OPPORTUNITIES FOR U.S.-EU-UKRAINE ENERGY

UNCLAS SECTION 01 OF 03 BRUSSELS 000402

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET EUN
SUBJECT: OPPORTUNITIES FOR U.S.-EU-UKRAINE ENERGY
COOPERATION

REF: BRUSSELS 306

Sensitive but Unclassified - not for Internet distribution.


1. (U) Summary. Ahead of the March 23, 2009 EU conference on
Ukraine's Gas Infrastructure this cable reflects on ways the
U.S. and EU could work together to improve Ukraine's
reliability as a gas transit State. The 2008 U.S.-EU Summit
affirmed our intention to work trilaterally with the
Ukrainian government to advance their ability to provide
energy to Europe. The EU has established an "Action Plan on
Ukraine", but to date progress has been minimal. Reviewing
this Action Plan, however, points out several areas where the
U.S., the EU, and Ukraine could cooperate constructively.
End Summary.


2. (U) The 2008 U.S.-EU Summit Declaration affirmed the
United States' commitment to working with the EU and Ukraine
trilaterally to improve energy security throughout the
region. Specifically, the Declaration states that "We will
work together with Ukraine to increase the transparency and
efficiency of its energy markets and support international
efforts to rehabilitate and modernize its transit networks."
Since that time, the U.S. and the EU have both pursued
bilateral energy cooperation with Ukraine, but no progress
has been made towards establishing cooperation on a
trilateral basis.

EU COOPERATION WITH UKRAINE

3. (U) The EU adopted an "Action Plan on Ukraine" in 2005,
which includes a number of energy initiatives that are of
mutual interest to the United States. As such, these
initiatives serve as examples of areas where the U.S. and EU
could work in a complimentary fashion. A central theme to
these objectives is one of bringing Ukraine's electricity and
gas markets into line with the regulatory structure found in
the EU's internal market. The Action Plan suggests this can
be achieved by:

-- Gradually increasing domestic prices to market levels,

-- Restructuring the internal gas sector,

-- Revision and adoption of debt law as regards the Ukrainian
gas network, and

-- Adoption and implementation of a National Electricity
Regulatory Commission.


4. (U) Regarding energy networks and gas transit through said
networks, the Action Plan seeks to achieve a reduction in
network losses through modernization of Ukraine's
infrastructure, the development of diversified oil and gas
supplies, and continued efforts to unbundle and increase
transparency within the gas transit business.


5. (U) A progress report published in April of 2008 details
progress made by the European Union in meeting the Action
Plan's objectives. In 2006-2007, the European Commission and
Ukraine jointly conducted an audit of Ukraine's natural gas
transit infrastructure. The audit concluded that from 2008
to 2013 Ukraine would need 2.5 billion Euros to rehabilitate
transit infrastructure. Progress has been made on extending
Ukrainian pipelines through the construction of new and
redundant pipeline systems to supplement existing
infrastructure, and with the Ukrainian adoption of a sector
reform plan and opening of accession talks to the Energy
Community Treaty, the EU and Ukraine continue to strengthen
ties and draw closer to harmonization on the issues laid out
in the Action Plan. Two areas of weakness noted in the
progress report are Ukrainian regulatory presence and energy
price levels, where "much work still needs to be done,"
though the report acknowledges Ukrainian adaptation efforts
to that end.


6. (SBU) EU Commission officials have made clear to us that
stabilizing relations with transit countries remains a
priority for the European Union. According to Faouzi
Bensarsa, Energy Counselor and Head of the Task Force for
Energy Security and Nuclear Safety for DG-RELEX at the EU
Commission, even if all three currently proposed Stream
pipelines (North, South, and White) went forward and entered
operation, the European Union would still depend on Russian
gas transit via Ukraine to meet its energy needs. Currently,
the EU relies on Ukraine's network to transfer some 120
billion cubic meters per year of Russian gas. The EU's
policy goal, according to Bensarsa, is to work with Ukraine
and Russia and the energy systems currently in place while

BRUSSELS 00000402 002 OF 003


simultaneously working to diversify energy sourcing to
improve energy security.

