Russia, Ukraine Agree Talks to Resolve Gas Dispute

By Kateryna Choursina and Nicholas Comfort

Jan. 15 (Bloomberg) -- Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Timoshenko will meet in Moscow on Jan. 17 to resolve a natural-gas dispute that’s disrupted shipments to the European Union for nine days.

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 in the Balkans, with rationing introduced and factories shut down because of a lack of fuel.

Natural gas jumped and the ruble slid to a record as the continent endured a second week without transit gas supplies from Ukraine. Slovak Prime Minister Robert Fico said he sees no early resumption of flows, halted last week after Russia accused Ukraine of siphoning off gas intended for EU customers for its own use, a charge the country denies.

“Russia and Ukraine will be at loggerheads for the foreseeable future,” Frank Schallenberger, a commodities analyst at Landesbank Baden-Wuerttemberg in Stuttgart, said today in a Bloomberg Television interview. “The only way to solve this problem is to find other routes and build pipelines to get the gas to Europe.”

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.

Ukraine’s Guarantee

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

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.

Russian President Dmitry Medvedev yesterday 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.

Russia is prepared to compensate Ukraine should it agree to ship gas to Europe from underground storage reservoirs near its western border, Medvedev said.

Diversify Supplies

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

Ukraine’s President Viktor Yushchenko said he supported three-way talks, rejecting Russian’s offer to host the summit in Moscow because it’s a party in the dispute. He suggested Prague or Brussels as alternatives.

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 today.

Gas prices in the U.K., Europe’s largest market, climbed as much as 8.1 percent to 67 pence a therm, according to broker Spectron Group Ltd. That’s equal to $9.79 a million British thermal units. A therm is 100,000 Btus. The ruble fell as low as 32.4112 per dollar.

‘Technically Impossible’

Ukraine refused to pump Russian gas to European consumers for a third day, reneging on an EU-brokered deal, Gazprom said today. Its western neighbor declined shipments to the Balkans, Slovakia and Moldova, citing the lack of a technical agreement, the Moscow-based company said.

NAK Naftogaz Ukrainy, the state energy company, said the request had been “technically impossible” to meet without endangering domestic supplies.

“Gazprom requested the same route as yesterday,” Naftogaz spokesman Valentyn Zemlyanskyi said in a phone interview from Kiev. “Gas should be sent through all stations in sufficient amounts and with sufficient pressure.”

The transit route requested by Gazprom, via the Sudzha pumping station, would have cut off deliveries to four provinces, Yushchenko said yesterday.

“This is a lose-lose situation,” said Eugen Weinberg, a senior commodity analyst at Commerzbank AG, in a television interview. “I don’t see any solution yet as one side accused the other of theft, while Ukraine says Russian gas isn’t being delivered at the agreed levels.”

Present

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 yesterday. That volume of gas would amount to giving Ukraine a $700 million present, Miller said.

Timoshenko said in the telegram that all natural gas used for technical needs will be paid for once price is set for Russian gas deliveries.

Slovakia is using imports and backup generators to avoid a blackout following the supply cut. It’s also asked Ukraine to ship 20 million cubic meters of gas from its reserves while Gazprom has agreed to supply that amount to storage in eastern Ukraine, Fico said. The Slovak side is awaiting a response from the Ukrainians.

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.

“Within a week I think normality will return and gas flows will resume but the political scars will take longer to heal,” said Rob Laughlin, senior broker at MF Global Ltd. in London.

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: Kateryna Choursina in Kiev kchoursina@bloomberg.net