UKRAINE: SENATOR LUGAR HEARS THAT ENERGY ISSUES

C O N F I D E N T I A L KYIV 000194 SIPDIS SIPDIS E.O. 12958: DECL: 01/25/2017 TAGS: PREL ENRG ECON PGOV UP SUBJECT: UKRAINE: SENATOR LUGAR HEARS THAT ENERGY ISSUES HIGH ON NEW GOVERNMENT'S AGENDA Classified By: Ambassador for reasons 1.4(a,b,d). ¶1. (C) Summary: In Kyiv meetings with Senator Richard Lugar (R-IN) January 15-16, President Yushchenko, PM Tymoshenko, opposition representatives and local business leaders all discussed the importance of energy issues for Ukraine. President Yushchenko talked in detail about ways to transport Central Asian and Azeri oil and gas to Europe via Ukraine and the importance of energy diversification in other areas. He urged the USG to send a senior-level official to participate in a May 22-23 energy summit in Kyiv. In her meeting, PM Tymoshenko focused more on the political aspects of energy policy, expressing concern about dependence on one source (Russia) and the existence of "shadow deals" regarding energy supplies. The opposition noted the importance of keeping the flow of Russian gas through Ukraine at a high rate, and local business leaders working in the energy field stressed the existence of both opportunities and challenges in Ukraine's energy market. Senator Lugar's discussions on NATO and the U.S. biological threat reduction program were reported septels. President Focuses on Energy Details -------------- ¶2. (C) In his meeting with Senator Lugar, President Yushchenko said that it was important for energy to be on Ukraine's agenda with the U.S. and that Ukraine was ready to work with us. In March, Ukraine would deliver oil by rail and then through the Druzhba pipeline (and by rail) to the Czech Republic. U.S. companies could play an important role in transporting oil to Slovakia via Ukraine. On January 14, Yushchenko and the Slovak President had agreed to a test in February to send 20,000 tons of oil to Slovakia. (Embassy Note: Post has seen an announcement of this test. However, we do not know if any batching equipment, which we believe would be necessary for such a test shipment, has been installed in the pipeline. End Note.) Ukraine had reached agreement with Poland to transport oil via a to-be-built pipeline from Brody and was ready to negotiate with U.S. private companies to encourage the transport of Caspian oil via this route. He anticipated 10-11 million tons of oil from the Ukrainian side to use this pipeline; and by the end of the year, Odesa-Brody,s capacity would be up to 20 million tons. (Embassy Note: Yushchenko's meaning about the Ukrainian contribution was not clear, although most likely he was referring to proposals to adapt two refineries in western Ukraine to process Caspian crude. End note.) The Ukrainians wanted to expand this route in concert with U.S. partners, and Yushchenko stressed that this was a very sensitive and important issue for Ukraine. Yushchenko noted that negotiations would take place in April/May to reverse the direction of the Odesa-Brody pipeline. He also urged senior U.S. officials to attend the upcoming energy summit May 22-23 in Kyiv in order to discuss possible transit options and the Odesa-Brody pipeline. Senator Lugar responded that he had just been in Kazakhstan, Turkmenistan and Azerbaijan and that there was great interest in these countries to find oil and gas routes to Europe via Ukraine. ¶3. (C) Yushchenko said that Ukraine was very interested in finding ways to help transport Central Asian and Azeri oil and gas to Europe, and that he would ask for U.S. support to organize the process. Yushchenko argued that there was no doubt regarding the reliability of Ukraine as a transit country -- "we have a unique system of transport and we are willing to modernize it." However, politics, namely Russia, was a major factor and this made it hard to protect Ukraine's independence. According to Yushchenko, Russia wanted to disrupt the route through Ukraine by questioning the reliability of the system. However, Ukraine's system was as "reliable as any Russian system," and the President noted that all of Russia's pipeline and compressors were Ukrainian-built, and 60% were serviced by Ukrainians. Russia had monopolized Central Asian gas; Central Asia's interest in transporting gas via Ukraine to Europe was a key issue for Kyiv. Otherwise, Central Asian gas would end up going to China, India and Afghanistan, which was not good for Europe. Russia was offering alternatives to Ukraine's transport system and "we want to minimize Russia's role." With regard to Azerbaijan and Georgia, Yushchenko asked for U.S. support to ensure that Ukraine could be a short cut to Europe. Lugar responded that these countries wanted to see Ukraine as an alternative, but that they feared Russia's and in some cases Iran's reaction. Turkmenistan's new President was open to cooperation with the U.S. and others, but it would be a real leap. Yushchenko acknowledged that Russia dominated this policy, but that plans to send Caspian gas via the Black Sea to Italy were vague and therefore, Ukraine would have to continue to struggle. ¶4. (C) With regard to nuclear energy, Yushchenko expressed interest in working with U.S. companies on mining and processing uranium. He referred to recent Ukrainian decisions regarding the creation of a spent nuclear fuel depot and power generation. Re Chernobyl, he said that there would be a review of operations during the first six months of 2008 and noted that additional technical assistance would be needed. Construction of a new sarcophagus would begin in April/May and plans were underway regarding the storage of dry nuclear (waste) spent fuel (Holtec). Lugar pledged to work with Ukraine on nuclear facilities and Chernobyl, and also noted that U.S. firms were ready to work with Ukraine on the disposition of spent nuclear fuel. He expressed appreciation for all of Ukraine's work under the