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Gazprom vs. Kiev

Europe Worried as Gas Stops Flowing to Ukraine

Russia has once again shut off its gas supply to Ukraine over a price dispute. This time Europe says it's ready with stockpiles, but the dispute is far from over: Russia swears to verify on Friday that Ukraine has not siphoned gas bound for Europe

This time, Europe says it is prepared. Nevertheless, with the Russian company Gazprom cutting off natural gas supplies to Ukraine for the second time in three years on Thursday, the European Union has voiced concern. Both the European Commission and the Czech EU presidency, which took over the reins from France on Thursday, uring Ukraine and Russia to "continue negotiations and rapidly reach a successful outcome so that gas supplies to the EU are not affected."

By Friday, no European energy firms had reported a loss of pressure in their natural-gas pipes from Russia. Governments from Moscow to Rome have sworn there will be no shortage in western Europe despite the fact that 80 percent of EU gas imports from Russia arrive via the same pipeline that supplies Ukraine. Kiev and Gazprom have for weeks been embroiled in a price dispute and failed to find a resolution by the end-of-the-year deadlin.

Ukraine's state energy firm, Naftogaz, promised there would be no interruption in European gas supplies, but a spokesman for Russia's state-owned gas monopoly, Gazprom, said on Russian television that Gazprom would investigate statements that the flow to Europe would be reduced by 6 percent.

German Economics Minister Michael Glos said reserves in Germany were sufficient to keep the nation warm for days, but not weeks, in case of an unforeseen shortage in supply. Europe receives about a fifth of its gas through pipelines across Ukraine, but Moscow said the flow to western Europe would be unaffected unless Kiev diverted some gas.

Such a diversion remains a possibility. Naftogaz has said that with no gas in its pipes, it would have to divert a daily volume of 21 million cubic meters bound for Europe to maintain pressure in the network -- a measure Gazprom could interpret as siphoning. "We saw this announcement," said Gazprom's Sergei Kupriyanov on Thursday, according to Russian and Ukrainian media outlets, "but we believe that we should wait for the moment when 24 hours expire and we can draw corresponding conclusions. That will happen tomorrow (Friday) in the middle of the day."

This is the second time in three years that Gazprom has shut off supply to Ukraine in the depth of winter. The last occasion -- New Year's Day, 2006 -- led to shortages in countries as far away as Italy and France. This time most European governments, including Ukraine's, say they've prepared for a shortage with stockpiles.

US officials have indicated that Washington is following the matter closely. "We are concerned that Gazprom has cut off gas sold to Ukraine," said acting deputy spokesman for the US State Department, Gordon Duguid. "The US encourages Gazprom and Naftogaz to resume negotiations on an agreement that will maintain the reliability of gas delivery to Ukraine and Europe."

Talks between Russia and Ukraine had not resumed Friday morning. The dispute involves not just the price of gas in 2009 but also pipeline transit fees demanded by Naftogaz from the Russians to move supplies to Europe, and about $2 billion of a debt which Gazprom says the Ukrainians still haven't settled in full. Ukraine said it wired €1.5 billion to Gazprom just before the deadline as a goodwill gesture but the dispute has continued.

For 2009, Naftogaz has said it would pay a maximum of $235 per 1,000 cubic meters of gas, while Gazprom held out for a minimum of $250. After talks broke down this week, Gazprom CEO Alexei Miller said Ukraine had missed its chance for a low price and raised his company's demand to $418.

"The message is very simple," said Ilya Kochevrin, executive director of Gazprom's export arm, Gazexport, to the International Herald Tribune. "If you receive a product, you have to pay for it. If you don't pay, you don't receive it."

'Politics Are to the Fore'

When Russia first cut off gas to Ukraine in 2006, the consensus was that Moscow -- which owns a controlling interest in Gazprom -- wanted to punish Ukrainians for leaning westward after their Orange Revolution in 2004. Former Soviet satellite states like Ukraine had traditionally enjoyed low natural-gas prices from Russia. The low prices ended for some western-leaning governments under Vladimir Putin while he was president. Western European firms currently pay around $500 for 1,000 cubic meters of Russian gas.

Experts say the political calculus hasn't changed. "(The Russians) have had three years to come up with an arrangement with Ukraine and of course they could have at any time in the summer not supplied the gas," said Deiter Helm, professor of energy policy at the University of Oxford, to Reuters on Thursday. "What this tells you is that politics are to the fore in Russian gas supply."

But Russia also needs the money. Taxes on oil and gas cover more than half of the nation's annual budget, and the recent plunge in the price of oil has devastated its finances. Russian officials have said the nation would run a deficit if crude oil remained below $70 a barrel. On Friday the price per barrel hovered around $41.

-- with wire reports