UKRAINE TO PAY $160 FOR GAS IN 2008; MARKET PRICES

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 005458

SIPDIS

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HARBERT, HEGBORG, EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER

E.O. 12958: DECL: 11/02/2017
TAGS: EPET ENRG ECON PREL RS
SUBJECT: UKRAINE TO PAY $160 FOR GAS IN 2008; MARKET PRICES
BY 2011

REF: A. KYIV 2832


B. MOSCOW 4932

C. KYIV 2611

Classified By: DCM DANIEL A. RUSSELL FOR REASONS 1.4 (b/d)

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SUMMARY
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1. (C) According to the Ukrainian Embassy in Moscow,
agreement has been reached on a gas price of $160 per
thousand cubic meters (mcm) for Russian gas deliveries to
Ukraine for 2008. The agreement also calls for a rise to
"market prices" by 2011. Separately, Gazprom indicated that
final details are still being worked out, but that an
agreement in principle, including these terms, has been
reached. Although a shut off is now unlikely this year,
Gazprom has forecast an average price of $300 per mcm for
Europe in 2008, meaning prices in Ukraine are still well
below market levels and will have to rise rapidly in the next
three years to reach market prices. End summary.

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$160 MCM IN 2008; &MARKET LEVEL8 BY 2011
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2. (C) Ukrainian Embassy Economic and Trade Section First
Secretary Oleg Gutsulyak confirmed to us on November 19th
that Gazprom and Ukraine came to an agreement on 2008 gas
prices during the November 15th meeting between Ukrainian
Minister of Fuel and Energy Yuriy Boyko and Gazprom CEO
Alexey Miller in Moscow. He said the price for 2008 "will be
what has been widely reported in the press" -- that is $160
per thousand cubic meters (mcm).


3. (C) Gutsulyak said the agreement will also include gradual
price increases "on the schedule reported by the press to be
preferred by Russia" -- that is to "market levels"
(presumably European prices minus transit costs) by 2011.
Gutsulyak added that no agreement was signed during Boyko's
visit because President Yuschenko preferred the agreement be
"between companies" and witnessed by Ukrainian Prime Minister
Yanukovich. According to Gutsulyak, Yanukovich will be in
Moscow by November 22 "at the latest" for the signing of the
agreement.

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GAZPROM: UKRAINE COMING ALONG "KICKING AND SCREAMING"
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4. (C) Separately, Gazprom Director of International Affairs
Ivan Zolotov told us November 20th that negotiations are
still on-going "to work out details of the commercial
contract," but acknowledged that an "agreement in principle"
had been reached during Boyko's visit. Zolotov said the $160
figure is correct and that Ukraine understands that Gazprom
cannot sell gas to Ukraine more cheaply than to its domestic
Russian customers who are expected to pay market prices by

2011. (Comment: Alexander Medvedev, Gazprom's Deputy CEO in
charge of exports, said last week at a major conference in
Rome that Gazprom forecasts an average European price of $300
per mcm for 2008. If that forecast is correct then Ukraine's
price, and that of Russian domestic consumers, would both
have to rise dramatically in the next three years to reach a
true market level.)


5. (C) Zolotov called the negotiations "very difficult,"
adding that the Ukrainians are finally accepting Gazprom's
terms "kicking and screaming." He said the agreement, to be
signed "before the end of the year," would be between
Gazprom, RosUkrEnergo, UkrHazEnergo, and NaftoHazUkraina, and
would not involve governments.

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NO SHUTOFF
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6. (C) The majority of officials and observers with whom we
have discussed this issue, including in the GOR, Gazprom,
other embassies, and investment analysts agree that Russia

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does not want to permit a situation to develop by year's end
that threatens to repeat the infamous 2006 gas cutoff to
Ukraine. As such, few are surprised that an agreement is
being finalized well in advance of the typical end-December
expiration of the existing agreement or that some safeguards
are being incorporated by the Russian side to establish price
guidelines for out-years.

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COMMENT
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7. (C) The agreement suggests a quiet winter on this front
(ref B),but it will not be the end of the story. Although
we defer to Kyiv as to how readily Ukraine can absorb steady
gas price increases until 2011, Gazprom seems quite
determined to make it happen, and the two sides still differ
on a number of issues not least of which is the merits of
setting prices for the coming years so early (ref A).
Finally, ref A notes RosUkrEnergo remains the middleman for
now, which is likely to skew deal-making. If after the
recent crisis over Ukrainian gas debts, Yanukovich does visit
Moscow and oversees the signing of an agreement by November
22 as suggested, this year's gas price negotiations indeed
seem to be coming to an end.
BURNS