VZCZCXRO0919
RR RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #0156/01 0250610
ZNR UUUUU ZZH
R 250610Z JAN 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 4783
INFO RUCNCIS/CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZG/NATO EU COLLECTIVE
RUEHMO/AMEMBASSY MOSCOW 0284
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 KYIV 000156 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB 
EEB/EEC/IEC-GALLOGLY/WRIGHT 
DOE FOR LEKIMOFF, CCALIENDO, EMCGINNIS 
DOE FOR NNSA: CHUNSAKER, NCARLSON, ABIENIAWSKI, JCONNERY 
 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ETRD PREL UP
SUBJECT: UKRAINE: NEW ENERGY MINISTER TOUTS WESTINGHOUSE-ENERGOATOM 
CONTRACT AS A DELIVERABLE 
 
Treat as Sensitive but Unclassified.  Not for Internet. 
 
¶1. (SBU) Summary:  New Energy Minister Yuri Prodan told the 
Ambassador on January 21 that the GOU hoped to use a possible visit 
by President Bush in the near future to sign a contract with 
Westinghouse for the delivery of fuel to Ukraine's nuclear reactors. 
 Acknowledging that the contract proposed by Westinghouse to 
state-owned nuclear utility EnergoAtom was complex and new for 
Ukraine, Prodan nonetheless was confident that negotiations could be 
completed in time for a possible POTUS visit on the margins of the 
Bucharest NATO summit in April.  The Ambassador agreed that a POTUS 
visit would be an ideal backdrop for such a landmark signing, and 
emphasized that no discussion on such a visit had yet been made, but 
said negotiations should move forward independently of a possible 
visit.  Prodan also said that Ukraine must remove intermediary 
RosUkrEnergo (RUE) from its gas dealings with Russia, but in the 
short run had no alternative to RUE because Ukraine could not yet 
pay the world prices that Russia would demand in direct 
negotiations.  The new head of NaftoHaz did not negotiate gas or 
transit prices during his recent trip to Moscow, Prodan told the 
Ambassador.  On other topics, Prodan gave his backing to the oil and 
gas exploration agreement signed by the previous GOU with U.S.-based 
Vanco, said Ukraine needed to bring municipal heating prices in line 
with true costs, and came out in favor of large-scale privatization 
and restructuring of the electricity market in Ukraine. He was 
non-committal when the Ambassador urged him to keep plans for a 
central nuclear waste storage facility on track. 
 
¶2. (SBU) Comment: The surprise statement linking the 
Westinghouse-EnergoAtom deal to a POTUS visit shows that the new GOU 
is keen to provide incentives for President Bush to come to Ukraine 
in the near future.  It remains to be seen whether the GOU and 
EnergoAtom can sift through, negotiate and conclude a complex 
commercial contract by the self-imposed April deadline that Prodan 
mentioned, especially as there are likely still some in Energoatom 
who oppose the deal.  The new minister's comments on RUE do not 
differ in substance from those of former Minister Boyko, and reflect 
the view that gas bought from the intermediary still remains cheaper 
than gas Ukraine buys directly from Russia.  The economic rationale 
for RUE will soon disappear as the prices Ukraine pays for imported 
gas approach European levels.  Prodan generally has moderate 
pro-reform credentials on account of his previous track record in 
the energy sector and his lack of cozy ties to many of the more 
nefarious players in the sector, although his ties as a deputy to 
former Minister Plachkov (who was in charge during the January 2006 
gas deal) do not inspire great confidence in us.  End summary and 
comment. 
 
Westinghouse-EnergoAtom Contract a POTUS Deliverable? 
--------------------------------------------- -------- 
 
¶3. (SBU) During their January 21 introduction meeting, Minister of 
Fuel and Energy Yuriy Prodan told the Ambassador that the new GOU 
hoped to use a possible visit by President Bush in the near future 
to sign a contract between Westinghouse and EnergoAtom for the 
delivery of nuclear fuel.  Prodan and his deputy Yuriy Nedashkovsky 
made the comment after the Ambassador applauded Prodan's recent 
public statements of support for the Ukraine Nuclear Fuels 
Qualification Project, in which Westinghouse fuel, with USG support, 
is being qualified for usage in Ukraine's Russian-built reactors. 
Prodan said cooperation with Westinghouse would help Ukraine 
strengthen energy security by allowing it to diversify its sources 
of nuclear fuel, all of which currently is purchased from Russia. 
With the qualification project moving forward, the state-owned 
nuclear utility EnergoAtom was making progress negotiating a 
commercial contract over the supply of fuel with Westinghouse. 
Deputy Minister Nedashkovsky said the contract was the first of its 
kind for Ukraine; it was far more complex than the agreements 
EnergoAtom had with Russia and was being examined carefully. 
However, the GOU was keen that it be ready for signing should 
President Bush visit Ukraine in April before or after the NATO 
summit in Bucharest, and had given instructions to EnergoAtom to 
expedite the negotiations with Westinghouse.  Prodan expressed 
confidence that the timeline could be met despite these 
complexities. 
 
