Ukraine's gas supply cut off

Russia halts its supply of natural gas to Ukraine after negotiations on a deal break down, says a Gazprom spokesman.

A worker of Naftogaz company turns off valves on a newly built Bobrovnytska gas-compressor and gas-holder station in Mryn, Chernigiv region on Dec 16 2008.

Russia has halted all gas supplies to the Ukraine for the second time in three years after talks broke down over payments for past shipments and the pricing of future gas deliveries. Officials of the Russian state-owned gas monopoly Gazprom said the cuts began yesterday morning. Naftogaz, the Ukrainian state pipeline operator, confirmed a steady drop in gas flows. But earlier fears of the festering dispute disrupting gas supplies to Europe during the depth of winter receded after Gazprom said it had increased the amount of gas pumped through Ukrainian pipelines for delivery to other countries. Providing further reassurance, the Ukrainian president and prime minister jointly issued a statement guaranteeing the uninterrupted transit of gas bound for Europe. Russia supplies about 25 per cent of Europe's gas, mostly through pipelines that pass through the Ukraine. The Russian prime minister, Vladimir Putin, had warned its neighbour against diverting gas intended for other customers, as Russia claimed it did three years ago. That was after Russia briefly cut the Ukraine's gas supplies over a similar contract dispute. A repeat of the January 2006 incident could have "quite serious consequences for the transit country" by damaging its relations with Europe, he said. The Paris-based International Energy Agency, whose clients include some European gas importers, said it hoped the dispute's impact on natural gas customers would be minimal and that it should not affect third parties. Since 2006, most European countries, including the Ukraine, have built up their gas storage capacity, and have been building stocks ahead of winter. As a result, they would be unlikely to see any disruption for several weeks, said Chris Weafer, the chief strategist at Uralsib bank, based in Moscow. Nonetheless, in a sign that more trouble could be brewing, Bohdan Sokolovsky, the Ukrainian president's energy adviser, said it appeared that Gazprom had reduced supplies by more than the Ukraine's quota of the deliveries and was not shipping enough gas to satisfy European customers. Gazprom had warned it would cut the Ukraine's gas supplies on Jan 1 unless the nation paid all of a US$2.1 billion (Dh7.71bn) debt for unpaid gas bills and signed a deal before the start of the year setting prices for 2009 deliveries. Neither condition was fulfilled, although Naftogaz paid $1.5bn to the Swiss-based gas trader Rosukrenergo to cover a large part of the debt. Rosukrenergo is 50 per cent owned by Gazprom. "We are getting the impression that there are some political forces in Ukraine that are very interested in seeing a gas conflict between our countries," the Gazprom chief executive, Alexei Miller, said yesterday. "All responsibility for this situation lies with the Ukrainian side." But Russia's failure to resolve the dispute could further sour its relations with the West, which were seriously strained in August by the brief war between Russia and Georgia, a US ally. The two sides are still far apart in pricing negotiations, with the Ukraine rebuffing Gazprom's latest offer to sell gas at $250 per 1,000 cubic metres provided the Ukraine leaves its transit fee for gas unchanged. Gazprom rejected a Ukrainian counter-offer to pay $201 per 1,000 cubic metres. The Ukraine also wants higher transit fees for transporting Russian gas bound for Europe. Last year, Naftogaz paid $179.50 per 1,000 cubic metres for about 110 million cubic metres a day of Russian gas. The recurring gas dispute between the two former Soviet countries has been widely viewed as a Russian response to the Ukraine's 2004 political upheaval, which brought a pro-western government to power. The Ukraine's drive to join Nato has deepened Moscow's distrust of Kiev. Last year, Russia accused its neighbour of supplying arms to Georgia. [e-mail]