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08KYIV580, UKRAINE: TERMS OF RECENT GAS AGREEMENT WITH RUSSIA

March 18, 2008

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Reference ID Created Released Classification Origin
08KYIV580 2008-03-18 12:54 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXYZ0039
OO RUEHWEB

DE RUEHKV #0580/01 0781254
ZNR UUUUU ZZH
O 181254Z MAR 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5236
INFO RHEBAAA/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE

UNCLAS KYIV 000580 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EB/ESC/IEC - GALLOGLY/WRIGHT 
DOE PLEASE PASS TO LEKIMOFF, CCALIENDO 
USDOC FOR 4321/IEP/OEENIS/NISD/CLUCYK 
 
E.O. 12958: N/A 
TAGS: EPET ECON ENRG PREL UP
SUBJECT: UKRAINE: TERMS OF RECENT GAS AGREEMENT WITH RUSSIA 
APPEAR IN PRESS 
 
REF: KYIV 501 
 
1. (SBU) On March 13, Ukrainian news service "Ukrainska 
Pravda" published what it called the latest authentic version 
of the March 12 gas agreement between Gazprom and NaftoHaz 
entitled "Agreement on the Development of Gas Sector 
Relations." To date, no government officials have denied the 
authenticity of the document.  The agreement as written seems 
largely consistent with earlier press releases and 
explanations.  The agreement, like other Ukrainian-Russian 
agreements, is very "thin" given the importance of the 
agreement, even if it makes reference to other, previously 
signed technical agreements.  In post's view, it is safe to 
assume that  additional side agreements were made which are 
not accounted for in the text of the agreement.  An Embassy 
Kyiv translation of the agreement begins in paragraph 7. 
 
2. (SBU) According to the document, RosUkrEnergo (RUE) will 
continue to sell gas to NaftoHaz at least until December 
2008.  There is also no mention of RUE's exclusion from 
participation in future agreements (Note: Tymoshenko has been 
very careful to avoid mention of RUE's role in the latest gas 
deal, but she has considered the elimination the other gas 
middleman UkrHazEnerho (UHE) from the Ukrainian domestic gas 
market a major victory.  End note). 
 
3. (SBU) Widespread media reports claimed that Ukraine agreed 
to pay $315 per thousand cubic meter (tcm) for Russian gas, 
but there is no mention of such a price in the agreement. 
However, NaftoHaz did agree to buy 1.4 billion cubic meters 
(bcm) of Russian gas via in kind gas transfers.  (Note: 
NaftoHaz officials announced on March 18 that NaftoHaz will 
make two gas transfers of 700 million cubic meters of gas to 
Gazprom.  End note.) 
 
4. (SBU) A subsidiary, or subsidiaries, of Gazprom receive 
the right to sell no less than 7.5 bcm of gas on the 
Ukrainian domestic market to industrial customers of 
Gazprom's choosing.   NaftoHaz agrees to facilitate these 
transactions for Gazprom, including helping Gazprom conclude 
agreements with customers of Gazprom's choosing.  The 
agreement specifies no upper-limit to the Gazprom sales, but 
does set an upper-limit on the margin that the subsidiary 
(-ies) may earn.  (Note: the industrial sector is the more 
lucrative portion of the Ukrainian domestic gas market.  End 
note.) 
 
5. (SBU) NaftoHaz agreed to inform Gazprom by March 15 of gas 
volumes in Ukrainian gas storage facilities belonging to RUE 
and UHE.  This has been a particular murky issue for Gazprom, 
which in the past has accused Ukraine of illegally 
withdrawing gas in storage belonging to RUE and UHE. 
 
6. (SBU) The agreement does not address the issue of 
increases in the fees paid for transit or storage of Russian 
gas.  However, it forbids Ukraine to re-export gas originally 
purchased for domestic use (Note: Since Ukraine is buying gas 
at $179.50 per tcm, a price far lower than that paid by 
western European countries,  energy experts assumed that 
Gazprom would not permit Ukraine to re-export gas.  End 
note.) 
 
7. (U) BEGIN TEXT OF GAS AGREEMENT TRANSLATION: 
 
Open Joint Stock Company Gazprom of the Russian Federation, 
hereinafter referred to as Gazprom in the person of Board 
Chairman A.B. Miller acting under the Charter, on the one 
side, National Joint Stock Company NaftoHaz Ukraine of 
Ukraine, hereinafter referred to as NaftoHaz Ukraine in the 
person of Board Chairman O.V. Dubyna acting under the 
Charter, on the other side, hereinafter referred to as 
Parties, striving to settle on a mutually beneficial basis 
issues of natural gas supplies to Ukraine and sales of 
natural gas on the Ukrainian market, confirming its desire to 
transfer to market principles of management and pricing, 
signed this Agreement as a Deed on the following: 
 
ROSUKRENERGO AG or Gazprom sells from January 1 through 
December 31, 2008 to NaftoHaz Ukraine natural gas of Central 
and Middle Asian origin on terms DAF at the border of the 
Russian Federation/Ukraine and/or border of Republic 
Belarus/Ukraine ("Incoterms" - 2000) in the amount of no less 
than 49.8 bcm at the price of USD 179.5 per 1000 cubic 
meters. 
 
