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Russia cuts gas to Ukraine

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Russia halted gas supplies to Ukraine today for the second time in three years in a payments dispute, raising the threat of disruption to natural-gas shipments to Europe, as both sides said they wanted talks to resume.

Negotiations broke down shortly before midnight after Ukraine rejected an offer from OAO Gazprom, Russia’s state gas exporter, to sell it the fuel this year at $250 per 1,000 cubic meters, and insisted that Russia also pay higher transit fees. Ukraine said today it is seeking a price of $201.

The repeat of an energy standoff between the former Soviet neighbors risks further souring Russia’s ties with the West, months after its war with U.S. ally Georgia.

Gazprom, which supplies a quarter of Europe’s natural gas, mostly through Ukraine, cut Ukrainian deliveries in January 2006 amid a similar pricing dispute. The shutdown reduced gas flows to Europe and led to questions over both countries’ reliability as suppliers.

The European Union “trusts that we can count upon assurances given that gas supplies to the EU will be unaffected, as a demonstration of the reliability of its gas suppliers,” European Commissioner for Energy Andris Piebalgs said today in a statement issued by the Czech Presidency of the EU. It urged Russia and Ukraine to “rapidly” resolve the dispute through talks.

Talks Urged

Russia stands to look “brutal and ruthless” while Ukraine’s reliability as a supplier to Europe will be “called into question and its squabbling leadership will lose credibility domestically and abroad,” the Carnegie Endowment for International Peace, a Washington-based research group, said in an e-mailed commentary.

Gazprom spokesman Sergei Kupriyanov said that price was not the main issue holding up an agreement, telling a press conference in Moscow today that the Ukrainian delegation didn’t have a mandate to sign a contract.

He called for a resumption of negotiations. State Ukrainian energy company NAK Naftogaz Ukrainy said it also wants to resume talks with Russia, though it did not say how soon it expects this to happen. Naftogaz Chief Executive Officer Oleh Dubina planned to hold a press conference at 4 p.m. Kiev time today.

Ukraine suggested the EU could become involved in talks with Russia, according to a statement posted on the Ukrainian Foreign Ministry Web site today.
The International Energy Agency said it hopes the dispute will have minimal impact on natural-gas customers and shouldn’t damage third parties.

European Gas

“We are getting the impression that there are some political forces in Ukraine that are very interested in seeing a gas conflict between our countries,” Gazprom Chief Executive Alexei Miller said late yesterday. “All responsibility for this situation lies with the Ukrainian side.”

The threat to European energy supplies is less severe than during a similar dispute in 2006, because liquefied natural gas shipments have diversified supplies, the weather in Europe is warmer and utilities say they have sufficient inventories. Ukraine says it has gas in storage equivalent to about 35 percent of annual consumption.

In 2006, some consumers, including in Hungary and Italy, registered shortfalls in shipments in the shutoff, which lasted for more than two days. Gazprom then blamed Ukraine for causing the shortages by stealing gas, a claim rejected by the Ukrainian side.

‘Serious Consequences’

Ukraine is guaranteeing the stable transit of Russian gas to European Union, President Viktor Yushchenko and Prime Minister Yulia Timoshenko said today in a joint statement on the president’s Web site.

Ukraine faces “serious consequences” in its relations with Russia and its reputation among consumers in EU countries should it disrupt Russian natural-gas supplies to Europe, Russian Prime Minister Vladimir Putin warned yesterday.

Gazprom at 10 a.m. Moscow time today halted deliveries of 110 million cubic meters a day of gas destined for Ukraine. Gas pumped to European customers was increased by 20 million cubic meters above normal volumes to 326 million cubic meters a day, Kupriyanov said.

E.ON Ruhrgas AG, the gas unit of Germany’s largest utility, said it is prepared for a reduction of Russian gas supplies, and could secure shipments from Norway and the Netherlands. It would reach limits if the dispute led to “serious” cutbacks that lasted a long time and winter was especially cold, E.ON Ruhrgas said. Germany is Russia’s main gas market.

Payment Transfers

In Austria, which gets 51 percent of its gas from Russia, the largest oil and gas company, OMV AG, said it had enough gas in storage to ensure supplies for its customers. FGSZ Zrt, which operates Hungary’s transmission network, said in an e-mailed statement the country hasn’t had any problems with gas supply.

The failure to agree on new contract terms came after Ukraine sought to defuse the conflict by pledging to settle part of debts of $2.1 billion for gas received in November and December, plus fines.

Naftogaz said yesterday it transferred $1.52 billion to RosUkrEnergo AG, the Swiss-based trader half-owned by Gazprom that imports the gas from Russia, and will seek international arbitration over at least $450 million in fines for late payment levied by Gazprom.

Gazprom Finances

In 2006, the gas conflict was widely seen as a Russian response to the 2004 Orange Revolution that brought Western- backed opposition leaders to power in Ukraine. Ties between the the two countries have soured over Ukraine’s drive to join the North Atlantic Treaty Organization and Russia has accused the Ukrainian leadership of supplying weapons to Georgia in the August conflict.

This time, Gazprom is short of funds because of the global financial crunch.
While Gazprom’s price offer represented a 39 percent increase on the $179.5 per 1,000 cubic meters Ukraine was paying for Russian gas in 2008, Putin said Gazprom will pay an average of $340 per 1,000 cubic meters of gas from three Central Asian nations in the first quarter.

Ukraine sees $201 per 1,000 cubic meters as an optimal price and no less than $2 per 1,000 cubic meters per 100 kilometers (62 miles) as an appropriate transit rate for Russian gas, according to the statement issued by Yushchenko and Timoshenko. That compares with the agreed 2008 rate of $1.70.

Widening Rift

“Now that Gazprom has to pay a full price for gas it buys from Central Asian producers, then selling gas at less than that to Ukraine is taking money out of the pockets of investors in Gazprom,” said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow.

Higher gas prices represent a problem for Ukraine, which like other emerging markets, has been shaken by a lack of credit, a weakening currency and plunging demand for its products due to the global financial crisis. In November, Ukraine received approval for a two-year, $16.4 billion International Monetary Fund loan to help support its banking system and rising current-account deficit.

A widening rift between Yushchenko and Timoshenko, former Orange Revolution allies who are each looking to take the credit for resolving the Russian gas dispute, is also blocking an agreement, analysts say.

Gazprom’s Miller said yesterday that Yushchenko had blocked an agreement after Timoshenko aborted plans to fly to Moscow to negotiate the gas contract.

“Part of the problem is financial but a big part is Ukraine politics and the differences between the prime minister’s office and the presidency,” said Weafer.

Source: Bloomberg

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