VZCZCXRO5501
RR RUEHAG RUEHAST RUEHDF RUEHHM RUEHIK RUEHLN RUEHLZ RUEHMA RUEHPB
RUEHPOD RUEHROV RUEHSR RUEHTM RUEHTRO
DE RUEHBS #0402/01 0791246
ZNR UUUUU ZZH
R 201246Z MAR 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 000402 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET EUN
SUBJECT: OPPORTUNITIES FOR U.S.-EU-UKRAINE ENERGY 
COOPERATION 
 
REF: BRUSSELS 306 
 
Sensitive but Unclassified - not for Internet distribution. 
 
¶1. (U) Summary.  Ahead of the March 23, 2009 EU conference on 
Ukraine's Gas Infrastructure this cable reflects on ways the 
U.S.  and EU could work together to improve Ukraine's 
reliability as a gas transit State.  The 2008 U.S.-EU Summit 
affirmed our intention to work trilaterally with the 
Ukrainian government to advance their ability to provide 
energy to Europe.  The EU has established an "Action Plan on 
Ukraine", but to date progress has been minimal.  Reviewing 
this Action Plan, however, points out several areas where the 
U.S., the EU, and Ukraine could cooperate constructively. 
End Summary. 
 
¶2.  (U) The 2008 U.S.-EU Summit Declaration affirmed the 
United States' commitment to working with the EU and Ukraine 
trilaterally to improve energy security throughout the 
region.  Specifically, the Declaration states that "We will 
work together with Ukraine to increase the transparency and 
efficiency of its energy markets and support international 
efforts to rehabilitate and modernize its transit networks." 
Since that time, the U.S. and the EU have both pursued 
bilateral energy cooperation with Ukraine, but no progress 
has been made towards establishing cooperation on a 
trilateral basis. 
 
EU COOPERATION WITH UKRAINE 
¶3. (U) The EU adopted an "Action Plan on Ukraine" in 2005, 
which includes a number of energy initiatives that are of 
mutual interest to the United States.  As such, these 
initiatives serve as examples of areas where the U.S. and EU 
could work in a complimentary fashion.  A central theme to 
these objectives is one of bringing Ukraine's electricity and 
gas markets into line with the regulatory structure found in 
the EU's internal market.  The Action Plan suggests this can 
be achieved by: 
 
-- Gradually increasing domestic prices to market levels, 
 
-- Restructuring the internal gas sector, 
 
-- Revision and adoption of debt law as regards the Ukrainian 
gas network, and 
 
-- Adoption and implementation of a National Electricity 
Regulatory Commission. 
 
¶4. (U) Regarding energy networks and gas transit through said 
networks, the Action Plan seeks to achieve a reduction in 
network losses through modernization of Ukraine's 
infrastructure, the development of diversified oil and gas 
supplies, and continued efforts to unbundle and increase 
transparency within the gas transit business. 
 
¶5. (U) A progress report published in April of 2008 details 
progress made by the European Union in meeting the Action 
Plan's objectives.  In 2006-2007, the European Commission and 
Ukraine jointly conducted an audit of Ukraine's natural gas 
transit infrastructure.  The audit concluded that from 2008 
to 2013 Ukraine would need 2.5 billion Euros to rehabilitate 
transit infrastructure.  Progress has been made on extending 
Ukrainian pipelines through the construction of new and 
redundant pipeline systems to supplement existing 
infrastructure, and with the Ukrainian adoption of a sector 
reform plan and opening of accession talks to the Energy 
Community Treaty, the EU and Ukraine continue to strengthen 
ties and draw closer to harmonization on the issues laid out 
in the Action Plan.  Two areas of weakness noted in the 
progress report are Ukrainian regulatory presence and energy 
price levels, where "much work still needs to be done," 
though the report acknowledges Ukrainian adaptation efforts 
to that end. 
 
¶6. (SBU) EU Commission officials have made clear to us that 
stabilizing relations with transit countries remains a 
priority for the European Union.  According to Faouzi 
Bensarsa, Energy Counselor and Head of the Task Force for 
Energy Security and Nuclear Safety for DG-RELEX at the EU 
Commission, even if all three currently proposed Stream 
pipelines (North, South, and White) went forward and entered 
operation, the European Union would still depend on Russian 
gas transit via Ukraine to meet its energy needs.  Currently, 
the EU relies on Ukraine's network to transfer some 120 
billion cubic meters per year of Russian gas.  The EU's 
policy goal, according to Bensarsa, is to work with Ukraine 
and Russia and the energy systems currently in place while 
 
BRUSSELS 00000402  002 OF 003 
 
 
simultaneously working to diversify energy sourcing to 
improve energy security. 
 
