Russia Proposes European Companies Share Cost of Transit Gas

By Yuriy Humber and Halia Pavliva

Jan. 16 (Bloomberg) -- Russia proposed that European companies form a group to share the cost of natural gas Ukraine needs to operate its pipelines, as part of efforts to resolve a dispute that’s halted supplies through the country for 10 days.

The move came as Russian Prime Minister Vladimir Putin prepared to meet his Ukrainian counterpart, Yulia Timoshenko, in Moscow tomorrow.

Natural gas jumped and the ruble slid to a record low as the continent endured a second week without gas supplies from Ukraine. The meeting was called after the EU threatened to urge companies in the 27-nation bloc to seek legal redress if supplies aren’t resumed without further delay. The crisis has led to power shortages across the Balkans, with rationing introduced and factories shut down because of a lack of fuel.

“This is a rare lose-lose situation,” Eugen Weinberg, senior commodity analyst at Commerzbank AG, said in a Bloomberg Television interview. “I think it will take a few days to resolve as emotions have risen and the subject has moved from being a purely business issue to a political one.”

Russia stopped flows through Ukraine on Jan. 7 after negotiations over gas prices and transit fees broke down. OAO Gazprom, the Russian gas exporter that provides a quarter of the continent’s gas needs, estimates it has lost $1.1 billion in export revenue since the crisis unfolded.

Sharing Risk

Gazprom, Russia’s gas-export monopoly, could sell gas to the group for resale to Ukraine, Putin said yesterday, according to his spokesman Dmitry Peskov. Putin considers it “absurd” to give Ukraine free gas for running the pipeline system, Peskov told reporters.

“Russia is not ready to take all the risks,” Peskov said on a conference call after Putin made the proposal at a Moscow meeting with Paolo Scaroni, chief executive officer of Italy’s Eni SpA.

Timoshenko sent a telegram to Putin yesterday guaranteeing Russian transit flows to EU nations “apart from 8 percent of gas used to fuel gas-pumping,” according to a statement on the government’s Web site. An argument over the so-called technical gas, needed to ensure Ukraine’s pipeline system can operate, has been one of the sticking points in the conflict between Russia and Ukraine.

Gazprom plans to contact other European companies such as Germany’s E.ON Ruhrgas AG with Putin’s proposal in the next few hours after Scaroni said the Italian oil producer would look “favorably” on this solution, according to Peskov.

Eni Role

The pipeline network must be filled with about 140 million cubic meters of gas to operate, while pumping stations use about 20 million cubic meters a day, Scaroni told reporters on a conference call.

“We will pay for the gas and be paid back in gas at the moment Ukraine and Russia reach an agreement,” he said, adding that Italian Prime Minister Silvio Berlusconi backed the plan. Eni would lead the EU group, Scaroni said.

A gas consortium has been discussed by Russia and Ukraine since at least 2006, when then-President Putin and his Ukrainian counterpart, Viktor Yushchenko, said they would welcome assistance from European energy companies in operating Ukraine’s gas pipelines.

Yushchenko has repeatedly said the pipelines, which carry most Russian gas exports to western Europe, will remain state- owned by Ukraine.

‘Reliability’

German Chancellor Angela Merkel took aim at Russia a day before she’s due to host talks with Putin in Berlin, saying Moscow could lose its “reliability” as an energy partner if gas deliveries are interrupted for much longer. Russia’s behavior has been “unacceptable,” Fatih Birol, the chief economist of the International Energy Agency, said in Madrid.

Russian President Dmitry Medvedev on Jan. 14 invited Ukraine and the EU to an emergency summit in Moscow this weekend to reach a settlement and also prevent a repeat of the crisis.

He made the proposal after meeting the prime ministers of Slovakia, Moldova and Bulgaria, nations hit hardest by the supply cutoff. The disruption has already led to renewed calls for region to diversify its sources of energy away from Russia.

The EU said it’s ready to send representatives to a meeting to “assist” Russia and Ukraine in reaching a settlement. EU officials “urge once again Russia and Ukraine to resume gas supplies to the EU immediately,” spokesman Johannes Laitenberger told reporters in Brussels yesterday.

EU Representatives

Czech Industry Minister Martin Riman said he and EU Energy Commissioner Andris Piebalgs would attend the meeting as “observers” if Ukraine also took part.

Yushchenko met with U.K. Prime Minister Gordon Brown in London today. Brown later issued a statement urging an “urgent resolution” to the dispute, which he said was causing “severe economic and social difficulties” in a number of EU countries.

Gas prices in the U.K., Europe’s largest market, climbed as much as 8.1 percent to 67 pence a therm yesterday, according to broker Spectron Group Ltd. That’s equal to $9.79 a million British thermal units. The ruble fell as low as 32.4668 per dollar.

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: Yuriy Humber in Moscow at yhumber@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net