UKRAINE: SE GRAY AND DAS BRYZA'S MEETING WITH DPM

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001063 DEPT FOR EUR DAS BRYZA, EUR/ERA FOR EMCCONAHA EUR/UMB, EEB/EEC/IEC - LWRIGHT DOE FOR LEKIMOFF, CCALIENDO USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK E.O. 12958: DECL: 06/03/2018 TAGS: EPET EINV ENRG PINR PGOV UP SUBJECT: UKRAINE: SE GRAY AND DAS BRYZA'S MEETING WITH DPM NEMYRYA ON ENERGY ISSUES REF: KYIV 760 Classified By: DCM James Pettit for reasons 1.4 (b),(d) ¶1. (C) Summary. On the margins of the Kyiv Energy Security Summit May 22-23, Special Envoy Gray and DAS Bryza met with Ukrainian Deputy Prime Minister Hryhoriy Nemyrya to discuss US-EU-Ukraine cooperation on energy security, including the Ukrainian proposal to expand gas transit through Ukraine by de-bottlenecking the existing main pipeline as it transits Ukraine's Carpathian region (also in reftel). Nemyrya was uncertain about the EU's enthusiasm for the project, but strongly supported the proposal. He agreed that the Ukrainian government would need to provide a unified approach to convince the Europeans that Ukraine would not show up to proposed trilateral cooperation meetings empty-handed. He also described the current political rift between PM Tymoshenko and President Yushchenko as an obstacle that at times has prevented the Tymoshenko-led government from moving Ukraine forward, citing examples of Presidential interference into the government's work, and putting the blame for the current political stalemate on the President. Nemyrya defended the Cabinet of Ministers' May 21 decision to annul the production sharing agreement (PSA) with Houston-based oil company Vanco, but was hopeful that an amicable resolution to the highly publicized dispute could still be reached. End summary. US-EU-Ukraine Cooperation on Energy Security -------------- ¶2. (C) On May 22 DAS Bryza told Nemyrya that cooperation with Ukraine could be one of the goals of the US-EU Summit to be held in Ljubljana on June 10. Bryza also mentioned the importance of creating incentives via US-EU cooperation for Ukraine to help create transparency in the energy sector and reduce unnecessary intermediaries. DAS Bryza referred to the Ukrainian proposal to expand gas transit through Ukraine by 19 billion cubic meters (bcm) by de-bottlenecking the existing main pipeline as it transits Ukraine's Carpathian region. Nemyrya then asked SE Gray and DAS Bryza about the EU's level of readiness for engaging in such trilateral cooperation. Gray responded by asking Nemyrya if he sensed a lack of EU interest; Nemyrya indicated that he did indeed sense a lack of EU interest, especially since many EU members openly supported the "Russian option" as far as energy security was concerned, he said. Gray told Nemyrya that Europe would be lacking sufficient natural gas supplies in 10 years and in hindsight would be grateful for the U.S. push. Gray was confident EU Commissioner Piebalgs supported the initiative and asked Nemyrya where the USG might nudge the EU in Brussels. Nemyrya felt that the creation of an official US-EU-Ukraine task force that met on a regular basis might be an appropriate way to start convincing the Europeans that Ukraine was indeed serious about becoming part of the European community and increasing transparency in the energy sector. ¶3. (C) Nemyrya felt the trilateral approach would be the most effective way to attract investment in Ukraine, expand production, and increase efficiency and reliability, but he felt the biggest obstacle was Ukraine's current inability to provide a unified approach for such a project, given the current political situation in the country. He added that in pursuing the trilateral task force, Ukraine could not approach the EU empty-handed and Ukraine needed to work hard to ensure supplies of adequate amounts of hydrocarbons from its regional partners. Ukrainian Political Situation and Its Effect on Trilateral Cooperation -------------- -- ¶4. (C) Nemyrya expressed strong support for the U.S.-supported proposal and effort to expand gas transit, provided the project would adhere to European standards of transparency. Nemyrya lamented the difficulty in advancing the project due to the current political situation in Ukraine, which he defined as a counterproductive, bicephalous phenomenon, commenting that the President should preside and the government should govern. He described President Yushchenko as the Achilles' heel in Kyiv, and that Ukraine's energy security has been held hostage to personal and political interests. He felt that there was a lack of information sharing from the President's camp, and that the USG should advise Yushchenko that Presidential Advisor Bohdan Sokolovskiy and members of the Presidential Secretariat-Oleksandr Chaliy, Viktor Baloha, and Oleksandr Shlapak- cannot create change alone; they will need to work with others in the government. ¶5. (C) Nemyrya described the Kyiv Energy Security Summit as an organizational disaster caused mainly by the Presidential Secretariat's unwillingness to share