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RUEHPOD RUEHROV RUEHSR RUEHTM RUEHTRO
DE RUEHBS #0186/01 0410939
ZNR UUUUU ZZH
R 100939Z FEB 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

UNCLAS SECTION 01 OF 03 BRUSSELS 000186 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET EUN UP
SUBJECT: EU INVESTMENT CONFERENCE FOR UKRAINE'S GAS 
INFRASTRUCTURE 
 
Sensitive but Unclassified - not for Internet distribution. 
 
¶1.  (SBU) Summary.  In a February 6 meeting DG-RELEX Energy 
Counselor Faouzi Bensarsa told visiting DAS Doug Hengel about 
EU Commission plans to host an investment conference on 
Ukrainian Gas Infrastructure in Brussels on March 23. 
Bensarsa said the fundamental key from an external policy 
perspective is that the EU has to work on what it has now 
(Ukraine) while building for diversity (Nord Stream and the 
Southern Corridor).  The March conference is aimed at 
assisting Ukraine in rehabilitating and developing its gas 
transit network as well as fostering the implementation of 
structural reforms for the domestic gas market and the 
international transit of gas.  Bensarsa stopped short of 
predicting funding pledges at the conference and instead 
suggested the conference could result in a statement of 
readiness to consider making investments to improve the 
reliability of the transit system while at the same time 
continuing reforms and adding transparency.  On February 9 
representatives from Ukraine's Mission to the EU told Econ 
Officers that Ukraine is open to pursuing reforms in its 
energy sector and that they are optimistic the conference 
will result in a number of funding pledges.  End Summary. 
 
¶2.  (SBU)  On February 6 DAS Doug Hengel met with Faouzi 
Bensarsa, Energy Counselor and Head of the Task Force for 
Energy Security and Nuclear Safety for DG-RELEX at the EU 
Commission, to discuss opportunities for U.S.-EU cooperation 
on Ukrainian energy.  Bensarsa started the meeting by 
stressing that the EU "must stabilize relations with Russia 
and the transit states (Ukraine and Belarus)."  The EU 
depends on Ukraine for transiting 120 bcm of Russian gas. 
Even if all the Streams (Nord Stream, South Stream, and White 
Stream) go forward, Bensarsa said the EU will continue to 
depend on Ukraine for gas transit.  The fundamental key from 
an external policy perspective is that the EU has to work on 
what it has now (Ukraine) while building for diversity (Nord 
Stream and the Southern Corridor).  Bensarsa said he welcomed 
the deal struck by Ukrainian Prime Minister Tymoshenko and 
Russian Prime Minister Putin because it has moved 
Russia/Ukraine gas into contracts that are not far from EU 
models and has eliminated RosUkrEnergo as a middleman. 
 
¶3.  (SBU) Bensarsa said that the EU Commission plans to hold 
a conference in Brussels on March 23 entitled "Joint 
EU-Ukraine International Investment Conference on the 
Rehabilitation of Ukraine's Gas Transit Network."  Bensarsa 
provided DAS Hengel with copies of the invitations for 
Secretaries Clinton and Chu, which he said were sent out on 
February 6.  The March investment conference is aimed at 
assisting Ukraine in rehabilitating and developing its gas 
transit network as well as fostering the implementation of 
structural reforms both for the domestic gas market and the 
international transit of gas.  The conference will bring 
together representatives of the EU, Ukraine, and third 
countries, as well as international financial institutions 
and the private sector.  The Commission has invited 
participation by EU Member States, Ukraine, the Western 
Balkans, Central Asia, the South Caucasus, G8 Countries 
(Canada, Japan, Russia, and the United States), international 
financial institutions (European Investment Bank, European 
Bank for Reconstruction and Development, World Bank, and the 
IMF), as well as national financial agencies, banks, and gas 
companies. 
 
EU-UKRAINE ENERGY COOPERATION 
¶4.  (U) Improving Ukraine's gas transit system is a major 
objective of the "Memorandum of Understanding on co-operation 
in the field of energy between the European Union and 
Ukraine" signed on December 1, 2005 and of the EU-Ukraine 
Action Plan.  The EU-Ukraine Summit of September 9, 2008 
further endorsed this commitment.  In 2006-2007, the European 
Commission and Ukraine jointly conducted an audit of 
Ukraine's natural gas transit infrastructure.  The audit 
concluded that Ukraine needed 2.5 billion Euros to 
rehabilitate the audited infrastructure over the period from 
2008-2013. 
 
MOTIVATIONS FOR THE CONFERENCE 
¶5.  (SBU) The Commission considers the March conference as 
extremely important.  Bensarsa said the EU believes it is 
time to push for a full gas reform program and bring 
Ukraine's gas system in line with the EU acquis.  Bensarsa 
believes Prime Minister Tymoshenko is committed to achieving 
this reform.  Ukraine has been hard hit by the financial 
crisis, but Tymoshenko is committed to work with financial 
institutions provided Ukraine's Constitution is respected. 
Under the Constitution, privatization is not an option and 
 
BRUSSELS 00000186  002 OF 003 
 
 
there is no readiness to consider changing this.  Under 
current legislation there is also no way to allow for foreign 
investment in the gas transit system. 
 
