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August 11, 2006

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Reference ID Created Released Classification Origin
06KIEV3128 2006-08-11 13:27 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv
DE RUEHKV #3128/01 2231327
P 111327Z AUG 06


C O N F I D E N T I A L SECTION 01 OF 04 KIEV 003128 




E.O. 12958: DECL: 08/11/2016 

Classified By: ADCM Michelle Logsdon; Reasons 1.4 (b) and (d) 

1.  (C) Summary.  In August 10 meetings with Ambassador, 
Deputy Prime Minister Andriy Kluyev and Minister of Fuels and 
Energy Yuriy Boyko made clear that the new GOU was determined 
to reach a good outcome in dealings with Russia and 
Turkmenistan on natural gas supplies.  Boyko was confident 
that Ukraine would be able secure such an outcome through 
"strategic cooperation" with Gazprom.  Kluyev was short on 
details but promised transparency in any future dealings, 
while Boyko was unapologetic about the January 4 deal and the 
role it accorded RosUkrEnergo (RUE).  RUE's task, Boyko said, 
remains to supply Ukraine with sub-$100/tcm gas, apparently 
by any means possible.  Neither official expressed a 
preference on what form a potential International Gas 
Consortium would take, though Kluyev hinted that the 
Consortium's might include activity within Russia.  Both 
Kluyev and Boyko said economic and commercial factors should 
determine the future of the Odesa-Brody pipeline.  Both 
supported Holtec's project to build the Central Spent Nuclear 
Fuel Storage Facility and said they would urge Rada approval 
of the building site.  Kluyev hoped for a quick and 
definitive resolution from the EBRD's investigation of the 
flawed Chornobyl Shelter tender.  End Summary. 

2.  (SBU) In separate meetings on August 10, Ambassador 
discussed the new GOU's approach to energy issues with Deputy 
Prime Minster Andriy Kluyev, and with Minister of Fuel and 
Energy Yuriy Boyko (former head of Ukraine's oil and gas 
monopoly, Naftohaz).  Kluyev noted he was responsible for 
Ukraine's real economy sectors, to include the Ministries of 
Agriculture, Industrial Policy, Energy, Coal, Emergencies, 
and Environment.  Boyko was accompanied by his colleague from 
the tiny Republican Party -- Ukraine's former Ambassador to 
the U.S. Konstantin Hryshchenko, who, Boyko said, would soon 
be heading up a Ukrainian think tank. 

The Gas Deal 

3.  (C) Ambassador asked both Kluyev and Boyko for their 
thoughts on the prospects of revising the notoriously 
non-transparent January 4 gas deal.  The U.S., Ambassador 
said, would support efforts to revise the deal in order to 
make it more transparent and to enhance Ukraine's energy 
security.  DPM Kluyev said his office was still reviewing all 
the documents, and while it was too early to make a final 
decision, the GOU had a path forward and would find a way to 
ensure a stable gas supply for Ukraine and stable gas transit 
system to Europe. (Note: Kluyev did not share details on this 
path forward.  End Note)  Next week, Kluyev said, Ukraine 
would begin bilateral consultations with Russia and 
Turkmenistan on 2007 gas supply.  Kluyev vowed that 
transparency would be a primary condition for any future 
deal, since he knew the prestige of Ukraine was at stake. 
(Note:  These points on transparency were repeated in a press 
release on the meeting issued by Kluyev's office August 10. 
End Note.) 

4.  (C) Minister Boyko (along with Kluyev a key architect of 
the 2004 gas contract that had guaranteed Ukraine the right 
to buy Russian gas at $50/tcm for six years) laid out the 
history of energy middleman RosUkrEnergo (RUE).  RUE, Boyko 
explained, was Ukraine's way out of the situation created in 
April 2003 when Turkmenbashi signed a contract to sell all 
Turkmen natural gas to GazProm.  At the time, this implied an 
end to direct Ukrainian purchases of Turkmen gas.  Ukrainian 
president Kuchma tasked then NaftoHaz Chairman Boyko to 
secure Ukraine's gas supplies.  The solution, Boyko found, 
was to create a Ukrainian-Russian joint venture -- RUE.  A 
key component of the deal was to finance an expansion of 
pipeline capacity in Uzbekistan and Kazakhstan to increase 
Turkmen gas exports to Russia.  RUE partner Dmytro Firtash 
took care of these finances, Boyko said.  Russia, in turn, 
agreed to in-kind payments of cheap Turkmen gas to Ukraine in 
return for transit of its gas exports to Europe. 
RosUkrEnergo, for its efforts, would be able to recoup its 
financing of the Central Asia-Center pipeline expansion by 
then re-exporting some of this Turkmen gas from Ukraine. 

