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Cablegate: U/S Hormats's Meeting with Gazprom

VZCZCXRO0499
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHMO #3051/01 3521537
ZNY CCCCC ZZH
P 181537Z DEC 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5712
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003051

SIPDIS

DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GREENSTEIN,
S/EEE MORNINGSTAR
DOE FOR HEGBURG, EKIMOFF
DOC FOR JBROUGHER
NSC FOR MMCFAUL

E.O. 12958: DECL: 09/15/2019
TAGS: EPET ENRG ECON PREL RS
SUBJECT: U/S HORMATS'S MEETING WITH GAZPROM

REF: A. MOSCOW 2904
B. MOSCOW 2874

Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d)

-------
SUMMARY
-------

1. (C) Gazprom's Deputy CEO Alexander Medvedev told U/S
Hormats that he welcomes better relations with the U.S. and
that Gazprom seeks to expand its presence in North America.
He blamed last year's gas crisis on President Yushchenko and
claimed Russia does not want to politicize the gas trade. He
confirmed the concessions that Gazprom has made on gas sales
to Ukraine, believed Ukraine can pay its gas bills, and
expected no disruption this winter "unless Yushchenko goes
crazy." Medvedev said the gas market is becoming more
globalized and that Gazprom is "not afraid of liberalized
markets." He said Gazprom continues to push for a rise to
net-back parity of domestic industrial gas prices with
European prices by 2011. Medvedev also stressed the
importance of hockey diplomacy, expressing hope for greater
cooperation between the Russian KHL and the NHL. End summary.

--------------------
GAZPROM AND THE U.S.
--------------------

2. (C) In a December 1 meeting with visiting U/S Hormats and
the Ambassador, Gazprom's Deputy CEO Alexander Medvedev
expressed satisfaction with the "reset" and suggested that
the next step in relations is an "upgrade." Medvedev was
very pleased that the USG does not see Gazprom projects in
Europe as a threat, and predicted that Gazprom would boost
its operations in the U.S. He noted that Gazprom sees North
America as a "priority market" and that it would like to
expand its U.S. subsidiary, Gazprom Marketing and Trading
U.S.A. He opined that shale gas production in the U.S. would
not preclude future LNG imports and said Gazprom has booked
future LNG regassification capacity on both North American
coasts. Medvedev also suggested the environmental impact of
shale gas production needs further review. In response to
U/S Hormats's question regarding specific projects in which
Gazprom is interested in the U.S., Medvedev simply said
Gazprom would "consider projects on a case-by-case basis as
opportunities arise."

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UKRAINE
-------

3. (C) In discussing Ukraine, Medvedev spared no scorn.
Unprompted, he said "treating Ukraine as a democracy is a
discredit to democracies worldwide." He asserted -- with a
straight face -- that Russia does not want to politicize the
gas trade; that it is a purely commercial issue. He blamed
President Yushchenko for playing politics with the gas issue,
claiming that Yushchenko had directly ordered Naftohaz head
Dubyina not to sign a contract with Gazprom in December 2008
"in order to create the crisis." Medvedev confirmed that
Gazprom had agreed to waive fines that it could have imposed
on Ukraine for taking less gas than contracted in 2009, that
it had agreed to lower 2010 sales volumes to meet Ukraine's
lower demand, and that it would pay higher transit fees to
Ukraine in 2010 (ref B). He also said that Gazprom believes
Ukraine has the money to pay for its winter gas needs. He
therefore did not expect any problems this winter, "unless
Yushchenko goes crazy and forbids the central bank from
transferring funds to Naftohaz.

4. (C) In response to the Ambassador's question, Medvedev
said he did not expect any effect on Gazprom contracts with
other European customers as a result of its agreement with
Ukraine. He clarified that its contracts with Ukraine were,
at Ukraine's request, not "traditional" take-or-pay contracts
in that Ukraine had agreed to pay a fine if it took less gas
than contracted. In contrast, Gazprom's contracts with other
European customers require them to pay for a specified
quantity of gas whether they take it or not. If they do not
take the minimum amount of gas in a given year, Medvedev

Moscow 00003051 002 of 002


explained, they can take it in future years.

----------
GAS MARKET
----------

5. (C) With regard to the gas glut and depressed spot market
prices, Medvedev downplayed the role of the spot market,
emphasizing that it is currently "only" 15% of the total gas
market. He added that Gazprom also expects spot market
prices to rise in the longer-term toward Gazprom's prices and
thus have limited impact on Gazprom's sales. However, he
also admitted that it is "quite obvious that the market is
globalizing" and said that Gazprom expects the share of spot
market sales to reach 25% in coming years. He added that
Gazprom is "not afraid of competing in a liberalized market."

6. (C) Regarding developments of new gas fields in Russia,
Medvedev said that Gazprom has both the technology and
ability to exploit new fields in the Yamal peninsula, but
that it has pushed back plans due to market conditions. He
said development of the Bovanenko field, has been delayed to
2012 because Gazprom sees no demand for additional gas in
2011.
---------------------------------
DOMESTIC GAS PRICE LIBERALIZATION
---------------------------------

7. (C) Medvedev said that Gazprom continues to push for full
liberalization of domestic gas prices for industry by 2011,
without admitting that it is unlikely to happen (ref A). He
noted that artificially low regulated domestic gas prices had
created market distortions and hurt efficiency. According to
Medvedev, Gazprom made its first profit on domestic sales
only this year. He said that the GOR was hesitant to raise
gas prices on consumers during an economic crisis, but that
from Gazprom's point of view household gas prices could
remain subsidized as they only represent 15% of domestic gas
sales. (Comment: He seemed to neglect that industrial
prices would also pass through to consumers. End comment.)

------
HOCKEY
------

8. (C) As a hockey fanatic and president of the major Russian
hockey league, the KHL, Medvedev also stressed the importance
of "hockey diplomacy." Frustrated by the lack of an
agreement with the NHL (on competitions, player transfers,
and other issues), he called the NHL "retrograde" and "stuck
in the cold war." That said, Medvedev reported that he had a
good meeting in Washington with NHL Commissioner Gary
Bettman, and that he hoped it would lead to positive action.

-------
COMMENT
-------

9. (C) Medvedev is understandably selective with his facts
and positions regarding the gas market and Ukraine. However,
he sounded sincere in his desire for better U.S.-Russian
relations and greater bilateral economic activity. An
expansion of Gazprom's presence in the U.S. and in other
developed economies would likely serve our interests by
further exposing the company to both the discipline of
western financial markets as well as the oversight of strong
regulatory institutions. End comment.

10. (U) This cable has been cleared by U/S Hormats'
delegation.
Beyrle

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