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