EU INVESTMENT CONFERENCE FOR UKRAINE'S GAS

UNCLAS SECTION 01 OF 03 BRUSSELS 000186 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EPET EUN UP SUBJECT: EU INVESTMENT CONFERENCE FOR UKRAINE'S GAS INFRASTRUCTURE Sensitive but Unclassified - not for Internet distribution. ¶1. (SBU) Summary. In a February 6 meeting DG-RELEX Energy Counselor Faouzi Bensarsa told visiting DAS Doug Hengel about EU Commission plans to host an investment conference on Ukrainian Gas Infrastructure in Brussels on March 23. Bensarsa said the fundamental key from an external policy perspective is that the EU has to work on what it has now (Ukraine) while building for diversity (Nord Stream and the Southern Corridor). The March conference is aimed at assisting Ukraine in rehabilitating and developing its gas transit network as well as fostering the implementation of structural reforms for the domestic gas market and the international transit of gas. Bensarsa stopped short of predicting funding pledges at the conference and instead suggested the conference could result in a statement of readiness to consider making investments to improve the reliability of the transit system while at the same time continuing reforms and adding transparency. On February 9 representatives from Ukraine's Mission to the EU told Econ Officers that Ukraine is open to pursuing reforms in its energy sector and that they are optimistic the conference will result in a number of funding pledges. End Summary. ¶2. (SBU) On February 6 DAS Doug Hengel met with Faouzi Bensarsa, Energy Counselor and Head of the Task Force for Energy Security and Nuclear Safety for DG-RELEX at the EU Commission, to discuss opportunities for U.S.-EU cooperation on Ukrainian energy. Bensarsa started the meeting by stressing that the EU "must stabilize relations with Russia and the transit states (Ukraine and Belarus)." The EU depends on Ukraine for transiting 120 bcm of Russian gas. Even if all the Streams (Nord Stream, South Stream, and White Stream) go forward, Bensarsa said the EU will continue to depend on Ukraine for gas transit. The fundamental key from an external policy perspective is that the EU has to work on what it has now (Ukraine) while building for diversity (Nord Stream and the Southern Corridor). Bensarsa said he welcomed the deal struck by Ukrainian Prime Minister Tymoshenko and Russian Prime Minister Putin because it has moved Russia/Ukraine gas into contracts that are not far from EU models and has eliminated RosUkrEnergo as a middleman. ¶3. (SBU) Bensarsa said that the EU Commission plans to hold a conference in Brussels on March 23 entitled "Joint EU-Ukraine International Investment Conference on the Rehabilitation of Ukraine's Gas Transit Network." Bensarsa provided DAS Hengel with copies of the invitations for Secretaries Clinton and Chu, which he said were sent out on February 6. The March investment conference is aimed at assisting Ukraine in rehabilitating and developing its gas transit network as well as fostering the implementation of structural reforms both for the domestic gas market and the international transit of gas. The conference will bring together representatives of the EU, Ukraine, and third countries, as well as international financial institutions and the private sector. The Commission has invited participation by EU Member States, Ukraine, the Western Balkans, Central Asia, the South Caucasus, G8 Countries (Canada, Japan, Russia, and the United States),international financial institutions (European Investment Bank, European Bank for Reconstruction and Development, World Bank, and the IMF),as well as national financial agencies, banks, and gas companies. EU-UKRAINE ENERGY COOPERATION ¶4. (U) Improving Ukraine's gas transit system is a major objective of the "Memorandum of Understanding on co-operation in the field of energy between the European Union and Ukraine" signed on December 1, 2005 and of the EU-Ukraine Action Plan. The EU-Ukraine Summit of September 9, 2008 further endorsed this commitment. In 2006-2007, the European Commission and Ukraine jointly conducted an audit of Ukraine's natural gas transit infrastructure. The audit concluded that Ukraine needed 2.5 billion Euros to rehabilitate the audited infrastructure over the period from 2008-2013. MOTIVATIONS FOR THE CONFERENCE ¶5. (SBU) The Commission considers the March conference as extremely important. Bensarsa said the EU believes it is time to push for a full gas reform program and bring Ukraine's gas system in line with the EU acquis. Bensarsa believes Prime Minister Tymoshenko is committed to achieving this reform. Ukraine has been hard hit by the financial crisis, but Tymoshenko is committed to work with financial institutions provided Ukraine's Constitution is respected. Under the Constitution, privatization is not an option and BRUSSELS 00000186 002 OF 003 there is no readiness to consider changing this. Under current legislation there is also no way to allow for foreign investment in the gas transit system. ¶6. (SBU) Bensarsa said the March conference was conceived last Fall as part of the EU-Ukraine Strategic Partnership talks. According to Bensarsa, the EU's goals of this Strategic Partnership rest on four pillars: full integration of the