Gazprom Threatens to Cut Gas Through Ukraine as Dispute Worsens

By Lyubov Pronina and Daryna Krasnolutska

Jan. 7 (Bloomberg) -- OAO Gazprom, Russia’s gas-export monopoly, threatened to cut gas deliveries through Ukraine if it holds up fuel meant for customers in central and western Europe.

“If Ukraine fully stops delivery of gas to the west, for consumers in central and western Europe, we do not see sense in supplying gas to the border with Ukraine,” Gazprom Chief Executive Officer Alexei Miller said at Prime Minister Vladimir Putin’s Novo-Ogarevo residence near the Russian capital.

Russia and Ukraine blamed each other yesterday for cuts as supplies from Gazprom through Ukraine plummeted, deliveries to the Balkans halted and Slovakia declared an emergency. The spat, which shut off fuel shipments to Europe for the first time in three years, caused U.K. gas to jump as much as 27 percent and came amid freezing temperatures across Europe.

“Gazprom risks increasing negative publicity,” said Igor Kurinnyy, an oil and gas analyst with ING Groep NA. “What matters is that European customers are facing disruption.”

Since a similar dispute in January 2006, European nations have diversified their sources of fuel and improved inventories. They are also using more gas, the source of 24 percent of the world’s energy consumption last year, to reduce emissions linked to global warming.

NAK Naftogaz Ukrainy Chief Executive Officer Oleh Dubina said he would return to Moscow tomorrow to resume talks. In 2006, Russia turned off all Ukrainian gas exports for three days, causing volumes to fall in the European Union, and also cut shipments by 50 percent last March during related debt claims.

Arctic Air

Gazprom Deputy Chief Executive Officer Alexander Medvedev told Bloomberg Television yesterday that Ukraine shut three export pipelines and said “unilateral action of the Ukrainians” caused the shortfall. Naftogaz spokesman Valentyn Zemlyanskyi said Gazprom, Russia’s state-run gas exporter, cut shipments to Europe through Ukraine to 74 million cubic meters a day, compared with about 300 million normally.

Miller said Gazprom would hold talks with European partners in Brussels tomorrow.

As the dispute intensified, Arctic air from Siberia pushed into Central Europe, northern France, Italy and parts of the U.K., bringing snow and temperatures as low as minus 25 degrees Celsius (minus 13 degrees Fahrenheit) in parts of Germany.

Russia, which supplies a quarter of Europe’s gas, cut shipments intended for Ukraine’s domestic market on Jan. 1, and accused Ukraine of siphoning off gas destined for other buyers. Gazprom has warned that Ukraine risks amassing a debt of “billions of dollars” if the conflict continues.

Russian Energy

Gas flows to Bulgaria, Turkey, Greece and Macedonia were halted early yesterday morning at the Ukrainian-Romanian border, Bulgaria’s Energy and Economy Ministry said. Russian gas is sent through Ukraine and then Romania to the southern Balkan states. Supplies were cut to Romania and Croatia too.

“The former Soviet bloc countries are between the devil and the deep blue sea,” James Nixey, manager of the Russia and Eurasia Program at London-based foreign policy research institute Chatham House, said by phone. “They are reliant on Russian energy more than Western countries and that’s a big problem because they are desperately trying to break free, but then the reality is that they just can’t.”

Further west, Russian gas supplies to Germany’s Waidhaus transit point, near the Czech border, stopped completely at times yesterday, according to Kai Krischnak, a spokesman for the Ruhrgas unit of E.ON AG, Germany’s biggest utility.

Lower Supplies

Gas for next-day delivery at Germany’s EGT trading hub rallied 17 percent yesterday to 26.65 euros ($35.93) a megawatt- hour, according to broker ICAP Plc.

In the U.K., Europe’s biggest market for the fuel, gas for immediate delivery rose as much as 27 percent yesterday to 75 pence a therm, ending trading at a two-month high of 67 pence.

Other utilities across Europe experienced lower gas supplies, including Austria’s OMV AG, which operates Baumgarten gas hub, near Vienna, and Poland’s Polskie Gornictwo Naftowe I Gazownictwo SA. In Slovakia, emergency measures were declared as the country’s dominant gas company, Slovensky Plynarensky Priemysel AS, restricted deliveries to some customers.

Czech Prime Minister Mirek Topolanek, whose country holds the revolving presidency of the EU, said the dispute between Russia and Ukraine on gas prices is becoming “more serious” and the effects are spreading across Europe.

Alternative Sources

Other countries can’t be “held hostage” by Russia over gas supplies, Topolanek told reporters in Prague yesterday. Ukraine may have to compromise on gas fees in the disagreement, he added.

Italy, Poland and other nations said they were using stockpiled gas, and alternative delivery routes from Russia where possible, to help satisfy demand. Restrictions on which customers receive gas may prove necessary in some countries, should the stoppage prove prolonged.

Turkey may also draw on more natural gas from a pipeline from Iran, Energy Minister Hilmi Guler said.

Gazprom raised its demands on Jan. 4 as Miller cited a possible price of $450 per 1,000 cubic meters for deliveries to Ukraine this month, reflecting the average price in countries bordering Russia’s neighbor. Ukraine paid $179.50 for its Russian gas last year and says $201 would be fair in 2009.

IMF Bailout

Ukraine’s political leaders, President Viktor Yushchenko and Prime Minister Yulia Timoshenko, are grappling with a financial crisis that has forced it to seek a $16.4 billion International Monetary Fund bailout.

Gazprom’s Medvedev said yesterday in London that the company is working to diversify its export routes to Europe, including two planned pipeline projects that bypass Ukraine.

The Nord Stream link, in which Gazprom owns 51 percent, is planned to run from Russia via the Baltic Sea to Germany. South Stream, where Eni is a partner, will run from the Black Sea to Bulgaria, where it will split into a southern route to Italy and a northern route to Austria.

To contact the reporters on this story: Lyubov Pronina in Moscow on lpronina@bloomberg.net; Daryna Krasnolutska in Kiev on dkrasnolutsk@bloomberg.net