EC OPTIMISTIC ON UKRAINIAN GAS PIPELINE COMMITMENTS

UNCLAS SECTION 01 OF 02 KYIV 000599

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB, EEB/ESC/IES FOR SCALLOGLY, LWRIGHT
NSC FOR KKVIEN
DOE FOR LEKIMOFF, CCALIENDO, KBOURDREAU
DOC FOR CLUCYK


E.O. 12958: N/A
TAGS: ENRG EFIN EPET PGOV PINR PREL RS UP EUN

SUBJECT: EC OPTIMISTIC ON UKRAINIAN GAS PIPELINE COMMITMENTS

Ref: Brussels 436

Sensitive but Unclassified. Not For Internet Distribution.

Summary
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1. (SBU) On March 31 European Commission External Relations (RELEX)
Energy Counselor Faouzin Bensarsa told us that President Yushchenko
and PM Tymoshenko remain on message following the March 23
investment conference on Ukraine's gas transit system (reftel).
Bensara, who was in Kyiv to discuss the next steps outlined in the
conference declaration, said Yushchenko and Tymoshenko continued to
demonstrate a shared commitment to the package of reforms Ukraine
agreed to in the declaration. A joint EC/GOU/donors coordination
unit was being created to implement the technical aspects of the
declaration, he said. The EC would not support Ukraine's desire to
construct an additional 60 billion cubic meters (bcm) of transit
capacity, since the planned technical upgrades and efficiency
measures could increase existing capacity by at least 30 bcm within
seven years, he said. It also saw no need to install metering
stations at the Ukrainian border with Russia. He characterized the
Russian reactions to the conference as "emotional" and said the EC
would work to ensure that the planned cooperation with Ukraine would
not disrupt the Ukraine/Russia gas relationship. Bensara asked for
active USG engagement to move the planned modernization of the
pipeline system forward. End summary.

President, PM Continue to Show Unity on Pipeline
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2. (SBU) On March 31 the DG RELEX Energy Counselor Faouzin Bensarsa
and local Commission officials briefed us on their follow-up
discussions with Ukrainian officials aimed at implementing the March
23 EU/Ukraine declaration (reftel). Bensara, who met with both
President Yushchenko and PM Tymoshenko while in Kyiv, said he saw a
strong and shared Ukrainian commitment to the package of reforms
foreseen in the declaration. In particular, he said there was no
difference of opinion between President Yushchenko and Prime
Minister Tymoshenko on the need for reform of the GTS.


3. (SBU) Bensara stressed that the Commission would limit its work
to the goals outlined in the March 23 declaration. It would avoid
discussions on contentious issues such as privatization or the
question of the creation of a consortium to run the pipeline. He
did not offer any views on the issue of "unbundling," and said that
the EC has stopped using the expression "commercialization" in
reference to alternative models of managing the pipeline, but did
emphasize that Ukraine was on track to take the steps necessary to
join the European Energy Committee. The timetables listed in the
declaration -- the development of a gas sector reform program by the
end of 2009 with implementation in 2010-2011 -- were realistic and
would not change, he said. Bensara stated that Deputy Prime
Minister Hryhoriy Nemyria would take the lead on implementing the
needed reforms, with support from Deputy Foreign Minister Constantin
Yeleseyev, the Ministry of Energy, and the Presidential
Secretariat.


4. (SBU) Bensarsa said a coordination unit with representatives from
the GOU, the EC and from donors would be established to implement
the technical aspects of the declaration. The Commission was
prepared to offer technical and financial support to the unit. The
EC hopes that banks interested in financing projects related to
reforms will begin their due diligence, but Bensarsa was not sure
whether they would do so before reforms had been set in motion.
Acting Director of Naftohaz Igor Didenko would be POC for the
technical implementation of the master plan of proposed technical
upgrades to the GTS that Naftohaz presented at the Brussels
conference. Bensarsa characterized the master plan as a shopping
list of projects from which the banks (and other investors if
interested) could choose. He said the first meeting of the
technical coordination unit could be held within the next few weeks.


No Interest in Pipeline Expansion, Metering Stations
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5. (SBU) Bensara was careful to note, however, that the Commission
would not actively support two projects put forth by the GOU because
they are, in the Commission's view, politically sensitive. The
Commission would not push forward the Ukrainian suggestion to
install gas meters at its eastern border with Russia, since the

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Commission believed that they would not make sense economically
unless/until European clients of Gazprom begin to purchase gas from
the Russia/Ukraine border instead of from the Ukraine/Slovak border.
Bensara also believed that the GOU suggestion to increase the GTS
capacity by 60 bcm through the construction of new pipelines was
overly ambitious. The Commission would focus on efforts aimed at
expanding the efficiency of the existing network, he said. If
implemented, the seven year modernization plan would increase the
capacity of the existing pipeline system by at least 25 percent
through a combination of technical upgrades and efficiency
measures.

Russia
--------------


6. (SBU) Bensara said Japan has shown serious interest in the GTS
modernization project, but did not say how the Japanese might get
engaged. At the same time, he characterized the Russian reaction to
the declaration as "emotional." He also noted that the Commission
was working to correct what he said was Russia's misunderstanding of
the declaration. He did show concern, however, over Russia's next
moves, and asked if Russia had lobbied the USG in any way on the
issue of the GTS modernization and the Brussels conference. He also
said the Commission would work to ensure that the cooperation with
Ukraine on the GTS would not disrupt the implementation of the 10
year gas contract signed by Gazprom and Naftohaz in January.

Comment
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7. (SBU) It is encouraging that Bensara received a coordinated and
unified message from President Yushchenko and Prime Minister
Tymoshenko on the way forward for Ukraine's GTS. Experience has
taught us to be cautious, however, since signs of unity displayed
before an international audience can quickly be forgotten once the
President and Prime Minister return to the business of domestic
politics. Still, the EC focus on what it believes are pragmatic
technical and regulatory steps to modernize the pipeline could allow
it to sidestep the politics that have made genuine reform so
difficult to achieve in Ukraine. Bensara openly asked for USG
engagement. We do not know whether he spoke formally in the name of
the EC. However, if Brussels proposes formal collaboration, we
would consider this a valuable avenue for achieving our overarching
goal of helping Ukraine strengthen energy security as we committed
in our bilateral Charter.
TAYLOR