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 
 
KYIV 00003084  002 OF 002 
 
 
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.