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08KYIV194, UKRAINE: SENATOR LUGAR HEARS THAT ENERGY ISSUES

January 29, 2008

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Reference ID Created Released Classification Origin
08KYIV194 2008-01-29 13:42 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXYZ0010
PP RUEHWEB

DE RUEHKV #0194/01 0291342
ZNY CCCCC ZZH
P 291342Z JAN 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 4810
INFO RHEHNSC/NSC WASHDC PRIORITY
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

C O N F I D E N T I A L KYIV 000194 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 01/25/2017 
TAGS: PREL ENRG ECON PGOV UP
SUBJECT: UKRAINE: SENATOR LUGAR HEARS THAT ENERGY ISSUES 
HIGH ON NEW GOVERNMENT'S AGENDA 
 
 
Classified By: Ambassador for reasons 1.4(a,b,d). 
 
1. (C) Summary: In Kyiv meetings with Senator Richard Lugar 
(R-IN) January 15-16, President Yushchenko, PM Tymoshenko, 
opposition representatives and local business leaders all 
discussed the importance of energy issues for Ukraine. 
President Yushchenko talked in detail about ways to transport 
Central Asian and Azeri oil and gas to Europe via Ukraine and 
the importance of energy diversification in other areas.  He 
urged the USG to send a senior-level official to participate 
in a May 22-23 energy summit in Kyiv.  In her meeting, PM 
Tymoshenko focused more on the political aspects of energy 
policy, expressing concern about dependence on one source 
(Russia) and the existence of "shadow deals" regarding energy 
supplies.  The opposition noted the importance of keeping the 
flow of Russian gas through Ukraine at a high rate, and local 
business leaders working in the energy field stressed the 
existence of both opportunities and challenges in Ukraine's 
energy market.  Senator Lugar's discussions on NATO and the 
U.S. biological threat reduction program were reported 
septels. 
 
President Focuses on Energy Details 
----------------------------------- 
 
2.  (C)  In his meeting with Senator Lugar, President 
Yushchenko said that it was important for energy to be on 
Ukraine's agenda with the U.S. and that Ukraine was ready to 
work with us.  In March, Ukraine would deliver oil by rail 
and then through the Druzhba pipeline (and by rail) to the 
Czech Republic.  U.S. companies could play an important role 
in transporting oil to Slovakia via Ukraine.  On January 14, 
Yushchenko and the Slovak President had agreed to a test in 
February to send 20,000 tons of oil to Slovakia.  (Embassy 
Note:  Post has seen an announcement of this test.  However, 
we do not know if any batching equipment, which we believe 
would be necessary for such a test shipment, has been 
installed in the pipeline.  End Note.)  Ukraine had reached 
agreement with Poland to transport oil via a to-be-built 
pipeline from Brody and was ready to negotiate with U.S. 
private companies to encourage the transport of Caspian oil 
via this route.  He anticipated 10-11 million tons of oil 
from the Ukrainian side to use this pipeline; and by the end 
of the year, Odesa-Brody,s capacity would be up to 20 
million tons.  (Embassy Note:  Yushchenko's meaning about the 
Ukrainian contribution was not clear, although most likely he 
was referring to proposals to adapt two refineries in western 
Ukraine to process Caspian crude.  End note.)  The Ukrainians 
wanted to expand this route in concert with U.S. partners, 
and Yushchenko stressed that this was a very sensitive and 
important issue for Ukraine.  Yushchenko noted that 
negotiations would take place in April/May to reverse the 
direction of the Odesa-Brody pipeline.  He also urged senior 
U.S. officials to attend the upcoming energy summit May 22-23 
in Kyiv in order to discuss possible transit options and the 
Odesa-Brody pipeline.  Senator Lugar responded that he had 
just been in Kazakhstan, Turkmenistan and Azerbaijan and that 
there was great interest in these countries to find oil and 
gas routes to Europe via Ukraine. 
 
