Identifier
Created
Classification
Origin
09KYIV2219
2009-12-29 13:20:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE: NAFTOHAZ SEES PAYMENT DIFFICULTIES

Tags:  ECON ENRG EREL PGOV UA RU 
pdf how-to read a cable
VZCZCXRO7119
PP RUEHDBU RUEHSL
DE RUEHKV #2219/01 3631320
ZNY CCCCC ZZH
P 291320Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 9051
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 KYIV 002219 

SIPDIS

DEPT FOR S/EEE, EUR/UMB, EB/ESC/IEC
DOE PLEASE PASS TO JELKIND, LEKIMOFF, CCALIENDO
NSC PLEASE PASS TO KKVIEN

E.O. 12958: DECL: 12/28/2019
TAGS: ECON ENRG EREL PGOV UA RU
SUBJECT: UKRAINE: NAFTOHAZ SEES PAYMENT DIFFICULTIES

REF: A. KYIV 1472

B. KYIV 419

C. KYIV 2147

D. KYIV 2168

Classified By: Ambassador John Tefft for reasons 1.4(b,d)

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 002219

SIPDIS

DEPT FOR S/EEE, EUR/UMB, EB/ESC/IEC
DOE PLEASE PASS TO JELKIND, LEKIMOFF, CCALIENDO
NSC PLEASE PASS TO KKVIEN

E.O. 12958: DECL: 12/28/2019
TAGS: ECON ENRG EREL PGOV UA RU
SUBJECT: UKRAINE: NAFTOHAZ SEES PAYMENT DIFFICULTIES

REF: A. KYIV 1472

B. KYIV 419

C. KYIV 2147

D. KYIV 2168

Classified By: Ambassador John Tefft for reasons 1.4(b,d)


1. (C) Summary. Naftohaz Chairman Oleh Dubyna told the
Ambassador on December 24 that without IMF funds, Naftohaz
will have difficulty making the January 11 payment for
December gas purchases. Dubyna appealed for the Ambassador
to ask the IMF to instruct Ukraine's National Bank to issue
$2 billion of its reserves to the government. At the same
time, Dubyna noted improvements at Naftohaz since he became
chairman in 2007. He stated that he wanted Naftohaz to be
privatized to reduce the role of politics on the company.
Dubyna also discussed the impact of North and South Stream on
Ukraine's transit of Russian gas to Europe and the prospects
for shale gas in Ukraine. End summary.

Naftohaz Doing Better but Still Hampered by Politics
-------------- --------------


2. (C) During an introductory call with the Ambassador on
December 24, Naftohaz Chairman Oleh Dubyna described his
position at Naftohaz as balancing on two logs in a river with
a current flowing in both directions and a crocodile
(Ukraine's eastern neighbor) lurking under the surface. His
task, he said, was to keep Naftohaz afloat and out of reach
of the crocodile. Dubyna assessed that he had managed to do
that in his two years at Naftohaz's helm. According to
Dubyna, in 2007 the state-owned oil and gas company owed
$1.974 billion to foreign creditors and owned only 3 billion
cubic meters (bcm) of gas in Ukraine's underground gas
storage facilities. By 2009, the company had reduced and
restructured its foreign debt, now owing $1.563 billion due
in 2014 (Ref A). Naftohaz had also created a strategic gas
reserve of 26 bcm.


3. (C) Dubyna lamented, however, that Naftohaz's commercial
viability is limited by political considerations. Naftohaz
is forced to sell discounted gas to households and heating
companies. The company is unable to turn off gas supplies to
non-paying customers. Dubyna said that heating companies are

on average paying only 4% of their gas bills. Kyiv's heating
company alone owes Naftohaz $300 million for gas, he claimed.



4. (C) Dubyna also hinted at the pressures the company is
under from the government. Dubyna asked the Ambassador, "If
the Prime Minister calls and says to me that I must pay into
the budget today because tomorrow she needs to pay pensions,
what should I do?" Almost on cue, Dubyna stepped out of the
meeting with the Ambassador to receive a call from the Prime
Minister.


5. (C) Dubyna said that the political meddling into
Naftohaz's affairs would end once Naftohaz was privatized and
no longer answered to the government. Dubyna told the
Ambassador that he was working on consolidating gas
production, transit, and distribution in Naftohaz. Once that
was done, Dubyna said he would suggest to the government that
Naftohaz be privatized.


Russian Gas Relationship
--------------


6. (C) Dubyna defended the gas supply and transit contracts
Naftohaz signed with Gazprom on January 19, 2009. He also
doubted that Russia would be willing to renegotiate these
ten-year contracts. While the transit rate for Russian gas
through Ukraine was low in 2009, Dubyna argued that it was
balanced by Naftohaz's purchase of 11 bcm of gas to be used
for so-called technical gas, at a significantly-lower-than
market price of $154 per thousand cubic meters (tcm). (Note.
The 11 bcm Dubyna referred to is claimed by
shady-intermediary RosUkrEnego (Ref B). The gas was
transferred by Gazprom to Naftohaz as part of a debt swap
that was tacked onto the January 19 contract. End note.)


7. (C) Dubyna acknowledged that Russian gas was expensive but
asked why Ukraine should not be willing to pay more for

KYIV 00002219 002 OF 003


Russian gas to maintain its independence. Dubyna noted that
Ukraine bought nearly half the amount of gas in 2009 (around
27 bcm) as it did in 2008 (52.5 bcm). He observed that when
the price of gas went up, people thought more about gas
usage.


