Natural Gas Rises, Ruble Declines as Russian Supplies Disrupted

By Daryna Krasnolutska and Eduard Gismatullin

Jan. 14 (Bloomberg) -- Natural gas rose and the ruble declined as Russia’s shipments of gas to Europe were halted for an eighth day in its dispute with Ukraine over prices and transit fees.

Slovakia and Bulgaria, hit hardest by the dispute, sent their prime ministers to attempt to break the deadlock. Slovak leader Robert Fico said his nation, which relies solely on gas flowing through Ukraine, will run out of fuel in 12 days.

Gas prices in the U.K., the region’s largest market, rose for a second day after the collapse of a deal brokered by the European Union to resolve the dispute. OAO Gazprom, Russia’s gas exporter, declared force majeure on deliveries through Ukraine, allowing it to renege on supply contracts, after halting flows last week.

“Instead of just saying ‘we want our gas’, the Europeans need to do something to change the dynamics,” said Andrew Neff, senior energy analyst at Global Insight in Ankara.

NAK Naftogaz Ukrainy, the state energy company, said it was again unable to meet a Russian request to pump gas across its borders without jeopardizing domestic supplies.

U.K. gas for delivery next month increased 3 percent to 59.50 pence as of 11:12 a.m. London time, according to broker Spectron Group Ltd. Prices surged 24 percent last week after Gazprom turned off the taps. The ruble slid as low as 31.7560 per dollar today in Moscow, the lowest in almost six years, compared with 31.3087 yesterday.

Diverting Gas

Russia stopped flows through Ukraine on Jan. 7 after negotiations over a supply deal broke down. Russia complained that its western neighbor was diverting gas bound for Europe and had closed down its pipelines, charges denied by Ukraine.

The cutoff has renewed calls for the EU to diversify its sources of energy away from Russia. Negotiations between Russia and Ukraine over the separate issue of gas prices and transit fees are also stalled.

The actions of Russia and Ukraine suggest both are incapable of delivering on their commitments to EU nations, European Commission President Jose Barroso said.

“If the agreement is not honored, it means Russia and Ukraine can no longer be considered reliable partners for the EU in terms of energy supply,” he told the European Parliament today in Strasbourg, France.

Gazprom said Naftogaz once more refused to accept gas from Russia for transit to European consumers.

Naftogaz said it would have been forced to restrict local gas supplies if it had agreed to allow flows through an export route requested by Gazprom.

Local Supplies

“They want to pump gas diagonally across our territory,” interfering with domestic supplies, Naftogaz spokesman Valentyn Zemlyanskyi said in a phone interview.

The Russian company had proposed sending 98.8 million cubic meters of gas today through Ukraine, via the Sudzha pumping station. Naftogaz wanted Russian flows to be sent to the Valuyki and Pisarevka stations. To settle the issue, the Ukrainians are calling for a one-month technical protocol to define how gas transit should operate.

“Whatever the arguments bandied about by both sides, a quick resolution to the affair now looks to be beyond reach,” Ronald Smith, head of research at Russia’s OAO Alfa Bank, wrote today in an e-mailed report. “The damage to both sides’ reputations is getting worse, especially as Central and Eastern European nations suffer through a strong cold snap without enough fuel.”

Bulgarian Prime Minister Sergei Stanishev and Fico are due to hold talks with their Russian counterpart Vladimir Putin today in Moscow. They’re also meeting Ukrainian Prime Minister Yulia Timoshenko in Kiev.

IMF Loan

Slovakia is ready to help Ukraine secure a loan from the International Monetary Fund to pay for gas supplies from Russia, Fico said. He asked Timoshenko to provide supplies from Ukraine’s western storages to ease Slovakia’s shortage, though his opposite number said this wasn’t possible because Ukraine was barely able to meet domestic demand at present.

“We are not interested in relations between Ukraine and Russia,” Fico said. “But we have gas only for 12 days.”

Ukraine said it’s ready to transport gas to Europe as soon as Gazprom starts pumping the fuel. “Ukraine has never blocked gas from Russia,” Timoschenko said. “We are ready for transit.”

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. Slovakia warned on Jan. 12 it was “on the brink of blackout,” prompting the government to consider restarting a nuclear power plant in violation of EU rules.

Price Increases

Alexander Medvedev, Gazprom’s deputy chief executive officer, said on Jan. 12 that Gazprom is “open to discussions” to agreeing a solution on supplies to its neighbor. Ukrainian President Viktor Yushchenko favors gradual price increases for the gas the country imports from Russia.

Gazprom offered a price of $450 per 1,000 cubic meters after it said Ukraine rejected an offer, subsequently withdrawn, of $250. Medvedev said $450 was for the first quarter.

Gazprom’s prices to European customers under long-term contracts typically lag behind prices for crude and oil products by about six to nine months. Crude has fallen by more than 70 percent since reaching a record in July. Ukraine paid Russia $179.50 per 1,000 cubic meters for gas last year under a separate arrangement.

In 2006, Russia turned off all 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: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.netEduard Gismatullin in London at egismatullin@bloomberg.net