UKRAINE: COALMINE METHANE-1 PROJECT - OPIC RESPONSE

UNCLAS KYIV 004375 SIPDIS SIPDIS DEPT PLEASE PASS TO OPIC/SMEF/GALE DOE FOR LEKIMOFF, CCALIENDO E.O. 12958: DECL: NA TAGS: EPET ENRG EINV PGOV UP SUBJECT: UKRAINE: COALMINE METHANE-1 PROJECT - OPIC RESPONSE Ref: STATE 150913 ¶1. Summary. The following information is sent in response to reftel action request for embassy comments and clearance on OPIC financing for a coalbed methane project involving Ukrainian companies EnergoCapital, EnergoImpex, and Gorlovsky. Post was unable to ascertain definitive ownership information for the companies EnergoCapital and EnergoImpex, which refused to meet with EconOff despite repeated requests. All three companies are believed to be connected to two large Ukrainian industrial groups -- the Industrial Union of Donbas and Systems Capital Management. Coalbed methane is an alternative energy source in Ukraine with great potential, and could assist Ukraine in becoming more energy independent. Post grants its clearance on the loan application. End Summary. EnergoImpex and EnergoCapital -------------- ¶2. Post was unable to ascertain ownership information for the companies EnergoImpex LLC and EnergoCapital LLC, and the management of both companies failed to respond to repeated requests to meet with EconOff. EnergoImpex is registered in the city of Donetsk as a coal enrichment enterprise, and the National Electricity Regulatory Commission previously has granted EnergoImpex gas distribution licenses. EnergoCapital is registered in Kyiv at 14B Yaroslaviv Val. ¶3. Embassy internet research found that EnergoCapital supplied equipment valued at $77,000 to the Ukraine Methane Group (UMG) in ¶2005. UMG was registered in July 2005 with $78,000 of statutory capital and one employee (General Director Yuri Fedorov, who previously worked as an engineer at EnergoImpex LLC). According to on-line data, UMG's line of business is natural gas production, but UMG conducted no economic activity in 2005. UMG shares EnergoImpex's address in Donetsk at 66 Maiska Street. (Comment: Reftel notes that UMG was owned by the project's U.S. sponsors and EnergoCapital. UMG may have been registered expressly for the project described reftel.) Possible Connections to IUD -------------- ¶4. Embassy conjectures that EnergoImpex and EnergoCapital are Industrial Union of Donbas-affiliated structures, based on the intertwined finances, office locations, and reftel's mention of AmCit Jonathan Kelafant's involvement in the proposed project as president of Covalent. Kelafant is also Senior Vice President of Advanced Resources International (ARI),which is the U.S. contractor for a 2005 Trade Development Agency feasibility study currently underway on coalbed methane capture in the Donbas basin. ARI's Ukrainian partner in the project is EcoMethan, a company which belongs to the Industrial Union of Donbas (IUD). Industrial Union of Donbas -------------- ¶5. IUD is a diversified holding company which controls over 40 major enterprises in metallurgy, mining, engineering, food processing and agriculture in Ukraine, Russia, and Eastern Europe. Billionaire co-owners Serhiy Taruta and Vitaliy Hayduk each control equal 49.99% shares of the company; the remaining 0.02% share belongs to Donetsk based Oniks-Don company, the ownership of which is unknown. President Yushchenko recently appointed Hayduk Secretary of the National Security and Defense Council. Gorlovsky Machine Building Factory -------------- ¶6. The Gorlovsky company, which according to reftel is owned by EnergoImpex, is likely the Gorlovsky Machine Building Factory, which produces coal mine equipment and is one of eight holding companies making up UkrUgleMash (http://uum.dn.ua/en/). According to local press, several Donetsk-based industrial groups founded UkrUgleMash in 1998 to gain control over the coalmining equipment sector. One of the founders of UkrUgleMash was ARS, a company with ties to Ukraine's wealthiest man, Renat Akhmetov, who is also a member of parliament and the main financial backer of the Party of Regions. The current General Director of UkrUgleMash, Sergey Pavlenko, was previously Deputy General Director of Economic Affairs at the Industrial Union of Donbass. Krasnolimanska and Kirovska Mines -------------- ¶7. Krasnolimanska coalmine is a part of the GOU-owned Krasnolimansky holding company, created in 1996. The holding's other asset is Krasnolimansky Coal Enrichment Factory. Krasnolimanska mine began operations in 1958 with a designed annual production of 1.2 million tons. It is one of the most dangerous mines in Ukraine due to methane gas concentrations which can lead to explosions. Krasnolimanskaya conducts systemic degasification; in 2004, the mine captured 19.3 million cubic meters (mcm) of methane and used 1.82 mcm at the mine's boiler facility. ¶8. Kirovska mine is part of GOU-owned MakeevUgol, which consists of 5 mining complexes located in and around Makeevka, Ukraine. Kirovska also is considered a dangerous site due to methane gas and conducts degasification operations. In 2004, all five MakeevUgol mining enterprises captured a combined 60.3 mcm of methane gas and used 30 mcm at their facilities. Kirovska mine is one of the sites participating in the current Trade Development Agency feasibility study on coal bed methane production. Makeevka is a region in the Donetsk Oblast, which is reportedly under the political and financial control of former Deputy Donetsk Oblast governor and now Minister of Environment and (reportedly) Renat Akhmetov's right-hand man Vasyl Dzharty. Donetsk Coal Basin -------------- ¶9. Donetsk Coal Basin (Donbas) is believed to be one of the world's largest methane deposits with up to 12 trillion cubic meters of estimated reserves. (Note: Conservative estimates are for a minimum of 1.7 trillion cubic meters.) However, large scale production of coal bed methane has not been developed because of the depth of Donetsk mines and the lack of infrastructure to supply captured gas to potential consumers such as heat and power plants. In addition to Krasnolimanska and Kirovska, other mines in Donbas that have developed on-site methane capture and utilization technologies include Zasyadko, Krasnoarmeiskaya-Zapadnaya, Glubokaya and Scheglovskaya-Glubokaya mines. Comment -------------- ¶10. Large financial industrial groups, and their politically connected owners, are common in Donetsk Oblast. Post was not surprised that the companies in question appear to have connection to one or more of these large groups. Coalbed methane is an alternative energy source in Ukraine with great potential, and could assist Ukraine in becoming more energy independent, a goal the U.S. supports. The present loan request may have evolved from the 2005 TDA coalbed methane feasibility study. Post grants its clearance on the loan application. TAYLOR