VZCZCXRO6720
RR RUEHAG RUEHAST RUEHDF RUEHHM RUEHIK RUEHLN RUEHLZ RUEHMA RUEHPB
RUEHPOD RUEHROV RUEHSR RUEHTM RUEHTRO
DE RUEHBS #0047/01 0141511
ZNR UUUUU ZZH
R 141511Z JAN 09
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHKV/AMEMBASSY KYIV
RUEHMO/AMEMBASSY MOSCOW

UNCLAS SECTION 01 OF 02 BRUSSELS 000047 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET EUN
SUBJECT: EU/UKRAINE/RUSSIA: LIVING UP TO THE AGREEMENT 
 
Sensitive but Unclassified - not for Internet distribution. 
 
¶1.  (SBU) Summary.  On January 14 the EU Commission's point 
person on monitors for the Urkaine/Russia gas crisis, 
Director for Security of Supply and Energy Markets Heinz 
Hilbrecht, described the events leading up the current crisis 
and highlighted the challenges ahead.  Hilbrecht believes 
there are currently three main sticking points to the 
negotiations:  Russian gas flows and points of entry; access 
for Russian monitors; and who will bear the costs of 
technical gas.  The Commission is working to convince the 
Russians that unilateral decisions on how much gas and where 
to inject it are not helpful.  There needs to be coordination 
at the technical level between Gazprom and Naftogaz to decide 
where the gas should be input, at what volumes, and where it 
should exit.  A second problem revolves around Ukraine's 
refusal to grant access to Russian monitors as stipulated in 
Monday's agreement.  Ukraine, apparently in hindsight, is 
concerned over sharing data on domestic use and storage 
levels with Russia.  The third issue concerns the technical 
gas to fuel the compressors, which we understand Ukraine is 
obliged to provide under the terms of the current RUS-UKR 
transit agreement (which lasts until 2013).  Normally, 
Ukraine would use its own gas, which it receives at a 
discounted price from Russia.  However, since the 
Russia-Ukraine supply agreement has expired, Ukraine is no 
longer receiving gas at a discounted price.  End Summary. 
 
Evolution of the Crisis 
¶2.  (SBU) Hilbrecht said that the current crisis grew out of 
Russia and Ukraine's inability to agree on the price Ukraine 
should pay for its domestic gas needs.  Intertwined with the 
domestic price is the cost to Ukaine of supplying the 
"technical gas" needed to run the transit system which, 
according to the existing transit agreement, Ukraine is 
required to supply out of its domestic supply.  The two sides 
had reached an agreementwith a price of $250 per thousand 
cubic meters (mcm) with a phased increase over time to bring 
the Ukrainian domestic price up to market prices.  This deal 
fell apart, however, when Ukraine backed out over the price 
issue at the end of the year.  (Note:  Hilbrecht reiterated 
that the EU does not want to take a position on what the 
price should be.  End Note.) 
 
¶3.  (SBU) This situation led to Russia's decision to cutoff 
gas for the Ukrainian market on January 1.  This was followed 
by Russia's decision to cut off all gas flows to Ukraine, and 
by consequence its European customers, when it accused 
Ukraine of stealing gas from the flow intended for Europe. 
The situation continued to deteriorate until the EU managed 
to broker a deal whereby EU monitors would be sent to the 
entrance and exit points of the Ukrainian gas system to 
verify that the amounts of gas entering Ukraine comported 
with those exiting Ukraine to Europe.  This agreement was 
signed by Russia, Ukraine, and the EU, but had to signed 
again after Russia objected to a handwritten attachment 
annexed by Ukrainian PM Tymoshenko. 
 
¶4.  (SBU) A team of 18 monitors recruited from the European 
gas industry along with four Commission representatives were 
deployed to Russia and Ukraine over the weekend.  After a few 
hiccups, the EU monitors were granted access to the entry and 
exit points as well as the dispatching centers in Moscow and 
Kyiv.  The trilateral agreement also called for Russian and 
Ukrainian monitors to be deployed to these same cites. 
Ukraine has so far, however, denied Russian access to its 
dispatching center.  Russia claims it needs access there to 
be able to assess how the gas is flowing and where it is 
being used.  Hilbrecht believes the Ukrainians are denying 
access because they don't want the Russians to gain access to 
information on their storage levels. 
 
¶5.  (SBU) On Tuesday morning, Russia started supplying gas 
into the Ukrainian system at the Sudzha entry point in 
northern Ukraine at a rate of 76 million cubic meters per day 
(mmcm/d) with the expectation that it would transit Ukraine 
and arrive at the Orlovka exit point on the southern border 
with Romania.  Hilbrecht explained, however, that this was 
not technically feasible.  After the Russian shut-off Ukraine 
has reversed the flow of some of the East to West pipelines 
and has been pumping gas from storage facilities in the West 
to meet domestic demands in the East.  He described Ukraine's 
gas system as a mesh and said that with high volumes flowing 
West to East, there was no way to pump gas at low volumes 
crossing the West to East flow to transit gas from the North 
to the South.  When the gas did not reach Orlovka, Russia 
once again shut off the gas. 
 
