Russia, EU Agree on Monitors for Ukraine Transit Gas

By Tara Patel and Daryna Krasnolutska

Jan. 9 (Bloomberg) -- Russia and the European Union clinched a deal on monitoring gas shipments through Ukraine, paving a way for the resumption of deliveries to EU countries.

Russian Prime Minister Vladimir Putin reached an accord with Czech Prime Minister Mirek Topolanek, who holds the EU’s presidency, on deploying a monitoring commission. Russia and Ukraine still have to resolve their dispute over gas prices, fees and debt that’s hit supplies to at least 20 nations.

Since a previous dispute over gas prices in 2006, European Union 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 in 2007, to reduce emissions linked to global warming. OAO Gazprom suspended transit flows on Jan. 7 after accusing Ukraine of siphoning off gas destined for other buyers, a charge the country denies.

“It’s high time the EU gets serious about gas security and presses ahead with the creation of a single gas market,” Pierre Noel, senior policy fellow at the European Council on Foreign Relations, said in an e-mailed statement. “The EU must be instrumental in the push for investment” in eastern states.

The deal came after talks in Brussels involving Gazprom Chief Executive Officer Alexei Miller, his counterpart at NAK Naftogaz Ukrainy, Oleh Dubina and EU Energy Commissioner Andris Piebalgs stalled as the EU sought to negotiate an end to the dispute.

‘Full Access’

The agreement “should lead” to Russian gas supplies to the EU being restored, the Czech presidency said on its Web site.

EU monitors scheduled to arrive in Ukraine today have been assured of “full access” to pipelines, Piebalgs said earlier. Yesterday, Putin said Russia was prepared to pay a higher transit fee to send gas through Ukraine should its neighbor pay European prices for its gas. Naftogaz said it was ready to “guarantee 100 percent” of Russian gas transit supplies to Europe.

The accord is for “all locations that are relevant for the flow of gas” and “should lead to the Russian supplies of gas to EU member states being restored,” the Czech presidency said. Topolanek spoke with Putin and with German Chancellor Angela Merkel before reaching the accord, it said.

Border Supervision

Ukrainian President Viktor Yushchenko spoke with European Commission President Jose Barroso yesterday by telephone and confirmed Ukraine is prepared to immediately resume Russian gas transit, according to a statement from Yushchenko’s office.

“In the event that a multilateral committee is formed, Gazprom is ready to give monitors access to its gas-measuring stations in Russia,” Miller said in a comment in response to Bloomberg enquiries. Putin’s press service said Russia was insisting on having monitors on both its border into Ukraine and at exit borders.

Russian President Dmitry Medvedev spoke with Yushchenko by phone on Jan. 7, the first high-level contact between the two sides since negotiations broke off on Dec. 31. Medvedev also said Ukraine should pay the full market price for its gas and clear its debt with Russia. Each side blamed the other for shutting the transit route.

Russia’s ruble and Ukraine’s hryvnia rallied against the euro following the resumption of talks.

Supply Shortfalls

U.K. natural gas for within-day delivery fell 3.25 pence, or 4.8 percent, to 64.50 pence a therm yesterday, according to data from broker ICAP Plc at 5:30 p.m. London time. That’s equal to $9.81 a million British thermal units. A therm is 100,000 Btus. Earlier in the day it was as high as 76 pence.

French President Nicolas Sarkozy and Germany’s Merkel urged Russia to renew shipments of gas to Europe. Russia must “respect” its contractual commitments, Sarkozy told a joint press conference in Paris yesterday. “Russia has to hold to its obligations,” Merkel said.

Gazprom’s European customers receive 80 percent of supplies through pipelines that cross Ukraine. The Russian exporter, which provides a quarter of Europe’s gas, said its overall deliveries to Europe were cut by about 60 percent on Jan. 7.

“Russia’s motivation isn’t exclusively financial,” David Hauner, a London-based economist at Bank of America Corp., said in a Bloomberg Television interview yesterday. “In this tough time for the Russian government, with lower oil prices and a weaker ruble, they want to show strength. That always comes across well with the public.”

Pipelines Stable

Ukraine, Romania, Bulgaria, Greece, Turkey, Macedonia, Serbia, Czech Republic, Slovakia, Bosnia-Herzegovina, Slovenia, Austria, Hungary, Italy, Croatia, Moldova, Turkey, Poland, Germany and France have all registered supply shortfalls since the cutoff.

The market is still “broadly pricing in a near-term solution to the crisis,” UniCredit SpA said yesterday in an e- mailed note. Industrial stoppages “would spread relatively rapidly if gas supplies remain limited,” it added.

Ukraine’s gas transportation system is stable and no gas is arriving from Russia, Naftogaz Deputy Chief Executive Officer Volodymyr Trikolich said. Naftogaz is supplying gas only to customers in Ukraine, he told a briefing yesterday in Kiev.

Gazprom delivered about 170 million cubic meters of gas to Europe on Jan. 7, compared with 420 million to 450 million cubic meters a day normally, Deputy Chief Executive Officer Alexander Medvedev said on a conference call on Jan. 7. Gas is being supplied through Belarus and from underground storage.

Price Talks

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

Russia halted shipments intended for Ukraine’s domestic market Jan. 1. Gazprom has warned that Ukraine risks amassing a debt of “billions of dollars” if the conflict continues.

Gazprom raised its demands on Jan. 4 as Miller cited a possible price of $450 per 1,000 cubic meters for deliveries to Ukraine, reflecting the average price in countries bordering Russia’s neighbor. Ukraine, which paid $179.50 for Russian gas last year, rejected a Gazprom offer last week of $250 for 2009 and says $201 would be fair.

Putin said yesterday Russia would be prepared to double the fee it pays to send gas through Ukraine, if its neighbor paid market prices for supplies. Russia is ready to pay $3.40 per 1,000 cubic meters of gas over 100 kilometers (62 miles), up from $1.70, Putin told reporters at his residence near Moscow.

The company is still owed $615 million by Ukraine, Gazprom’s Medvedev said earlier this week in London. Ukraine disputes the debt.

Miller and Dubina flew back to Moscow together late yesterday after the Brussels talks.

Ukraine’s leaders, Yushchenko and Prime Minister Yulia Timoshenko, are facing a financial crisis that has forced them to seek a $16.4 billion International Monetary Fund bailout.

The hryvnia yesterday added 3.1 percent to 8.1050 per dollar, from 8.3525 on Jan. 7. The ruble rose 0.2 percent to 30.4325 per dollar in limited holiday trading.

To contact the reporters on this story: Tara Patel in Paris at tpatel2@bloomberg.netDaryna Krasnolutska in Kiev on dkrasnolutsk@bloomberg.net