information and work with others. In addition, Nemyrya explained that working with the EU is complicated by the fact that the MFA is in the President's purview, and as a result, information is not shared between the MFA and the government. In Nemyrya's view, it is Yushchenko who has stymied progress on many fronts including energy by impeding the government's ability to work. To illustrate his point, Nemyrya recounted that in the 5 months since the Tymoshenko-led government has been in power, the President has sent the government 800 official orders, which by Nemyrya's math added to one Presidential order per working hour. Nemyrya acknowledged that personality differences between Tymoshenko and Yushchenko did contribute to the current political instability, but felt that these personality differences were unjustly overemphasized in the press. Instead, he felt the current 3-prong government which includes the President, the Cabinet of Ministers (CabMin),and the National Defense and Security Council (NSDC) was the real cause of the instability, clarifying that the CabMin was an island of stability wedged between the President and the NSDC. Nemyrya pressed in particular for Bryza to appeal to Presidential advisor Sokolovskiy and Deputy National Security Council Secretary Gryshenko to pursue the proposal for U.S.-EU-Ukraine cooperation on gas transit quietly with the Prime Minister's team to advance the plan notwithstanding political differences. Bryza followed up later with both. Vanco -------------- ¶6. (C) Nemyrya said that all of the issues leading to the eventual annulment of the Vanco production sharing agreement (PSA) by the Cabinet of Ministers (CabMin) occurred during heightened tensions between Tymoshenko and Yushchenko. He then noted, however, that the PSA with Vanco was signed on October 19, 2007, when it was obvious to the Yanukovych government that they would no longer be in power. (Note: the special parliamentary election was held on September 30, 2007, but it was not clear which coalition would actually take power until December 2007. The signing timing was forced by the PSA and tender's limitation of 18 months of negotiations after the tender award in April 2006. End note.) Nemyrya asserted that when former Deputy Prime Minister Klyuyev forced the last-minute signing of the PSA when the Party of Regions was on its way out, the new government had to reexamine the deal. ¶7. (C) Nemyrya then reviewed the current list of investors: Vanco Ukraine, Akhmetov's DTEK, Novitsky's Shadowlight, and the Austrian Group Integrum. Nemyrya said that when he took this list of investors at face value, he and the rest of the CabMin concluded Vanco and its investors might sell its interests to Gazprom, given worries that Integrum was a front company along the lines of RUE, with several hidden layers of ownership that lead back to Gazprom and Dimitriy Firtash. Nemyrya acknowledged that the law firm Aiken-Gump had performed due diligence on all investors and although all investors had been cleared, the government was still not happy with the list. Nemyrya also urged the USG to investigate whether there were actual links to Gazprom via Vanco's current investors. Nemyrya was also uncomfortable with NSDC Head Raisa Bohatyryova leading the NSDC investigation into Vanco, as Nemyrya felt there was no way she could be objective given her allegiance to the Party of Regions. Nemyrya added that Yushchenko was using the NSDC to air the country's dirty laundry and serve as a de facto executive branch of government. ¶8. (C) Nemyrya confirmed that Prime Ministerial Advisor Vitaliy Haiduk would still lead the working group promised by PM Tymoshenko, even though the CabMin had annulled the PSA. He added that Minister of Environmental Protection Heorhiy Filipchuk, who originally canceled Vanco's operating license, would also be a member of the working group. Nemyrya characterized the CabMin decision to annul the PSA with Vanco as simply the right thing to do, underlining that the Ministers unanimously voted in favor of the PSA annulment, regardless of their allegiance to the President or Prime Minister. He emphasized that Deputy Prime Minister Vasyunyk, who was appointed as one of the President's quotas, actually wrote the resolution and mustered support from the Ministers to annul the PSA. ¶9. (C) Nemyrya hoped an amicable solution could still be reached and said he encouraged Vanco's CEO Gene Van Dyke to return to Kyiv as soon as possible to meet with Haiduk and the working group. Nemyrya volunteered to be the conduit in arranging meetings between Vanco and the working group. ¶10. (C) Bryza noted that the U.S. had three sets of interest in this case: contract sanctity, transparency in the energy sector; and diversification of sources of gas supply. He suggested that the GOU and Vanco sit down quietly and work out a compromise that takes all three of these principles into account. Nemyrya embraced this approach, and sought U.S. assistance in convincing Vanco to follow it. ¶11. (U) DAS Bryza cleared this cable. TAYLOR