 
BRUSSELS 00000047  002 OF 002 
 
 
¶6.  (SBU) Today Russia has once again agreed to start pumping 
gas, but only at a volume of 100 mmcm/d with approximately 80 
mmcm/d going in at Sudzha and 20 mmcm/d going in at the 
Valuvki entry point, also in north eastern Ukraine. 
Hilbrecht was doubtful that this gas volume would be 
sufficient to allow gas to transit to Orlovka.  The 
Ukrainians have claimed that they need at least 120 mmcm/d to 
restart the flow.  Hilbrecht said that from the EU's 
perspective Gazprom has a contractual obligation to deliver 
gas to its European customers.  As such, Gazprom should step 
up and be willing to provide the technical gas if it is 
necessary to ensure the contracted gas arrives at its 
destination.  Otherwise, Gazprom will be in default of its 
contracts with EU Member States. 
 
Sticking Points 
¶7.  (SBU)  Hilbrecht believes there are currently three main 
sticking points to the negotiations:  Russian gas flows and 
points of entry; access for Russian monitors; and who will 
bear the costs of technical gas.  The Commission is working 
to convince the Russians that unilateral decisions on how 
much gas and where to inject it are not helpful.  There needs 
to be coordination at the technical level between Gazprom and 
Naftogaz to decide where the gas should be input, at what 
volumes, and where it should exit.  Hilbrecht said the 
Ukrainians had proposed a technical coordination agreement to 
cover a three month period, but the Russians have so far 
rejected this.  Hilbrecht believes that a more medium term 
agreement is needed on the technical aspects of shipping gas 
and that they can continue on an ad hoc basis. 
 
¶8.  (SBU) EU officials believe that under the terms of 
Monday's monitoring agreement, Ukraine must provide access to 
the Russian monitors.  They advised that Ukraine normally 
provided internal market information to Gazprom but had 
ceased doing so at "Christmas".  If Ukraine provides this 
information, Gazprom would be able to determine when Ukraine 
reserves would run out, giving Gazprom the upper hand in 
negotiating the RUS-UKR bilateral supply contract.  Thus 
Ukraine is in a difficult situation - it can either fulfill 
its monitoring agreement to let gas flow to Europe or violate 
the agreement to protect its self interest. 
 
¶9.  (SBU) The third issue concerns the technical gas to fuel 
the compressors, which we understand Ukraine is obliged to 
provide under the terms of the current RUS-UKR transit 
agreement (which lasts until 2013).  Normally, Ukraine would 
use its own gas, which it receives at a discounted price from 
Russia.  However, since the Russia-Ukraine supply agreement 
has expired, Ukraine is no longer receiving gas at a 
discounted price.  Thus, it can either use its reserves to 
fuel the compressors - which no one expects it to do - or use 
gas destined for Europe.   In so doing, Ukraine is subject to 
charges of stealing and Gazprom can again cease flows (as 
Putin said "for the good of Europe").   Russia maintains that 
Ukraine must pay for this gas, but Ukraine refuses to do so 
at European prices.  The Commission has told Gazprom that it 
must fulfill its supply obligation regardless, and it should 
work out a sales agreement with Ukraine for this purpose. 
 
¶10.  (SBU)  Commission officials indicate that Russian 
technical experts have been by-and-large complying with the 
agreement (which now appears beneficial to them), while 
Ukrainian technical experts have been more of a challenge. 
Ukraine has proposed a 3-month agreement to address technical 
issues on flows, but Russia has refused to discuss it.  The 
EU monitors will attempt to convene Gazprom and Naftogaz 
experts to work out the technical issues, identify good entry 
points, and coordinate action to restore gas flows, but it is 
not clear yet whether this will be sanctioned.  When asked 
what the U.S. could do to support EU efforts, Hilbrecht asked 
that the U.S. encourage Ukraine to resume discussions with 
Russia over domestic pricing.  He also asked that U.S. 
encourage Ukraine to live up to its agreement to allow in 
Russian monitors. 
 
¶11.  (SBU) Comment.  We're cognizant allowing the Russian 
monitors in gives Gazprom access to sensitive internal data 
that could prejudice Ukraine's negotiating position on a 
bilateral sales agreement, but Kyiv did sign the agreement 
and only belatedly seems to have recognized the 
vulnerability.  End Comment. 
 
Silverberg 
.