5.  (C) The situation was more difficult now, Boyko said. 
Turkmenistan's President Niyazov wanted $100 per thousand 
cubic meters (tcm) at his border.  Adding transit costs, the 
price would be $150/tcm at the Ukrainian-Russian border.  At 
present, Ukrainian law prohibited gas supplier to sell to 
industrial consumers at prices more than $110/tcm.  The 
chemical industry would come to a standstill if the price 
went higher than $120/tcm, Boyko claimed, while the metals 

KIEV 00003128  002 OF 004 

industry could survive with a price no greater than 
tcm.  Boyko said the GOU was talking to RUE and to 
Turkmenistan on how to address this issue.  "RUE's job," 
Boyko said, "is to deliver gas to Ukraine at less than 
$100/tcm; I don't care how they do it."  He explained that 
RUE's gas sales to European customers would make this 

6.  (C) Ambassador pointed out that having European customers 
essentially subsidize Ukrainian energy consumption was not 
sustainable.  The GOU should be trying to move the country 
gradually to world prices.  Boyko agreed that the current 
solution had to be temporary, but countered that the GOU's 
task was to purchase gas at the lowest price possible.  As he 
had told Gazprom, Ukraine would need two or three years 
(which Boyko later in the meeting lengthened to three to four 
years) to adjust.  When Ambassador asked if Gazprom had 
agreed to this time frame, Boyko said "we will be able to 
find a compromise through our strategic cooperation."  When 
asked what this cooperation would entail, Hryshchenko piped 
in that it was too early to discuss such matters.  The new 
GOU had been in office less than a week, Hryshchenko said, 
and the answer to this question would be much clearer once PM 
Yanukovych returned from his meetings in Moscow the following 

International Gas Consortium 

7.  (C) Kluyev expressed no preference on what form a 
possible International Gas Consortium (IGC) would take.  The 
ruling coalition would first consult and pass any consortium 
concept to the Rada for approval.  Kluyev said that the views 
of Yushchenko's Our Ukraine, which originally opposed the 
IGC, would also matter if, as he expected, the party joined 
the ruling coalition in September.  In principle, Kluyev said 
he supported a consortium that included companies involved in 
gas supply and consumption, but said he would perhaps expand 
the consortium's activities to include Southwestern Russia. 

8. (C) Comment:  Boyko did not mention the IGC, but his 
allusion to "strategic cooperation" with Gazprom could be a 
hint that the GOU would make tradeoffs in order to achieve 
its objective of cheap gas.  One such tradeoff could be some 
measure of Russian participation in management of future or 
existing Ukrainian pipelines.  Another possibility is 
Kluyev's reference to possible Ukrainian involvement in 
Russian production.  Kluyev may have been referring to 
Astrakhan, located on the edge of the Caspian Sea on the 
Volga river delta.  In May 2006 press reports indicated 
Dmytro Firtash's RUE had purchased a 74.87% stake in 
Astrakhan Oil and Gas Company.  Astrakhan government 
officials confirmed the deal, while Firtash denied it. 
Astrakhan Oil and Gas Company has estimated reserves of 220 
bcm of gas and 20 million tons of oil. End Comment. 

Energy Advisors 

9.  (C) Ambassador noted that the USG had funded advisors to 
work with the past two governments on energy matters, and 
inquired whether the GOU would be interested in continuing to 
receive this advice.  Both Kluyev and Boyko said the GOU 
still needed to discuss this issue, but noted they had worked 
with one of the experts in the past.  Boyko agreed to meet 
with the advisors when they were next in Kiev September 5 - 
9.  Kluyev merely noted that the advisors had his phone 

Off-Shore Tenders 

10.  (C) Kluyev did not comment on whether there would be 
additional tenders for off-shore oil and gas exploration, 
saying his office had not yet looked into this topic.  He 
acknowledged the importance of passing Production Sharing 
Agreement (PSA) legislation that would enable American 
company Vanco, which had won the March off-shore exploration 
tender, to begin drilling.  The legislation would also apply 
to other companies working onshore or offshore in the 
extractive sectors.  Kluyev expected the new Rada would pass 
the necessary legislation this fall.  Ambassador noted that 
USG was providing a PSA consultant to review existing 
legislation and draft new implementing legislation, and 
offered additional technical assistance if needed.  Kluyev 
replied that most of the work was already done, though if a 
consultant had some good ideas, the GOU would of course 
consider them. 

KIEV 00003128  003 OF 004 

11.  (C) When Ambassador raised the question of PSA 
legislation with Boyko, the Minister responded that he would 
meet with Vanco and explain what potential problems they may 
face.  Although Boyko did not elaborate on what these 
problems might include, Hryshchenko quickly interjected that 
the biggest challenge would be getting the PSA legislation 
through the Rada.  Boyko said he would order his deputy 
minister (and former Ambassador to Turkmenistan) Vadim 
Chupron to help Vanco as the company's designated "curator." 


