Russia, Ukraine Resume Talks to Resolve Gas Dispute

By Daryna Krasnolutska

Jan. 8 (Bloomberg) -- Russia and Ukraine resumed talks on a dispute over natural-gas prices that disrupted shipments to Europe for the second time in three years, spurring doubts over the former Soviet Union’s role as a reliable energy supplier.

Ukrainian Deputy Prime Minister Hryhoriy Nemyrya urged OAO Gazprom to resume gas shipments to Ukraine immediately. “There’s no agreement yet,” he said in an interview, adding that the heads of Gazprom and NAK Naftogaz Ukrainy met “face to face” earlier today in Brussels.

Since a previous dispute in 2006, European 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. Gazprom suspended transit through Ukraine yesterday after saying Kiev wasn’t passing on fuel intended for European customers.

“Gas will start to flow again fairly soon,” said Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy. “Both Russia and Ukraine want cash and they know that if no gas is flowing they won’t get paid.”

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

Ruble, Hryvnia Climb

Russia’s ruble and Ukraine’s hryvnia rallied, rebounding from their lowest against the euro this year, following the resumption of talks.

French President Nicolas Sarkozy and German Chancellor Angela Merkel urged Russia to renew shipments of gas to Europe.

Russia must “respect” its contractual commitments, Sarkozy told a joint press conference in Paris today. “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 yesterday.

“Russia’s motivation isn’t exclusively financial,” David Hauner, a London-based economist at Bank of America Corp., said in a Bloomberg Television interview today. “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.”

U.K. natural-gas prices climbed to the highest since March 2006 today following forecasts that inventories in the pipeline network may fall from a record.

Gas Prices

Within-day delivery gas increased as much as 8.25 pence, or 12 percent, to 76 pence a therm, according to broker ICAP Plc. That’s equal to $11.42 a million British thermal units. A therm is 100,000 Btus. Prices have surged 36 percent this week as the dispute between Ukraine and Russia intensified.

At least 20 countries have been affected by the supply halt. Ukraine, Romania, Bulgaria, Greece, Turkey, Macedonia, Serbia, Czech Republic, Slovakia, Bosnia-Herzegovina, Slovenia, Austria, Hungary, Italy, Croatia, Moldova, Turkey, Poland, Germany and France have registered shortfalls.

‘Near-term Solution’

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

Bulgaria may be “at risk” with regard to gas reserves, with levels at less than 10 days of average consumption, UniCredit said.

RWE Transgas, the Czech Republic’s biggest natural-gas trading company, said domestic fuel supplies remain sufficient even as supplies from Russia remain stopped for a second day.

Hungary partially lifted gas use restrictions though it said it would reimpose them if needed, according to a statement from Mol Nyrt., the country’s biggest refiner.

OMV AG, Austria’s largest oil and gas producer, said today it’s still not receiving gas from Russia.

Italy has enough gas reserves for the next two months and the country relies less on imports from Gazprom than others in Europe, Edison SpA Chief Executive Officer Umberto Quadrino was cited as telling Il Giornale in an interview.

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 press conference today in Kiev.

‘Real Problems’

European Commission President Jose Barroso said “real problems” may arise unless transit flows resume through Ukraine. Russian and Ukrainian officials have accepted a proposal to have international monitors verify gas transit, Barroso told a press conference in Prague yesterday.

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

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

Russia cut shipments intended for Ukraine’s domestic market Jan. 1, and accused Ukraine of siphoning off gas destined for other buyers, a charge rejected by Kiev. Gazprom has warned that Ukraine risks amassing a debt of “billions of dollars” if the conflict continues.

Raised Demands

Gazprom raised its demands on Jan. 4 as CEO Alexei 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.

Gazprom is still owed $615 million by Ukraine, Medvedev said earlier this week in London. Ukraine wants to charge Russia $2.05 for transporting 1,000 cubic meters of gas for 100 kilometres, compared with $1.70 in 2008.

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

The ruble gained 4.7 percent to 39.6468 per euro in limited holiday trading today, from 41.6079 yesterday, in Moscow. The hryvnia increased 2.7 percent per euro to 11.0893, from 11.4155 yesterday.

To contact the reporters on this story: Daryna Krasnolutska in Kiev on dkrasnolutsk@bloomberg.net