Russia Proposes Energy Summit in Moscow to Resolve Gas Dispute

By Lucian Kim and Ben Farey

Jan. 15 (Bloomberg) -- Russian President Dmitry Medvedev proposed an emergency summit in Moscow to resolve a dispute with Ukraine over prices and transit fees that’s disrupted shipments to the European Union for nine days.

EU nations and Ukraine have been invited to the Jan. 17 meeting, which will also seek to prevent a repeat of the crisis that’s disrupted supplies to the 27-nation bloc and caused power shortages in the Balkans, Medvedev told state television.

Natural gas rose and the ruble declined as the continent endured a second week without transit gas supplies from Ukraine. 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.

“It’s a disaster,” said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, adding southeast Europe is facing a humanitarian crisis. “We have got to get gas to them so they can keep warm, cook food and generate power.”

Russia is prepared to compensate Ukraine should it agree to ship gas to Europe from underground storage reservoirs near its western border, Medvedev said. Russia is also ready, together with the EU, to provide Ukraine with loans to pay for gas “at market prices,” he said.

Medvedev made the proposal at a meeting with the prime ministers of Slovakia, Moldova and Bulgaria, nations hit hardest by the supply cutoff.

Domestic Supplies

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

U.K. gas for delivery next month increased 2.5 percent to 60.25 pence a therm yesterday, according to broker Spectron Group Ltd. Prices, which surged 24 percent last week after Gazprom turned off the taps, also gained after Qatar halted production at its Qatargas-1 plant because of a mechanical fault.

The ruble slid as low as 31.9066 per dollar in Moscow, the lowest in six years, compared with 31.3087 on Jan. 13.

Ukrainian Prime Minister Yulia Timoshenko said she expects to talk with Russian Prime Minister Vladimir Putin by telephone tomorrow in an attempt to resume Russian gas flows via Ukraine to Europe, and is also prepared to meet with him.

“Gazprom is making every attempt to discredit Ukraine,” Timoshenko said. “Ukraine is a hostage in this situation, just like other European consumers.” She said she supported the proposal for a meeting of Russian, Ukrainian and EU leaders and said it should be held in a country not involved in the dispute.

Flows Stopped

The European Commission, the EU’s executive arm, declined to comment on the Russian proposal for a Moscow summit. “We need to have more information on the details and format of the meeting,” Commission spokesman Johannes Laitenberger said by phone from Brussels.

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. Gazprom estimates it has lost $1.1 billion in export revenue since the start of the year.

The EU threatened to urge companies in the 27-nation bloc to seek legal remedies if a settlement isn’t reached. The cutoff has already led to renewed calls for region to diversify its sources of energy away from Russia.

‘Technical Difficulty’

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

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

“We’ll see very soon whether there is a technical difficulty or whether there is no political intention to honor the agreement,” Barroso said yesterday in Strasbourg, France. “It will be clear if indeed there is or not the political will to fulfill the commitments.”

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

“No transit country has the right to abuse its status,” Putin said after meeting his counterparts from Moldova, Slovakia and Bulgaria. He accused Ukraine of holding European consumers to ransom.

Export Route

Ukraine demanded 1.5 billion cubic meters of gas for free in the first three months of the year to resume transit to Europe, Gazprom Chief Executive Officer Alexei Miller said on state television. That volume of gas would amount to giving Ukraine a $700 million present, Miller said.

Naftogaz said it would have been forced to curtail domestic gas supplies if it had agreed to transport gas through an export route requested by Gazprom yesterday.

“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 yesterday through Ukraine, via the Sudzha pumping station. Naftogaz wanted Russian flows to be sent to the Valuyki and Pisarevka stations.

Naftogaz would be prepared to pay for “transit gas” needed to operate the pipeline system, when an accord is reached, CEO Oleh Dubina told a news conference in Kiev.

Slovakia is using imports and backup generators to avoid a blackout following the supply cut. Timoshenko yesterday rejected her Slovak counterpart Robert Fico’s request to deliver gas to Slovakia from storage, saying Ukraine can barely meet domestic demand.

Gas Rationing

Bulgaria has slashed daily consumption by more than half, using gas from reserves to meet demand, shut 72 factories and rationed gas for heating utilities and 150 other companies. Moldova has also imposed curbs on gas use.

The EU should step in and pay for the 140 million cubic meters of gas Gazprom accuses Ukraine of having diverted, the Oxford Institute’s Stern said.

He said it would cost the EU about $63 million to buy 140 million cubic meters of gas to replace the volume Gazprom says has vanished from the pipeline system. “The EU should give Russia that money,” Stern said.

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.

In 2006, Russia turned off 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