3.  (C)  Yushchenko said that Ukraine was very interested in 
finding ways to help transport Central Asian and Azeri oil 
and gas to Europe, and that he would ask for U.S. support to 
organize the process.  Yushchenko argued that there was no 
doubt regarding the reliability of Ukraine as a transit 
country -- "we have a unique system of transport and we are 
willing to modernize it."  However, politics, namely Russia, 
was a major factor and this made it hard to protect Ukraine's 
independence.  According to Yushchenko, Russia wanted to 
disrupt the route through Ukraine by questioning the 
reliability of the system.  However, Ukraine's system was as 
"reliable as any Russian system," and the President noted 
that all of Russia's pipeline and compressors were 
Ukrainian-built, and 60% were serviced by Ukrainians.  Russia 
had monopolized Central Asian gas; Central Asia's interest in 
transporting gas via Ukraine to Europe was a key issue for 
Kyiv.  Otherwise, Central Asian gas would end up going to 
China, India and Afghanistan, which was not good for Europe. 
Russia was offering alternatives to Ukraine's transport 
system and "we want to minimize Russia's role."  With regard 
to Azerbaijan and Georgia, Yushchenko asked for U.S. support 
to ensure that Ukraine could be a short cut to Europe.  Lugar 
responded that these countries wanted to see Ukraine as an 
alternative, but that they feared Russia's and in some cases 
Iran's reaction.  Turkmenistan's new President was open to 
cooperation with the U.S. and others, but it would be a real 
leap.  Yushchenko acknowledged that Russia dominated this 
policy, but that plans to send Caspian gas via the Black Sea 
to Italy were vague and therefore, Ukraine would have to 
continue to struggle. 
 
 
4.  (C)  With regard to nuclear energy, Yushchenko expressed 
interest in w
orking with U.S. companies on mining and 
processing uranium.  He referred to recent Ukrainian 
decisions regarding the creation of a spent nuclear fuel 
depot and power generation.  Re Chernobyl, he said that there 
would be a review of operations during the first six months 
of 2008 and noted that additional technical assistance would 
be needed.  Construction of a new sarcophagus would begin in 
April/May and plans were underway regarding the storage of 
dry nuclear (waste) spent fuel (Holtec).  Lugar pledged to 
work with Ukraine on nuclear facilities and Chernobyl, and 
also noted that U.S. firms were ready to work with Ukraine on 
the disposition of spent nuclear fuel.  He expressed 
appreciation for all of Ukraine's work under the Nunn-Lugar 
program and said that the next phase of more sophisticated 
work -- the disposition of nuclear fuel -- was about to 
begin.  Lugar emphasized that the U.S. would continue to be a 
good partner.  Yushchenko said that Ukraine had "big 
prospects" in the nuclear area with regard to the 
construction of new power units, the processing and enriching 
of ore and fuel supplies.  Ukraine's best cooperation in this 
area was with the U.S.  Two new power plants would start 
(construction) next year. 
 
PM's Emphasis is on Energy Independence 
--------------------------------------- 
 
5.  (C)  After Senator Lugar described his discussions in 
Georgia, Azerbaijan, Kazakhstan and Turkmenistan about the 
importance of alternative energy sources, the PM noted 
Ukraine's difficult situation of being dependent on one major 
source of energy -- Russia.  She said that in her view, 
energy independence equaled political independence and her 
government was committed to finding ways to make energy 
security more reliable, including by removing 
"non-transparent" methods of gas supply.  According to the 
PM, the previous government had "destroyed" Ukraine's 
relationship with Turkmenistan and, in principle, had no 
arrangements in place at all with Kazakhstan and Uzbekistan. 
She believed that the project to supply Turkmen gas through 
the Caspian to Ukraine and on to European consumers was a 
good project that deserved U.S. support.  It was also 
important to modify existing laws regarding exploration in 
order to attract foreign investment. 
 