8. (C) Dubyna told the Ambassador that Naftohaz would
purchase 4.2 bcm of gas ($874 million) from Gazprom in
December. (Note. Earlier, GOU officials had told us that
Ukraine would purchase 5.5 bcm in December (Ref C). Dubyna's
figure tracks with comments made by Gazprom's Alexiy Miller,
who indicated on December 25 that Ukraine had significantly
decreased gas purchases in the middle of December. End
note.) Dubyna said that Ukraine's gas consumption in
December would be close to 5 bcm. Naftohaz would take
between 800 million cubic meters to 1 bcm of gas from storage
to meet Ukraine's demand, he stated. Dubyna forecasted that
Ukraine would purchase 6 bcm of gas from Russia in the first
three months of 2010, slightly less than the 7 bcm Dubyna had
told the Cabinet of Ministers on November 27 that Ukraine
would purchase from Russia in the first quarter of 2010.


9. (C) Dubyna described Naftohaz's relationship with Gazprom
as professional. He acknowledged, however, that Ukraine's
gas relationship with Russia was mainly political. He said
that he had recently told Gazprom's Miller that Gazprom and
Naftohaz together influence only 10% of the two countries'
gas relationship.

Without IMF Funds, Will Not Make the Payment
--------------


10. (C) Asked to comment on how Ukraine would make the
January 11 payment for December gas purchases, Dubyna stated
that without money from the IMF, Naftohaz would not be able
to pay Gazprom. He acknowledged that there have been
discussions about taking a loan from Russian banks (Ref D)
but said that he would rather see another gas crisis than to
take loans from Russia.


11. (C) Dubyna said that it would not be necessary for the
IMF to lower the National Bank of Ukraine's (NBU) net
international reserve threshold. Dubyna understood that the
reserve threshold applied to the end of December and that no
IMF targets had been set for 2010; the gas payment was not
due until after December 31. He explained that NBU Governor
Stelmakh had not signed the joint letter (with PM Tymoshenko
and Acting Finance Minister Umanskyi) to the IMF requesting
that the threshold be lowered and speculated that Stelmakh
would not sign the letter. He said there was, however, some
possibility that Naftohaz would get funds from the NBU
between January 3-5.


12. (C) Dubyna noted that the Prime Minister has a difficult
political choice to make. She could either make the gas
payment or pay pensions and salaries. Dubyna said he would
choose to pay salaries if he were in her situation. He
emphasized that the NBU would not decide to provide Naftohaz
with foreign reserves without clear instructions from the
IMF. He appealed to the Ambassador to intervene with the
IMF, asking the Fund to instruct the NBU to issue $2 billion
of its reserves to the government. Dubyna said this would
keep the decision from being held up by politics. "Our
neighbors (in Europe) wait for it," he concluded.

Ukraine's Role in Gas Transit
--------------


13. (C) Asked whether Naftohaz was concerned about losing its
position as the main transit route for Russian gas to Europe,
Dubyna responded that the Ukrainian gas transit system (GTS)
matches the proposed capacity of North Stream and South
Stream combined. Dubyna mused that the problem with Russia
is that it is too "veliki" (grand); Russia has grandiose
plans that are often beyond its capabilities. He said that
Ukraine understands the purpose of Russia's plans to build
alternate pipelines. Dubyna asked, "if we said we would sell
50% of the GTS to Russia, would there be North or South
Stream?" Naftohaz Deputy Chairmen Yaroslav Marchuk and Vadym
Chuprun chuckled and said no. Dubyna admitted that North
Stream would change gas transit flows but noted that the
proposed route lacks gas storage facilities. Deputy Chairman
Chuprun added that it would be less expensive to completely

KYIV 00002219 003 OF 003


modernize the Ukrainian GTS than to build new routes.
Shale Gas
--------------


14. (C) Deputy Chairman Chuprun stated that the development
of shale gas in the United States had a strong impact on gas
prices in Europe. He said that while the Soviet Union had
developed some shale gas fields in the 1930s, Ukraine lacked
the technology to develop its shale fields. Chuprun said
that Naftohaz was more and more focused on shale gas
development and welcomed cooperation from American firms in
the sector.

Comment
--------------


15. (C) While Dubyna painted a fairly optimistic view of
Naftohaz's situation, he failed to mention the difficulties
the company has had throughout the year in making its monthly
gas payment to Russia. The company may have reduced its
foreign debt, but its domestic borrowing from state-owned
banks has grown tremendously. As evidenced during the
meeting, Dubyna is under the close scrutiny of Prime Minister
Tymoshenko, who is calculating how she can make the gas
payment and salary and pension payments ahead of the January
17 presidential election. Furthermore, although NBU Governor
Stelmakh has signed a request to the IMF to lower its reserve
floor, the GOU request for a specific letter from the IMF
instructing the NBU to release reserves to the government is
a clear sign that the NBU governor remains a reluctant
participant at best in this plan to get through Ukraine's
budgetary problems. Despite his reluctance, Dubyna may have
little choice but to take loans from Russia if NBU reserves
are held up by Ukraine's electoral politics. End comment.
TEFFT