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