/ 1 January 2009

Russia cuts off gas to Ukraine

Russia cut off the gas to its neighbour Ukraine on Thursday after a contract dispute but increased supplies to other European states to try to reassure customers worried about possible disruption.

The European Union, which receives a fifth of its gas from pipelines crossing Ukraine, and the United States urged further negotiations to resolve the dispute and said all supply commitments must be met.

Energy firms in Germany, France, Poland, Romania, Austria and Italy said they had not yet seen any drop in supply. Europe has enough gas stockpiled to manage without Russian gas for several days, though not weeks, analysts said.

The row could raise new doubts about Moscow’s reliability as an energy supplier and fuel suspicions in the West — already running high since Russia’s war with Georgia last August — that the Kremlin bullies its pro-Western neighbours.

Ukrainian President Viktor Yushchenko, the target of fierce criticism from Moscow over his drive to take Ukraine into the Nato alliance, said he wanted to resume talks with Moscow to settle a row over payment arrears and gas prices for 2009.

Yushchenko said in a statement he believed a compromise deal with Russian gas export monopoly Gazprom was achievable by Orthodox Christmas on January 7.

Signalling a possible way out of the stand-off, Ukraine’s state energy firm Naftogaz increased the amount it said it was prepared to pay for Russian gas to $235 per 1 000 cubic metres — $15 short of the amount Russia has demanded — but also said it wanted Russia to pay higher transit fees.

The EU is keen to avoid a repeat of a January 2006 row when Moscow cut off supplies to Ukraine, causing a brief fall in gas deliveries to other parts of Europe in mid-winter.

Russian gas export monopoly Gazprom halted supplies to Ukraine on Thursday morning after a failure to agree terms for supplying gas in 2009.

”We have fully cut off supplies to Ukraine as of 10am (7am GMT) today,” a Gazprom official told reporters at company headquarters in Moscow. ”We continue supplying Europe in full.”

Ukraine’s Naftogaz said it had seen a reduction of pressure in its pipelines, and was pumping gas from its stockpiles, which it says are sufficient to last it several months.

Both Russia and Ukraine say they will do nothing to jeopardise supplies to Europe.

The cut-off could, however, have a knock-on effect if it causes a drop in pressure in the transit pipelines or if Ukraine diverts flows bound for Europe.

Naftogaz chief Oleh Dubyna said the firm was diverting 21-million cubic metres per day of Russian gas bound for Europe. He said the gas was needed to maintain sufficient pressure in the pipeline network to keep transit gas moving.

Gazprom said it had stepped up volumes for European consumers beyond Ukraine to 326-million cubic metres (mcm) per day from the usual level of 300 mcm — a step which may have been aimed at offsetting the gas Ukraine was diverting.

West urges talks
At the Texas ranch of US President George Bush, a White House spokesperson urged Moscow and Kiev to bear in mind the possible humanitarian implications of supply disruptions.

”We hope that Russia and Ukraine can resolve their dispute over the gas debt and the terms of their natural gas supply arrangements in a transparent, commercial manner,” Gordon Johndroe said in a written statement.

Earlier, the EU urged more talks. ”All existing commitments to supply and transit must be honoured,” the Czech Republic — which took over the EU’s rotating presidency on Thursday — said in a joint statement with the Commission, the bloc’s executive.

Pipelines that cross Ukraine are a major source of foreign currency revenue for Gazprom, Russia’s biggest company.

Germany, France and Italy are among the biggest customers for Russian gas. If there is disruption, it could be some time before it is felt because of the large distances involved.

Bernhard Reutersberg, chairperson of German energy firm E.ON Ruhrgas, which is a Gazprom shareholder, said in a statement he did not anticipate any shortages for consumers.

He added that if ”the supply restrictions prove to be serious and long-lasting and the winter turns out to be particularly cold, our means of offsetting the shortfalls will come up against limits”.

A protracted row is likely to further damage Ukraine’s crisis-battered economy. The hryvnia currency has suffered steep falls and an International Monetary Fund loan has failed to halt an exodus by investors. – Reuters