Gazprom to Cut Gas Shipments to Ukraine in Half, Putting European Supplies in Peril

By Jason Simpkins
Associate Editor

OAO Gazprom, Russia’s state-owned oil monopoly upped the ante in its ongoing dispute with Ukrainian policymakers yesterday (Tuesday), when it threatened to cut natural gas supplies to the former Soviet satellite by half, a move that has disturbing implications for the rest of Europe.

Gazprom reduced natural gas deliveries to Ukraine by one-quarter Monday, saying the country has failed to pay $600 million in gas bills for the year. Gazprom also said that Ukraine’s state energy company, Naftogaz Ukrainy, failed to sign contracts for the supply of gas this year. Gazprom has refuted accusations from Naftogaz that the reduction of natural gas supply from Russia was closer to 35%.

After Ukrainian officials failed to turn up for planned talks aimed at ending the pair’s supply dispute, Gazprom threatened to cut supplies by another 25%, reducing the total amount of natural gas to the Ukraine by half.

"Due to the lack of progress in negotiations and Naftogaz’s failure to sign gas supply contracts - including for January and February - gas supplies to Ukraine will be reduced by an additional 25% at 1700 GMT [12 p.m. EST]," Gazprom spokesman Sergei Kuprianov said in a statement.

In response, Naftogaz Ukrainy accused Gazprom of violating basic "principles" in relations between nations, and that it could only guarantee natural gas delivery to the rest of Europe as long as Ukraine’s energy security is stable.

"Naftogaz Ukrainy reserves the right to adopt adequate and asymmetric actions to defend the interests of its consumers," the company said in a statement.

The speed at which the dispute has intensified has raised eyebrows in many European nations concerned their gas supplies will be affected. 

"This represents a very severe escalation of the rhetoric and has moved both sides much closer to the brink of a truly serious disruption," Geoffrey Smith, deputy head of research at Renaissance Capital Ukraine told Bloomberg News.

About 80% of Russian gas supplies to Europe pass through the Ukraine, which puts Naftogaz in a position to siphon off supplies intended for other customers throughout Europe. In January 2006, Russia cut supplies to Ukraine completely for a period of three days causing gas volumes across Europe to fall, as Ukraine scrambled to satisfy its demand.

With such disputes becoming commonplace, Europe has sought to build pipelines from Central Asia to reduce dependence on Russian gas, while Gazprom is laying plans of its own for a direct route to Western Europe, avoiding transit nations such as Ukraine.

Politics at Work

Relations between Russia and Ukraine fell apart in 2005 when Viktor Yushchenko took office in the Orange Revolution. Since then, Yushchenko has sought to steer his country from the former Soviet Union towards the European Union and NATO. Meanwhile, Russia has more than tripled the price it charges Ukraine for gas.

Gazprom first threatened to reduce gas supplies to Ukraine on Feb. 7, just two days after the country was welcomed into the World Trade Organization. Yushchenko and then President Vladimir Putin came to terms on Feb. 12, averting a Gazprom gas cut just hours before the deadline.

Both parties agreed Ukraine would pay $1.5 billion in debt accrued this year and last. They also agreed that two controversial middlemen - RosUkerEnergo and UkGazEnergo - would be replaced by a 50-50 joint venture between Gazprom and Naftogaz.

However, Gazprom insists Ukraine owes another $600 million for 19 billion cubic meters of Russian gas it received without a contract. The oil giant also wants Ukraine to approve the creation of the two new companies set to replace RosUkerEnergo.

Yulia Tymoshenko, the Ukrainian prime minister, says the Ukraine has fulfilled its obligations and accused RosUkerEnergo of running up debts for $4 billion cubic meters of gas.

Ukrainian First Deputy Prime Minister Oleksandr Turchynov said in a statement yesterday on the government Web site that Gazprom has failed to pay for transit shipments to Europe since December. 

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