12.  (C) Kluyev said there was too much talk about the 
Odesa-Brody pipeline; action was needed either to build its 
extension into Poland or to accept that its operation in the 
northern direction was not operationally feasible.  Kluyev 
stated that Odesa-Brody's future should be based on its 
commercial prospects, noting that when politicians got 
involved in building projects the results were "stillborn 
babies."  There was a normal, commercial way to go about 
developing pipeline projects; simply putting a pipe in the 
ground for the sake of supply diversification was not a 
serious approach, Kluyev said.  Kluyev continued that in 
April 2004 Ukraine and Poland had signed an agreement to 
extend the pipeline into Poland, but nothing had been done 
since.  The GOU would consult with participant suppliers and 
consumers and then make a decision on the pipeline and its 
direction, Kluyev said. 

13.  (C) When asked about Odesa-Brody's future, Boyko 
digressed into the past, claiming that the 2004 reversal to 
ship Russian oil south rather than Caspian oil north to 
Europe was a technical step to keep the pipeline from 
deteriorating.  He echoed Kluyev's view that the key 
uncertainty concerned extending the pipeline across Poland. 
He said he thought there was still great interest both in 
Poland and on the part of Chevron and even BP-TNK to use the 
pipeline, and that north-bound shipments of oil through the 
pipeline now made economic sense.  (Comment: Although Boyko 
is thought to have been the key player in executing the 2004 
pipeline reversal, he does not seem to have had recent 
dealings on this issue.  He conceded that his conversations 
with the Poles, Chevron, and BP took place two years ago. End 

Nuclear Issues 

14.  (C) Kluyev said he was well acquainted with Holtec, the 
company selected to build a central spent nuclear fuel 
storage facility, having met wit
h them in the past.  He said 
he would support their project and urge the Rada to approve 
the storage facility's building site during the Rada's 
September session.  Kluyev was also aware of Holtec's work to 
complete the Chornobyl Interim Spent Nuclear Fuel Storage 
Facility.  Boyko said he had a high opinion of Holtec and 
agreed to meet with the company on the building site issue. 

15.  (C) Neither Kluyev nor Boyko appeared aware of the 
non-proliferation program which the U.S. funds through the 
IAEA to remove highly enriched uranium from the Sevastopol 
University for Nuclear Energy and Industry for return to 
Russia for storage.  (Note: CabMin approval of the shipment 
of uranium to Russia is required.)  DPM Kluyev pledged to 
look into this project, while Boyko's associate Hryshchenko 
claimed it was not an issue for the Minister of Fuels and 

16.  (C) Kluyev shared his opinion that the Chornobyl Shelter 
tender had not been conducted according to the tender's 
rules, and noted that information on the tender process was 
in his office at the Cabinet of Ministers.  (Note:  U.S. 
company CH2M Hill filed a formal complaint about tender 
improprieties and EBRD has been investigating the matter. 
The first meeting of the committee investigating this issue 
was held on August 10. End Note.)  Kluyev hoped the project 
would begin as quickly as possible following the successful 
resolution of the EBRD investigation. 

Bio Notes and Comment 

17.  (C)  With the appointments of Boyko and Kluyev, the 
Yanukovych government seems to be trying to recreate the 
Kuchma-era style of managing energy issues -- through 

KIEV 00003128  004 OF 004 

personal relationships in the former Soviet Union and 
back-room deals.  Kluyev is returning to a position he held 
from 2003-2004 under Kuchma, though now with a slightly wider 
portfolio including agriculture.  Beginning in 2005 he was 
head of the Rada's Fuels and Energy Committee.  In our 
meeting Kluyev's manner was at times curt and brusque, just 
as he was in a meeting three weeks ago.  Gone apparently was 
the contriteness and introspection seen from post-Orange 
Revolution, oppositionist Kluyev.  Kluyev's manner today 
seemed to project that he was back in charge and moving ahead 
with his plans; and, as for what those plans were, he would 
reveal on his terms and at his time. 

18.  (C) Under Kuchma, Boyko was one of the 
architect-proponents of the 2002 International Gas 
Consortium, the 2004 Odesa-Brody reversal, and the founding 
of RosUkrEnergo.  Gazprom has put the International Gas 
Consortium back on the table in recent months, suggesting 
Ukraine could get cheaper gas prices if it agreed to creation 
of the consortium. 

19.  (C) Early August press reports recall that Boyko managed 
NaftoHaz from January 2002 - March 2005 with the 
non-transparency characteristic of "developed Kuchmism."  At 
that time he maintained good relationships with Gazprom and 
Turkmenistan's President Niyazov, for whom he translated 
Niyazov's book of spiritual musings, the Rukhnama, into 
Ukrainian.  Kuchma awarded Boyko in 2004 the Hero of Ukraine 
medal for negotiating a profitable gas deal with Turkmenistan 
that gave Ukraine Turkmen gas for $44/tcm.  If Boyko has 
maintained his friendships over the past 18 months, another 
Turkmen gas deal again may be in the works.  Based on past 
experience, any Boyko-bartered deal could well be creative 
but non-transparent. 





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