This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 KIEV 000386 
 
SIPDIS 
 
DOE FOR LEKIMOFF, CCALIENDO 
 
SENSITIVE 
 
E.O. 12958: DECL: NA 
TAGS: EPET ENRG RS UP
SUBJECT: UKRAINE: Gas Pipeline Technical Capabilities 
 
Sensitive But Unclassified.  Not for Internet Distribution. 
 
¶1. (SBU) Summary.  Post met with Ukrainian technical experts 
at Naftohaz and UkrTransGaz following the January 1-3 gas 
shut-off to learn operational aspects of the gas crisis. 
Interlocutors provided background on the gas system's 
capabilities and parameters, and in detail described on 
which lines gas was cut January 1 and how Ukraine worked 
through the crisis by distributing the pressure decrease 
throughout its system.  According to the experts, the 
January 4 agreement's price basket of $95/tcm and 
1.60/tcm/100km was not economically justified, even if the 
transit rate now was supposed to cover the purchase of 
technical gas.  All interlocutors stated Ukraine's gas 
transit system was not damaged by January events. End 
Summary. 
 
¶2. (SBU) Econ Officers on January 6 met with Valery 
Panasiuk, Chief of Naftohaz's Oil and Gas Measurement 
Department, Feliks Sakadinets, Deputy Chief of Naftohaz's 
Oil and Gas Transport Department, and Igor Ponomarenko, 
UkrTransGaz Director of Foreign Relations.  Panasiuk led a 
wide-ranging discussion on Ukraine's gas transit system 
technical capabilities and on events during the January 1-3 
gas shut-off.  Econ Officer, along with Staffdel Tillemann, 
then met separately on January 18 with UkrTransGaz 
representatives Myroslav Khymko, Director of the United 
Dispatch Department, Valentyn Kolomieiev, First Vice 
Chairman of the Board and Production Director, and 
Kostiantyn Yefymenko, Member of the Board of Directors.  Mr 
Ponomarenko also attended the January 18 meeting.  (Note: 
UkrTransGaz is a wholly-owned subsidiary of state-owner oil 
and gas monopoly Naftohaz.  The subsidiary's operations 
include natural gas transit, storage, and delivery in 
Ukraine.) 
 
General Characteristics 
----------------------- 
 
¶3. (U) Ukraine's gas transportation system consists of 
36,500 km of gas pipelines with 11 inputs points to Ukraine, 
4 outlet points to Europe, 71 gas pumping stations with 
total capacity of 5.4 million kW, 12 underground storage 
facilities with 34 bcm available storage capacity (total 
capacity is about 50 bcm, but 16 bcm is required for 
maintaining necessary pressure levels), 1,405 gas 
distributing stations, and a network of gas metering 
stations. 
 
¶4. (SBU) Originally built exclusively for transit purposes, 
the pipeline system over time has become cluttered with 
small branch lines that connect the system's main pipelines 
with surrounding towns and villages.  This now makes it 
impossible to separate domestic gas supplies from transit 
resources, the Naftohaz officials explained.  To ensure that 
correct amounts of gas transit to Europe, Naftohaz 
'balances' its flow of incoming and outgoing transit gas by 
using stored gas from underground facilities at Ukraine's 
western border to add to export amounts and make up for 
volumes taken out within the Ukrainian territory.  The 
system technically can maintain hourly balances of transit 
volumes, but the minimum commercial period Naftohaz uses for 
its accounting purposes is 24 hours.  According to contracts 
and technical agreements signed by Naftohaz and Gazprom, a 
one-day accounting period runs from 0900 to 0900 the 
following day, Kiev time, or from 1000 to 1000, Moscow time. 
This time accounting explained why Gazprom chose 1000 
January 1 to stop delivering Ukraine's gas supply, said 
Naftohaz's Panasiuk; 1000 on January 1 corresponded to the 
start of the new accounting year. 
 
