United States, Russia Approve New "HEU Deal" Contract

July/August 2002

J. Peter Scoblic

Ending years of negotiation, the United States and Russia have approved a new contract that will allow a key nonproliferation agreement to move forward, the State Department announced June 19.

The 1993 Highly Enriched Uranium Purchase Agreement requires the United States to purchase, over 20 years, 500 metric tons of highly enriched uranium (HEU) derived from Russian nuclear weapons. Russia blends down the HEU to low-enriched uranium and ships it to the United States for use in commercial power reactors.

The so-called HEU deal is implemented in Russia by the government-run Techsnabexport (Tenex) and in the United States by the privately owned USEC, Inc. Since 1995, Russia has converted approximately 150 metric tons of HEU from almost 6,000 nuclear weapons into low-enriched uranium fuel.

Under the terms of the new contract, USEC will pay Tenex a market-based price for the blended-down uranium. The actual amount paid will be an average of international market prices over the past three years minus a discount, allowing USEC to make a profit when it resells the material to U.S. and foreign power companies. According to a senior administration official, Russia will earn less revenue than it did under the previous contract, at least in the short term.

Under the terms of the previous contract, USEC had paid Tenex a fixed price that was well below market value for enriched uranium when the five-year deal was signed in 1996. But in the late 1990s, the market price dropped sharply, reducing USEC’s profit margins when it resold the material to its customers. In the spring of 1999, anticipating the contract’s expiration at the end of 2001, USEC opened negotiations on a new contract with Tenex that would account for market fluctuations.

Tenex and USEC initialed a preliminary agreement in May 2000 that incorporated a more flexible pricing mechanism and obligated USEC to buy some commercially produced low-enriched uranium from Russia, but this deal was not approved by the U.S. or Russian governments. The latter provision was eventually dropped at the request of the U.S. government, and in February 2002 USEC and Tenex signed an agreement establishing market-based pricing as the foundation of the new contract. (See ACT, March 2002.)

Although the pricing terms had been settled between USEC and Tenex, obtaining required government approval of the deal proved difficult. The Department of Energy (DOE), under both Presidents Bill Clinton and George W. Bush, had been concerned that the U.S. supply of energy was overly dependent on the HEU deal, which provides almost half of the United States’ uranium.

A year ago, USEC shut down enrichment operations at its plant in Portsmouth, Ohio, leaving the United States with only one uranium-enrichment plant, located in Paducah, Kentucky. Concerned about U.S. energy security—and the political impact of shutting down U.S. plants and laying off workers—the Department of Energy insisted that USEC commit to maintaining the ability to enrich uranium domestically as an alternative to Russian HEU.

The U.S. government finally approved USEC’s deal with Tenex after the Department of Energy and USEC signed an agreement June 17 addressing this concern. Under the agreement, USEC has committed to building an “advanced uranium enrichment facility” either at Portsmouth by 2010 or at Paducah by 2011, and it has agreed to continue enrichment operations at the Paducah facility until the new plant is operational. DOE will provide USEC access to centrifuge enrichment technology, which is more advanced than the gaseous-diffusion process currently being used at Paducah.

The deal also requires USEC to maintain the shipping and transfer portion of the Portsmouth facility for 15 months. USEC had planned to close that facility completely and consolidate all shipping operations at Paducah by the end of June. The move would have cost several hundred jobs at Portsmouth, but under the June 17 agreement some of the employees that would have been laid off will be tasked with decontaminating uranium. In exchange, the Department of Energy has agreed to dispose of three years’ worth of depleted uranium that USEC has generated at its enrichment facilities.

The deal appears to have satisfied DOE’s concerns. According to a June 18 statement by Energy Secretary Spencer Abraham, the deal succeeds in “ensuring our domestic capacity to produce fuel for our commercial nuclear reactors and meeting important nuclear nonproliferation goals by accepting enriched uranium from Russia.” USEC’s president, William Timbers, likewise expressed satisfaction. “This agreement provides a strong cooperative foundation between DOE and USEC,” he said in a statement the same day.

The Russian government has publicly said little about the deal. Speaking to the news agency Interfax after the February 2002 agreement was signed, Alexander Rumyantsev, the minister of atomic energy, said simply that “Russia’s interests were not hurt.” However, according to one U.S. analyst familiar with the deal, “The Russians feel that they were forced by the U.S. government to accept unfair commercial terms in order to benefit U.S. business and political interests.”

The terms of the new pricing contract do not take effect until January 1, 2003, and are good through the completion of the HEU deal in 2013. Until then, shipments are being made at the 2001 price under a rollover provision in the previous contract, which expired last year.