EU Says Gas Crisis a Test Case for Russia, Ukraine Reliability

By Yuriy Humber and Halia Pavliva

Jan. 16 (Bloomberg) -- The European Union said weekend talks to resolve the standoff between Russia and Ukraine over natural-gas shipments will be a “test case” for their reliability as energy suppliers.

Russian Prime Minister Vladimir Putin is scheduled to meet his Ukrainian counterpart, Yulia Timoshenko, in Moscow tomorrow to seek an end to the crisis that’s disrupted supplies to 20 nations. Russia proposed that European companies including Eni SpA and E.ON AG buy the gas Ukraine needs to operate its pipelines, one of the main sticking points in the dispute.

Gas prices in the U.K., Europe’s biggest market, are poised for their steepest one-week advance since August after the collapse of an EU-brokered deal between both sides. Ukraine today rejected another demand from OAO Gazprom, Russia’s gas monopoly, to pump gas across its borders, saying the request was “technically impossible” to carry out.

“We can expect an agreement covering the technical aspects of gas transit to Europe, but there’s no guarantee that it will be honored by either party given the absolute lack of trust or goodwill,” said James Beagle, chief investment strategist at Pilgrim Asset Management

Russian gas flows via Ukraine were halted Jan. 7 after negotiations over gas prices and transit fees broke down. Gazprom accused Ukraine of siphoning off transit gas for its own needs, a charge the country denies. The Russian gas exporter that provides a quarter of the continent’s gas needs estimates it has lost $1.1 billion in export revenue since the crisis unfolded.

Energy Summit

Separately, Russian President Dmitry Medvedev has invited both the Ukraine and the EU to an emergency summit in Moscow tomorrow. The EU has said it’s ready to send representatives to the meeting to “assist” both sides in reaching a settlement.

Czech Industry Minister Martin Riman has said he and EU Energy Commissioner Andris Piebalgs will attend as “observers” if Ukraine also takes part.

“The meetings in the coming days offer the last and best chance for Russia and for Ukraine to demonstrate that they are serious about resolving this dispute,’’ EU spokesman Johannes Laitenberger told reporters in Brussels today. “We will regard this period as a test case for judging whether or not they are credible partners.”

EU nations suffered further declines in gas stockpiles today on the continuing suspension of Russian gas flows via Ukraine.

‘Unusually low’

German gas inventories are “unusually” low, while Slovenia said supplies may last less than a month and Croatia sourced emergency imports. Balkan countries, the worst hit by the gas cutoff, have been forced to ration supplies, shut factories and cut power.

The Slovak government asked France and Germany to share Russian gas they receive through the Yamal pipeline through Belarus if Ukraine doesn’t approve a proposed gas swap by Jan. 19, Deputy Economy Minister Peter Ziga said today.

Under Putin’s proposal, Gazprom could sell the fuel to European companies for resale to Ukraine.

The Russian premier considers it “absurd” to give Ukraine free gas for running the pipeline system, according to his spokesman Dmitry Peskov. “Russia is not ready to take all the risks,” Peskov said yesterday on a conference call after Putin made the proposal at a Moscow meeting with Paolo Scaroni, chief executive officer of Italy’s Eni.

‘Favorably’

Gazprom said it planned to contact other European companies such as Germany’s E.ON Ruhrgas AG with Putin’s proposal after Scaroni said the Italian oil producer would look “favorably” on this solution, according to Peskov. Ukraine needs 1.7 billion cubic meters of gas for technical purposes, according to Gazprom.

Spokespeople at E.ON Ruhrgas and BASF SE’s Wintershall Holding AG oil & gas unit didn’t immediately return calls seeking comment. Sebastian Ackermann, a spokesman for RWE Energy AG, a Dortmund-based unit of RWE AG, declined to immediately comment.

“We will pay for the gas and be paid back in gas at the moment Ukraine and Russia reach an agreement,” Scaroni said, adding that Italian Prime Minister Silvio Berlusconi backed the plan. Eni would lead the EU group.

U.K. gas prices for next-month delivery are up 12 percent this week, the biggest five-day gain since August, according to data from broker Spectron Group Ltd. February gas was unchanged at 63.50 pence a therm as of 12:01 p.m. in London.

Technical Accord

“We can only pump the full amount of gas on export contracts,” Dmytro Marunych, a spokesman for NAK Naftogaz Ukrainy, the state utility, said by phone in Kiev today. “We are waiting for Gazprom to sign a technical agreement on gas transit to Europe.”

Ukraine wants Russian gas to Europe to be supplied via four gas stations with a total daily amount of 318 million cubic meters of fuel. Ukraine needs 36 hours’ notice before the gas arrives at stations near Ukraine’s western and southern borders, Marunych said.

Timoshenko sent a telegram to Putin yesterday guaranteeing Russian transit flows to EU nations “apart from 8 percent of gas used to fuel gas-pumping,” according to a statement on the government’s Web site.

A gas group has been discussed by Russia and Ukraine since at least 2006, when then-President Putin and his Ukrainian counterpart, Viktor Yushchenko, said they would welcome assistance from European energy companies in operating Ukraine’s gas pipelines.

Yushchenko has repeatedly said the pipelines, which carry most Russian gas exports to western Europe, will remain state- owned by Ukraine.

German Chancellor Angela Merkel took aim at Russia before she’s due to host talks with Putin in Berlin today, saying Moscow could lose its “reliability” as an energy partner if gas deliveries are interrupted for much longer. Germany is the biggest foreign customer of Russian gas.

Gazprom’s overall deliveries to Europe fell by about 60 percent when it halted transit flows and supplies to Ukraine’s domestic market were suspended Jan. 1.

In 2006, Russia turned off gas exports to Ukraine for three days, causing volumes to fall in the EU, and also cut shipments by 50 percent last March during a debt spat.

To contact the reporters on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net