Gazprom ready to turn off Ukraine gas supplies

By bne IntelliNews December 5, 2008

bne -

Russia says it is ready to slash the supply of gas to Ukraine this winter if Kyiv doesn't settle an overdue gas bill of $2bn soon.

A similar row over energy bills led to the Russian state-owned gas company Gazprom turning off the taps on New Year's Day 2007, which also reduced supplies to Western Europe; some 80% of Russia's gas exports to Western Europe run though pipelines on Ukraine's territory.

Russia is demanding that Ukraine sign a long-term contract for gas transfers to Europe and claims that Ukraine is illegally siphoning off gas for its own use. Ukraine's state-owned energy company Naftogaz owes over $2bn to gas trader Rosukrenergo that handles the Russian-Ukrainian business, but doesn't even have enough money to pay the first tranche of the bill of $550m

If Gazprom does decided to turn the gas off again, Ukraine will probably be able to get through the winter without freezing, as it has built up a four-month stockpile of gas in its underground storage facilities. However, gas supplies to Western Europe would be hit. Gazprom has reserves in Western Europe to last about a month, but after that the only way of meeting its obligations to European customers is to resume pumping gas through Ukraine.

This time round, Gazprom and the Kremlin are a lot more conscious of the need to prepare the West for the upcoming showdown. In 2007, the first that Western Europe knew about Gazprom's decision to shut off supplies was when the pressure dropped in their own pipes. This time round, the Kremlin is being more careful to publicise the row and emphasis the delinquent payments.

Russian Prime Minister Vladimir Putin said that, "Russia is having a difficult dialogue on the 2009 gas supplies with Ukraine," during his three-hour question and answer session on Wednesday, December 4. Putin said he had agreed with Ukrainian Prime Minister Yulia Tymoshenko to make a gradual, three-year transfer to the market prices. However, Gazprom said earlier that this deal was only valid if Ukraine pays off the current debt, otherwise the company will immediately almost triple prices from $179.50 to about $400 per thousand cubic metre from the start of next year.

Rosukrenergo, which is half owned by Gazprom, said Ukraine had paid off no more than $268.7m for September supplies and has not met the October or November deliveries payments of $2.195bn, which includes penalties. There is another payment due in December of $862.3m that looks like it will also be missed.

Putin said he believed there would be no problems with the transit of Russia's energy resources to key customers in Western Europe. "But if our partners don't execute these agreements or, as in previous years, illegally siphon off our resources from the transit pipelines, we will have to cut the supplies," Putin was reported by Kommersant as saying.

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