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Cablegate: Ukraine: Dpm Klyuyev On Nuclear Supply, Oil and Gas,

VZCZCXRO3393
PP RUEHDBU RUEHIK RUEHLN RUEHVK RUEHYG
DE RUEHKV #1521/01 1731330
ZNR UUUUU ZZH
P 221330Z JUN 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 2823
INFO RUCPDOC/USDOC WASHDC PRIORITY
RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 001521

SIPDIS

SENSITIVE
SIPDIS

STATE FOR NP - PMETZ, EUR/UMB, EUR/ACE, EB/IFD/OIA
STATE ALSO FOR EEB/ESC/IEC - RGARVERICK
USDOC FOR 4210/
DOE FOR LEKIMOFF AND CCALIENDO
STATE PLS PASS OPIC FOR BCHRISTALDI
LONDON PLS PASS EBRD - MSULLIVAN

E.O. 12958: N/A
TAGS: ENRG EPET EAID EINV ECON BEXP UP
SUBJECT: UKRAINE: DPM KLYUYEV ON NUCLEAR SUPPLY, OIL AND GAS,
OPIC, AND ECONOMIC REFORM ISSUES

REF: Kyiv 1507

Treat as Sensitive but Unclassified. Not for Internet.

1. (SBU) Summary: Meeting with Ambassador June 20, Deputy Prime
Minister Andriy Klyuyev told Ambassador that Ukraine intends to
pursue diversification of nuclear fuel supplies. He stated that
Ukraine is not seeking to have Russia supply all Ukrainian reactors
in the next contract for nuclear fuel supply. On the Chornobyl
shelter, Klyuyev said the GOU would write donors soon to argue the
negotiations with the French-led Novarka consortium are going
nowhere. Klyuyev noted the Rada had just passed useful amendments
to the Production Sharing Agreement (PSA) legislation, and he hoped
this would help move forward negotiations with Vanco. Ambassador
mentioned Cardinal Resources' problems with mandatory sales at lower
domestic prices as the kind of regulation that deters investment in
domestic gas production. Klyuyev responded that the requirement
could not be changed, although he hoped to provide some relief in
the fall. He remained a skeptic on Odesa-Brody-Plock, arguing the
Poles were overlooking technical problems with the proposed
expansion. Klyuyev said Ministry of Finance opposition has stalled
moving forward on a proposal to resolve the OPIC/Alliant dispute.
Klyuyev also provided additional details on how the Yanukovych
government has worked with McKinsey consultants to develop a
comprehensive economic reform program. End Summary.

DIVERSIFYING NUCLEAR FUEL SUPPLIES
----------------------------------

2. (SBU) Ambassador noted recent reports of Ukrainian-Russian
discussions on nuclear cooperation. He highlighted the importance
of diversification and competition, noting the example of France's
dealings with Westinghouse, which eventually had lowered fuel supply
costs. Klyuyev responded that diversification was Ukraine's
intention. He related that the GOU was now in negotiation with the
Russians, but was proposing that the contract be limited to 3 years
and not cover all Ukrainian reactors. This would leave room for
diversification, although he cautioned that Ukraine's options for
supply were limited. Ambassador noted that Westinghouse had agreed
with Minister of Fuels and Energy to provide a draft contract by
July 31; Klyuyev said the GOU would look at it. Noting the example
of a new exchange for exporting electricity implemented in Ukraine
recently, which had increased returns and eliminated intermediaries,
Klyuyev argued the GOU understood competition was advantageous.

GOU THINKS SHELTER NEGOTATIONS AT AN IMPASSE
--------------------------------------------

3. (SBU) Ambassador noted recent progress in reaching agreement with
Holtec on restarting the Interim Spent Fuel Storage project at
Chornobyl. Klyuyev agreed, but added the bigger problem was with
the negotiations for the Chornobyl shelter. The GOU did not believe
the French-led Novarka consortium will stay within the price quoted,
and also had doubts about their ability to finish the project on
time and with adequate quality. Novarka, Klyuyev charged, was
delaying the contract negotiations, and he believed even the
European Bank for Reconstruction and Development (EBRD) was starting
to see the negotiations were not making progress. The GOU was
writing a letter to donors, asking them to be active in moving the
process forward. Ambassador asked what alternative there was to
Novarka. Klyuyev thought they should negotiate with CH2MHill.
Ambassador expressed doubts this was workable, as CH2MHill had
withdrawn from the tender. (Comment: The GOU's observer in the
Novarka negotiations, Serhiy Korsunskiy of the Ministry of Foreign
Affairs, earlier approached post's DOE representative about a GOU
letter to donors to drop Novarka. DOE representative cautioned
Korsunskiy that donors might not favor a renewed tender, given the
long delays involved.)

