Russian Officials May Approve Ukraine Gas Deal at EU Meeting

By Stephen Bierman and Paul Abelsky

Jan. 12 (Bloomberg) -- Top Russian officials flew to Brussels today to approve a deal over international monitors and resolve a dispute that’s halted natural-gas shipments to the European Union via Ukraine for almost a week.

OAO Gazprom, Russia’s gas exporter, is “eager” to resume supplies to the 27-nation bloc, a spokesman for Prime Minister Vladimir Putin said, after last-minute wrangling threatened to scupper a deal. Alexei Miller, who heads Gazprom, and Russia’s Deputy Prime Minister Igor Sechin will attend a meeting of EU energy ministers today.

Supply disruptions to at least 20 European countries, with the Balkans the hardest hit, have renewed calls for the EU to diversify its sources of energy away from Russia. Gazprom, the supplier of a quarter of the region’s gas, suspended transit flows through Ukraine on Jan. 7 after accusing Ukraine of “stealing” gas for its own use, a charge the country denies.

“Gazprom’s share of the European energy market may decline,” Victor Mishnyakov, an analyst at UralSib Financial Corp. in Moscow, said today in an investor note. “The current dispute is the second since 2006 and European countries will be incentivized to construct new pipeline routes.”

Ukraine today signed the monitoring deal after removing a number of conditions, Gazprom said. Ukraine’s demand that it receives so-called “technical gas” from Gazprom may delay a settlement, according to Putin’s spokesman Dmitry Peskov.

Transit Fees

Ukraine wants Gazprom to supply the 21 million cubic meters of gas a day it takes to power the pipline network, Peskov said. The cost of these flows should be met by Ukraine as Gazprom already pays transit fees, he said.

Gazprom’s European customers receive 80 percent of supplies through pipelines that cross Ukraine. Gazprom’s overall deliveries to Europe fell by about 60 percent when it halted transit flows via Ukraine and supplies to Ukraine’s domestic market were suspended Jan. 1 pending a new contract.

Within-day gas prices in the U.K., Europe’s biggest market, slid as much as 18 percent today to 55.50 pence a therm, according to ICAP Plc. Prices surged 24 percent last week after Russia turned the taps off. Russia’s European customers receive 80 percent of supplies through pipelines that cross Ukraine.

The Ukrainians are “deliberately dragging their heels,” UralSib Chief Strategist Chris Weafer said by telephone today. “Their only leverage is the fact that they control transit. If they give up that control, to EU monitors then their position is considerably weaker.”

Monitors Arrive

EU gas-monitoring teams have already started arriving at Ukrainian border gas stations, NAK Naftogaz Ukrainy, the state energy company, said today. They’re also waiting for permits from Gazprom and Russian visas to access sites on the other side of the border.

Once gas starts to flow in Ukraine, it may take about 36 hours for it to reach EU states, where in some the situation is “serious,” said Czech Prime Minister Mirak Topolanek, whose country currently holds the EU’s rotating presidency.

Supply shortfalls across the continent continued for a sixth day. Slovakia warned it’s “on the brink of blackout” while Hungary halted deliveries to Serbia and Bulgarian gas imports were suspended because of “technical reasons.”

Slovakia’s government approved the restart of a nuclear reactor over the weekend, in the face of EU opposition, to meet energy demand.

Polskie Gornictwo Naftowe i Gazownictwo SA, Poland’s largest gas company, didn’t order fuel via Ukraine for today. It said it can change the order as soon as it hears that supplies are going to be restored. Hungary has sufficient gas to cover the expected consumption today.

EU Meeting

The Czech Republic has called an energy council meeting for all EU members today in Brussels.

The new version of the monitoring accord followed a phone call between Putin and European Commission President Jose Manuel Barroso yesterday. A handwritten declaration from the government of Ukrainian Prime Minister Yulia Timoshenko had previously caused the Russian side to threaten to pull out of the deal.

“Barroso has spoken to Timoshenko and they have agreed to separate the two documents,” commission spokesman Ferran Tarradellas Espuny in Brussels said yesterday. “On one side the declaration and on the other side the terms of reference.”

Independent Verification

“The Commission considers that all conditions expressed by the two parties have been met and there is no reason to delay the restoration of gas supplies any further,” the European Commission said yesterday.

Gazprom has lost about $800 million since the start of the dispute with Ukraine, Putin said on state television yesterday. Russia is ready to buy into Ukraine’s gas transportation network if the Ukrainian state agrees, he said.

Oleh Dubina, the chief executive officer of Naftogaz, said Jan. 10 that talks on a price for supplies of gas to Ukraine from Russia this year had failed to produce a result. Gazprom offered a price of $450 per 1,000 cubic meters after it said Ukraine rejected an offer, subsequently withdrawn, of $250.

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.

Relations between Ukraine and Russia have become strained over efforts by the former Soviet republic to join the EU and the North Atlantic Treaty Organization. The gas dispute has come as Timoshenko and Ukrainian President Viktor Yushchenko, who have clashed over economic policy, are facing a financial crisis that has forced them to seek a $16.4 billion International Monetary Fund bailout.

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: Peter Chapman in Brussels at pchapman10@bloomberg.netPaul Abelsky in St. Petersburg at pabelsky@bloomberg.net.