UKRAINE'S CASE THAT IT DID NOT IMPEDE GAS SUPPLIES

C O N F I D E N T I A L KYIV 000204 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: 01/29/2019 TAGS: EFIN ENRG EPET PGOV PINR PREL UP SUBJECT: UKRAINE'S CASE THAT IT DID NOT IMPEDE GAS SUPPLIES REF: KYIV 90 Classified By: Ambassador for reasons 1.4 b) and d) ¶1. (C) Summary and comment. A week after gas supplies have resumed to Ukraine and countries westward, the question of whether Ukraine or Russia is responsible for stopping supplies is still being raised. A close look at developments in the first week of January, however, shows that Russia was the first to cut off supplies completely early on January 7. Ukraine successfully reversed gas flows to supply its domestic market out of its vast storage reserves, a move that, the GOU argues, surprised Moscow. Ukraine argues that Gazprom then deliberately tried to disrupt this strategy by demanding Ukraine deliver gas to other European countries under conditions that Gazprom knew were technically impossible. To our knowledge, Gazprom has not attempted to seriously debunk this Ukrainian claim, nor has it delivered any evidence that Ukraine stole gas, Gazprom's main motive for reducing and then subsequently shutting down supplies completely. Instead, it is now evident that Ukraine continued to supply gas to other European countries as long as it could, and while it did use Russian gas for this purpose, in the end it used more of its own gas to do so. Ukraine did not help matters with its reticence to pay its gas debts in a timely manner, and its defense of its own position looks timid when compared to what the GOU says is Gazprom's ongoing lobbying efforts to brand Ukraine as an unreliable partner. Ukraine has solid arguments on its side, however, that Russia deliberately put the country in an impossible situation. Ukraine needs to disseminate the facts better so that a clearer, and fairer, overall picture of the gas war emerges. End summary and comment. Russia Gradually Reduced Supplies..... -------------- ¶2. (SBU) According to data provided on Naftohaz's website, Gazprom was delivering about 318 million cubic meters (mcm) of gas to Ukraine before Gazprom started reducing supplies on January 1. By January 2 Gazprom reduced deliveries by 18 mcm to 300 mcm. Subsequent reductions resulted in volumes of 293.2 mcm and 214 mcm on January 4 and 5, respectively. On January 6, Naftohaz only received 59.7 mcm from Gazprom. On January 7, Naftohaz continued transit supplies for two hours after Gazprom reduced gas supplies entering Ukraine to zero at 7:45 that morning. ¶3. (SBU) Gazprom and the Russian government openly acknowledged that Gazprom began reducing supplies on January 1, hours after the two sides failed to reach an agreement over gas purchases and transit for 2009. It also acknowledged reducing the volumes in the ensuing days, arguing that Ukraine had been stealing gas meant for other central and western European countries. Ukraine confirmed the delivery of gas, but argued repeatedly that it had not stolen any gas. It subsequently backed up its claims by publishing figures that Gazprom has yet to refute. ...While Ukraine Supplied Europe out of Storage -------------- -------------- ¶4. (SBU) In the early days of the conflict, Ukraine continued to supply destinations further westward with gas drawn from the country's vast underground storage facilities. From January 1 to January 6, Ukraine received an average of 248 mcm daily, and delivered 239 mcm further westward, according to Naftohaz. It argued that the difference, averaging 8.7 mcm per day, was technical gas that was withdrawn to fuel the compressor stations along the transit route. Naftohaz claims that it needed 21 mcm per day to ensure a 300 mcm per day volume. We have no reason to doubt these figures, as Naftohaz has published them and offered to allow European monitors to examine them. There is no evidence whatsoever that Ukraine took more than what it openly acknowledged, and to our knowledge Gazprom has not produced any figures contradicting what Naftohaz has published. Did Ukraine Steal Gas? -------------- ¶5. (C) We have been unable to find convincing evidence for the Gazprom claim that Ukraine had been stealing Russian gas meant for transit. It appears that Gazprom's argument is only true if one believes that the withdrawal of 21 mcm/day as technical gas, which Ukraine has openly acknowledged, can be considered theft. In the end, it may boil down to a formal legal argument. Ukraine has argued that Russia has a contractual obligation to supply technical gas for transit, which Ukraine pays for at a pre-agreed rate. In 2008, for example, Ukraine bought 6.5 billion cubic meters (bcm) of technical gas from Russia for $179.5 tcm - the same price it pays for gas purchased for domestic use - to pump 116 bcm further westward. Gazprom, however, argued that Ukraine had no right to withdraw technical gas, because the two countries had failed to conclude a 2009 agreement. Ukraine, in turn, argued that Russia could not expect Ukraine to transit its gas if it did not provide the technical gas to do so, even in absence