NEW PSA LAW PASSED
------------------

4. (SBU) Ambassador pushed for progress in the Vanco PSA
negotiations. Klyuyev responded that the Rada's passage on June 19
of PSA law amendments would help a great deal. Klyuyev noted as
early as 2003, he had seen the need for changes in Ukraine's PSA
laws to bring in international investment in oil and gas production.
Ambassador pointed out the President might not sign the law, as he
regarded Rada action after June 2 as not legitimate. Klyuyev
answered he hoped the President would sign the PSA law because it
was important for the country. Vanco was ready to proceed with

KYIV 00001521 002 OF 002


negotiations with or without a law, Ambassador noted. Klyuyev said
they would reach agreement either way, but it would be tougher
without the new amendments.

TWO-TIER GAS PRICE HURTS PRODUCERS
----------------------------------

5. (SBU) Ukraine's price structure whereby domestic producers must
sell at prices lower than domestic industry pays, in order to
provide households with lower prices, is a disincentive to
production, Ambassador noted. He cited the problems Cardinal
Resources faced as an example. For the time being, Klyuyev said,
the GOU could not change this 2-tier pricing, in part because the
opposition had made gas and utility prices a major issue. However,
he said he hoped to modify this pricing before the next heating
season started. The GOU would set one price for smaller household
and social users, with a sliding scale for other users. He hoped
this would increase profitability for domestic producers. His
interest was to develop gas production and spur investment from
domestic and international companies, he maintained.

ODESA-BRODY-PLOCK SKEPTICISM
----------------------------

6. (SBU) As in previous meetings, Klyuyev expressed skepticism about
the prospects for Odesa-Brody-Plock, which had been highlighted in
the recent GUAM-Poland summit in Baku. Noting his knowledge of the
technical difficulties faced by the Baku-Ceyhan pipeline in moving
oil over high mountains, Klyuyev charged Poland was ignoring
difficulties in the Plock extension of Odesa-Brody. The route
Poland had proposed for the extension "makes a nice line on the
map", and, he added, made sure the route crosses a minimal amount of
Polish territory. Although Klyuyev supposed the Poles had chosen
this approach to avoid land allocation problems in Poland, he noted
the route thus crossed rough, hilly territory in Ukraine, which
would add to the cost and technical difficulties of the project.
Ukraine was more interested in projects, like a possible expansion
of gas pipeline capacity (see septel), which had prospects for
private investment.

LEGAL DIFFICULTIES FOR OPIC
---------------------------

7. (SBU) When Ambassador asked about OPIC, Klyuyev admitted he had
major problems with the Ministry of Finance. For legal reasons, the
Ministry of Finance had rejected Klyuyev's proposed mechanism to
retire the claim, arguing it would require an amendment to the
budget, which must be approved by the Rada. Klyuyev instead wants
to use a cabinet resolution to permit Luhansk Cartridge Company to
process old munitions and use the proceeds to retire the OPIC claim.
He believed this approach had a legal basis and hoped the process
issue could be resolved soon. Things looked much worse a month ago,
he confided.

YANUKOVYCH'S REFORM PLANS
-------------------------

8. (SBU) Ambassador noted Rinat Akhmetov had told him recently of
the GOU's work with consultants from McKinsey on a study of
Ukraine's problems and proposals for a reform program (reftel).
Klyuyev explained he had been directly involved in the process with
McKinsey. Yanukovych had instructed Cabinet members to work
directly with McKinsey experts on the program. Klyuyev had been
responsible for: state monopolies and privatization, energy sector
reform, transport infrastructure, and the machinery industry. He
added that work was continuing on concrete proposals and ideas on
how to implement the reforms, with broad participation inside the
government. (Comment: In a later conversation with a U.S. adviser
to opposition leader Tymoshenko, the consultant said that Tymoshenko
had engaged the Rand Corporation in an analogous effort to develop a
broad series of reform proposals for her party.)
TAYLOR

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