By Daryna Krasnolutska and Stephen Bierman
Jan. 20 (Bloomberg) -- Russia and Ukraine signed 10-year natural-gas contracts, ending a dispute that’s squeezed supplies to the European Union for almost two weeks and setting the stage for a resumption of deliveries.
Russian Prime Minister Vladimir Putin said yesterday gas flows to the 27-nation bloc will restart in “full volumes” through all export routes. His Ukrainian counterpart, Yulia Timoshenko, said there would be “no delays.”
Gas prices in the U.K., Europe’s biggest market, slumped the most in almost a year on expectations that supply shortages in many parts of central Europe and the Balkans will shortly be eased. The contracts were signed by OAO Gazprom, Russia’s gas exporter, and NAK Naftogaz Ukrainy, the state energy supplier, following weekend talks between both leaders in Moscow.
“There is no replacement for Russian gas,” said Pavel Kushnir, director of oil and gas research at Deutsche Bank AG in Moscow. “Russia is likely to preserve its 25 percent share of European supplies.”
Ukraine will pay higher European prices for Russian gas from 2010, after a 20 percent discount this year. In return, 2009 transit fees for Russia will remain unchanged from last year before also being raised to European levels. Timoshenko said gas prices had been agreed to on an “objective basis,” without being more specific.
Russian Offer
Russia offered Ukraine a price of $360 per 1,000 cubic meters for the first quarter, according to a statement from Bohdan Sokolovskyi, President Viktor Yushchenko’s energy aide, published on his Web site.
Putin told state television that the deal will eliminate the use of middlemen. In the past, Gazprom and Naftogaz have employed RosUkrEnergo AG, the Swiss-based trader half-owned by Gazprom, as an intermediary.
The EU demanded to know the “precise time” at which transit flows through Ukraine will start. “Our monitors will verify when the gas actually starts to flow,” the European Commission, the executive arm of the EU, said in a statement.
U.K. gas for delivery next month fell as much as 9.8 percent, the steepest one-day decline since March last year. The contract traded at 54.60 pence a therm as of 4:30 p.m. in London, according to broker Spectron Group Ltd. Prices had risen 10 percent in the past two weeks.
OMV AG, Austria’s largest oil-and-gas company, expects Russian gas to begin arriving at its Baumgarten hub two to three days after Gazprom turns on the taps. “It will take a while” for flows to reach Poland, Malgorzata Polkowska, a spokeswoman for the national gas pipeline operator, said by phone.
Energy Mix
Russian gas flows via Ukraine were halted Jan. 7 after Gazprom accused Ukraine of siphoning off transit flows for its own needs, a charge the country denies. The crisis has left parts of eastern Europe without fuel during freezing temperatures. Europe relies on Russia for a quarter of its gas, 80 percent of which is carried through Ukraine.
“Europe has to diversify its energy mix because 40 percent of planned new power stations are natural gas,” said Colette Lewiner, the Paris-based global leader of energy and utilities at Capgemini. Factories and power stations will make better use of liquefied natural gas terminals, build more storage facilities and improve their ability to trade gas after the Russia-Ukraine dispute, Lewiner said yesterday by phone.
The weekend deal followed a warning from the EU that it might urge European companies to seek legal redress if fuel supplies remain halted. A previous attempt by the EU to break the deadlock failed a week ago.
EU Warning
The agreement “is a major step forward,” Bernhard Jeggle, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, said on Jan. 18. The 20 percent discount for Ukraine “makes it easier to transfer to world market price levels.”
The EU had labeled the talks a “test case” for the reliability of Russia and Ukraine as energy providers. The supply cutoff has already prompted renewed calls for the region to consider developing alternative sources of energy and nuclear power.
European alternatives to supplies from Gazprom are limited and no final decision has been made on financing the planned Nabucco pipeline, a rival route intended to carry central Asian gas to Europe by 2013.
“By signing a 10-year deal, they are moving to offset at least some of the damage done by the recent gas spat,” Alfa Bank Chief Strategist Ronald Smith said by phone from Moscow.
Price Demands
Turkish Energy Minister Hilmi Guler yesterday called for a speedy agreement on the Nabucco link, which would run from Turkey through Bulgaria, Romania and Hungary to Austria.
This month, Gazprom cited a possible price of $450 per 1,000 cubic meters for deliveries to Ukraine in January, reflecting the average price in countries bordering Russia’s neighbor. It made the offer after saying Ukraine had rejected a gas price of $250. Ukraine had said $201 would be fair.
The average price that Ukraine will pay this year, according to preliminary calculations, will be not more than $235, Deputy Prime Mister Hryhoriy Nemyria said in a Ukraine Channel 5 television interview. Timoshenko said a price would be announced in two days.
Gazprom’s prices to European customers under long-term contracts typically lag prices for crude and oil products by about six to nine months. Crude has fallen by 75 percent since reaching a record in July. Ukraine paid Russia $179.50 per 1,000 cubic meters for gas last year.
Gazprom’s gas output will likely fall 2 percent this year because of lower fuel prices, weaker demand and a milder winter, according to a report yesterday by JPMorgan Chase & Co.
A 20 percent discount to European prices will still weigh heavily on the Ukrainian economy, said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies.
For Related News: Today’s top gas stories: TGAS
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