UNCLAS KYIV 004089

SIPDIS

SIPDIS
SENSITIVE

DOE FOR LEKIMOFF, CCALIENDO

E.O. 12958: DECL: NA
TAGS: EPET ENRG PGOV PREL RS TX UP
SUBJECT: UKRAINE GETS $130 NATURAL GAS FOR 2007 WITH
ROSURKENERGO-UKRHAZENERGO DEAL


Sensitive but Unclassified. Not for Internet Distribution.


1. (SBU) Summary. Prime Minister Viktor Yanukovych confidently
announced October 24 that he had just received word from Moscow that
Ukraine in 2007 would receive 55 billion cubic meters of imported
natural gas at a price no greater than $130 per thousand cubic
meters. All that remained, he said, was to sign an
intergovernmental agreement to enable this cross-border trade.
Deputy Head of the Presidential Secretariat Oleksandr Chalyy,
however, was much less sanguine about the deal on October 25, noting
that Russia had not yet confirmed the $130/tcm price and that a
number of questions, included the fee for Russian gas transiting
Ukraine, remained unresolved. As of October 25, it appears the
trumpeted deal indeed has been signed, but the signatories were the
recently created companies RosUkrEnergo and UkrHazEnergo, and not
state companies GazProm and NaftoHaz. End Summary.


2. (SBU) Prime Minister Viktor Yanukovych announced October 24 that
Ukraine would receive in 2007 "no less than" 55 billion cubic meters
(bcm) of imported gas at a price "no greater than" $130 per thousand
cubic meters (tcm). Yanukovych made the statement at a joint press
conference with Russian Prime Minister Fradkov, who was in Kyiv for
a meeting of the economic subgroup of the Yushchenko-Putin
intergovernmental commission. Yanukovych said he had received the
deal details from unspecified negotiators then in Moscow, who were
completing negotiations and would soon return to Ukraine with the
contract. All that remained, he said, was to sign an
intergovernmental agreement to enable this cross-border trade.
(Note: Ukraine's usual gas negotiator, Energy Minister Boyko, was in
the hall with Yanukovych during the announcement. Yanukovych
apparently was referring to reports of a contract signed by
RosUkrEnergo (RUE) and UkrHazEnergo (UHE) that has RUE selling to
UHE at least 55 bcm at $130/tcm in 2007.)


3. (SBU) Fradkov, however, did not confirm the $130/tcm price at
the press conference. Earlier that day, the Russian press had
carried news that the gas price would not be on the agenda for the
Fradkov-Yanukovych meetings. Fradkov and Yanukovych, however, did
sign a protocol calling for an inventory of the international
agreements governing gas supply, and agreed to draft by December 1
an intergovernmental protocol on 2007 gas and crude oil volumes to
be supplied to Ukraine. The protocol noted that the 1994 Agreement
on Cooperation in Developing the Fuel and Energy Complex provided
for such yearly agreements, though Ukraine and Russia had failed to
sign protocols for 2005 and 2006 volumes.


4. (SBU) Deputy Head of the Presidential Secretariat Oleksandr
Chalyy cast doubt on the announced deal at an October 25 press
conference when he noted that Fradkov had not confirmed the $130/tcm
price, and said that many questions, including the fee for Russian
gas transiting Ukraine, remained open. The Presidential Secretariat
also did not have any information on how the $130/tcm price was
calculated, Chalyy said. Minister of Energy Boyko confirmed later on
October 25 that the 2007 supply contract had indeed been signed and
that, while the transit fee had been considered during negotiations,
it could not be changed due to existing agreements that fixed the
fee at $1.60/tcm/100km through 2010.

Comment
--------------


5. (SBU) If it was RUE and UHE negotiators who reached the deal
Yanukovych was trumpeting on October 24, it is further proof of how
far former state champion NaftoHaz has fallen in less than a year.
While NaftoHaz is 50% owner of the UHE joint venture, the two are
clear competitors on the Ukrainian domestic market. There is
speculation the intergovernmental agreement to be drafted by
December 1 will likely include language to allow RUE and UHE to
benefit from VAT-free interstate commerce, which will serve to
further solidify these companies' places in Ukraine's energy supply.
While information on the deal remains sketchy (our MFA contact said
his Ministry was not kept informed on the status of negotiations),
it now does appear that Yanukovych and his Party of Regions have
gotten the price they prepared Ukraine to accept. If Ukraine
granted any concessions in exchange for cheaper gas, they remain
hidden at present. The $130 price, however, is only good for one
year, which means come next winter, it will be deja vu all over
gain.

Taylor