VZCZCXRO0812
RR RUEHAG RUEHAST RUEHDF RUEHHM RUEHIK RUEHLN RUEHLZ RUEHMA RUEHPB
RUEHPOD RUEHROV RUEHSR RUEHTM RUEHTRO
DE RUEHBS #0436/01 0851345
ZNR UUUUU ZZH
R 261345Z 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
RUEHMO/AMEMBASSY MOSCOW

UNCLAS SECTION 01 OF 02 BRUSSELS 000436 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EPET EUN
SUBJECT: PROMISING RESULTS FROM EU-UKRAINE GAS 
INFRASTRUCTURE CONFERENCE 
 
Sensitive but Unclassified - not for Internet distribution. 
 
¶1.  (SBU) ummary.  At the March 23 EU-sponsored conference 
on investment in Ukraine's gas infrastructur, Ukrainian 
Prime Minister Timoshenko and Pesident Yushenko both 
attended and presented a united front pledging reform to the 
Ukrainian energy system.  Russian Energy Minister Schmatko, 
who spoke before Yushenko's arrival, said "Russia is prepared 
to participate in the modernization of Ukraine's GTS, 
including financing."  He criticized the declaration as "a 
radical departure from the current order; it raisesa lot of 
questions for Russia."  Representaties from the European 
Investment Bank (EIB),European Bank for Reconstruction and 
Development (EBRD), and the World Bank expressed their 
respective commitments to cooperate, but reiterated that 
reform was a prerequisite to financing.  Ukraine (PM 
Tymoshenko), the Commission (Commissioners Ferrero-Waldner 
and Piebalgs),and representatives from EIB, EBRD, and the 
World Bank signed a joint declaration at the conference in 
which the financial institutions (IFIs) committed to start 
due diligence work on the projects identified in Ukraine's 
"Gas Transit System (GTS) Master Plan." In exchange, Ukraine 
committed to implement the reforms called for by the IFIs. 
Charge Murray led the U.S. delegation.  End Summary. 
 
¶2.  (SBU) Prime Minister Timoshenko was the second speaker 
after EU External Relations Commissioner Ferrero-Waldner. 
She said the January gas cutoff by Russia was "political and 
not technical."  She said modernization of the GTS, linking 
to the EU's grids, and conformity with European standards 
will "open new opportunities" for Ukraine.  On the IFI's 
demand to unbundle the sector, she said that Ukraine's gas 
transit system "must remain in State hands in accordance with 
Ukraine law."  President Yushenko arrived later with 
Commission President Barroso (and was seated next to 
Timoshenko during Barroso's speech).  Yushenko said he was 
"determined to root out all kinds of corruption."  He 
continued Ukraine is "fully aware of its responsibility" and 
identified three priorities: (1) replacement of outdated 
facilities, (2) installation of an internal and external 
metering system, and (3) access to Ukraine's gas storage 
facilities by European energy companies. 
 
¶3.  (SBU) Russian Energy Minister Schmatko spoke before 
Yushenko's arrival.  He said "Russia is prepared to 
participate in the modernization of Ukraine's GTS, including 
financing."  He criticized the declaration as "a radical 
departure from the current order; it raises a lot of 
questions for Russia."  Noting the absence of any references 
to Russia in the joint declaration, he said the parties must 
coordinate their efforts with the supplier if they plan to 
expand the transit system and called for tripartite 
cooperation with "equal and equitable participation" for all. 
 The acting director of Naftogaz also called for a tripartite 
conference during a speech later in the day.  Schmatko said 
the proposal to increase Ukraine's transmission capacity by 
60 bcm was "not in line with the EU's policy of 
diversification of routes."  He warned that "Ukraine could 
take advantage of its (transit) monopoly to the detriment of 
Russia," and called for a mechanism of international 
guarantees for supply and transit. 
 
