Russia and Ukraine to Sign Contracts Today to End Gas Dispute

By Kateryna Choursina and Lyubov Pronina

Jan. 19 (Bloomberg) -- Russia and Ukraine are putting the finishing touches to new natural-gas contracts after a price dispute cut shipments to Europe for almost two weeks and cast doubt over their reliability as energy suppliers.

Ukrainian Prime Minister Yulia Timoshenko is returning to Moscow today after hammering out the broad outlines of a deal during weekend talks with her Russian counterpart, Vladimir Putin. The contracts will be signed by OAO Gazprom, Russia’s gas exporter, and NAK Naftogaz Ukrainy, the state energy supplier.

“This crisis is off the scale of anything that has ever happened before,” Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, said yesterday. “The idea that Russian gas supplies to Europe can be turned off for 12 days was unthinkable.”

Ukraine will pay higher European prices for Russian gas from 2010, after a 20 percent discount this year. In return, 2009 transit fees for Russia will remain at last year’s level. The European Union said it would reserve judgment on the settlement until gas starts flowing again to the 27-nation bloc.

Russian gas flows via Ukraine were halted Jan. 7 after Gazprom accused Ukraine of siphoning off transit flows for its own needs, a charge the country denies. The crisis has left parts of eastern Europe without fuel during sub-freezing temperatures. Europe relies on Russia for a quarter of its gas, 80 percent of which is carried through Ukraine.

‘Soon’

Gazprom spokesman Sergei Kupriyanov said the deal would pave the way for the resumption of Russian transit flows through Ukraine. Supplies to Europe should start “soon,” Putin said after holding all-night talks with Timoshenko on Jan. 17.

The agreement “is a major step forward,” Bernhard Jeggle, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, said yesterday. The 20 percent discount for Ukraine “makes it easier to transfer to world market price levels.”

Gazprom and Naftogaz will use direct contracts in future, a Russian government official said yesterday. In the past, they’ve employed RosUkrEnergo AG, the Swiss-based trader half-owned by Gazprom, as an intermediary.

Naftogaz said yesterday it’s not clear what price Ukraine will be paying for Russian gas. The company is “working on preparing the contract,” spokesman Dmytro Marunych said by telephone from Kiev. Once flows are restarted from Russia, it will take 36 hours for the gas to arrive at Ukraine’s western borders, he said.

EU Caution

Czech Industry Minister Martin Riman, whose nation holds the rotating presidency of the EU, said he remained “realistic” in light of previous attempts to break the deadlock between the two sides.

“The only thing that counts for the EU is the resumption of gas supplies,” Riman said in a statement yesterday. “For the time being, it is not clear when this resumption takes place.”

The disagreement pushed up gas prices on the continent, forced factories to be shut down and led to gas rationing in some nations. German inventories have slid to “unusually” low levels, while Slovenia said supplies may last less than a month and Croatia has sought emergency imports.

Dutch gas for day-ahead delivery closed at its highest since March 2006 on Jan. 8, according to broker ICAP Plc. Prices at the so-called Title Transfer Facility jumped 26 percent that day to 32 euros ($42.44) a megawatt hour. They closed at 25.50 euros on Jan. 16.

‘Test case’

Yesterday’s breakthrough came after EU officials said they may urge companies in the bloc to seek legal redress if fuel supplies remain halted.

The EU had labeled the weekend talks a “test case” for the reliability of Russia and Ukraine as energy providers. The supply cutoff has already prompted renewed calls for the region to diversify energy supply away from Russia.

European alternatives to supplies from Gazprom are limited and no final decision has been made on financing the planned Nabucco pipeline, a rival route intended to carry central Asian gas to Europe by 2013.

Earlier this month, Gazprom cited a possible price of $450 per 1,000 cubic meters for deliveries to Ukraine in January, reflecting the average price in countries bordering Russia’s neighbor. It made the offer after saying Ukraine had rejected a gas price of $250. Ukraine had said $201 would be fair.

Gazprom’s prices to European customers under long-term contracts typically lag 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.

‘High Price’

A 20 percent discount to European prices will still weigh heavily on the Ukrainian economy, said Stern.

“This strikes me as a very high price for Ukraine,” he said in a phone interview. “The Ukrainian economy is in rather worse shape than Europe.”

Ukraine’s economy grew by 2.1 percent last year, the slowest annual pace since 1999. The country, shaken by the global financial crisis, has already been forced to seek a $16.4 billion International Monetary Fund bailout.

Putin had suggested that EU utilities, including GDF Suez SA, E.ON Ruhrgas AG and Eni SpA, pay for “technical gas” needed to operate Ukraine’s gas pipeline system, one of the main sticking points in the dispute.

Russian President Dmitry Medvedev put forward an alternative proposal, whereby a European bank would provide a “letter of credit” for as much as $1 billion for Ukraine, guaranteeing the country’s gas payments.

Relations between Ukraine and Russia have become strained over efforts by the former Soviet republic to join the EU and the NATO. The gas dispute has come as Timoshenko and President Viktor Yushchenko, who have clashed over economic policy, are facing a financial crisis that has forced them to seek a $16.4 billion International Monetary Fund bailout.

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.