Technical, Fuel, and Pressure Gas 
--------------------------------- 
 
 
¶5. (SBU) Technical gas consisted of several components, 
Panasiuk continued, the largest of which was fuel gas.  Of 
Ukraine's 6.5 bcm of technical gas, about 5.2 bcm was fuel 
gas, which is used for fueling compressors at Ukraine's 71 
gas pumping stations.   Another one bcm of technical gas 
remained in the system at all times to maintain pressure. 
Most of the equipment installed at pumping stations was old 
and ineffective. The maximum efficiency rate of the 
stations' gas-fueled turbine engines was a woeful 40%. If 
replaced with electric-powered engines, in addition to 
saving fuel gas and reducing gas emissions to the 
atmosphere, the minimum efficiency rate of engines could 
reach 90%, the experts said.  (Note: on January 18 Prime 
Minister Yekhanurov noted that Ukraine used 7.8 bcm of gas 
for production and technical purposes.  He said this was "an 
extremely large amount" [more than 10% of Ukraine's yearly 
demand] and ordered Minister of Fuels and Energy within a 
week to draw up plans to conserve at least 10% of the 
amount, and to gradually convert Ukraine's transit system to 
electricity-powered compressors.) 
 
¶6. (U) Under Addendum Four from 9 August 2004, Panasiuk 
explained, Russia paid Ukraine $1.0935/tcm/100km for 
transit, and Ukraine at its own expense covered the purchase 
of technical gas.  The new transit fee of $1.60/tcm/100km, 
fixed in the January 4 agreement for five years, was set at 
a level to include payments for purchasing 6.5 bcm of 
technical gas. 
 
New Transit Rate is Not Justified Economically 
--------------------------------------------- - 
 
¶7. (SBU) Naftohaz's experts said the transit rate of 
$1.60/tcm/100km was a political decision and not a rate 
justified by costs.  In the past, the price of gas supplies 
for Ukraine and the fee for transit across the country had 
been proportional to one another.  The price of $50/tcm 
corresponded to $1.09/tcm/100km transit fee, while the price 
of $80/tcm, which was used before 1999, had corresponded to 
the $1.75/tcm/100km rate (Note: the proportion, in both 
cases, was approximately 46:1).  The experts added that the 
purported $50/tcm price was thus misleading, as the 
Ukrainian side had only cared about the relation of gas to 
transit prices.  They added that it was Gazprom who 
initiated the drop from $80/tcm to $50/tcm in 1999, 
apparently to reduce its Russian taxes.  Based on this 
proportion, which had not included the cost of technical 
gas, the Naftohaz experts thought the correlation (59:1) 
between $95 price and $1.6 seemed illogical. 
 
¶8. (SBU) According to Panasiuk, Ukraine never truly had paid 
$50 for Russian gas.  Given the additional cost of technical 
gas, which was paid for by Naftohaz, the real cost of gas 
for Ukraine had been closer to $80 when the transit fee was 
$1.09/tcm/100km.  $50 was, however, the benchmark used for 
calculating how much Russian gas Ukraine would receive as in- 
kind transit payment according to the following equation: 
110 bcm (transit amount) x 1200 km (weighted average 
distance of transportation) x 1.09/tcm/100km (transit rate) 
/ $50/tcm.  (Note: the 1200 km weighted average pipeline 
distance quoted by Panasiuk is significantly different from 
the Deutsche Bank estimate of 879 km, which has been used in 
some Washington analyses) 
 
Ukraine's System Continued to 
Operate after Pressure was Reduced 
---------------------------------- 
 
¶9. (SBU) The successful operation of Ukraine's gas pipeline 
system, explained Feliks Sakadinets, Deputy Chief of 
Naftohaz's Oil and Gas Transport Department, required a 
certain baseline pressure throughout.  If pressure decreased 
to a critical level, compressors at gas pumping stations 
either consumed all the gas to continue the compressor's own 
operations or "fell apart", i.e. broke down.  This would not 
only have meant no gas supply for Ukraine, but also no gas 
exports moving through the Ukrainian system to Europe. 
According to Panasiuk, when Russia stopped fuel supplies to 
Belarus in 2004, the Belarusian system `fell apart' very 
quickly, within one day.  Panasiuk and Sakadinets estimated 
that if Russia stopped supplies to Ukraine, the Ukrainian 
system could keep transit gas flowing for about 2 days. 
Panasiuk said Ukraine on January 1-3 had been able to 
continue operations even at lower pressure and keep 
servicing transit volumes because of the pipeline system's 
interconnected pipelines that cross one another at multiple 
points.  When Russia shut off supplies to certain pipelines 
January 1, Ukraine opened connections between crossing 
pipelines, and this allowed Ukraine to equalize the pressure 
in pipelines throughout the system, which alleviated the 
pressure fall in the Russian-targeted pipelines and kept 
pressure in these pipelines from reaching a critical level. 
However, several pumping stations located along pipelines 
near the affected Russian input points had to be stopped to 
prevent breaking equipment.  This was done, Panasiuk said, 
in a methodical manner because Naftohaz had been ready and 
planned for it.  Panasiuk added Ukraine had compensated for 
gas it had to withdraw from the system for its own 
consumption by adding gas from storage facilities near its 
western borders to export lines.  The Naftohaz officials 
expressed skepticism about some reports of gas delivery 
drops in Western Europe.  For example, they said Italy was 
reporting drops of 14 percent in deliveries on January 1, 
but added, "our gas would still have taken four days to get 
there." 
 