U.S.-UKRAINE COOPERATION

7. (SBU) The USG is already directly involved with Ukraine
vis-a-vis energy policy on a bilateral level. We enjoy good
relations with the Ukrainians on a variety of energy-related
issues, including nuclear and nonproliferation policy and
energy transportation policy. USG representatives, including
high-level representatives and Ambassadors, regularly
communicate with Ukrainian interlocutors on energy issues,
and there exists a frequent exchange of opinion and
information on the matter. This existing foundation of
cooperation and mutual respect would assist in the process of
engaging with Ukraine and the EU on a trilateral level on
energy policy.


8. (U) Additionally, the U.S. and Ukraine have engaged in a
number of concrete activities bilaterally in the field of
energy cooperation. The USG has funded Energy Advisors to
provide technical assistance to Ukraine on issues of gas
infrastructure maintenance and repair. The Department of
Commerce has provided support in the creation of a
feasibility study on combination coal and heating plants in
Ukraine, and has continued to support increased U.S.
investment in Ukrainian industry. On a more micro level, the
USG is working with Ukrainian municipalities to improve the
energy efficiency of local heating companies. USAID has
recently awarded a three-year, USD 13.3 million contract to
support energy-efficient retrofits at a local level
throughout Ukraine.

FUTURE AREAS FOR U.S.-EU-UKRAINE ENERGY COOPERATION

9. (SBU) There exist a number of issue areas within the
energy sector that present clear opportunity for trilateral
cooperation between the USG, EU, and Ukraine. In regards to
increasing transparency and stability of global energy
markets, both the USG and the EU have a strategic interest in
assisting Ukraine in its efforts to further create free,
transparent, and open markets for the transfer and sale of
gas products. Trilateral engagement could also be useful in
battling corruption at all stages of the supply chain, and
also in the building of clear and stable regulatory
frameworks governing international energy cooperation.


10. (SBU) The U.S. and the European Union also stand to
benefit from working with Ukraine to increase its energy
efficiency and modernize its infrastructure, both through
repair and renovation and the implementation of new
techniques to increase energy efficient transportation, such
as "smart" monitoring systems and up-to-date data centers.
Finally, trilateral talks on the issue of energy
diversification could maximize participant State's benefits,
minimizing the risk of energy supply disruption while
simultaneously working towards possible large-scale
diversification projects, especially in the area of nuclear
technology.

UKRAINE GAS INFRASTRUCTURE CONFERENCE

11. (U) The Commission is planning a conference on 23 March
entitled "Joint EU-Ukraine International Investment
Conference on the Rehabilitation of Ukraine's Gas Transit
Network,' which is designed as an investment conference with
concrete projects for consideration. The European Union aims
to offer assistance with infrastructure rehabilitation in
tandem with Ukraine's continued reforms towards harmonizing
with the EU's acquis. The conference is not intended to be
solely between the European Union and Ukraine - multiple
third parties and outside nations have been invited to
attend, including the United States.


12. (SBU) The EU views this conference as a way to show
political support for reforms in Ukraine's gas industry. The
World Bank, European Investment Bank, and the European Bank
for Regional development plan to participate in the
conference. These financial institutions have, however, put
forward some prerequisites for reform (see reftel) to provide
the transparency to the system that they require before they
will be willing to commit to investments in Ukraine's gas
infrastructure. Specifically the IFIs are calling for
Ukraine to unbundle its gas transmission system from control
by state-run Nafhtogaz. After extensive negotiations, the EU
and Ukraine have agreed on a draft declaration for the
Conference, which incorporates these prerequisites.

COMMENT

13. (SBU) Building a cooperative approach with the EU will
likely not be as straight forward as it would appear. There

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are divisions within the Commission and even within DG-RELEX
over how the EU should handle its relations with Ukraine and
whether or not these relations should involve Russia. We
have seen no overt opposition to the concept of working
jointly with the U.S. on Ukraine, but we have encountered
widely varying levels of interest in such cooperation. The
principal champions of closer U.S.-EU-Ukraine energy
cooperation reside with Faouzi Bensarsa in DG-RELEX's Energy
Task Force. Other DG-RELEX official, as well as their
counterparts at DG-TREN, are less enthused.

Murray
.