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09KYIV117, UKRAINE: DETAILS AND QUESTIONS ON GAS DEAL STILL

January 21, 2009

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Reference ID Created Released Classification Origin
09KYIV117 2009-01-21 15:56 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXYZ0025
PP RUEHWEB

DE RUEHKV #0117/01 0211556
ZNY CCCCC ZZH
P 211556Z JAN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7106
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

C O N F I D E N T I A L KYIV 000117 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, 
NSC FOR STERLING AND KVIEN, 
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT 
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
 
E.O. 12958: DECL: 01/21/2019 
TAGS: EFIN ENRG EPET PGOV PINR PREL UP
SUBJECT: UKRAINE: DETAILS AND QUESTIONS ON GAS DEAL STILL 
FLOWING 
 
REF: KYIV 107 
 
Classified By: DCM James Pettit for reasons 1.4 b) and d). 
 
1. (C) Summary.  As natural gas supplies reach normal levels 
in Ukraine and other countries in Europe, more details on the 
gas deal have been released by the Prime Minister, the 
President, the Minister of Energy, various members of the 
Presidential Secretariat and Naftohaz officials.  At present, 
questions remain concerning the actual price Ukraine will pay 
for gas in 2009, the price Ukraine will pay for the 
much-debated technical gas, the price Gazprom will pay 
Ukraine for gas transit in 2010, the role of the EU gas flow 
monitors, the commercial role Gazprom will play in the 
Ukrainian domestic market via its subsidiary Gazpromsbyt, and 
whether or not Ukraine will be allowed to export excess gas 
westward.  Tymoshenko claimed victories in obtaining a low 
gas price for 2009 and in refurbishing Ukraine's tarnished 
reputation as a reliable gas transit country.  At the same 
time, President Yushchenko seems to have abandoned his 
temporary unified gas negotiations position with the PM, and 
has reverted to criticizing the gas deal ex post facto in the 
press.  Moreover, he has called a meeting of the National 
Security and Defense Council on January 23 to determine if 
the gas agreement violates Ukraine's national security.  End 
summary. 
 
Tymoshenko Claims Victories 
--------------------------- 
 
2. (C) On January 21 PM Tymoshenko announced that Ukraine had 
regained its reputation as a reliable gas transit partner. 
She referred to a January 21 statement by EU Commissioner 
Andris Piebalgs which reportedly refuted Gazprom claims that 
Ukraine had siphoned Russian gas or inhibited transit 
supplies during the gas cutoff.  She also declared victory 
over the infamous gas intermediary RosUkrEnergo (RUE), 
repeating that RUE had been eliminated and that by doing so, 
Ukraine had finally destroyed a large "feeding trough" for 
corrupt politicians.  EconOff spoke with the EU/EC Energy 
Officer Hans Rhein in Kyiv on January 21 who stated that the 
EU was convinced RUE had finally been eliminated, but that 
Europe still did not have all the facts concerning the 
details of the gas agreement. 
 
3. (SBU) Tymoshenko told the press on January 20 that the 
2009 gas price for Ukraine would be $228.8 per thousand cubic 
meters (tcm) of gas, and added that Ukraine would receive 
this price for the entire year.  Minister of Energy Yuriy 
Prodan echoed her comments on the same day.  However, 
Naftohaz Deputy Head Volodymyr Trykolich announced that the 
gas price would be reduced quarterly.  Ukraine will pay $360 
per tcm in the first quarter, $270 per tcm in the second, 
$219 per tcm in the third, and $162 per tcm for the fourth, 
which when factoring 11 bcm at $167 per tcm translated into 
an average 2009 gas price of $228-$229 per tcm, assuming that 
Ukraine purchases equal amounts of gas each quarter. 
 
Technical Gas 
------------- 
 
4. (SBU) The Prime Minister also stated that Ukraine would 
buy 11 bcm of technical gas (gas required as fuel for 
compressor stations which pump gas for transit) for $153 per 
tcm. This contradicts her January 20 statement to the media, 
where she said Ukraine would pay $167 per tcm.  (Note: 
Ukraine reportedly used 6.5 bcm to transit 116 bcm of gas 
westward in 2008, and with gas demand decreasing, it is 
doubtful that Ukraine will transit 116 bcm or more in 2009, 
which could leave Ukraine with 4.5 bcm of excess gas. It is 
not clear if the recent gas agreement would allow Ukraine to 
export excess technical gas on to Europe and at what price 
Ukraine be allowed to sell this gas.  End note.)  Naftohaz's 
Trykolich, however, stated that Ukraine would have to pay 
$167 per tcm for technical gas for 2009 and not $153 per tcm 
as Tymoshenko stated.  As a result of these discrepancies, it 
is still unclear how much Ukraine will actually pay for 
domestic and technical gas for 2009 and what would happen to 
any excess technical gas.  In the past, excess technical gas 
was only allowed to be placed in Ukrainian underground 
storage facilities.  Tymoshenko also noted that the price for 
this technical gas was less than the $179.50 per tcm Ukraine 
 