NaftoHaz Ukraine shall sign, beginning on April 1, 2008, with 
 
a subsidiary or affiliated company of Gazprom created on the 
territory of Ukraine, a long-term contract on purchase and 
sales of natural gas of Central and Middle Asian origin in 
2008 and subsequent years in an amount not less than 7.5 bcm 
annually for sales to industrial consumers of Ukraine with 
margin and in an amount not to exceed USD 0.01 per 1000 cubic 
meters.  The Parties shall take into account that NaftoHaz 
Ukraine, in addition to purchases of Central and Middle Asian 
gas, shall sign with ROSUKRENERGO AG a
contract on 
purchase-sales of natural gas of Russian origin in the amount 
of up to 1.4 bcm, with payment via returning the respective 
amounts of gas, and shall undertake an obligation in 3 days 
from the date of this Agreement sign a Commercial Act on 
delivery-acceptance of gas as provided in p.3.7 of the 
Contract. 
 
NaftoHaz Ukraine and Gazprom shall within 3 days from the 
date of this Agreement sign a Technical Agreement on terms of 
delivery-acceptance of natural gas at the border gas metering 
stations for transit through the territory of Ukraine and 
transfer to Ukrainian consumers in 2008. 
 
Gazprom and NaftoHaz Ukraine shall within 3 days from the 
date of this Agreement be obliged to sign a technical act on 
gas delivery-acceptance in January and February 2008 
considering that ROSUKRENERGO AG and UKRGAZ-ENERGO CJSC, 
simultaneously with signing the technical act, in accordance 
with the effective contract shall sign delivery-acceptance 
acts for January-February 2008 for amounts equal to 5.2 bcm. 
 
Natural gas delivered to Ukraine is destined exclusively for 
the needs of Ukrainian consumers and is not subject to sales 
outside of the territory of Ukraine. 
 
In the framework of this Agreement implementation NaftoHaz 
Ukraine is obliged to: 
 
-     receive all approvals, permissions, licenses and other 
documents necessary under the Ukrainian law and NaftoHaz 
Ukraine's corporate documents for carrying out its 
obligations under the Agreement; 
 
-     provide maximum assistance to the subsidiary or 
affiliated company to be created on the territory of Ukraine 
by Gazprom and/or its affiliated company necessary in 
accordance with the law of Ukraine permissions and licensing 
documents for implementation of activities on purchase and 
sales of natural gas to consumers of Ukraine, including 
permission from the Antimonopoly Committee of Ukraine; 
 
-     provide maximum assistance for the creation of a 
subsidiary and/or affiliated company of Gazprom and/or its 
affiliated company on the territory of Ukraine and for the 
concluding by such subsidiary and/or company of contracts on 
purchase-sales of gas with Ukrainian industrial consumers 
suggested by Gazprom; 
 
-     conclude with ROSUKRENERGO AG supplemental agreements, 
within the framework of existing contracts, to ensure that 
ROSUKRENERGO can withdraw gas stored in underground gas 
storage facilities in Ukraine and ship Central Asian gas 
supplied by ROSUKRENERGO AG through the territory of Ukraine 
to European consumers (for the period until such supplies 
expire); 
 
-     ensure in accordance with additional agreements for 
Gazprom/Gazprom Export in the framework of the existing 
contract on gas transit from June 21, 2002, additional 
transit of Central Asian gas amounts that were earlier 
supplied by ROSUKRENERGO AG company through the territory of 
Ukraine to European consumers (beginning with the start of 
such supplies by Gazprom Export upon its notice to NaftoHaz 
Ukraine); 
 
-     within 3 days after signing this Agreement to provide 
Gazprom confirmation of the amounts of natural gas owned by 
ROSUKRENERGO AG and UKRGAS-ENERGO CJSC and stored in 
underground gas storage facilities in Ukraine.  From the 
moment of signing this Agreement the Parties shall take 
maximum efforts to ensure the settlement of debts of 
ROSUKRENERGO AG to Gazprom Group. 
 
Any dispute, disagreement or demand occurring from this 
Agreement or in connection with it, including any pertaining 
to its implementation, violations, end or ineffectiveness, 
shall be transferred for consideration and final resolution 
 
to arbitration in accordance with LCIA Regulations and these 
Regulations, as a result of reference to them, shall be 
incorporated as part of this reservation.  There will be 
three (3) arbiters.  The Place of arbitration will be: 
London, United Kingdom.  The Language of arbitration will be 
English.  The Law regulating this Agreement is the Law of 
Substance of England (without conflict rules). 
 
The present Agreement becomes effective upon its signing by 
both Parties and transferring to Gazprom by NaftoHaz Ukraine 
written confirmation of completion of all consultations, 
approvals and permissions including the decision of the 
Ministry of Fuel and Energy on approval of terms of this 
Agreement and respective resolution of the Cabinet of 
Ministers of Ukraine that are necessary under Ukrainian 
legislation and NaftoHaz Ukraine's corporate documents for 
signing of this Agreement and its entering into force. 
 
END TEXT. 
 
8. (SBU) Comment.  Although Prime Minister Tymoshenko and her 
supporters have declared the recent gas agreement a victory 
for Ukraine, both sides got something they wanted.  It is 
important to note that the agreement is valid only until 
December 31, 2008, and does not provide increases in 
Ukrainian transit or gas storage fees.  RUE also remains a 
player possibly until 2009.  End comment. 
Taylor

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