UKRAINE GETS $130 NATURAL GAS FOR 2007 WITH

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