Ukraine-International Energy Roundtable convenes in Houston (05/28/06)

Ukraine-International Energy Roundtable convenes in Houston

by Adrianna Melnyk

NEW YORK - In an address at the Vilnius Conference, a gathering of leaders from the Baltic and Black Sea regions, U.S. Vice-President Dick Cheney warned that the Kremlin was backtracking on the democratic progress it had made in the past 15 years and using its vast energy reserves as "tools of intimidation and blackmail."

"No legitimate interest is served when oil and gas become tools of intimidation and blackmail, either by supply manipulation or attempts to monopolize transportation," Vice-President Cheney said on May 4, alluding to Russia's January 1 decision to cut off gas supplies to Ukraine, and as a result, to the rest of Europe.

The echoes of his statements reverberated throughout the region and the United States, with some Russian media saying Vice-President Cheney's criticisms marked the dawn of a new Cold War, and comparing his speech to that of Winston Churchill's 1946 speech in Fulton, Mo., when he warned of an "Iron Curtain," or the 1945 Yalta conference where Europe's post-war map was drawn up. Both Russian government-controlled and independent media reacted with alarm. Mr. Cheney's speech was delivered in the Lithuanian capital of Vilnius to the Community of Democratic Choice, the nine-country group of former Soviet republics and satellites set up by Georgia and Ukraine, a fact whose significance was not lost on Russia.

The Russian president's reaction was more restrained, but it was clear - from an announcement earlier in the week that the Kremlin had signed a multi-million dollar deal with the U.S.-based Ketchum Communications - that the Kremlin was all too aware of its image problem. Ketchum, a top public relations firm, was hired to shore up Russia's image prior to the July summit of the Group of Eight (G-8) in St. Petersburg.

As Mr. Cheney made his speech in Vilnius, over 100 U.S. and Ukrainian energy officials, policy-makers and businesspeople were departing from a three-day Ukraine-International Energy Roundtable held at the Hyatt Regency Hotel in downtown Houston on May 1-4.

The conference, whose theme was "Strengthening Ukraine's Energy Diversity," brought together major U.S. and Ukrainian energy corporations and key policy-makers from both countries, including Matt Bryza, U.S. deputy assistant secretary of state for Europe and Eurasia; Volodymyr Ihnaschenko, vice minister of the economy of Ukraine; Al Frink, U.S. assistant secretary of commerce for manufacturing and services; Kseniya Lyapina, member of Parliament, advisor to President Viktor Yushchenko and head of the Council of Entrepreneurs at the Cabinet of Ministries of Ukraine; Rachel Halpern, U.S. Department of Commerce; Vasyl Rohovyi, deputy secretary for economic security, National Security and Defense Council of Ukraine; Pavlo Kachur, minister of building, architecture and housing of Ukraine; and Oleksander Todiychuk, chairman of Ukrtransnafta.

Energy corporations taking part in the roundtable included Aspect Energy, Alternative Fuels Center of Ukraine, ATG Inc., Cardinal Resources, Chevron, Conoco Phillips, Donbas Fuel Energy Co., Exxon Mobil, Halliburton, Nova Energia, Occidental Petroleum, Shell, Ukrgazvydobyvannya, Ukrtransnafta and Vanco. Also represented were firms providing financing, services and advice to energy companies, including Chadbourne and Parke, the U.S. Export Import Bank, the Ukrainian Export Import Bank and Russian-Ukrainian Legal Group.

The largest international gathering so far this year focused on enhancing Ukraine's energy diversity, the event was organized by The Orange Circle, the Center for U.S.-Ukrainian Relations and the newly formed Ukraine International Business Council, with the cooperation of Ukraine's energy, industry and economy ministries, and with the support of Ukraine's Presidential Secretariat.

The opening dinner on May 1, held in the ballroom of the Hyatt Regency Hotel, featured welcoming remarks from Dr. Oleh Shamshur, Ukraine's ambassador to the United States Robert Bensh, chairman, Cardinal Resources; and Mr. Rohovyi, deputy secretary for economic security of Ukraine. All three speakers underscored the importance of joint U.S.-Ukrainian cooperation in the energy sector and the strategic importance of such cooperation.

