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Cablegate: Ukraine: A Visit to an Underground Gas Storage Facility

VZCZCXRO4636
OO RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #3084/01 3521311
ZNR UUUUU ZZH
O 181311Z DEC 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4587
INFO RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 003084

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB,EB/ESC/IEC - GALLOGLY/WRIGHT
DOE PLEASE PASS TO LEKIMOFF, CCALIENDO

E.O. 12958: N/A
TAGS: EPET ENRG ECON UP
SUBJECT: UKRAINE: A VISIT TO AN UNDERGROUND GAS STORAGE FACILITY

REF: KYIV 3058

Treat as Sensitive but Unclassified. Not for Internet
Distribution.

1. (SBU) Summary. EconOff and Econ Assistant traveled to the
Ivano-Frankivsk Oblast in Western Ukraine to visit officials from
the Prykarpattiatransgaz (PTG) gas transportation company, gas
compressor stations and the underground gas storage facility near
the town of Bogorodchany. Built between 1978-1989 to service Soviet
gas exports to Europe, Bogorodchany's five gas compressor stations
and its impressive underground gas storage facility continue to
ensure transit of Russian natural gas to Europe and the storage of
billions of cubic meters (bcm) of natural gas. The staff we visited
took pride in their many years of service in the gas industry, and
many were eager to share ideas to increase efficiency and reduce
waste. However, NaftoHaz's poor financial health, low prices for
Russian gas transit and storage, and the existence of intermediary
UkrHazEnergo has cut into the profitability of regional pipeline
operators like PTG and prevented them from modernizing what is one
of Ukraine's most valuable strategic energy assets. End
summary.

PTG's Role in Ukraine's Gas Transportation System
--------------------------------------------- -----

2. (SBU) Prykarpattiatransgaz (PTG) is one of six subsidiaries of
Ukraine's state-owned gas pipeline operator Ukrtranshaz that manage
gas pipelines across Ukraine. PTG handles almost all Russian gas
transiting to Europe as it exits Ukraine to neighboring Hungary,
Slovakia, Romania and Moldova. PTG's main assets include the
Bogorodchany underground gas storage facility (UGS), and 5,000 km of
gas pipelines that include portions of the three major transit trunk
pipelines: Soyuz, Urengoi-Pomary-Uzhgorod, and Progress, as well as
low-pressure local distribution pipelines. PTG's pipelines can pump
up to 140 bcm of gas annually, but are currently operating somewhat
below maximum capacity because of decreasing supplies of Russian
gas.

The Bogorodchany Underground Gas Storing Facility
--------------------------------------------- -----

3. (U) The Bogorodchany underground gas storage facility is located
18 km from Ivano-Frankivsk on a depleted natural gas field.
According to UGS Director Leopold Mysliborskiyy, who has headed the
facility since construction began in 1978, the storage facility was
built in record time by 5,000 Polish workers hired by the Soviet
government after the USSR had to pay tens of millions of dollars in
fines for failure to supply an agreed amount of gas to Western
Europe. The UGS is located on a four square kilometer plot, and at
first glance appears to be a normal agricultural field, but beneath
the soil lies an overall gas capacity of 3.6 bcm, for both
retrievable gas and for the "buffer gas" needed to operate the
storage facility. A total of 2.3 bcm of retrievable gas is
currently stored in the facility. (Note: The total retrievable
capacity of Ukraine's gas storage facilities is approximately 34
bcm.)

4. (SBU) The Bogorodchany UGS is the second largest gas storage
facility in Ukraine, but the only one near the Western border of
Ukraine that can be tapped into very quickly, allowing the retrieval
of up to 50 million cubic meters (mcm) of gas per day. Ukraine has
one larger facility in Lviv oblast, which holds about 16 bcm, but
due to its geological characteristics drains more slowly than
Bogorodchany. Mysliborskiyy told us that in a gas crisis, everyone
would be turning to Bogorodchany to provide enough gas to weather a
shortage, be it from natural or political causes. The UGS is
connected to all three transit pipelines and lifted gas can be
quickly pumped into the pipelines to increase gas supply to Europe
during peak demand periods in the winter. PTG's Chief Engineer
Yevstakhiy Kovaliv told us that the public was unaware that Gazprom
tried unsuccessfully to take over the UGS three times, which in his
view, validates the strategic importance of the UGS. He declined to
be more specific when asked about Gazprom's unsuccessful takeover
attempts.