¶4.  (SBU) Representatives from the European Investment Bank 
(EIB), European Bank for Reconstruction and Development 
(EBRD), and the World Bank expressed their respective 
commitments to cooperate, but reiterated that reform was a 
prerequisite to financing, with EBRD specifying that Ukraine 
must install an independent transmission operator who would 
act as a credible borrower.  EBRD also called for third party 
access to Ukraine's transmission and storage systems, in 
accordance with the Energy Community Treaty.  EIB said it was 
ready to start due diligence on a loan package without delay, 
provided Ukraine moves forward to implement reforms. 
 
¶5.  (SBU) Ukraine PM Tymoshenko, External Relations (RELEX) 
Commissioner Ferrero-Waldner, Energy Commissioner Piebalgs, 
and representatives from EIB, EBRD, and the World Bank signed 
a joint declaration in which the financial institutions 
(IFIs) committed to start due diligence work on the projects 
identified in Ukraine's "Gas Transit System Master Plan." In 
exchange, Ukraine committed to implement the reforms called 
for by the IFIs, notably Ukraine committed to: 
 
-- Ensure the independence of the Ukrainian gas transmission 
operator in terms of its legal form, organization, decision 
making and accounts. 
 
 
BRUSSELS 00000436  002 OF 002 
 
 
-- Ensure transparency and openness of the borrower mandated 
for the modernization of the gas transmission system to 
ensure equal and effective access to the relevant financial 
and technical information as well as control of the use of 
funds allocated. 
 
-- Allow the gas transmission operator to operate on a 
commercial basis for fulfilling its business development 
plans over the long term. 
 
-- Ensure that tariffs for access to networks take into 
account the need for system integrity and its improvement and 
reflect actual costs incurred. 
 
-- Provide for third party access to storage facilities under 
transparent commercial conditions and under the control of 
the regulatory authority. 
 
-- Develop a "Gas Sector Reform Program" by the end of 2009 
at the latest for the implementation of the gas sector 
reforms in 2010-1011 with deadlines that should match the 
commitments that will be entered into in the context of the 
EU-Ukraine Association Agreement and Ukraine's accession to 
the Energy Community Treaty, and are commensurate with the 
shared objective of attracting investments. 
 
¶6.  (SBU) After the VIPs departed, Naftogaz officials 
discussed funding needs based on Ukraine's "Master Plan" for 
gas: 
 
-- 3.02 billion USD to rehabilitate/modernize Ukraine's GTS, 
including: 2.05 billion USD for gas pipelines; 455.3 million 
USD for underground storage facilities; 448 million USD for 
gas metering stations at all entry points to the GTS; and 
63.6 million USD for gas metering stations at exit points of 
the GTS. 
 
-- 5.55 billion USD to increase capacity by 60 bcm/a along 
the Novopskov-Uzhgorod and Torzhok-Dolyna pipelines. 
 
¶7.  (SBU) After the conference, Econ Officers met with a 
DG-RELEX official who said they were pleased with the 
conference results.  RELEX considered getting Timoshenko and 
Yuschenko on the same stage with complimentary messages to be 
a major political success.  The official said he was not 
surprised by the Russian response, but considered it positive 
that Russia's energy minister showed up.  The official also 
noted that the 5 billion USD project to boost capacity by 60 
bcm/a was a last minute addition by Yushenko and is not 
something the Commission plans to push for. 
 
¶8.  (SBU) Comment.  From our optic, the conference had three 
positive outcomes:  Yushenko and Timoshenko presented a 
united front, the Russians showed up at the table (albeit to 
express their objections), and the IFIs made it very clear 
that investment in Ukraine's gas infrastructure is contingent 
upon Ukraine moving ahead with reforms.  The Russians made at 
least one valid point: talking about expanding Ukraine's gas 
transit capacity by 60 bcm/a makes no sense unless you are 
also talking with the people who would provide the gas to 
fill that capacity.  End Comment. 
 
Murray 
.