6.  (C)  Energy conservation was also an absolute priority, 
according to Tymoshenko.  In addition, Ukraine needed to 
focus on the development of its own plentiful source -- coal 
-- and the diversification of nuclear fuel supplies.  The PM 
said that the orange coalition was committed to "breaking the 
artificial shadow dealings in the energy field."  Time was 
needed to do this, but all the coalition members believed 
that this was important.  Tymoshenko said that small steps 
would be taken first, but that Ukraine shared the U.S. 
concerns about the effect of energy supplies on foreign 
policy issues, economic growth and the agricultural sector. 
 
Opposition Focus on Maintaining Russian Transit Levels 
--------------------------------------------- --------- 
 
7.  (C)  During a meeting with opposition shadow foreign 
minister Konstantine Gryshchenko, Lugar noted that during 
previous visits to Kazakhstan, Turkmenistan, Georgia and 
Armenia, he had stressed that each country should focus on a 
more balanced energy portfolio.  The aim was not to interrupt 
the energy relations with Russia, but provide alternative 
sources and transmission conduits.  He noted that these 
countries saw these decisions in the context of their 
relations with Russia and Iran and wanted a sense of level of 
support from US.  Gryshchenko noted that during the tenure of 
the previous government, the U.S. company Vanco had received 
substantial piece of shelf for exploration and development in 
the Black Sea and that Marathon oil was in a joint venture 
for energy exploration in eastern Ukraine.  He also 
underlined that the Nuclear Fuel Qualification Project with 
Westinghouse would provide an alternative nuclear fuel source. 
 
8.  (C)  Gryshchenko mentioned the importance of keeping the 
transshipment of Russian-origin gas through Ukrainian 
pipelines to the EU.  Currently 80% of Russian gas came 
through Ukraine; he wanted to keep that level.  In 
Gryshchenko's view, it was important to have open dialogue 
with Moscow and to ensure that pipelines were maintained and 
upgraded.  Access to and shipment of Iranian gas via Ukraine 
was a future issue.  Gryshchenko also noted the need to work 
on coal extraction and reducing dangerous methane levels in 
the mines.  Lugar agreed that it was important to keep 
Ukraine's pipelines maintained.  Some in the EU (Germany) 
were looking for direct access to Russian gas.  The U.S. was 
 
also looking to nuclear energy with smaller, safer plants. 
Spent nuclear fuel would be an issue for both the U.S. and 
Ukraine.  Lugar suggested that Ukraine as an agricultural 
country could also benefit from new developments in biofuel 
technology. 
 
Business Sees Potential, but also Challenges 
-------------------------------------------- 
 
9.  (SBU) During a meeting with Senator Lugar and his 
delegation, U.S. and international businesses working in 
Ukraine with a focus on energy issues said they saw good 
potential in Ukraine, but stated Ukraine remained a very 
difficult environment for business, primarily because of 
corruption.  Michael Bleyzer of the investment firm 
SigmaBleyzer noted concerns about increasing lack of fiscal 
discipline in the Government.  Oil and gas companies said 
there is a clear need for international expertise, and this 
is recognized on the technical level by Ukrainian industry, 
since most of the easy-to-get hydrocarbons are gone, and 
remaining reserves are more challenging.  However, the senior 
management of the Ukrainian oil and gas industry is very 
politicized, which impedes investment.  Legal structure is a 
problem for oil and gas development; several noted that 
Ukraine has legal vehicles that might work, but the 
Ukrainians often do not use them.  Given how long it takes to 
develop oil and gas resources, Ukraine needs to move quickly 
if it is to address energy diversification, but this is not 
happening.  Ukraine's nuclear sector has opportunities for 
diversification via fuel supply and storage of spent fuel, 
but the Government needs to seize these chances soon, or they 
may not reappear. 
 
10. (SBU)  In general, the business representatives felt 
private interests continued to impede progress on national 
priorities, and many government leaders, fear of losing 
control was getting in the way of allowing foreigners in, 
including via privatizations, to help develop a number of 
sectors. 
 
11. (U)  Senator Lugar did not have the opportunity to clear 
this cable prior to departing Kyiv. 
 
12. (U) Visit Embassy Kyiv's classified website: 
www.state.sgov.gov/p/eur/kiev. 
Taylor

Wikileaks

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