Efficiency Efforts
------------------

5. (SBU) Built between 1978-1989, gas compressor stations in
Bogorodchany are still functioning well, according to Kovaliv.
Successful conservation efforts now allow PTG to save about 10 mcm
of gas annually that was previously emitted into the atmosphere.
This increase in efficiency was the result of the ability of PTG
engineers to repair gas pipelines, which were operating under
pressure, without halting gas flows. PTG officials told us that the

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compressor stations, pipelines, and the UGSS could become even more
efficient with appropriate financial support from NaftoHaz and the
GOU that would allow PTC to implement best practice efficiency
programs. For now, officials commented, PTG employees generally
make efficiency improvements using their own resourcefulness,
expecting little financial support from the government.

Impact of UkrHazEnergo
----------------------

6. (SBU) PTG management told us that the low prices for the transit
and storage of Russian gas under current gas agreements between
Russia and Ukraine have cut into the company's profitability, as has
the creation of UkrHazEnergo (UHE), which has affected other
regional gas transit companies as well. According to Kovaliv, PTG's
ability to improve its financial standing took a devastating hit
after UHE received a license for local gas distribution in Ukraine
and Ukrtranshaz lost this market segment in 2007. (Note: Previously,
PTG sold gas directly to industry and regional gas distributors.
End note). Although PTG got rid of a consumer payment collection
headache, it now completely depends on Ukrtranshaz's financial
disbursements. At the same time, Ukrtranshaz depends financially on
NaftoHaz and NaftoHaz has been rumored to be near bankruptcy for
some time (reftel). The presence of UHE reduced the amount
available for PTG and other pipeline operators to modernize
antiquated infrastructure.

Co-Generation in PTG's Future?
------------------------------

7. So-called co-generation is another perspective area for energy
efficiency in the Ukrainian gas transit sector. PTC uses gas from
its pipelines to generate electricity to power some of its gas
compressor stations. The small power plants have excess capacity
that can be used to generate electricity for surrounding towns.
According to PTG Chief Engineer Kovaliv, the co-generation potential
at all Ukrainian gas compressor stations is enormous and could
produce power equal to building a one thousand MW nuclear reactor.
Additional improvement plans include installation of a large 75 MW
co-generation unit that will produce heat and electricity for the
plant and a neighboring village. After a long search for investors,
financing for this $40 million project was provided by a Czech
company that produces the necessary co-generation equipment.
Co-generation plans and completed feasibility studies are underway
for Dolyna, Odesa and seven other of PTG's gas compressor stations.
Ukrtranshaz, however, lacks its own funds to implement such
projects. Attracting outside investors is also difficult, as they
would normally seek collateral from the pipeline operators, which
isn't possible since local pipeline operators are all GOU-owned and
their assets by law cannot be allowed to fall into private hands.


8. (SBU) Comment: The extensive pipeline system, gas compressor
stations, and gas storage facility are important strategic assets
for Ukraine that, if managed properly, can be a lucrative source of
public sector income for years to come. We were impressed by the
dedication and resourcefulness of the pipeline operator's management
and workers, yet this dedication alone is not sufficient to maintain
and modernize the pipeline network. Ukrtranshaz has been unable to
provide or attract sufficient investment to subsidiary transit
companies like PTG, in part because the lack of transparency on the
part of Ukrtranshaz and its parent NaftoHaz have long deterred
lenders and investors. Ukraine's current policy of negotiating
arguably low fees for transit and gas storage and the ability of the
gas middleman company UkrHazEnergo to divert profits from
Ukrtranshaz have further stymied energy efficiency and growth in
Ukraine's important gas transit and storage sectors. Unfortunately,
it appears that PTG and other pipeline operators will not get the
financial backing they need as long as the current policies
governing gas transit and distribution and not overhauled. End
comment.

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