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07KYIV2820, UKRAINE: RESOURCE NATIONALISM REPORT

November 14, 2007

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Reference ID Created Released Classification Origin
07KYIV2820 2007-11-14 12:55 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXRO6033
PP RUEHDBU
DE RUEHKV #2820/01 3181255
ZNY CCCCC ZZH
P 141255Z NOV 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 4319
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 002820 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/UMB, 
EEB/EEC/IEC-GALLOGLY/WRIGHT 
EEB/ESC/IEC/EPC BGRIFFEN 
DOE FOR LEKIMOFF, CCALIENDO 
 
E.O. 12958: DECL: 11/13/2017 
TAGS: EPET ENRG ETRD PREL UP
SUBJECT: UKRAINE: RESOURCE NATIONALISM REPORT 
 
REF: STATE 150999 
 
Classified By: Ambassador for reasons 1.4 (b) and (d) 
 
1. (C) Summary:  Ukraine has relatively small reserves of oil 
and natural gas, but is the world's largest hydrocarbon 
transit country, moving 75.8% of Russia's natural gas to 
Europe.  Ukraine imports 77% of its natural gas and 79% of 
its oil needs almost exclusively from Russia.  As a legacy of 
Soviet practices, some Ukrainian policies in domestic 
resource development exhibit some features of resource 
nationalism as defined in reftel.  If anything, Ukraine's 
need to diversify sources of energy supply are weakening this 
resource nationalism.  End summary. 
 
2. (C) The Ministry of Fuel and Energy of Ukraine exercises 
control of the energy sector via state-owned companies, most 
under the aegis of the oil and gas company NaftoHaz Ukrainy. 
NaftoHaz and related companies have traditionally controlled 
upstream production and exploration for hydrocarbons. 
Although foreign companies have been allowed into these 
activities, they have found the Ukrainians unwilling to allow 
large-scale foreign participation in practice, as companies 
run into a myriad of licensing, pricing, and other barriers. 
In addition, oil and gas pipeline operations remain state 
monopolies under NaftoHaz.  Ukrainian law forbids any sale of 
pipeline assets, which most believe is an effort to prevent 
Gazprom or other Russian entities from taking over Ukraine's 
gas transit assets.  On the other hand, downstream activities 
in Ukraine have long been open to foreign investment.  There 
is significant (mostly Russian) investment in Ukrainian 
refineries, oil retailing, and gas distribution.  NaftoHaz is 
widely regarded as very corrupt, with shady side deals, 
kickbacks, and featherbedding that allow a number of its 
employees to enrich themselves.  This corruption may be a 
motivation for keeping foreigners at bay, as those involved 
see foreigners eating into their potential take. 
 
3. (C) One particular recent GOU policy that might be defined 
as an example of resource nationalism is the January 2007 
Cabinet of Ministers Decree #31.  Via this decree, the GOU 
requires all gas companies that are 50% or more owned by the 
state (including joint ventures and subsidiaries) to sell all 
domestically produced natural gas, except for gas used for 
technical needs, at a low state-regulated price.  Recently, 
the U.K.-based company Cardinal Resources, which was in a 
joint venture with two Ukrainian state-owned companies, sold 
its Ukrainian assets to Kuwait Energy Company, claiming that 
Decree #31 had virtually bankrupted its Ukrainian venture 
because Cardinal Resources was unable to sell at prices above 
production costs.  However, the underlying motivation for the 
decree seems to be to keep domestic gas prices down, thus 
keeping the population happy, and does not seem to be driven 
by a need to push foreign companies out.  Moreover, it should 
be noted that under Decree #31, state-owned companies are 
also unable to sell their gas at market prices, which has 
contributed to financial difficulties for state-owned 
companies. 
 
4. (C) At the same time, there has been a trend in the last 
few years toward more foreign investment and foreign business 
collaboration, and even some foreign ownership of energy 
companies over the last few years.  The U.S.-based company 
AES, for example, since 2005 owns two regional electricity 
distribution companies and other distribution companies also 
have foreign owners.  In October 2007, the Houston-based oil 
company Vanco signed Ukraine's first-ever production sharing 
agreement for oil and gas exploration in the Black Sea, and 
additional U.S. companies are currently engaged in study 
agreements for future oil and gas exploration with 
state-owned companies.  In the nuclear sector, the 
Pennsylvania-based company Holtec recently signed a $250 
million agreement to complete an Interim Spent Nuclear Fuel 
Storage Facility at the Chernobyl Nuclear Power Plant.  In 
nuclear fuel supply, the nuclear generating monopoly 
Energoatom is negotiating with Westinghouse about providing 
fuel elements to some nuclear reactors.  To date Ukraine has 
imported 100% of its nuclear fuel from Russia. 
 
5. (C) What appears to be driving this liberalization is the 
imperative to bolster energy security by increasing domestic 
production through bringing in international expertise.  The 
importance of energy security was brought home by Russia's 
gas shut-off in January 2006 in a pricing dispute.  Since 
then, some senior leaders in the GOU recognize Ukraine needs 
 
KYIV 00002820  002 OF 002 
 
 
to bring in foreign partners with the technology to address 
problems such as deep drilling onshore and exploring in the 
deep water of the Black Sea.  This seems to be forcing 
Ukraine to move away from aspects of resource nationalism (or

perhaps more accurately in Ukraine's case - resource 
cronyism) towards a more open attitude toward foreign 
participation in the energy sector.  However, this opening is 
likely to move in fits and starts, as those in NaftoHaz who 
would like to keep the sector to themselves have not gone 
away and are likely to continue to seek to resist and 
undermine foreign participation in the sector. 
Taylor

Wikileaks

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