MOVING TOWARD GREATER U.S.-EU ENERGY COOPERATION

UNCLAS SECTION 01 OF 02 BRUSSELS 001316

SENSITIVE
SIPDIS

DOE FOR PDAS JONATHAN ELKIND

E.O. 12958: N/A
TAGS: ECON EPET EUN
SUBJECT: MOVING TOWARD GREATER U.S.-EU ENERGY COOPERATION
ON UKRAINE

Sensitive but Unclassified - not for Internet distribution.


1. (SBU) Summary. Special Envoy for Eurasian Energy
Richard Morningstar and DOE PDAS for Policy and International
Affairs Jonathan Elkind met with EU Commission officials on
September 18 to discuss ways to move forward toward greater
U.S.-EU Energy Cooperation on Ukraine. Both sides emphasized
the importance of presenting a consistent message to Ukraine
about the need for reforms in the energy sector. There was a
general consensus that the U.S. and the EU should urge the
EBRD and World Bank to insist that Ukraine meet the
conditionalities for reform before providing any funding.
The EU side emphasized, however, that funding from the IMF is
more essential for Ukraine's economy and argued for
"flexibility" in distributing the next tranche, even if
conditions had not been met. Both sides agreed the IMF would
make the final determination. Going forward it was agreed
that the U.S. and EU should work to increase information
exchanges (especially at the level of our respective Missions
in Ukraine),to better coordinate our efforts to encourage
reforms. The EU side welcomed the U.S.-EU Energy Council as
a forum to give political impetus to these efforts, but
stressed the ongoing need for continued coordination at an
informal working level. End Summary.


2. (SBU) On September 18 Special Envoy for Eurasian Energy
Richard Morningstar and DOE PDAS for International Affairs
Jonathon Elkind met with EU Commission officials from
DG-RELEX and DG-TREN to discuss opportunities for greater
U.S.-EU energy cooperation on Ukraine. In the course of the
two-hour long session, participants from both sides agreed
that it is important for the U.S. and the EU to present a
coordinated and consistent message to the Government of
Ukraine (GoU) about the need for reform in the energy sector.
Nonetheless, DG-RELEX officials declined an offer for the
USG to join the EC and EBRD on October 2nd to deliver a joint
message to the GOU. (Comment: Their hesitance to accept close
USG engagement came in distinct contrast to the firm embrace
from more senior EC officials, including Energy Commissioner
Piebalgs. End Comment.)


3. (SBU) Hugues Mingarelli, Deputy Director General of
RELEX, laid out a list of EU priorities for energy relations
with Ukraine:

- Nuclear Safety. The EU has been a major donor on
Chernobyl, and is currently carrying out a safety review of
the other Ukrainian nuclear plants.

- Grid Integration. The EU's goal is to integrate the
Ukrainian electricity and gas grids into the European system.
To this end, the EU has been working to get Ukraine to join
the Energy Community. DG-RELEX is pleased with the progress
on this front, noting that Ukraine's draft gas law appears
compatible with the EU acquis.

- Energy Efficiency. The EU views improving energy
efficiency in Ukraine as a key part of rationalizing the
energy market there. The Commission is pleased with the
initiative to this end proposed by the Swedish EU Presidency.
DG-RELEX noted that if you could move Ukrainian energy
efficiency up to the level of western European countries you
could completely eliminate their need for imported Russian
gas. The EU is already providing 15 million euros for
improving energy efficiency via the European Bank for
Regional Development (EBRD).

- Modernization of Gas Transit. This is a major component of
the EU's assistance to Ukraine. The GOU signed an action
plan with the EU in March of 2009. The aim of this plan is
to promote transparent and efficient operation of the line.
To monitor progress, the EU has established a Technical
Coordination Unit with the IFIs. The next meeting of the TCU
will be Oct 22-24 in Kyiv. The U.S. has asked to be an
observer to the TCU.


4. (SBU) On the question of the loan packages for Ukraine
from international financial institutions (IFIs),both sides
agreed to remain firm with Ukraine about the need to meet the
conditionalities for reform imposed by the EBRD and World
Bank (WB). The consensus was that GoU needs to recognize the
necessity of implementing reforms in the energy sector and
that it should not be rewarded for non-compliance. There was
also a consensus that the EBRD and WB loans are not essential
to Ukraine's solvency. DG-RELEX judged that Ukraine's

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progress on meeting the conditionalities has been lackluster
so far and indicated that if things continue at this pace it
is doubtful that Ukraine will get IFI funding in October.


5. (SBU) Going forward the EU considers the next critical
period for Ukraine to be October 2009 to January 2010. The
EU remains concerned that there will be a repeat of the
Russia-Ukraine gas crisis, with the EU once again faced with
gas cutoffs to vulnerable Member States. There was a general
acknowledgement of the difficulties faced by Prime Minister
Tymoshenko going into the Presidential election on January

17. DG-RELEX pointed out that the gas situation will be used
as a political tool by all the candidates. As such,
Mingarelli pointed to the difficulty Tymoshenko would face in
trying to raise domestic gas prices and asked "How can we ask
her to commit political suicide?"


6. (SBU) On the question of funding from the International
Monetary Fund (IMF),DG-RELEX officials cautioned that if
Ukraine does not secure the next tranche of IMF funding
(Note: Fourth tranche of $3.8 billion is scheduled for
disbursement in mid-November, pending October review. End
Note.) there could be serious consequences for Ukraine's
economy. As such, DG-RELEX representatives advocated for
"flexibility" in evaluating Ukraine's progress on loan
conditionalities and disbursement of the next tranche. Both
sides agreed the IMF would be in the lead in determining the
fate of the loan.


7. (SBU) On next steps, the group agreed the U.S. and the
EU should work to better coordinate efforts on Ukraine.
DG-RELEX suggested the first step will be to encourage the
respective Missions in Ukraine to work together more closely
and share information about our respective initiatives.
(Note: The Commission has proposed Oct 23 in Kyiv to meet
with U.S. officials to review ongoing technical assistance
programs. End note.) Participants welcome the U.S.-EU Energy
Council as a forum for discussions on Ukraine, but also
emphasized the importance of continued informal working-level
exchanges.


8. (SBU) Ambassador Morningstar and PDAS Elkind have cleared
this cable.

Murray
.