Underlying their remarks was the recognition that the events of early 2006 have posed new challenges for Ukraine and have placed the energy issue at the forefront of policy-making on both the U.S. and Ukrainian sides, and that price hikes for natural gas and short-term interruptions present opportunities for mutual initiatives aimed at increasing energy exploration, diversifying energy sources and increasing energy efficiency.

The morning session on May 2 opened with remarks from Walter Zaryckyj, executive director of the Center for U.S.-Ukrainian Relations in New York and one of the organizers of the roundtable, whose introduction led into the first panel of the day, "Energy Exploration and Energy Production in Ukraine." The panel was moderated by Bob Schaffer, projects director, Aspect Energy, a former U.S. congressman from Colorado and former co-chairman of the Congressional Ukrainian Caucus. Panelists included Borys Syniuk of Ukrgazvydobyvannya and Julia Nanay of PFC Energy.

Ms. Nanay, whose firm provides strategic advisory for global energy companies, spoke of the large potential for Ukrainian oil exploration, saying that there are proven undeveloped onshore and offshore resources, which "if developed, will compensate for price hikes at least in the short-term." However, she also warned of several key concerns for international oil companies (IOCs) interested in the country, including data availability, transparency and investment security, saying that "all three of these have to be addressed to attract IOC investment and exploration in Ukraine." She presented seven "signposts," or indicators related to the aforementioned concerns, and suggested that their pulse be taken now, and that progress be measured and presented at the next roundtable.

The barriers to investment named by Ms. Nanay were themes touched upon by many of the presenters and discussants throughout the conference. In particular, concern over the lack of transparency was raised both by Ukrainian and U.S. conference participants.

In his remarks, Ambassador Keith Smith, now senior associate at the Center for Strategic and International Studies in Washington, spoke of how a real or perceived lack of transparency in the Ukrainian energy sector can have widespread implications for international attitudes toward Ukraine. Regarding the January 2006 gas deal signed with Russia, many unanswered questions remain. "The United States government", he said, "and that of the EU, want to know why Ukraine did not take the 2004 agreement to arbitration. Why did the prime minister not know about the deal? Why weren't the protocols made public? And was the agreement signed for four months or five years?"

According to Ambassador Smith, this lack of transparency has caused great concern in the United States. He said he believes that the investigation into RosUkrEnergo will continue, and that it is incumbent on and necessary for Ukraine to send high-level delegations to Brussels and to all the European Union's capital cities to explain relations with Russia and to present plans for new energy supply and transport arrangement, and for improving transparency within the energy and other sectors. "It is critical for Ukraine to travel to Brussels to drum up support - the timing is good because Europe sees a new threat from Russia," he said.

Many participants sought a better understanding of Ukraine's Energy 2030 plan, which was presented in March by the Ukrainian government. Ukrainian government officials present at the conference made clear that the plan is currently a work-in-progress, and that "for it to be a national plan, it must be approved by Parliament."

"The plan is a draft," said Secretary Rohovyi, "it needs to be discussed and revised." He went on to say that "the plan is not meant to be filed away, it is just the beginning."

Many of those present spoke of the need to include in the Energy 2030 plan measures to combat lack of transparency and corruption. Dr. Irina Paliashvili, president and senior counsel of the Russian-Ukrainian Legal Group P.A., acknowledged the importance of the plan, but also stated that she has seen it, and that it "lacks information about attracting foreign investment and improving transparency." Ambassador Smith stated that for the plan to be actionable, "it needs high level support in Brussels and the EU."

Other panels throughout the day included "Energy Pipeline and Distribution Systems"; "Meeting Ukraine's Energy Challenges: Views from Ukraine's New Parliament"; "Energy Efficiency and Conservation Policy"; and "Financing Ukraine's Energy Diversification." A series of business-to-business breakout sessions focused on oil and gas, alternative fuel and energy financing.

Ministers present from Ukraine responded to questions from U.S. energy firms and investors, noting that progress is being made on several fronts. In his talk on energy efficiency and conservation policy, Minister Kachur spoke of discussions under way with the IFC and EBRD to improve efficiency of Ukraine's end users of energy - consumers, hospitals, schools and other "social network" institutions. Ukraine is currently one of the least efficient consumers of energy in Europe: for every dollar's worth of industrial production, Ukraine consumes about two and a half times as much energy as does Poland, for example.