Nunn-Lugar program and said that the next phase of more sophisticated work -- the disposition of nuclear fuel -- was about to begin. Lugar emphasized that the U.S. would continue to be a good partner. Yushchenko said that Ukraine had "big prospects" in the nuclear area with regard to the construction of new power units, the processing and enriching of ore and fuel supplies. Ukraine's best cooperation in this area was with the U.S. Two new power plants would start (construction) next year. PM's Emphasis is on Energy Independence -------------- ¶5. (C) After Senator Lugar described his discussions in Georgia, Azerbaijan, Kazakhstan and Turkmenistan about the importance of alternative energy sources, the PM noted Ukraine's difficult situation of being dependent on one major source of energy -- Russia. She said that in her view, energy independence equaled political independence and her government was committed to finding ways to make energy security more reliable, including by removing "non-transparent" methods of gas supply. According to the PM, the previous government had "destroyed" Ukraine's relationship with Turkmenistan and, in principle, had no arrangements in place at all with Kazakhstan and Uzbekistan. She believed that the project to supply Turkmen gas through the Caspian to Ukraine and on to European consumers was a good project that deserved U.S. support. It was also important to modify existing laws regarding exploration in order to attract foreign investment. ¶6. (C) Energy conservation was also an absolute priority, according to Tymoshenko. In addition, Ukraine needed to focus on the development of its own plentiful source -- coal -- and the diversification of nuclear fuel supplies. The PM said that the orange coalition was committed to "breaking the artificial shadow dealings in the energy field." Time was needed to do this, but all the coalition members believed that this was important. Tymoshenko said that small steps would be taken first, but that Ukraine shared the U.S. concerns about the effect of energy supplies on foreign policy issues, economic growth and the agricultural sector. Opposition Focus on Maintaining Russian Transit Levels -------------- -------------- ¶7. (C) During a meeting with opposition shadow foreign minister Konstantine Gryshchenko, Lugar noted that during previous visits to Kazakhstan, Turkmenistan, Georgia and Armenia, he had stressed that each country should focus on a more balanced energy portfolio. The aim was not to interrupt the energy relations with Russia, but provide alternative sources and transmission conduits. He noted that these countries saw these decisions in the context of their relations with Russia and Iran and wanted a sense of level of support from US. Gryshchenko noted that during the tenure of the previous government, the U.S. company Vanco had received substantial piece of shelf for exploration and development in the Black Sea and that Marathon oil was in a joint venture for energy exploration in eastern Ukraine. He also underlined that the Nuclear Fuel Qualification Project with Westinghouse would provide an alternative nuclear fuel source. ¶8. (C) Gryshchenko mentioned the importance of keeping the transshipment of Russian-origin gas through Ukrainian pipelines to the EU. Currently 80% of Russian gas came through Ukraine; he wanted to keep that level. In Gryshchenko's view, it was important to have open dialogue with Moscow and to ensure that pipelines were maintained and upgraded. Access to and shipment of Iranian gas via Ukraine was a future issue. Gryshchenko also noted the need to work on coal extraction and reducing dangerous methane levels in the mines. Lugar agreed that it was important to keep Ukraine's pipelines maintained. Some in the EU (Germany) were looking for direct access to Russian gas. The U.S. was also looking to nuclear energy with smaller, safer plants. Spent nuclear fuel would be an issue for both the U.S. and Ukraine. Lugar suggested that Ukraine as an agricultural country could also benefit from new developments in biofuel technology. Business Sees Potential, but also Challenges -------------- ¶9. (SBU) During a meeting with Senator Lugar and his delegation, U.S. and international businesses working in Ukraine with a focus on energy issues said they saw good potential in Ukraine, but stated Ukraine remained a very difficult environment for business, primarily because of corruption. Michael Bleyzer of the investment firm SigmaBleyzer noted concerns about increasing lack of fiscal discipline in the Government. Oil and gas companies said there is a clear need for international expertise, and this is recognized on the technical level by Ukrainian industry, since most of the easy-to-get hydrocarbons are gone, and remaining reserves are more challenging. However, the senior management of the Ukrainian oil and gas industry is very politicized, which impedes investment. Legal structure is a problem for oil and gas development; several noted that Ukraine has legal vehicles that might work, but the Ukrainians often do not use them. Given how long it takes to develop oil and gas resources, Ukraine needs to move quickly if it is to address energy diversification, but this is not happening. Ukraine's nuclear sector has opportunities for diversification via fuel supply and storage of spent fuel, but the Government needs to seize these chances soon, or they may not reappear. ¶10. (SBU) In general, the business representatives felt private interests continued to impede progress on national priorities, and many government leaders, fear of losing control was getting in the way of allowing foreigners in, including via privatizations, to help develop a number of sectors. ¶11. (U) Senator Lugar did not have the opportunity to clear this cable prior to departing Kyiv. ¶12. (U) Visit Embassy Kyiv's classified website: www.state.sgov.gov/p/eur/kiev. Taylor