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Cablegate: Ukraine: Terms of Recent Gas Agreement with Russia

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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