Ukraine's gas system into the EU gas market through the adoption of the EU acquis, improving Ukrainian energy infrastructure and energy efficiency, diversification, and reform and transparency. Bensara said that the EU-Ukraine audit had shown that Ukraine's transit system will require large investments to allow it to meet its commitments under the 10 year contract with Russia for gas transit. As part of this program, Ukraine will also need to improve the efficiency of the system by 25 percent by upgrading compression facilities and reducing the amount of gas used to fuel compressors. Also important will be improved security of the pipelines. CONCRETE PROJECTS AND READINESS TO CONSIDER PARTICIPATION ¶7. (SBU) The March conference is intended to be an investment conference with concrete projects. The EU is working with Ukraine on a full master plan of bankable projects for financing by international financial institutions. The EU wants Tymoshenko to agree that funding for these projects will be conditioned on Ukraine implementing the necessary reforms linked to the EU acquis. The EU wants to pursue the rehabilitation program in parallel with the reforms. By the end of 2009, the EU wants to set up a "Project Management Unit" (PMU) to facilitate investment by international financial institutions and help Ukraine to develop reforms. ¶8. (SBU) Bensaras said the March conference is intended to be international, not just EU-Ukraine. The EU is looking for international support for implementing reforms in Ukraine and enforcing the conditionalities of investment. Bensarsa said he does not expect the conference to result in immediate funding pledges. One option for the conference would be to agree on readiness to do investment and reform at a later stage through the PMU (formed by those countries willing to participate). Bensarsa envisages this as a "lighter version of the Chernobyl Fund." The Commission plans to distribute a list of potential investment projects by the end of February. Ideally, the EU wants countries participating in the conference to "commit to consider" participating provisional on reforms taking place. Bensarsa indicated he is working closely with Prime Minister Tymoshenko's people, and stressed that this effort should not be limited to the EU. METERING ¶9. (SBU) Bensarsa said that the EU is also talking to Ukraine about the fundamental issue of metering. Currently, the delivery point for Russian gas to the EU is Ukraine/Slovakia border. There is no delivery point at the Ukraine/Russia border. There are also no EU/Ukraine contracts for gas transit. The transit contracts are between Russia and the EU. Bensarsa opined that if there is any hope of improving transparency in the Ukraine transit system, you need to have a clear picture of the volumes crossing the Ukraine/Russia border. The costs of establishing such a metering system are not negligible, however, and there is no economic reason for Ukraine to invest in this. As such, there must be a political decision to institute metering. THE UKRAINIAN PERSPECTIVE ¶10. (SBU) On February 9 representatives from the Ukrainian Mission to the EU provided Econ Officers with their view of the March Conference. Deputy Head of Mission Vsevolod Chentsov and Counselor for Energy, Nuclear Safety, and Environment Viacheslav Kniazhnytskyi said that they are expecting the March conference to result in real investment commitments for improving Ukraine's gas transit infrastructure. Kniazhnytskyi indicated that Ukraine has identified a number of "bankable" projects to improve the gas transit system with a total cost of about 1.6 billion euros (2.1 billion dollars),much lower than the 2.5 billion euros the Commission is proposing. A final list of projects will be submitted on February 16. Chentsov and Kniazhnytskyi both indicated that Ukraine wants to continue reforms in its energy sector with the aim of bringing the Ukrainian system up to EU standards. ¶11. (SBU) On the question of metering, Kniazhnytskyi said that Ukraine estimates it would cost 80 million euros to install metering facilities at all 7 gas entry points. BRUSSELS 00000186 003 OF 003 Kniazhnytskyi agreed with Bensara's logic that there was no economic reason to justify this investment. Kniazhnytskyi said, however, that he had been asked by an EU Council official if Ukraine would be open to European companies purchasing gas at the Russia/Ukraine border rather than the Ukraine/Slovakia border. Kniazhnytskyi said he believes Ukraine would welcome such an arrangement. ¶12. (SBU) Comment. Bensarsa was eager for U.S. participation in the March conference and was open to pursuing U.S.-EU-Ukraine cooperation on energy. Chentsov and Kniazhnytskyi were also eager to pursue cooperation on a trilateral basis. Selling other EU officials on the idea of U.S.-EU-Ukraine cooperation will be a harder sell. DG-TREN and EU Council officials with whom we've raised the subject have so far been hesitant to pursue this opportunity. As one example, a DG-TREN Commission official we spoke with recently seemed confused by questions about trilateral cooperation, saying that the EU was already pursuing the idea of trilateral energy cooperation between the EU, Ukraine, and Russia. End Comment. Murray .