Russian Gas Flows Still Halted Amid Monitoring Delays

By Maria Ermakova and Kateryna Choursina

Jan. 10 (Bloomberg) -- Russian natural-gas shipments through Ukraine to Europe were suspended for a fourth day amid delays in signing an agreement to deploy international monitors.

Czech Prime Minister Mirek Topolanek, who holds the European Union’s presidency, will visit Moscow today to persuade Russia to resume gas shipments. OAO Gazprom Chief Executive Officer Alexei Miller said supplies won’t be restored until a document has been signed and monitors are in place.

Natural-gas prices in the U.K., Europe’s largest market, initially fell on speculation gas could soon be flowing again through Ukraine after EU officials brokered a deal on Jan. 8 between both sides. Gazprom halted transit flows on Jan. 7 after accusing Ukraine of diverting gas intended for other buyers for its own use, a charge denied by the country.

“Europe has seen its dependence on Russia,” said Stephan Thomas, a fund manager at Frankfurt Trust Investment GmbH. “It highlights our need of a pipeline through the Baltic Sea to diversify our supplies.”

The first three EU monitors of a group of 22 arrived in Ukraine’s capital just before 5 p.m. local time, David Stulik, a spokesman for the European Commission delegation in Kiev, said by telephone. There’s no definite schedule for the visit yet and its duration is unknown, he added.

The monitoring team will consist of 18 experts from Europe’s main gas companies and four “high-ranking” European Commission officials, according to Stulik.

‘Imperative’

Russia, Ukraine and the EU struck a deal Jan. 8 on monitoring gas flows, paving the way for the resumption of deliveries to the 27-nation bloc. The EU said it’s “imperative” that shipments resume “without any further delay” after the three parties agreed on the details of the mission, though it hasn’t been signed by all parties yet.

“As soon as the document is signed and the commission’s representatives begin work at Ukrainian and Russian gas measuring stations, transit will become possible,” Miller told reporters in Sochi, Russia yesterday.

Once Russia restarts shipments, it will take up to three days for Russian gas to reach European consumers, the EU said. Russia halted shipments intended for Ukraine’s domestic market Jan. 1.

Supply Shortfalls

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 on Jan. 7.

The gas crisis is “unprecedented” in European history, the EU said yesterday.

Bulgaria, Hungary and Slovakia were among eastern European countries that maintained curbs on gas use yesterday. Most countries in western Europe have suffered less from the cutoff, tapping stockpiles and sourcing alternative supplies to satisfy demand.

E.ON AG, Germany’s biggest utility, is in charge of the technical side of the monitoring, Kai Krischnak, a spokesman for the company’s Essen-based gas unit, said yesterday by phone. Germany is Russia’s biggest foreign gas customer.

RWE Transgas, the Czech Republic’s biggest gas trader, said it has sent an observer to join the monitoring team while OMV AG, Austria’s largest oil and gas company, is sending two.

GDF Suez SA said it will send four technicians while Italian Industry Minister Claudio Scajola said representatives of Eni SpA will also join the group.

No Progress

Gazprom spokesman Sergei Kupriyanov said the agreement governing the monitoring group has not yet been signed. “Until the protocol is signed by all sides, these specialists do not have the status of observers,” he said.

Miller said yesterday that no progress has been made in talks with Ukraine over gas prices and fees, at the center of the disagreement that has hit supplies to at least 20 nations.

“Talks have resumed but there is an impression that the Ukrainian participants don’t have any mandate, any authority” to discuss price levels for 2009 or volumes of gas purchases, he told Russian President Dmitry Medvedev yesterday. “We don’t see any readiness of Ukrainian participants in talks for signing the contract.”

Ukrainian President Viktor Yushchenko told reporters in Kiev yesterday Ukraine favors applying market prices for Russian gas. “The earlier we switch to market prices for gas, for transit and for storage, the better it is for Russia and Ukraine,” he said at a briefing after a meeting with Topolanek.

IMF Bailout

The standoff comes as Ukraine’s leaders, Yushchenko and Prime Minister Yulia Timoshenko, are facing a financial crisis that has forced them to seek a $16.4 billion International Monetary Fund bailout.

Neil Shearing, an emerging-markets economist at Capital Economics Ltd., said higher gas prices could deepen the country’s recession. “Given that gross domestic product is already set to contract by more than 5 percent this year, the implications for the real economy would be catastrophic,” Shearing said in an e-mailed note.

Russian Prime Minister Vladimir Putin said on Jan. 8 Russia would be prepared to double the fee it pays to send gas through Ukraine, if its neighbor paid market prices for supplies. Russia would be ready to pay $3.40 per 1,000 cubic meters of gas over 100 kilometers (62 miles), up from $1.70, Putin told reporters at his residence near Moscow, without specifying a timetable.

Gazprom had raised its demands on Jan. 4 as 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 said then $201 would be fair.

Gas Market

Gazprom says it is still owed $615 million by Ukraine. Yushchenko said yesterday Ukraine has paid for all the gas it received in 2008.

U.K. natural-gas for the week ahead declined after the deal on monitors was reached. Week-ahead gas fell as much as 1.75 pence, or 2.9 percent, to 58.50 pence a therm, according to broker ICAP Plc.

In 2006, Russia turned off all Ukrainian gas exports 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: Maria Ermakova in Moscow at mermakova@bloomberg.net. Kateryna Choursina in Kiev at kchoursina@bloomberg.net