Russia Firm Cuts Gas To Ukraine

Russia switched off natural gas to Ukraine Thursday, in a jolting reminder of a 2006 cutoff that spread fear in Europe about Moscow's tightening grip on energy supplies.

Officials at Russia's gas monopoly, OAO Gazprom, said they had no choice but to halt supplies to Ukraine after talks on a new supply contract for 2009 ended in failure hours before a New Year's Eve midnight deadline. Without a valid contract, Gazprom said, it had no legal basis to continue supplying Ukraine.

That's worrisome for the European Union, because the same gas pipeline that supplies Ukraine also carries 80% of the gas the EU imports from Russia. During the brief 2006 cutoff, Ukraine dipped into some of the gas that was supposed to be passing through on its way to Western Europe, causing supply disruptions in places like Poland and Italy.

But this time around, the crisis seems likely to play out differently. Partly because of declining industrial use, both Ukraine and the EU have built up their gas storage, meaning that any immediate disruption to the EU's supplies appears unlikely. And Russia and Gazprom -- which are facing their own financial woes -- are taking pains to reassure customers that their differences won't affect anyone else.

Both Moscow and Kiev, despite their long-running and rancorous dispute over what price Ukraine should pay for its gas, appear to understand that a prolonged cutoff could do serious damage to their images. Ukraine President Viktor Yushchenko said Thursday that a price deal with Gazprom was close and should be reached by Jan. 7.

Russia's ties with the West remain strained after its short war with Georgia in August. Moscow has repeatedly said it wants to shed what it deems an unfair perception that it uses energy as a political weapon -- while adding that it aims to aggressively build its share of the European energy market.

Moscow has had a difficult relationship with Ukraine, a former Soviet republic, since 2004, when pro-Western forces took the political initiative in Kiev. Ukraine is seeking to join the North Atlantic Treaty Organization, a move Moscow strongly opposes, and also the EU. Ukraine also wants to be regarded as a trustworthy international partner at a time when it is struggling to keep its economy together with the help of billions of dollars in aid from the International Monetary Fund.

The U.S. called for the gas-price dispute to be settled in a transparent, commercial manner. "We urge both sides to keep in mind the humanitarian implications of any interruption of gas supply in the winter," said a White House spokesman, Gordon Johndroe.

The EU urged a rapid resolution. "The EU trusts that we can count upon assurances given that gas supplies to the EU will be unaffected," said European Energy Commissioner Andris Piebalgs.

The 2006 disruption caused panic in Europe. The EU launched a wide-ranging review of its energy policy. Some 42% of the EU's natural-gas imports come from Russia, according to the Eurostat statistics agency; the bloc relies on imports for about 60% of all its gas needs.

The 2006 shock also encouraged Russia to plan expensive new gas pipelines under the Baltic and Black seas that would circumvent Ukraine. The EU, meanwhile, has pressed for a pipeline that would bring gas from Central Asia via Turkey, circumventing Russia.

Gazprom lost the public-relations battle in 2006, appearing to cut Ukraine off brutally and with scant warning in the winter. This time, Gazprom has played things differently. It has retained an American public-relations agency, Ketchum; it is running a dedicated Web site to explain its position; and is holding frequent news conferences.

"We gave Europe plenty of warning that there was trouble ahead," Ilya Kochevrin, executive director of Gazprom Export, said in an interview. He said Gazprom officials traveled to Brussels a month ago to explain how the situation was unraveling, and warned of possible disruptions.

Prime Minister Vladimir Putin has sought to get the point across that Ukraine would bear the responsibility for any supply disruptions in Europe. He has warned Ukraine of "serious consequences" if it interferes with gas flowing through Ukraine to Western Europe.

Mr. Putin also has tried to portray Russia as a magnanimous friend of Ukraine. Natural-gas prices in Europe have remained stubbornly high despite the steep fall in the price of crude oil. The price of gas tends to be loosely pegged to that of oil, but often with a lag.

The price Gazprom charged Ukraine in 2008 was $179.50 per thousand cubic meters of gas, far below the roughly $500 that Gazprom charges Western European customers. Gazprom initially said it was looking for a price of $418 from Ukraine in 2009. But Mr. Putin said on New Year's Eve that Gazprom was now asking for $250 -- what he called a "humanitarian" offer -- because of economic woes Ukraine faces amid the global financial crisis.

Ukraine says even $250 is too high. A Ukrainian government statement said Naftogaz Ukrainy, the state gas company, was ready to pay $201, but that Moscow should pay it a higher transit fee for the supplies headed to Western Europe, a position Gazprom rejects. Later, Naftogaz Ukrainy said it was ready to pay $235, increasing the chances of an early compromise.

The situation remained confused on Thursday, however, with Gazprom's chief executive, Alexei Miller, telling Russian news agencies Gazprom now once again wanted a price of $418.

Decision-making in Kiev has sometimes appeared confused because of a simmering political rivalry between President Yushchenko and Prime Minister Yulia Tymoshenko, who are expected to contest presidential elections a year from now. They set aside differences Thursday to issue a joint statement.

In it, they pledged that Ukrainian consumers and European gas supplies would be unaffected by the dispute. Naftogaz Ukrainy says it has built up large underground reserves that will last until early April, while Gazprom says it is boosting the volume of gas passing through Ukraine to keep customers such as Germany and Italy supplied.

Gazprom maintains Ukraine owes it $2.1 billion in unpaid bills for 2008, a figure that includes fines for late payment. Gazprom says a Russian-Ukrainian intermediary company has received $1.5 billion from Ukraine, but that this money covers only unpaid bills. The Russian gas giant contends it is owed a further $600 million in fines.

Ukraine's statement contended that Ukraine has cleared all of its debts for 2008 and owes Russia nothing.

It takes 36 hours for gas to get from the transit point in Ukraine to the EU's borders, said European Commission spokeswoman Christiane Hohmann, adding: "That's how long before we know whether the EU will be affected." Both sides say they are ready to resume talks as soon as possible.  01 Jan 200914:24 GTBST DJ Austria's OMV Ready To Tap Reserves In Russia-Ukraine Dispute
VIENNA (AFP)--Austrian oil and gas giant OMV AG (OMVKY) said Thursday it was ready to tap its reserves if Russia's halt of natural gas deliveries to Ukraine were to hit its own imports.

OMV, the largest oil and gas provider in central Europe, said that so far there had been no problems with supply to Austria after Russia's Gazprom cut delivery to Ukraine, through which western Europe gets much of its needs.

The company added that "it could not yet ascertain" whether the Russia-Ukraine dispute would lead to a reduction in supplies to Europe.

"Econgaz, the OMV unit, currently holds 1.7 billion cubic meters of gas in stock which it can use in the event supplies are cut," it said, adding that these reserves should be able to last about three months.

Austria, which consumes eight billion cubic meters of gas per year, gets 51% of its needs from Russia.

Russia earlier Thursday halted gas supply to Ukraine after the two ex-Soviet neighbors failed to agree on payment terms.

Ukraine's gas company, Naftogaz, separately confirmed that the volume of gas it was receiving from Russia had dropped, but promised that transit of supplies meant for customers downstream in Europe would be guaranteed.

OMV said it was in constant touch with OAO Gazprom (GAZP.RS), its supplier since 1968, stressing that up to now the Russian firm had always been "a trustworthy partner."

OMV and Gazprom joined forces last year to set up a major distribution platform based in Austria, called the Central European Gas Hub, which supplies Croatia, France, Germany, Hungary, Italy and Slovenia as well as the local market.