UKRAINE: DETAILS AND QUESTIONS ON GAS DEAL STILL

C O N F I D E N T I A L KYIV 000117

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB,
NSC FOR STERLING AND KVIEN,
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

E.O. 12958: DECL: 01/21/2019
TAGS: EFIN ENRG EPET PGOV PINR PREL UP
SUBJECT: UKRAINE: DETAILS AND QUESTIONS ON GAS DEAL STILL
FLOWING

REF: KYIV 107

Classified By: DCM James Pettit for reasons 1.4 b) and d).


1. (C) Summary. As natural gas supplies reach normal levels
in Ukraine and other countries in Europe, more details on the
gas deal have been released by the Prime Minister, the
President, the Minister of Energy, various members of the
Presidential Secretariat and Naftohaz officials. At present,
questions remain concerning the actual price Ukraine will pay
for gas in 2009, the price Ukraine will pay for the
much-debated technical gas, the price Gazprom will pay
Ukraine for gas transit in 2010, the role of the EU gas flow
monitors, the commercial role Gazprom will play in the
Ukrainian domestic market via its subsidiary Gazpromsbyt, and
whether or not Ukraine will be allowed to export excess gas
westward. Tymoshenko claimed victories in obtaining a low
gas price for 2009 and in refurbishing Ukraine's tarnished
reputation as a reliable gas transit country. At the same
time, President Yushchenko seems to have abandoned his
temporary unified gas negotiations position with the PM, and
has reverted to criticizing the gas deal ex post facto in the
press. Moreover, he has called a meeting of the National
Security and Defense Council on January 23 to determine if
the gas agreement violates Ukraine's national security. End
summary.

Tymoshenko Claims Victories
--------------


2. (C) On January 21 PM Tymoshenko announced that Ukraine had
regained its reputation as a reliable gas transit partner.
She referred to a January 21 statement by EU Commissioner
Andris Piebalgs which reportedly refuted Gazprom claims that
Ukraine had siphoned Russian gas or inhibited transit
supplies during the gas cutoff. She also declared victory
over the infamous gas intermediary RosUkrEnergo (RUE),
repeating that RUE had been eliminated and that by doing so,
Ukraine had finally destroyed a large "feeding trough" for
corrupt politicians. EconOff spoke with the EU/EC Energy
Officer Hans Rhein in Kyiv on January 21 who stated that the
EU was convinced RUE had finally been eliminated, but that
Europe still did not have all the facts concerning the
details of the gas agreement.


3. (SBU) Tymoshenko told the press on January 20 that the
2009 gas price for Ukraine would be $228.8 per thousand cubic
meters (tcm) of gas, and added that Ukraine would receive
this price for the entire year. Minister of Energy Yuriy
Prodan echoed her comments on the same day. However,
Naftohaz Deputy Head Volodymyr Trykolich announced that the
gas price would be reduced quarterly. Ukraine will pay $360
per tcm in the first quarter, $270 per tcm in the second,
$219 per tcm in the third, and $162 per tcm for the fourth,
which when factoring 11 bcm at $167 per tcm translated into
an average 2009 gas price of $228-$229 per tcm, assuming that
Ukraine purchases equal amounts of gas each quarter.

Technical Gas
--------------


4. (SBU) The Prime Minister also stated that Ukraine would
buy 11 bcm of technical gas (gas required as fuel for
compressor stations which pump gas for transit) for $153 per
tcm. This contradicts her January 20 statement to the media,
where she said Ukraine would pay $167 per tcm. (Note:
Ukraine reportedly used 6.5 bcm to transit 116 bcm of gas
westward in 2008, and with gas demand decreasing, it is
doubtful that Ukraine will transit 116 bcm or more in 2009,
which could leave Ukraine with 4.5 bcm of excess gas. It is
not clear if the recent gas agreement would allow Ukraine to
export excess technical gas on to Europe and at what price
Ukraine be allowed to sell this gas. End note.) Naftohaz's
Trykolich, however, stated that Ukraine would have to pay
$167 per tcm for technical gas for 2009 and not $153 per tcm
as Tymoshenko stated. As a result of these discrepancies, it
is still unclear how much Ukraine will actually pay for
domestic and technical gas for 2009 and what would happen to
any excess technical gas. In the past, excess technical gas
was only allowed to be placed in Ukrainian underground
storage facilities. Tymoshenko also noted that the price for
this technical gas was less than the $179.50 per tcm Ukraine

paid for gas in 2008 and claimed this low price for technical
gas as another victory.