Volodymyr Kasyanov, director of the Alternative Fuels Center in Kyiv, agreed, saying that his organization's focus "is and will continue to be on alternative and renewable energy sources." Mr. Ihnaschenko, Ukraine's vice minister of the economy, stated that he "fully expects that the new coalition government will make financing and privatization a priority of its policy-making."

The first day of the conference ended with a Texas-style barbeque hosted by Gene Van Dyke in the open-air party pavilion at his River Oaks Houston estate. Van Dyke is founder and chairman of Vanco Energy, a privately held Houston-based oil and gas company that specializes in deep-water oil and gas exploration and development.

Just days before, it was announced that Vanco had emerged the winner from a short list of seven companies that tendered for the right to conclude a Production-Sharing Agreement (PSA) with the government of Ukraine for the highly prospective Prykerchenska Block in the Black Sea, which has estimated reserves of 30 billion cubic meters. The agreement was the first of its kind, granting rights for deep-water exploration. It is also Ukraine's first Production-Sharing Agreement for hydrocarbons.

The final day of the conference featured remarks from Mr. Bryza, deputy assistant secretary of state for Europe and Eurasia, during a session chaired by Adrian Karatnycky, founder and president of the New York-based Orange Circle. In his introductory remarks, Mr. Karatnycky described plans for a major conference this fall in Warsaw to address Euro-Atlantic cooperation in enhancing energy security and energy diversification through a business-government dialogue. He indicated that there was strong support for the initiative among leaders of Poland, Ukraine and the U.S. While in Poland on May 12, President Yushchenko won the support and endorsement of Polish President Lech Kaczynski for such a major conference.

Mr. Bryza spoke about the U.S. interest in Ukraine's energy challenges, saying that "there needs to be a broad geopolitical strategy with regard to energy," and that "for the United States, Ukraine has to make it as a transparent democracy." Mr. Bryza also addressed the U.S. position toward the European gas market: "The Department of State believes that the European gas market is not functioning properly ... there is a big problem in Europe of market distortions resulting from arbitrage and rent-seeking. Gas is being bought from Central Asia at a price of $65 per 1000 cubic meters and sold to Europe at a price of $265."

He noted that the United States is not "trying to pick a fight with Gazprom" and that the policy is one of "competition, not confrontation." According to Mr. Bryza, there needs to be an aggressive energy policy and strategy created by Ukraine to address the current challenges. "The U.S. Department of State is not anti-Russian, [we] are anti-monopoly ... [but] although the U.S. can provide a vision and political support, Ukraine has to create an environment into which investors must be willing to operate."

Mr. Bryza closed by responding to questions about the upcoming G-8 summit to be held in St. Petersburg, saying that "the U.S. government is not scared to broach these issues in July," but that ultimately, although "U.S. and Ukrainian diplomatic pressure on Russia is possible, internal Ukrainian reform is critical for making the message more credible."

The final plenary dialogue of the day, "Energy Efficiency - Keys to Energy Security and Profitability," with remarks from Maksym Timchenko of Donbas Fuel Energy Co., Walter Derzko of Creative Consortium and Valeriy Borovyk of Nova Energia.

The conference closed with a luncheon chaired by George Chopivsky, chairman of the newly formed Ukraine-International Business Council. Ms. Halpern closed with remarks about the role of the Department of Commerce, via the International Trade Administration, in facilitating and promoting U.S.-Ukrainian business development, trade and investment though market research, partner matching, and two-way policy and trade missions.

The steering committee of the conference comprised three organizations: The Orange Circle, whose founder and president is Mr. Karatnycky, the Center for U.S.-Ukrainian Relations (CUSUR) whose executive director is Mr. Zaryckyj, and the Ukraine International Business Council (UIBC), whose chairman is Mr. Chopivsky.

Marta Kostyk of CUSUR was the logistics coordinator; Adrianna Melnyk, director of research and outreach of The Orange Circle, served as outreach coordinator; and Andriy Bihun of UIBC assisted in corporate outreach. Significant assistance was also provided by Mykola Hryckowian of CUSUR and Luda Lozowy of The Orange Circle.

Adrianna Melnyk is director of research and outreach of The Orange Circle.

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