¶10.  (SBU) In a separate meeting January 18 with UkrTransGaz 
officials, Myroslav Khymko, Director of the United 
Dispatching Department, said Gazprom on January 1 reduced 
its delivery volumes to Ukraine by 25%.  Gazprom reduced 
volumes to Ukraine's Donetsk/Luhansk line first, followed by 
the Transdniepr line, and then the Central-Kiev line in the 
amounts of 45 mcm/day, 45 mcm/day, and 30 mcm/day, 
respectively.  These three lines were located farthest from 
Ukraine's western border with Europe and as such carried 
little Europe-bound transit gas.  The gas these lines did 
transport was primarily for Ukraine's industrial centers -- 
Donetsk, Luhansk, Dnieprpetrovsk and Zaporizhya. 
UkrTransGaz officials could not say if Gazprom intentionally 
chose to reduce gas to Ukraine's industrial regions to 
induce maximum economic harm, or if Gazprom had wanted 
specifically to cut gas intended for Ukraine's domestic use, 
which these lines provided. 
 
¶11. (SBU) In contrast to Panasiuk, UkrTransGaz's Khymko 
reported that during the shut-off, 24 pump stations had been 
stopped and 96 compressors, equal to half the system's 
power, had been taken off-line.  The system, however, was 
not damaged as a result of this shut-down.  Ukraine had used 
its own gas production and stored gas to gradually reduce 
outflows to Europe, in spite of Russia's immediate 25% 
reduction January 1 -3.  (Note: Our interlocutors, as policy 
implementers and not policy makers, did not discuss why 
Ukraine made the decision to cut, albeit gradually, Russia's 
Europe-bound gas.) 
 
¶12. (SBU) According to the Naftohaz experts, Ukraine and 
Russia had already reached agreement on how to make up 
amounts under-supplied in the first days of January and 
ensure the full January balance.   Gazprom would do this by 
supplying small additional amounts beginning January 3, 
Panasiuk said. 
 
Gas Metering at the Russian Border 
---------------------------------- 
 
¶13. (SBU) When Ukraine's gas transport system was built, gas 
metering stations for export gas were placed at the Soviet 
Union's western borders with Hungary and Poland, but nothing 
monitored flows between the Ukrainian and Russian republics. 
After the break-up of the Soviet Union, Russia built 
metering station on its territory, and Ukraine now had 
permanent representatives at each Russian export station who 
daily verified and signed documents on shipment volumes, 
Naftohaz's Panasiuk explained.  The information was sent via 
an on-line system to Kiev and Moscow.  There was some 
metering equipment at gas pumping stations on Ukrainian 
side, but it was not as sophisticated as at metering 
stations, Panasiuk continued.  Russia in the past had 
accused Ukraine of `playing' with its meters to distort the 
real amounts of transported gas. 
 
¶14. (SBU) UkrTransGaz's First-Vice Chairman of the Board and 
Production Director Valentyn Kolomieiev argued that the in- 
place Ukrainian representatives were sufficient for 
verifying volumes received and dispatched.  In addition to 
its representatives in Russia, Kolomieiev noted that 
Gazprom's subsidiary GazExport and the various importing 
countries had in-place representatives at Ukraine's western 
gas metering stations.  Sharing representatives and 
equipment was actually preferable, Kolomieiev explained, 
since gas measuring equipment was extremely sensitive and an 
error or even 0.1% would be extremely costly and time 
consuming.  Better, he said, to agree on the amounts with 
one set of instruments. 
 
¶15. (SBU) Separately, and somewhat contradictorily, 
Naftohaz's Panasiuk said Naftohaz had plans to build six 
metering stations as close to the Russian border pumping 
stations as possible to better measure and control volumes 
shipped by Russia.  In addition, Panasiuk praised Ukraine's 
new Regional Metering Center, which would be commissioned 
on/around March 10 and was built with support from the EU. 
The facility would improve gas metering technologies in 
Ukraine and help Ukraine improve its metering system to meet 
internationally recognized standards. 
 
Herbst