Russia Agrees to Gas Talks With Ukraine, Warns on Rising Debt

By Daryna Krasnolutska and Jones Hayden

Jan. 6 (Bloomberg) -- Russia and Ukraine agreed to restart talks on their dispute over natural gas prices and transit fees as deliveries were disrupted for a sixth day and OAO Gazprom warned Ukraine risks amassing a debt of “billions of dollars.”

Gazprom cut supplies of the fuel to Ukraine on Jan. 1, a day after talks broke down with Ukrainian utility NAK Naftogaz Ukrainy on contract renewals for 2009. A similar dispute interrupted supplies to Europe in 2006.

Russia supplies a quarter of Europe’s gas, and 80 percent of that is transported through Ukraine. Most supplies are continuing to reach European markets, and Russia said it would plug any shortfall with spot market purchases for which Ukraine would have to pay.

“It’s not in the interest of either side for it to drag on and cause a larger drop in supplies,” said Chris Weafer, chief strategist at UralSib Financial Corp., by phone from London. “The risk of a more substantial pressure drop elsewhere in the pipeline system increases if supplies are cut for more than 10 days.”

Gazprom Chief Executive Officer Alexei Miller told Russian Prime Minister Vladimir Putin in a meeting that Gazprom intends to reduce gas deliveries to the Ukraine border by 65.3 million cubic meters a day, equivalent to the amount it says Ukraine has taken out of the system. Ukraine denies siphoning the fuel, saying some is needed to keep pipelines operating.

“If this continues then the debt will soon come to billions of dollars,” Miller said. Gazprom says it is still owed $614 million for 2008 supplies, even after it receives a $1.5 billion payment, a claim Ukraine rejects.

Gazprom Demands

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.

The European Union sought to help defuse the conflict, sending a delegation headed by Czech Industry Minister Martin Riman for talks with Ukrainian officials. They will meet with Ukrainian Energy Minister Yuriy Prodan, Oleh Dubina, head of state energy company NAK Naftogaz Ukrainy, and presidential advisers at 10 a.m. today, according to Bohdan Sokolovskyi, President Viktor Yushchenko’s energy aide.

“We have a mission in the region,” European Commission President Jose Manuel Barroso told reporters yesterday in Lisbon. “I hope the situation will be resolved.”

Ferran Tarradellas Espuny, a spokesman for the European Commission, the EU executive in Brussels, said the EU delegation would also meet Gazprom officials in an unspecified EU capital today.

Gas Diplomacy

Espuny told a press conference yesterday Russia’s cutoff of gas shipments to Ukraine was a “commercial dispute” that must be solved bilaterally.

“It has to be resolved by the two parties,” he said. “We’re putting pressure on to encourage both countries to go to the negotiating table, because it’s in our interest,” though the EU is “not acting as an intermediary.”

U.K. gas for immediate delivery gained 8.7 percent to 59.35 pence a therm at 4:44 p.m. London time yesterday, according to broker ICAP Plc. That’s equal to $8.66 a million British thermal units. A therm is 100,000 Btus. Gas for tomorrow rose 6.6 percent to 60.75 pence. U.K. gas for delivery next month rose 3.2 percent to 57 pence.

“I’m really surprised that the negotiations haven’t been settled,” said Alexander Rahr, director of Russian Programs at the German Council on Foreign Relations. “Both sides are being very stubborn.”

Romania, Bulgaria

Gazprom Deputy Chief Executive Officer Alexander Medvedev called in Paris yesterday for Ukraine to take part in talks, describing its behavior as “irresponsible.”

Romania and Bulgaria said gas supplies from Russia have dropped as several European countries tapped reserves to meet shortfalls.

Hungary, one of the countries most hurt in the 2006 dispute, and the Czech Republic also said supplies were down, while Poland and Slovakia noticed lower shipments via Ukraine. France, Germany and Austria said deliveries were as contracted. Officials in Italy, also affected in 2006, couldn’t immediately be reached for a comment.

“Import levels are down 30 percent to about 7 million cubic meters per day,” Ioan Rusu, general manager of Romanian state-owned pipeline operator Transgaz SA, said in a phone interview yesterday.

Storage Reserves

Deliveries also fell in Bulgaria, which pumps some 17.8 billion cubic meters of Russian gas onwards to Turkey, Greece and Macedonia annually. Supplies to Bulgaria fell by some 15 percent from Jan. 3, Marusia Dimova, a spokeswoman for Bulgargaz AD, the state-run gas distributor, said by phone in Sofia.

“We’re compensating the gap in supplies with gas from the storage facility at Chiren,” she said. “If supplies remain at this level, the Chiren storage will last for a little more than a month.”

Hungary may cut the amount of natural gas it transits to Serbia and Bosnia after Ukraine proposed to reduce supplies by 8 million cubic meters, Energy Minister Csaba Molnar said in Budapest yesterday. The central European country was scheduled to get 38 million cubic meters yesterday, 11 million of which was to go to Serbia and Bosnia.

Polskie Gornictwo Naftowe i Gazownictwo SA, Poland’s largest gas distributor, is getting gas in line with contracts. Supplies via Ukraine are down 11 percent and Gazprom is compensating for this drop by increasing shipments via Belarus, spokeswoman Joanna Zakrzewska said by phone.

Deliveries of Russian gas to Germany are unaffected.

To contact the reporters on this story: Daryna Krasnolutska in Kiev on dkrasnolutsk@bloomberg.net: Jones Hayden in Brussels on jhayden1@bloomberg.net