Russia, Ukraine Blame Each Other as Gas Supply Remains Halted

By Stephen Bierman and Daryna Krasnolutska

Jan. 14 (Bloomberg) -- Russian natural-gas shipments through Ukraine were halted for a seventh day as both sides blamed each other for the failure to reopen pipelines and restore supplies to the European Union.

OAO Gazprom, Russia’s gas exporter, said it would try again to ship gas today after accusing Ukraine of flouting an EU- brokered deal and blocking flows yesterday. NAK Naftogaz Ukrainy, the state energy company, said there wasn’t enough pressure in the pipelines to ship gas without endangering domestic supplies.

Gas prices in the U.K., Europe’s biggest market, rebounded yesterday on concerns that supply disruptions to at least 20 nations won’t be eased soon. Gazprom, the supplier of a quarter of the continent’s gas, had agreed to resume deliveries suspended for the past week after EU observers began monitoring transit flows under an accord signed Jan. 12 in Brussels.

“It’s not a surprise that the agreement has already fallen apart,” Moscow-based Alfa Bank Chief Strategist Ronald Smith said. “This morning we were already getting signals that there was no agreement on who would provide the gas to power the turbines” in the Ukrainian pipeline network, he said.

The EU said “little or no” gas is flowing to the 27- nation bloc through Ukraine. “This situation is obviously very serious and needs to improve rapidly,” EU spokeswoman Pia Ahrenkilde-Hansen told reporters in 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.

Diversify Supplies

The cutoff has renewed calls for the EU to diversify its sources of energy away from Russia. Negotiations between Russia and Ukraine over a separate issue of gas prices and transit fees remain stalled.

U.K. gas for delivery next month advanced 2.5 percent to 57.45 pence a therm as of 5:45 p.m. London time yesterday, according to broker Spectron Group Ltd. Prices surged 24 percent last week after Gazprom turned off the taps.

The EU called for the international monitors to be granted “full access” to pumping stations in both Ukraine and Russia. “This is indispensable for ensuring that the gas destined for EU member states will arrive unhindered,” European Parliament President Hans-Gert Poettering said in a statement.

Alexei Miller, who heads Gazprom, said Ukraine’s pipeline system didn’t even take “a single cubic meter” of the fuel yesterday. Russia earlier gave an order for about 76 million cubic meters of fuel to be sent to the Balkans, Turkey and Moldova.

Technical Accord

Ukrainian President Viktor Yushchenko said Ukraine wants to sign a technical agreement with Russia to determine the volumes of gas that should be transported through its pipes, including destination and pressure. “A number of technical procedures must be done to switch the system back to transport Russian gas to the EU,” he told reporters in Kiev yesterday.

Gazprom also said Naftogaz refused a request to send a daily gas volume of 22.2 million cubic meters via the Ukrainian station of Uzhhorod, demanding “a guarantee of transit over an extended period of time.” Naftogaz spokesman Valentyn Zemlyanskyi denied Gazprom had applied to send gas via Uzhhorod.

Gazprom’s Deputy Chief Executive Officer Alexander Medvedev said the Russian exporter may have to declare force majeure on exports because of Ukraine’s “unreasonable” action. Force majeure is a legal clause that allows producers to miss contracted deliveries because of circumstances beyond their control.

‘Too Low’

“It looks like Ukraine never intended to open the system, Medvedev told reporters on a conference call. “The door is closed as before.”

Naftogaz said it wasn’t able to “technically” pump Russian gas to Europe. “The pressure in the pipeline is too low,” company spokesman Valentyn Zemlyanskyi said in a phone interview.

Three Ukrainian regions would have been left without gas if Naftogaz had agreed to a Russian proposal to export gas through the Sudzha compressor station, Chief Executive Officer Oleh Dubina told reporters in Kiev yesterday.

Ukrainian Prime Minister Yulia Timoshenko plans to meet her counterparts from Bulgaria and Slovakia today to discuss the dispute.

Gazprom said Ukraine was “dancing to music” being played by the U.S. An agreement Ukraine signed last month with the U.S. is “suspicious,” Medvedev said, without identifying the accord.

Blackout Threat

Ukraine, which is seeking membership of the North Atlantic Treaty Organization, signed a “charter on strategic partnership” agreement with the U.S. on Dec. 18 that includes commitments by both countries “to work closely together on rehabilitating and modernizing the capacity of Ukraine’s gas transit infrastructure.”

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. Slovakia warned on Jan. 12 it was “on the brink of blackout,” prompting the government to consider restarting a nuclear power plant in violation of EU rules.

Medvedev said on Jan. 12 that Gazprom is “open to discussions” to agreeing a solution on supplies to its neighbor. Yushchenko favors gradual price increases for the gas the country imports from Russia.

Gazprom offered a price of $450 per 1,000 cubic meters after it said Ukraine rejected an offer, subsequently withdrawn, of $250. Medvedev said $450 was for the first quarter.

Oil Decline

Gazprom’s prices to European customers under long-term contracts typically lag behind 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 under a separate arrangement.

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.

To contact the reporters on this story: Stephen Bierman in Moscow sbierman1@bloomberg.net; Eduard Gismatullin in London at egismatullin@bloomberg.net