ENERGY MINISTER WELCOMES ENERGY COOPERATION WITH

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003052 SIPDIS DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GREENSTEIN, S/EEE MORNINGSTAR DOE FOR HEGBURG, EKIMOFF DOC FOR JBROUGHER NSC FOR MMCFAUL E.O. 12958: DECL: 12/16/2019 TAGS: EPET ENRG ECON PREL RS SUBJECT: ENERGY MINISTER WELCOMES ENERGY COOPERATION WITH U.S.; SAYS GOR STRIVING TO AVOID UKRAINE TRANSIT PROBLEMS Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d) -------------- SUMMARY -------------- ¶1. (C) Minister of Energy Shmatko and Transneft President Tokarev met with Ambassador Beyrle on December 16 to discuss prospects for the Bilateral Presidential Commission's (BPC) Energy working group, particularly opportunities for information exchange and technology transfer on energy efficiency in public buildings and the development of biofuels, clean coal, and smart grids. In addition, Shmatko requested clarification on the function of the U.S.-EU Energy Commission and the U.S. policy on Russian-Ukrainian gas issues as well as additional information on the shale gas revolution that has altered global gas markets. Tokarev, who announced the signing of the CPC expansion agreement, reported Ukraine's intention to raise transit tariffs on Russian oil in 2010, which could cause Russian oil firms to reroute their oil exports. End Summary. -------------- -------------- GOR HOLDS HIGH HOPES FOR BPC ENERGY WORKING GROUP -------------- -------------- ¶2. (SBU) At a December 16 meeting between the Ambassador, Minister of Energy Shmatko, and Transneft President Tokarev, Shmatko expressed optimism regarding the BPC Energy working group (EWG). He looked forward to the initial meeting in the U.S. and expects the EWG to facilitate constructive dialogue and information exchange. He highlighted the expertise Deputy Energy Minister Kudryashov brings as co-chair of the Energy Security subgroup from his background working in industry. Shmatko also referenced Russian cooperation with international partners, particularly Germany, on the exchange of best business practices and technology transfer related to energy efficiency. He looked forward to collaboration with the U.S. on this issue through the Energy Efficiency subgroup, particularly regarding public-private partnerships to improve energy efficiency in government buildings and communal services. (Note: New legislation passed in November will allow GOR agencies to keep budgetary funds saved through enhancing their energy efficiency. End Note.) In addition, Shmatko referenced emerging technologies the GOR hopes to advance through the Energy Innovation subgroup, including biofuels, clean coal, and smart grids. He noted that smart grids are already part of a multi-year, USD 10 billion GOR program to modernize electrical infrastructure. -------------- -------------- GOR STILL UNCLEAR ON U.S. ENERGY POLICIES AND DEVELOPMENTS -------------- -------------- ¶3. (C) Shmatko stressed GOR commitment to preventing a repeat of last winter's disruption of gas flows through Ukraine. He stated that the GOR was emphasizing the development of dialogue and mutual understanding between Russia and Ukraine in both the government and corporate spheres. Although he acknowledged that disruptions in Russian gas transit through Ukraine were possible, Shmatko underscored the higher level of discussion and attention on the part of Russia, Ukraine, and European countries compared to last year. In addition, he asked the Ambassador to convey to Ambassador Morningstar Russia's desire for additional clarity on the U.S. position regarding Russian gas supplies transiting Ukraine. ¶4. (C) Shmatko also requested clarification on the function of the recently formed U.S.-EU Energy Commission and expressed concerns over its potential involvement in Russian-Ukrainian energy relations. He was uneasy about Ambassador Morningstar's public comments regarding a Commission subgroup that will evaluate the "legitimacy" of Russian energy deals with EU countries. Transneft's Tokarev, who had just arrived from a CPC shareholders meeting at which the expansion agreement was finally signed, later echoed Shmatko's unease, particularly regarding a U.S.-EU body that includes in its agenda the prevention of conflicts between Russia and Ukraine over gas transit. Shmatko said Russia would like additional background on the structure and MOSCOW 00003052 002 OF 002 function of the Commission in order to avoid any misunderstanding. ¶5. (C) Shmatko said he would also welcome additional information on the development of shale gas in the United States. He noted that participants at the December 9 Gas Exporting Countries Forum (GECF) meeting in Doha, at which Russian gas pipeline construction executive Bokhanovskiy was named GECF Secretary General, gave particular attention to the issues of shale gas and changes in U.S. gas demand. Shmatko would like an open discussion and exchange of information on these developments through bilateral and multilateral channels in order to avoid a "cat in a bag" situation in which GECF members know something is happening but lack clarity on exactly what it is and how it will affect the market. -------------- UKRAINIAN OIL TARIFF HIKE SURPRISES RUSSIA -------------- ¶6. (C) Tokarev said Transneft was caught off guard two weeks ago by a Ukrainian decision to raise oil transit tariffs in ¶2010. Tokarev reported that Ukrtransneft intended to raise transit tariffs on Russian oil through its northern and southern pipelines by 26 and 30 percent, respectively, as of January 1. Although Transneft will sign a three-month agreement with the higher tariffs, Tokarev emphasized that the higher tariffs would reduce the commercial attractiveness of Russian oil transiting through Ukraine. He said Russian oil companies could choose to reroute their oil exports for commercial reasons, which, he worried, could be portrayed in the press as Russia "cutting off" supplies through Ukraine. Shmatko also stressed displeasure on the Russian side that Ukraine would take such a decision at the end of the year without consultation or explanation. He stated that Russia would use the recently created early warning mechanism to advise its European partners of the development while continuing to negotiate with its Ukrainian partners to resolve the issue. In addition, Shmatko noted that a switch to oil from other sources by Central European refineries currently configured to process Russian oil could cause unforeseen technical problems. Responding to the Ambassador's comment that improvement in Russian-Ukrainian political relations would ease the resolution of such issues, Shmatko stated that the relationship "could not get any worse." (Note: Tokarev commented that actions like this justify Russia's 35 billion ruble investment in the BTS-2 pipeline, which he predicted would be operational in 2011. End Note.) -------------- BIOGRAPHICAL NOTE -------------- ¶7. (C) Minister Shmatko was an unimpressive presence in the meeting, working from a sheet of notes and speaking so quietly and quickly that even our local staff in the meeting had difficulty understanding his remarks. Shmatko is also developing a reputation for being chronically late to meetings. He was more than 20 minutes late to this meeting, having been 40 minutes late to a June meeting with the Ambassador and Ambassador Morningstar. Beyrle