Russian gas reaches Europe again via Ukraine

Posted at 01/20/09 10:59 PM

MOSCOW/KIEV - Russian gas reached Europe via Ukraine for the first time in two weeks on Tuesday after Moscow and Kiev ended a contract row that cut supplies to about 20 European countries.

Slovakia and Hungary said they had begun receiving gas, though pipeline operators said it could be Wednesday before supplies reach other parts of Europe, where the cut-off forced some countries to ration supplies to customers in midwinter.

"Gas is not only flowing in the direction of Europe but it is flowing to Europe," Alexander Medvedev, deputy chief executive of Russian gas export monopoly Gazprom, said on a conference call with reporters.

Ukraine confirmed it was receiving gas from Russia and said it would deliver it to Europe as quickly as possible.

The gas transmission arm of Hungarian oil and gas group MOL

said it started receiving Russian gas via Ukraine at 7:20 a.m. EST. Slovakian Economy Minister Lubomir Jahnatek said supplies had started arriving there too.

The gas dispute had reflected political tension between Moscow and Kiev, with Russia opposed to formerly Soviet Ukraine's aspirations to join the NATO military alliance.

Even once gas flows return to normal, the effects are likely to linger. Russia's reliability as an energy source is under renewed scrutiny and Europe is anxious to diversify suppliers so it cannot become hostage again to local disputes.

European Commission President Jose Manuel Barroso said he was considering taking legal action over the dispute.

"We must not allow ourselves to be placed in this position in future. This cannot become an annual event. We have to stop simply talking about energy security in Europe, and start doing something about it," he told a news conference in Brussels.

Gazprom said that, under the new contract, Ukraine would pay $360 per 1,000 cubic meters of gas in the first quarter of this year, double the $179.50 that Kiev was paying for Russian gas last year.

The new price is likely to come down later this year as gas tracks falling oil prices, but it could still be a huge burden for a Ukrainian economy struggling with debt and sharp falls in the hryvnia currency.

Ukrainian Prime Minister Yulia Tymoshenko said on Monday she expected the average price over this year to be around $230-250 per 1,000 cubic meters.

Domestic rivalry

Gazprom Chief Executive Alexei Miller warned if Ukraine were to fall behind in its payments, the firm would raise the price and demand Kiev pay for all its gas in advance -- sanctions that could cripple the fragile Ukrainian economy.

Fears persist that political infighting in Kiev could cause the deal to unravel. Aides to Ukrainian President Viktor Yushchenko, a bitter rival to Tymoshenko, accused her of signing an agreement that would hurt the economy.

But Yushchenko's deputy chief of staff, Oleksander Shlapak, said the president lacked the legal authority to annul the deal.

Austrian oil and gas group OMV said Russian gas could reach its hub in Baumgarten, near Slovakia, on Wednesday and a Turkish Energy Ministry source said the flow of Russian gas into should be back to normal on Thursday.

Oil prices fell to just over $33 a barrel on Tuesday, partly in response to the resumption of gas supplies. The gas disruptions had driven up demand for oil products, used as alternatives to gas in heating and power generation.

Russia provides about a quarter of Europe's gas requirements and pumps 80 percent of this via Ukraine.

In Bulgaria, almost entirely dependent on Russian energy, many households were left without adequate heating and hundreds of firms have had to scale down production.

"The impacts on the Bulgarian economy are catastrophic," Economy and Energy Minister Petar Dimitrov told Reuters in an interview. " ... the impact very much resembles that of a terrorist attack."

Russia cut flows to Ukraine itself on January 1 after the two sides failed to agree a 2009 supply contract. Six days later, export flows to Europe through Ukraine also ceased after Russia accused Kiev of siphoning off gas intended for export.

Ukraine denied stealing gas, and countered that Moscow was trying to blackmail European customers by halting gas supplies.