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Cablegate: Ukraine: Chernomyrdin Crashes Kyiv Energy

VZCZCXRO2166
RR RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2008/01 2831240
ZNR UUUUU ZZH
R 091240Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 6503
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 KYIV 002008

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB, EEB/EEC/IEC - LWRIGHT
DOE FOR LEKIMOFF, CCALIENDO
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

E.O. 12958: N/A
TAGS: EINV ENRG EPET PINR PREL UP
SUBJECT: UKRAINE: CHERNOMYRDIN CRASHES KYIV ENERGY
CONFERENCE

REF: KYIV 1967

Sensitive But Unclassified. Not for Internet Distribution.

1. (U) Summary. An animated Viktor Chernomyrdin, Russian
Ambassador to Ukraine since 2001, provided a spirited
presentation on Ukraine's energy sector on October 7 at the
"Ukrainian Energy Forum," a three-day event organized by Adam
Smith Conferences. According to Chernomyrdin, reliability is
key for Russia in its gas relations with Ukraine. Referring
to Ukraine's natural gas pipeline system, he said it needs at
least $1 billion of investment and that it would be a "heap
of scrap metal" without gas supplies. The Russian-Ukrainian
gas consortium, which was established in 2003 and aimed to
manage Ukraine's extensive gas pipeline infrastructure with
participation from European companies, should be
re-energized. Ukraine in cooperation with Russia should take
steps to complete the Bogorodchany-Uzhgorod gas pipeline; no
progress has been made to-date. The Russian Ambassador said
that if Ukraine wants to buy "more expensive," "lower
quality" nuclear fuel from the U.S., so be it. Post
assesses, however, that this statement about the cost and
quality of Western-supplied nuclear fuel to Ukraine simply is
not true. End summary.

Russia Seeks Reliability in its Gas Relations with Ukraine
--------------------------------------------- -------------

2. (U) Russian Ambassador to Ukraine Viktor Chernomyrdin on
October 7 presented his views on Russian-Ukrainian energy
relations at an Adam Smith conference called "The Ukrainian
Energy Forum." He said that Ukraine's gas transportation
system is more than 40 years old, so Russia "needs to be
careful." As much as $1.5 billion is required to modernize
Ukraine's gas infrastructure. The Russian Ambassador said
that without gas supplies, Ukraine's gas pipeline system
would be a "heap of scrap metal." Chernomyrdin added that
the amount of gas Ukraine can transport across its territory
varies between 112 billion cubic meters (bcm) and 120 bcm,
and that the potential throughput capacity numbers quoted in
the press (much higher than 120 bcm) are nonsense.

3. (U) Most important for Russia, according to
Chernomyrdin, is the operation and management of Ukraine's
gas pipeline system, which annually transports about 80
percent of the gas Russia sells to Europe. In 2003, the
Russia-Ukraine gas consortium was formed, which aimed to
better manage and improve Ukrainian gas infrastructure with
participation from European companies. Chernomyrdin
expressed regret that nothing had happened during the past
five years to advance the consortium project.

Pipeline Projects: Ukraine Needs to Act
---------------------------------------

4. (U) Chernomyrdin, expressing his wish "not to hurt
anyone's feelings," said that if Ukraine wants to use the
Bogorodchany-Uzhgorod (B-U) gas pipeline project to boost
transit volumes, it should act. Referring to smaller
pipelines that would be used in the B-U project, he noted
that they had been empty since the 1980s (Note: The B-U
pipeline's capacity is expected to be 19 bcm; its cost
currently is estimated to be $560 million. End note.)
Chernomyrdin noted that Russia and Ukraine had been talking
for three years about the B-U project and encouraged the
Ukrainian side to work with Russia to move the project
forward.

5. (U) Regarding the Odessa-Brody oil pipeline, Chernomyrdin
questioned why the $500 million project was completed in the
first place. Nevertheless, the reversal of the
pipeline--using it to transport Russian crude oil south to
Odessa--so far has netted Ukraine $250 million. If Ukraine
now aims to reverse Brody-Odessa, it should first secure the
necessary crude oil supplies to fill the pipeline.

Chernomyrdin on Nuclear Fuel Supplies
-------------------------------------

6. (SBU) An incredulous Chernomyrdin said that if Ukraine
wants to buy "more expensive," "lower-quality" nuclear fuel
from the U.S., so be it. Post assesses that this statement
is untrue. Under the US-Ukraine Nuclear Fuel Qualification
Project (UNFQP), six fuel assemblies manufactured by

KYIV 00002008 002 OF 002


Westinghouse were supplied to the South Ukrainian Nuclear
Power Plant (NPP) number 3 reactor in 2005. These fuel
assemblies have been tested and inspected by U.S. and
Ukrainian technical experts who for more than three years
indicated that the fuel met safety and quality standards.
Ukrainian nuclear utility (Energoatom) expressed its complete
satisfaction with the operation, safety, and quality of these
Westinghouse fuel assmeblies after the physical inspection
and analyses were conducted in September 2008. Under the
the UNFQP, the U.S. will provide an additional 42
Westinghouse fuel assemblies in 2009 for operation in the
South Ukraine NPP unit number 3. Regarding price, then
Energoatom President Yuriy Kovryzhkin on March 30, 2008,
publicly said that "Westinghouse fuel offers high quality and
competitive prices." Russia, on the other hand, during the
last three years has almost doubled the price it charges
Ukraine for reprocessing and storing spent nuclear fuel from
Ukraine's nine reactors. Post also believes that Russia has
increased its prices of fresh nuclear fuel for Ukraine (Note:
If Ukraine's fuel supplies are not diversified, Russia will
continue to dominate Ukraine's nuclear sector, which
generates almost half of Ukraine's electricity; Moscow also
will dictate whatever prices and conditions it wants. End
note)

Gazprom Executive on Russia-Ukraine Gas Negotiations
--------------------------------------------- -------

7. (U) Anatoliy Podmyshalskiy, General Director of Gazprom
sbyt, a Ukraine-based subsidiary of Russian energy giant
Gazprom that sells gas to industrial consumers in Ukraine,
also attended the energy forum in Kyiv. He said that Gazprom
may supply Russian instead of Central Asian gas to Ukraine
next year because prices of Central Asian gas are likely to
be much higher than the price Ukraine pays in 2009 for
imported gas. Podmyshalskiy said that the numerous gas
agreements Russia and Ukraine concluded in the past would
need to be examined and then canceled to complete new
agreements, which could remove gas intermediaries and allow
Ukraine a three-year period to transition to European prices.
He also noted that before removing gas intermediaries their
debts to Gazprom would need to be settled.
TAYLOR

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