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 BRUSSELS 00000402 003 OF 003 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 .