¶6.  (SBU) Bensarsa said the March conference was conceived 
last Fall as part of the EU-Ukraine Strategic Partnership 
talks.  According to Bensarsa, the EU's goals of this 
Strategic Partnership rest on four pillars:  full integration 
of the Ukraine's gas system into the EU gas market through 
the adoption of the EU acquis, improving Ukrainian energy 
infrastructure and energy efficiency, diversification, and 
reform and transparency.  Bensara said that the EU-Ukraine 
audit had shown that Ukraine's transit system will require 
large investments to allow it to meet its commitments under 
the 10 year contract with Russia for gas transit.  As part of 
this program, Ukraine will also need to improve the 
efficiency of the system by 25 percent by upgrading 
compression facilities and reducing the amount of gas used to 
fuel compressors.  Also important will be improved security 
of the pipelines. 
 
CONCRETE PROJECTS AND READINESS TO CONSIDER PARTICIPATION 
¶7.  (SBU) The March conference is intended to be an 
investment conference with concrete projects.  The EU is 
working with Ukraine on a full master plan of bankable 
projects for financing by international financial 
institutions.  The EU wants Tymoshenko to agree that funding 
for these projects will be conditioned on Ukraine 
implementing the necessary reforms linked to the EU acquis. 
The EU wants to pursue the rehabilitation program in parallel 
with the reforms.  By the end of 2009, the EU wants to set up 
a "Project Management Unit" (PMU) to facilitate investment by 
international financial institutions and help Ukraine to 
develop reforms. 
 
¶8. (SBU) Bensaras said the March conference is intended to be 
international, not just EU-Ukraine.  The EU is looking for 
international support for implementing reforms in Ukraine and 
enforcing the conditionalities of investment.  Bensarsa said 
he does not expect the conference to result in immediate 
funding pledges.  One option for the conference would be to 
agree on readiness to do investment and reform at a later 
stage through the PMU (formed by those countries willing to 
participate).  Bensarsa envisages this as a "lighter version 
of the Chernobyl Fund."  The Commission plans to distribute a 
list of potential investment projects by the end of February. 
 Ideally, the EU wants countries participating in the 
conference to "commit to consider" participating provisional 
on reforms taking place.  Bensarsa indicated he is working 
closely with Prime Minister Tymoshenko's people, and stressed 
that this effort should not be limited to the EU. 
 
METERING 
¶9.  (SBU) Bensarsa said that the EU is also talking to 
Ukraine about the fundamental issue of metering.  Currently, 
the delivery point for Russian gas to the EU is 
Ukraine/Slovakia border.  There is no delivery point at the 
Ukraine/Russia border.  There are also no EU/Ukraine 
contracts for gas transit.  The transit contracts are between 
Russia and the EU.  Bensarsa opined that if there is any hope 
of improving transparency in the Ukraine transit system, you 
need to have a clear picture of the volumes crossing the 
Ukraine/Russia border.  The costs of establishing such a 
metering system are not negligible, however, and there is no 
economic reason for Ukraine to invest in this.  As such, 
there must be a political decision to institute metering. 
 
THE UKRAINIAN PERSPECTIVE 
¶10.  (SBU) On February 9 representatives from the Ukrainian 
Mission to the EU provided Econ Officers with their view of 
the March Conference.  Deputy Head of Mission Vsevolod 
Chentsov and Counselor for Energy, Nuclear Safety, and 
Environment Viacheslav Kniazhnytskyi said that they are 
expecting the March conference to result in real investment 
commitments for improving Ukraine's gas transit 
infrastructure.  Kniazhnytskyi indicated that Ukraine has 
identified a number of "bankable" projects to improve the gas 
transit system with a total cost of about 1.6 billion euros 
(2.1 billion dollars), much lower than the 2.5 billion euros 
the Commission is proposing.  A final list of projects will 
be submitted on February 16.  Chentsov and Kniazhnytskyi both 
indicated that Ukraine wants to continue reforms in its 
energy sector with the aim of bringing the Ukrainian system 
up to EU standards. 
 
¶11.  (SBU) On the question of metering, Kniazhnytskyi said 
that Ukraine estimates it would cost 80 million euros to 
install metering facilities at all 7 gas entry points. 
 
BRUSSELS 00000186  003 OF 003 
 
 
Kniazhnytskyi agreed with Bensara's logic that there was no 
economic reason to justify this investment.  Kniazhnytskyi 
said, however, that he had been asked by an EU Council 
official if Ukraine would be open to European companies 
purchasing gas at the Russia/Ukraine border rather than the 
Ukraine/Slovakia border.  Kniazhnytskyi said he believes 
Ukraine would welcome such an arrangement. 
 
¶12.  (SBU) Comment.  Bensarsa was eager for U.S. 
participation in the March conference and was open to 
pursuing U.S.-EU-Ukraine cooperation on energy.  Chentsov and 
Kniazhnytskyi were also eager to pursue cooperation on a 
trilateral basis.  Selling other EU officials on the idea of 
U.S.-EU-Ukraine cooperation will be a harder sell.  DG-TREN 
and EU Council officials with whom we've raised the subject 
have so far been hesitant to pursue this opportunity.  As one 
example, a DG-TREN Commission official we spoke with recently 
seemed confused by questions about trilateral cooperation, 
saying that the EU was already pursuing the idea of 
trilateral energy cooperation between the EU, Ukraine, and 
Russia.  End Comment. 
 
Murray 
.