paid for gas in 2008 and claimed this low price for technical 
gas as another victory. 
 
Yushchenko's Buyer's Remorse 
---------------------------- 
 
5. (SBU) President Yushchenko challenged Tymoshenko's gas 
price victory and her math skills on January 20, calling 
Tymoshenko's price of $228.8 per tcm implausible.  He claimed 
that Ukraine would have to pay $360 per tcm for the first 
quarter (as Naftohaz's Trykolich asserted) and that the &#x00
0A;fourth quarter price would have to be $132 per tcm in order 
to achieve an average price of $228 per tcm.  In addition, 
Yushchenko stressed that Tymoshenko agreed to a 2009 gas 
price of $450 per tcm, minus a 20 percent discount, but 
Ukraine would come out losing as future gas prices would be 
based on a formula that would use $450 per tcm as the base 
price.  He argued that Tymoshenko should have fought for a 
much lower base price for Ukraine.  He characterized the 2009 
gas price as a defeat for Ukraine. Presidential Advisors 
Bohdan Sokolovskiy and Oleksandr Shlapak accused Tymoshenko 
of ignoring Presidential directives during gas talks which 
have possibly endangered Ukraine's energy security. 
 
NSDC to Review Gas Deal 
----------------------- 
 
6. (C) Building on this theme of price problems, Yushchenko 
took the opportunity during a joint press conference with 
Belarusian President Lukashenko (held in Chernihiv, Ukraine) 
to comment on the deal and the price, noting that $360/tcm 
would be an "obvious loss" for Ukraine.  He has called a 
closed door meeting of the National Security and Defense 
Council (NSDC) to review the deal in detail, in particular to 
assess whether it meets Ukraine,s national interests or 
creates a threat to national security.  The NSDC is also 
tasked with coming up with measures to counter negative 
economic impacts of any price increase. 
 
7. (C) Conversations with colleagues at the EC delegation on 
January 21st highlighted Commission concerns regarding the 
call for an NSDC meeting, particularly given the meeting's 
focus on identifying national security threats posed by the 
deal.  Our contacts speculated that such "threats", whether 
exaggerated by the President or legitimate -- could then be 
used by Yushchenko to reinsert himself into the process. 
They expressed clear concern that Yushchenko could 
inadvertently derail or even undo the deal, which according 
to them would cause very serious further damage to Ukrainian 
credibility in Europe. 
 
Gazpromsbyt and Ukraine's Industrial Gas Sector 
------------- ---------------------------- 
 
8. (SBU) The Ukrainian press reported that Gazprom subsidiary 
Gazpromsbyt Ukraine would be allowed to sell 25 percent of 
the gas intended for Ukrainian industrial use in 2009.  In 
2008 Gazpromsbyt was allowed to sell 7.5 bcm of gas, 
according to last year's gas agreement. In October 2008, 
Gazpromsbyt head Anatoli Podmysharlsky expected that 
Gazpromsbyt would provide only 4 bcm of gas to industrial 
consumers by the end of 2008, due to decreased demand during 
the global economic crisis.  In very good production years, 
Ukraine's industries use at most 34 bcm of gas, so allowing 
Gazpromsbyt to receive 25 percent of the industrial market 
would not be a dramatic increase in Gazpromsbyt's current 7.5 
bcm limit, if any. 
 
9. (C) Comment.  Although gas is flowing again, many 
questions regarding the gas deal remain unanswered.  The 
President reportedly gave the Prime Minister full negotiating 
authority to act on Ukraine's behalf, but he is now publicly 
expressing his dissatisfaction with the agreement Tymoshenko 
made with Russia on January 19.  Yushchenko's true objectives 
in calling an NSDC meeting to examine the deal are unclear, 
however, and the European Commission delegation was frankly 
concerned that the gas crisis might not yet be behind them. 
End comment. 
TAYLOR

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