Cablegate: Ukraine: Naftohaz Reforms Unlikely

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R 161349Z OCT 09
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SUBJECT: UKRAINE: NAFTOHAZ REFORMS UNLIKELY

1. (SBU) Summary. In meetings with Naftohaz Chairman Oleh
Dubyna and PM Tymoshenko Energy Advisor Vitaliy Hayduk in
late September both stated that the structural reform of the
gas sector was unlikely, even unnecessary. Dubyna stated
that he would not support the unbundling of Ukraine's gas
transit system (GTS), in opposition to promises made to the
EU in March. Dubyna told us that Naftohaz already operated
successfully and pointed to the state-energy company's
performance during the two-week cutoff of Russian gas
supplies in January 2009 as evidence that it was able to
manage the strategic gas transit system effectively. Hayduk
stated that there had been no gas crisis in Ukraine at the
beginning of the year and that Ukraine would be ready for any
difficulties this winter. He also predicted that gas sector
reforms would not move ahead in the current political
climate. End summary.

BEARISH ON NAFTOHAZ REFORMS
----------------------------

2. (SBU) Naftohaz Chairman Oleh Dubyna was clear about his
resistance to structural reforms of Naftohaz in a September
23 meeting. He stated that Naftohaz already operates in line
with all EU directives and rejected any attempt to "add,
subtract, split, or divide" Naftohaz. Dubyna stated that
Ukraine had already begun to diversify the natural gas market
and pointed to a Cabinet of Ministers' resolution from the
spring that allows certain chemical companies to purchase gas
directly from Russia. (Note: Although the resolution was
passed in April 2009, we have not heard of any chemical
companies successfully contracting directly with Russian gas
suppliers. End note.) Dubyna also rejected the EU's call to
"unbundle" the gas transit system (GTS) from Naftohaz. He
stated that Naftohaz had proven that the GTS operates
effectively within the Naftohaz structure, pointing to the
company's success in reversing the flow of the system for the
first time in its history during the January 2009 cutoff.
Unbundling the GTS from Naftohaz would have a negative
effect.

WAITING FOR DONORS ON GTS MODERNIZATION PROGRAM
--------------------------------------------- ----

3. (SBU) Despite Dubyna's clear rejection of the basic
commitments made by the GOU to the EU, World Bank, EBRD, and
EIB at the March 23 Brussels conference on financing for
modernization of the gas transit system, Dubyna said that
progress on the financing program was held up because the EU
and others had not responded to Naftohaz's project proposals,
commenting that the Europeans found their holidays "more
important" than the GTS project. (Note: In conversations with
the World Bank and the EU, it is clear that they have found
working with Naftohaz on the GTS modernization project
trying. Dymtro Glazkov, the World Bank's energy expert, told
us that the feasibility studies would likely not meet the
Bank's requirements. End note.)

"WHO KNOWS WHAT RUSSIA WILL DO"
--------------------------------

4. (SBU) Discussing the likelihood of a repeat of the January
2009 gas crisis, Dubyna stated, "Who knows today what Russia
will do in the future?" To counter the possibility of a
cutoff, Dubyna said that the government decided after the
2009 cutoff to create a strategic reserve of natural gas.
Naftohaz has 25 billion cubic meters (bcm) of gas in its
storage facilities already this year, versus 11 bcm at the
end of 2008. He commented that Naftohaz had not overcome all
its difficulties with Russia but believed it would be able to
resolve outstanding issues. Dubyna noted that Naftohaz had
asked Gazprom to lower the 2010 contracted volumes from 52
bcm to 33.75 bcm by the July 1 deadline in the contract but
that Gazprom had yet to respond.

5. (SBU) In a separate conversation on September 24, Vitaliy
Hayduk, head of the group of advisors to PM Tymoshenko,
rejected that there was a gas crisis for Ukraine in 2009. He
said that although Russia had shut off gas supplies, Ukraine
did not have problems as it successfully reversed the flow of
its gas transit system to supply gas from underground
storages in the west to consumers in the east. It would do
the same this winter if Russia decided to turn off gas
supplies. He noted the problem is for Europe, not Ukraine.
Hayduk repeated what Dubyna told us that Ukraine was even
better prepared this year, with higher volumes of gas in
storage.

6. (SBU) Hayduk also suggested that there would be no reform
in Ukraine's energy sector now due to the divide between the
Rada (Ukraine's parliament) and the government. He said
vested interests would ensure that monopolies were not broken
up, pointing out that government ministers in particular
would not support changes to the current system that may
bring about less profitability to their sector. He thought
this was true even if the changes represented progress, a
savings to consumers, or development for the economy in
general.

7. (SBU) Comment. Dubyna's comments rejecting calls for
structural reforms at Naftohaz underline how difficult it
will be to achieve meaningful reform in Ukraine's gas sector.
Absent a clear political decision from the Prime Minister,
Naftohaz's leadership will not support efforts to divide the
bloated and inefficient company into more manageable and
financially viable segments. If the EU and IFIs take a hard
line on the conditions of the March 23 Brussels declaration,
financing for the modernization of Ukraine's GTS will remain
a pipedream for some time to come. End comment.
PETTIT

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