of a contract. Naftohaz chairman Oleh Dubyna told the Ambassador (reftel) that, on December 31, when it became obvious that no 2009 deal would be signed, he had suggested the two sides sign a 30 day agreement to continue gas supplies and transit according to their 2008 agreement. Subsequently, when a 2009 agreement was reached, the two sides would compensate each other for any differences that might arise because of changes in the gas price and transit fee. Gazprom refused to consider this option, Dubyna claimed, creating a legally gray area on January 1. ¶6. (SBU) One might argue that Ukraine did not need technical gas if it was supplying other European countries from its underground storage capacity, most of which is located in the far west of the country. However, in the first days of the conflict, when pressure dropped, yet remained relatively high, Ukraine took some of the Russian deliveries to supply its own market - most prominently in the eastern part of the country - and as technical gas to pump gas domestically. (Note: Ukraine's domestic market consumes about 240 mcm daily.) Russia might have argued that this was theft, but ultimately Ukraine's behavior should be judged on the total balance of what it received from Russia, and what it delivered to other European countries. On balance, Ukraine used 52.2 mcm of gas out of its own reserves to ensure transit to Europe. At a price of $179.5 per tcm, this means that Ukraine spent $9.36 million to guarantee transit, a sum for which, to our knowledge, it will not receive compensation from Russia. Ukraine: Russia Cuts Off Gas in Front of Running Cameras -------------- -------------- ¶7. (SBU) After supplies stopped completely on January 7, and Ukraine stopped shipping gas further westward, both sides in the conflict waged a war of words over who was responsible. However, Russia's and Gazprom's leadership actually demonstrated publicly that they took the final step on January 7 to shut down supplies to Ukraine. On the evening of January 6, Russian TV televised a meeting in which Prime Minister Putin directed Gazprom CEO Alexei Miller to shutoff supplies to prevent further Ukrainian theft, and it later broadcast how an engineer at the Sudzha gas metering facility took orders from an unknown Gazprom official to cut off all supplies. From these two Russian programs clips, which were repeatedly shown in Ukraine, it seemed clear in Kyiv, at least, that Gazprom ordered a complete shutoff of supplies. But Did Ukraine Turn Off the Valves? -------------- ¶8. (SBU) What was not immediately clear was whether Naftohaz had prevented gas from entering the country by turning off valves on its side first, as Gazprom has claimed. In hindsight, this does not appear to be the case. Gazprom shut down supplies completely on January 7. Neither side had acknowledged that Gazprom actually tried to deliver gas on that day. It was only on January 13 that Gazprom again tried to deliver gas, but claimed that Ukraine was refusing delivery. Ukrainian officials have told us that this was a trick, and that Gazprom had no intention of sending gas through Ukraine. Naftohaz acknowledged that it had received daily requests from Gazprom to accept deliveries of relatively small amounts of gas meant for countries in southeastern Europe, to be delivered from Sudzha in Russia via Orlivka in southwestern Ukraine. Naftohaz added, however, that it could not accept the gas, because Gazprom was proposing to deliver gas in a manner that Ukraine could not accept. Naftohaz had already reversed the flow of gas to supply eastern Ukraine from storage facilities in the far west of the country. The high pressure flow would have backed up the small amount of gas coming from one entry point in Russia. Naftohaz maintained that Gazprom officials knew this, but decided to create a technically impossible situation for Ukraine. On January 29 First Deputy PM Oleksandr Turchynov told the Ambassador that Naftohaz kept the valves temporarily open after the complete shutoff on January 7, but ultimately was forced to close them completely on January 9 to prevent backflow into Russia. ¶9. (C) Prime Minister Tymoshenko's Chief Advisor Vitaliy Haiduk told the Ambassador (reftel) that Gazprom did not think that Ukraine could actually reverse gas flows to supply its own market in the face of a complete gas cutoff. Once Gazprom realized that Naftohaz had successfully reversed the gas flows, it tried to thwart the action demanding transit of gas under conditions that it knew Ukraine could not accept, Haiduk argued. Russia Forces Ukraine to Choose Between Donbass and Europe -------------- -------------- ¶10. (SBU) If Naftohaz had accepted and transited the Russian gas, it would have had to shut down supplies to the heavily populated Donbass industrial heartland of eastern Ukraine. Naftohaz asked Gazprom to supply gas at entry points adjacent to the Donbass, and in return Ukraine would have supplied countries further westward out of its underground storage facilities, but Gazprom refused. Hence Ukraine was being forced by Russia to choose between servicing a large, economically important