Ukraine, Russia hold last minute talks to avoid another gas cut-off

By bne IntelliNews February 11, 2008

Roman Olearchyk in Kyiv -

A top Ukrainian energy official headed to Moscow late Sunday, February 10 for last-minute talks aimed at avoiding a repeat of a 2006 energy standoff between the two countries that caused natural gas shortages all over Europe.

Oleg Dubyna, chairman of Ukraine's state oil and gas holding Naftogaz, flew to Moscow for meetings on Monday, February 11 with the Russian energy giant Gazprom, which warned the previous week it would reduce gas supplies to Ukraine over $1.5bn in debt that has piled up in the past two months.

In an interview with a Ukrainian television channel before leaving, Dubyna said both sides had every interest in avoiding a clash. "This is disturbing not only for us, but it is also disturbing for Gazprom," Dubyna said.

Dubyna said the Ukrainian side is questioning some of the debts from late last year that Naftogaz allegedly owes to controversial intermediary gas suppliers. Russia claims it still hasn't received payment for more than 11bn cubic meters (cm) of gas that was transported to Ukraine in December, but Dubyna said the Ukrainian side hadn't yet approved the technical aspects confirming the transfer of this gas so couldn't, therefore, pay for it. He suggested the debt could have been attributed to the cash-strapped Naftogaz without warrant.

Dubyna added that both sides need to clarity the structure and source of this debt that is being attributed to Naftogaz.

Squeezed dry

The standoff comes two years after supplies to Europe were disrupted in connection with a price dispute between both countries. Since then, Ukraine has suffered several stiff price increases in gas prices and an intermediary has stripped control of lucrative gas sales to domestic industry away from Naftogaz. The current supply arrangements have squeezed Naftogaz and strengthened Gazprom's position on Ukraine's energy sector. Ukraine's vast gas pipeline system still serves as the main artery for supplies to Europe, but Gazprom has moved quickly in recent years to develop alternative gas pipeline routes across the Baltic and Black Seas to bypass Ukraine.

Dubyna's trip comes after Gazprom Chairman Aleksei Miller pleaded in a letter over the weekend to Ukraine's president, Viktor Yushchenko, for a swift solution to the issue. Leaders of both counties have pledged that supplies to Europe would not be disrupted this time.

The stand-off comes just days ahead of a pre-scheduled Russia-Ukraine summit in Moscow, during which Yushchenko and Russian President Vladimir Putin are to discuss bilateral relations, with energy high on the agenda. The dispute also comes amid calls by Ukraine's new prime minister, Yulia Tymoshenko, to remove what she describes as shadowy intermediaries from the multi-billion-dollar gas trade between Ukraine, Russia and Central Asia.

In recent days, Dubyna and other Ukrainian officials have suggested that neither Naftogaz nor their country owes any money to Gazprom. They point the finger instead at intermediary companies that were appointed by Gazprom as suppliers to Ukraine as part of the deal to resolve the previous gas dispute.

Swiss-registered RosUkrEnergo, 50% owned by Gazprom and the other half owned by two Ukrainian businessmen, supplies Ukraine with a cocktail of gas from Central Asian producers and more expensive Russian gas. UkrGazEnergo, another intermediary jointly owned by RosUkrEnergo and Naftogaz, imports the gas and took over Naftogaz's role in reselling it on the domestic Ukrainian market to industrial consumers.

UkrGazEnergo has accused Naftogaz of taking and reselling gas on the domestic market without a contract since late December. Ukrainian officials have confirmed this, but deny siphoning off gas and point to legal technicalities for their inability to sign a contract with UkrGazEnergo, which in turn owes money for gas supplied to Gazprom through RosUkrEnergo, the importer.

In a statement issued February 10, Tymoshenko's right-hand man, First Deputy PM Oleksandr Turchynov, clearly laid out the Ukrainian position: "Naftogaz Ukraine is ready to fully settle all the debts if a direct contract [with Gazprom] and corresponding documents are signed."

"Raising tensions around the gas issue has one goal – to do everything possible in order to keep gas intermediaries on Ukraine's internal and external market," Turchynov claimed.

Tymoshenko's handling of the gas standoff is expected to be closely watched at home and exploited by domestic political competitors, including Yushchenko. Both are expected to scrap for the presidential post in a campaign that kicks off in 2009. Yushchenko has already criticized Tymoshenko's campaign to do away with these intermediary companies, warning it could lead to higher prices for Ukraine, which has seen the cost it pays for gas swell since the 2006 dispute. Officials at Gazprom have expressed willingness to supply Ukraine with gas directly, but warn the price would rise from the current $179 per 1,000 cubic meters, to a rate above $300.

"The Ukrainian side's immediate aim is to remove UkrGazEnergo from its current role as main domestic gas supplier returning control over lucrative industrial sales to Naftogaz," says a source at Naftogaz. "This should help restore badly-needed revenue to Naftogaz, which lost these key customers to UkrGazEnergo following the 2006 gas accords."

Naftogaz has suffered from cash flow problems since the 2006 gas deal and fell into a technical default on a Eurobond placement last year. Bondholders have expressed concern the company won't be able to finance its debt in the long term unless it regains revenues and profits that were lost to UkrGazEnergo. "In the near future, we will also seek to remove RosUkrEnergo in order to establish direct contracts with Gazprom," the Naftogaz source says.

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