U.S.-UKRAINE COOPERATION 
¶7. (SBU) The USG is already directly involved with Ukraine 
vis-a-vis energy policy on a bilateral level.  We enjoy good 
relations with the Ukrainians on a variety of energy-related 
issues, including nuclear and nonproliferation policy and 
energy transportation policy.  USG representatives, including 
high-level representatives and Ambassadors, regularly 
communicate with Ukrainian interlocutors on energy issues, 
and there exists a frequent exchange of opinion and 
information on the matter.  This existing foundation of 
cooperation and mutual respect would assist in the process of 
engaging with Ukraine and the EU on a trilateral level on 
energy policy. 
 
¶8. (U) Additionally, the U.S. and Ukraine have engaged in a 
number of concrete activities bilaterally in the field of 
energy cooperation.  The USG has funded Energy Advisors to 
provide technical assistance to Ukraine on issues of gas 
infrastructure maintenance and repair.  The Department of 
Commerce has provided support in the creation of a 
feasibility study on combination coal and heating plants in 
Ukraine, and has continued to support increased U.S. 
investment in Ukrainian industry.  On a more micro level, the 
USG is working with Ukrainian municipalities to improve the 
energy efficiency of local heating companies.  USAID has 
recently awarded a three-year, USD 13.3 million contract to 
support energy-efficient retrofits at a local level 
throughout Ukraine. 
 
FUTURE AREAS FOR U.S.-EU-UKRAINE ENERGY COOPERATION 
¶9. (SBU) There exist a number of issue areas within the 
energy sector that present clear opportunity for trilateral 
cooperation between the USG, EU, and Ukraine.  In regards to 
increasing transparency and stability of global energy 
markets, both the USG and the EU have a strategic interest in 
assisting Ukraine in its efforts to further create free, 
transparent, and open markets for the transfer and sale of 
gas products.  Trilateral engagement could also be useful in 
battling corruption at all stages of the supply chain, and 
also in the building of clear and stable regulatory 
frameworks governing international energy cooperation. 
 
¶10. (SBU) The U.S. and the European Union also stand to 
benefit from working with Ukraine to increase its energy 
efficiency and modernize its infrastructure, both through 
repair and renovation and the implementation of new 
techniques to increase energy efficient transportation, such 
as "smart" monitoring systems and up-to-date data centers. 
Finally, trilateral talks on the issue of energy 
diversification could maximize participant State's benefits, 
minimizing the risk of energy supply disruption while 
simultaneously working towards possible large-scale 
diversification projects, especially in the area of nuclear 
technology. 
 
UKRAINE GAS INFRASTRUCTURE CONFERENCE 
¶11. (U) The Commission is planning a conference on 23 March 
entitled "Joint EU-Ukraine International Investment 
Conference on the Rehabilitation of Ukraine's Gas Transit 
Network,' which is designed as an investment conference with 
concrete projects for consideration.  The European Union aims 
to offer assistance with infrastructure rehabilitation in 
tandem with Ukraine's continued reforms towards harmonizing 
with the EU's acquis.  The conference is not intended to be 
solely between the European Union and Ukraine - multiple 
third parties and outside nations have been invited to 
attend, including the United States. 
 
¶12. (SBU) The EU views this conference as a way to show 
political support for reforms in Ukraine's gas industry.  The 
World Bank, European Investment Bank, and the European Bank 
for Regional development plan to participate in the 
conference.  These financial institutions have, however, put 
forward some prerequisites for reform (see reftel) to provide 
the transparency to the system that they require before they 
will be willing to commit to investments in Ukraine's gas 
infrastructure.  Specifically the IFIs are calling for 
Ukraine to unbundle its gas transmission system from control 
by state-run Nafhtogaz.  After extensive negotiations, the EU 
and Ukraine have agreed on a draft declaration for the 
Conference, which incorporates these prerequisites. 
 
COMMENT 
¶13.  (SBU) Building a cooperative approach with the EU will 
likely not be as straight forward as it would appear.  There 
 
BRUSSELS 00000402  003 OF 003 
 
 
are divisions within the Commission and even within DG-RELEX 
over how the EU should handle its relations with Ukraine and 
whether or not these relations should involve Russia.  We 
have seen no overt opposition to the concept of working 
jointly with the U.S. on Ukraine, but we have encountered 
widely varying levels of interest in such cooperation.  The 
principal champions of closer U.S.-EU-Ukraine energy 
cooperation reside with Faouzi Bensarsa in DG-RELEX's Energy 
Task Force.  Other DG-RELEX official, as well as their 
counterparts at DG-TREN, are less enthused. 
 
Murray 
.