and politically sensitive part of its own market, or maintaining a small amount of transit to southeastern Europe. Ukraine's political leadership had no choice but to accept the first option. ¶11. (C) To our knowledge, Gazprom has not refuted the aforementioned technical arguments in any meaningful way. It has not explained how Ukraine might have serviced its own market while guaranteeing transit from Sudzha to Orlivka. An Energy officer at U.S. Embassy Moscow told us that Gazprom officials commented that Gazprom did not want to send gas into other pipelines that feed into Ukraine's domestic market because that would be an expensive way to prove that Ukraine was stealing gas. Naftohaz Says It Prevented Explosion in the Pipeline -------------- -------------- ¶12. (C) Naftohaz Deputy Head Volodymyr Trykolich and Naftohaz engineers have also told us that an explosion would have occurred had Naftohaz shut off its valves when Russia was attempting to deliver large volumes gas. The fact that Ukraine was able to shut the valves is a testament to the fact that Russia was only delivering small volumes of gas, or none at all, Trykolich argued. Gas pressure has to remain in a certain range, he argued, and extremely low pressure, such as Russia delivered on January 6, could also have caused damage had the valves been closed. Hence Ukraine kept its system open for Russian gas, Trykolich said, and ultimately only shut the valves when it began pumping gas in the opposite direction to prevent backflow into Russia. EU Representatives in Kyiv Support Naftohaz Position -------------- -------------- ¶13. (C) European Commission Energy Officer in Ukraine Hans Rhein told EconOff that the EU agreed with Ukraine's arguments. Russia/Gazprom created a "technically impossible" situation for Ukraine which forced Ukraine to shut off the valves on its side. According to Rhein, EU monitors also came to this conclusion and reported as such to Brussels. Brussels, however, has made no specific statements which would place responsibility on one of the parties; instead, the EC has stated that Russia and Ukraine have severely damaged their reputations as a reliable supplier and transit country, respectively. Rhein also reported, as of January 26, EU monitors remained at gas metering stations in Ukraine and Russia. He noted that Ukrainian and Russian monitors stopped participating immediately after the gas deal was signed on January 19. First DPM Oleksandr Turchynov also told the Ambassador that independent experts, including the EU monitors, confirmed that Ukraine did not shut off the gas first and did not steal any gas. Ukraine had not stolen "one cubic meter" of gas, Turchynov said. Moreover, Ukrtranshaz's (Ukraine's state-owned gas transport company and subsidiary of Naftohaz) Deputy Head Bohdan Klyuk told Qthat he gave all documents to EU monitors showing gas amounts at each entry point during the cutoff, adding that those documents prove that Russia decreaseQupplies to zero, not Ukraine. Ukraine and Naftohaz Share Some Blame -------------- ¶14. (SBU) Naftohaz's failure to pay its outstanding gas debt to RUE exacerbated an already tense negotiating atmosphere, with the Ukrainian side scrambling to settle the $1.52 billion debt on December 30. The GOU had to engage the National Bank to secure last-minute loans from Ukrainian banks to pay the debt. The IMF has told us it suspects that Ukraine may have delayed paying as long as possible to ensure fulfillment of a key IMF conditionality. (Note: The recent IMF loan package stipulates that the NBU's reserves remain above $26.7 billion by December 31. Ukraine met the goal with $300 million to spare. End note.) Ukraine refused to pay $450 million in late fees and penalties (perhaps because it would have violated the IMF floor had it done so). Ukraine has turned to an international court for a decision on the penalties. Naftohaz's financial troubles also plagued gas negotiations in 2007, when outstanding debts weakened Ukraine's bargaining position. In addition, the general lack of transparency surrounding Naftohaz and the entire gas sector make it difficult for many observers to believe Ukrainian assertions that it is a reliable partner, and has not been siphoning Russian gas meant for Gazprom's other European customers. ¶15. (C) Comment. Despite sound arguments and support from EU representatives in Kyiv, Naftohaz and the GOU have failed to aggressively confront Gazprom charges that Ukraine was responsible for impeding supplies to other European countries during the 18 day gas war. GOU officials tell us repeatedly that Gazprom continues to lobby countries affected by the cutoff, placing blame on Ukraine. Despite this awareness of Gazprom's actions, Ukraine has done little to get its side of the story out. Its inaction has only strengthened Russia's charge that Ukraine is not a reliable gas transit partner. Ukraine has solid arguments on its side however, that Russia deliberately put the country in an impossible situation. Ukraine needs to disseminate the facts better so that a clearer, and fairer, overall picture of the gas war emerges. End comment. TAYLOR