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)

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SUMMARY
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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.

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GOR HOLDS HIGH HOPES FOR BPC ENERGY WORKING GROUP
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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.

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GOR STILL UNCLEAR ON U.S. ENERGY POLICIES AND DEVELOPMENTS
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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.

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UKRAINIAN OIL TARIFF HIKE SURPRISES RUSSIA
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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.)

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BIOGRAPHICAL NOTE
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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