¶4. (SBU) The Ambassador praised the GOU's proactive determination to 
accelerate the fuel qualifications project (which met some 
resistance under the previous government), and said the USG was 
willing to support the parties as they negotiate the commercial 
aspects of the cooperation.  The signing of the commercial contract 
 
KYIV 00000156  002.2 OF 003 
 
 
during a presidential visit would be a major economic and political 
success story.  The Ambassador said he would welcome a visit by the 
President, and said the proximity of the Bucharest summit could 
provide an opportunity.  He added, however, that there were still no 
concrete plans, and encouraged Prodan to move forward on the 
Westinghouse deal independently of a possible visit. 
 
Prodan: No Alternative to RUE in the Short Term 
--------------------------------------------- -- 
 
¶5. (SBU) Prodan told the Ambassador that Ukraine needed to move 
towards market conditions in its gas dealings with Russia.  That 
would allow Ukraine to negotiate directly with Russian suppliers and 
eliminate middleman RosUkrEnergo (RUE).  In the short term, however, 
Ukraine still had no option but to use RUE.  The intermediary 
purchased central Asian gas and sold it to Ukraine at prices that 
remained lower than those that Russia would charge Ukraine directly. 
 In bilateral discussions on the gas issue, Russia regularly said it 
was ready to sell gas to Ukraine at the average price charged to 
Europe minus the transit fee, but Ukraine still could not pay such 
prices, Prodan said. 
 
¶6. (SBU) The problem, he told the Ambassador, was that the Ukrainian 
economy still could not absorb a sudden rise in the price of gas to 
European levels.  Before getting there, Ukraine needed to further 
modernize its economy, improve energy efficiency and develop more 
domestic energy sources.  The new government would need to determine 
the timing and the path towards full market relations with Russia 
over gas, but "the sooner the better," he said.  Any discussions 
over market prices for gas would invariably lead to new discussions 
about the proper transit fee for Russian gas crossing Ukraine to 
Europe.  The price for imported gas would continue to rise in the 
coming years and soon reach world levels.  In the meantime, there 
was no other option to the middleman solution which provided 
affordable gas, he maintained. 
 
NaftoHaz 
-------- 
 
¶7. (SBU) Responding to a question by the Ambassador, Prodan said 
that new NaftoHaz Chairman Oleg Dubyna did not travel to Moscow on 
January 17 to negotiate prices for gas imports or for transit fees. 
Prodan said the new government "was eager to learn what is happening 
inside NaftoHaz," the state-owned gas and oil company that might be 
on the verge of bankruptcy.  The GOU has established an interagency 
committee to look into all aspects of the company's operations.  The 
new government was acutely aware that many across the world were 
following the developments surrounding NaftoHaz on account of the 
importance of its gas transit network for Europe.  Hence making 
NaftoHaz transparent and accountable was a priority for the new 
government and his ministry, he said. 
 
Other topics 
------------ 
 
¶8. (SBU) On other topics, Prodan: 
 
-- said new Deputy Prime Minister Vitaliy Haidyuk would cover 
industrial and economic policy as well as energy.  Both NaftoHaz and 
EnergoAtom will be subordinated to the Ministry of Energy, although 
the CabMin will control the hiring and firing of the chairmen of the 
two companies and their deputies. 
 
-- reiterated support for the production sharing agreement with 
U.S.-based Vanco. 
 
-- criticized the current practice of selling gas to municipal 
utilities far below cost. Ukrainian policy was still hamstrung by 
the idea that domestically produced natural gas, because it was 
cheaper than imported gas, should somehow be sold to municipal 
utilities at prices far below market rates.  Such thinking was 
bankrupting NaftoHaz and retarding the development of domestic 
natural gas supplies.  The GOU would need to insulate the population 
from rising energy prices by targeted subsidies. 
 
-- confirmed that the GOU planned to privatize more regional power 
distribution companies (Oblenergos).  He also said Ukraine should 
begin privatizing power generation companies as well, particularly 
since "shadow privatizations" were already taking place.  Further 
administrative regulatory and legislative steps were necessary, he 
said, to create the proper regulatory environment for a power sector 
 
KYIV 00000156  003.2 OF 003 
 
 
based on private players. 
 
-- gave his support, in principle, for the construction of a central 
storage facility for spent nuclear fuel, but otherwise remained 
non-committal when the Ambassador asked for his engagement to keep 
the project on track. (Note: U.S.-based Holtec won the tender, but 
progress on the project has been slow. End note.) 
 
-- said he backed plans, developed with U.S. DOE assistance, for the 
disposition of highly enriched uranium currently stored at research 
institutes in Kyiv and Sevastopol. The National Security and Defense 
Council still needed to approve the plan, he said. 
 
-- said he expected draft laws introducing green energy tariffs to 
be passed in the Rada. (Note: U.S. investor AES has been interested 
in such legislation, as it would make wind energy investments in 
Ukraine more viable.) 
 
Taylor