
officials, Myroslav Khymko, Director of the United
Dispatching Department, said Gazprom on January 1 reduced
its delivery volumes to Ukraine by 25%. Gazprom reduced
volumes to Ukraine's Donetsk/Luhansk line first, followed by
the Transdniepr line, and then the Central-Kiev line in the
amounts of 45 mcm/day, 45 mcm/day, and 30 mcm/day,
respectively. These three lines were located farthest from
Ukraine's western border with Europe and as such carried
little Europe-bound transit gas. The gas these lines did
transport was primarily for Ukraine's industrial centers --
Donetsk, Luhansk, Dnieprpetrovsk and Zaporizhya.
UkrTransGaz officials could not say if Gazprom intentionally
chose to reduce gas to Ukraine's industrial regions to
induce maximum economic harm, or if Gazprom had wanted
specifically to cut gas intended for Ukraine's domestic use,
which these lines provided.


11. (SBU) In contrast to Panasiuk, UkrTransGaz's Khymko
reported that during the shut-off, 24 pump stations had been
stopped and 96 compressors, equal to half the system's
power, had been taken off-line. The system, however, was
not damaged as a result of this shut-down. Ukraine had used
its own gas production and stored gas to gradually reduce
outflows to Europe, in spite of Russia's immediate 25%
reduction January 1 -3. (Note: Our interlocutors, as policy
implementers and not policy makers, did not discuss why
Ukraine made the decision to cut, albeit gradually, Russia's
Europe-bound gas.)


12. (SBU) According to the Naftohaz experts, Ukraine and
Russia had already reached agreement on how to make up
amounts under-supplied in the first days of January and
ensure the full January balance. Gazprom would do this by
supplying small additional amounts beginning January 3,
Panasiuk said.

Gas Metering at the Russian Border
--------------


13. (SBU) When Ukraine's gas transport system was built, gas
metering stations for export gas were placed at the Soviet
Union's western borders with Hungary and Poland, but nothing
monitored flows between the Ukrainian and Russian republics.
After the break-up of the Soviet Union, Russia built
metering station on its territory, and Ukraine now had
permanent representatives at each Russian export station who
daily verified and signed documents on shipment volumes,
Naftohaz's Panasiuk explained. The information was sent via
an on-line system to Kiev and Moscow. There was some
metering equipment at gas pumping stations on Ukrainian
side, but it was not as sophisticated as at metering
stations, Panasiuk continued. Russia in the past had
accused Ukraine of `playing' with its meters to distort the
real amounts of transported gas.


14. (SBU) UkrTransGaz's First-Vice Chairman of the Board and
Production Director Valentyn Kolomieiev argued that the in-
place Ukrainian representatives were sufficient for
verifying volumes received and dispatched. In addition to
its representatives in Russia, Kolomieiev noted that
Gazprom's subsidiary GazExport and the various importing
countries had in-place representatives at Ukraine's western
gas metering stations. Sharing representatives and
equipment was actually preferable, Kolomieiev explained,
since gas measuring equipment was extremely sensitive and an
error or even 0.1% would be extremely costly and time
consuming. Better, he said, to agree on the amounts with
one set of instruments.


15. (SBU) Separately, and somewhat contradictorily,
Naftohaz's Panasiuk said Naftohaz had plans to build six
metering stations as close to the Russian border pumping
stations as possible to better measure and control volumes
shipped by Russia. In addition, Panasiuk praised Ukraine's
new Regional Metering Center, which would be commissioned
on/around March 10 and was built with support from the EU.
The facility would improve gas metering technologies in
Ukraine and help Ukraine improve its metering system to meet
internationally recognized standards.

Herbst