Yushchenko's Buyer's Remorse
--------------


5. (SBU) President Yushchenko challenged Tymoshenko's gas
price victory and her math skills on January 20, calling
Tymoshenko's price of $228.8 per tcm implausible. He claimed
that Ukraine would have to pay $360 per tcm for the first
quarter (as Naftohaz's Trykolich asserted) and that the
fourth quarter price would have to be $132 per tcm in order
to achieve an average price of $228 per tcm. In addition,
Yushchenko stressed that Tymoshenko agreed to a 2009 gas
price of $450 per tcm, minus a 20 percent discount, but
Ukraine would come out losing as future gas prices would be
based on a formula that would use $450 per tcm as the base
price. He argued that Tymoshenko should have fought for a
much lower base price for Ukraine. He characterized the 2009
gas price as a defeat for Ukraine. Presidential Advisors
Bohdan Sokolovskiy and Oleksandr Shlapak accused Tymoshenko
of ignoring Presidential directives during gas talks which
have possibly endangered Ukraine's energy security.

NSDC to Review Gas Deal
--------------


6. (C) Building on this theme of price problems, Yushchenko
took the opportunity during a joint press conference with
Belarusian President Lukashenko (held in Chernihiv, Ukraine)
to comment on the deal and the price, noting that $360/tcm
would be an "obvious loss" for Ukraine. He has called a
closed door meeting of the National Security and Defense
Council (NSDC) to review the deal in detail, in particular to
assess whether it meets Ukraine,s national interests or
creates a threat to national security. The NSDC is also
tasked with coming up with measures to counter negative
economic impacts of any price increase.


7. (C) Conversations with colleagues at the EC delegation on
January 21st highlighted Commission concerns regarding the
call for an NSDC meeting, particularly given the meeting's
focus on identifying national security threats posed by the
deal. Our contacts speculated that such "threats", whether
exaggerated by the President or legitimate -- could then be
used by Yushchenko to reinsert himself into the process.
They expressed clear concern that Yushchenko could
inadvertently derail or even undo the deal, which according
to them would cause very serious further damage to Ukrainian
credibility in Europe.

Gazpromsbyt and Ukraine's Industrial Gas Sector
-------------- --------------


8. (SBU) The Ukrainian press reported that Gazprom subsidiary
Gazpromsbyt Ukraine would be allowed to sell 25 percent of
the gas intended for Ukrainian industrial use in 2009. In
2008 Gazpromsbyt was allowed to sell 7.5 bcm of gas,
according to last year's gas agreement. In October 2008,
Gazpromsbyt head Anatoli Podmysharlsky expected that
Gazpromsbyt would provide only 4 bcm of gas to industrial
consumers by the end of 2008, due to decreased demand during
the global economic crisis. In very good production years,
Ukraine's industries use at most 34 bcm of gas, so allowing
Gazpromsbyt to receive 25 percent of the industrial market
would not be a dramatic increase in Gazpromsbyt's current 7.5
bcm limit, if any.


9. (C) Comment. Although gas is flowing again, many
questions regarding the gas deal remain unanswered. The
President reportedly gave the Prime Minister full negotiating
authority to act on Ukraine's behalf, but he is now publicly
expressing his dissatisfaction with the agreement Tymoshenko
made with Russia on January 19. Yushchenko's true objectives
in calling an NSDC meeting to examine the deal are unclear,
however, and the European Commission delegation was frankly
concerned that the gas crisis might not yet be behind them.
End comment.
TAYLOR