Gazprom-Ukraine Dispute Could Leave Europe Out in the Cold

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By Jason Simpkins
Associate Editor
Money Morning

Russia’s state-run energy monopoly, OAO Gazprom, is warning its European customers that a dispute with Ukraine could lead to supply disruptions, as the Eastern European transit state siphons off supplies to meet its own energy needs.

Representatives from Gazprom and Ukraine are negotiating a deal for 2009 natural gas purchases, but Gazprom insists that a new deal cannot be reached unless Ukraine pays off approximately $2 billion in debt to the company.

Gazprom says Ukraine owes $1.6 billion in gas imports for the months of November and December, as well as $450 million in late fees and fines. The company also says that if Ukraine does not satisfy its fiduciary obligations by Jan. 1, it will cut off supplies to the European state.

“If Ukraine doesn’t repay its debts before the end of the day December 31, Gazprom won’t have any grounds for pumping gas there,” said Gazprom Chief Executive Officer Alexei Miller. "From 10 a.m. on Jan. 1, Gazprom will completely, 100%, cease gas supplies to consumers in Ukraine."

However, 80% of Europe’s gas supply is transited through Ukraine and Gazprom has warned that the country may resort to siphoning off gas en route to customers in other parts of the continent, as it did during a similar dispute in 2006.

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. This occurrence came close to repeating itself last March, when Gazprom again threatened to cut supplies to Ukraine.

Gazprom made good on its threats by reducing natural gas deliveries to Ukraine first by one-quarter, and then by half. However, supplies to the rest of the Europe were left undisturbed and the Russian oil monopoly restored deliveries of gas to Ukraine in full as soon as the country agreed to pay Gazprom $600 million.

There is hope that the current altercation will be resolved without incident, as Ukraine has already paid $1.52 billion of the supposed debt. NAK Naftogaz Ukrainy, the country’s state-run energy company, made the payment Tuesday to RosUkrEnergo AG, the Swiss-based trader that imports the gas from Russia. But that payment was still short of the $2 billion being sought by Gazprom.

Gazprom spokesman Sergei Kupriyanov puts the chance that the dispute will be resolved by the Jan. 1 deadline at 30%, according to the AFP. Kupriyanov said that a “crisis scenario” is more likely because Ukraine’s delay has produced “a whole layer of complex issues.”

“Our Ukrainian partners have officially notified us that, in case no contract is signed on gas supplies for Ukraine itself, it will block the transit of our product to principal consumers in Western Europe,” Russian Prime Minister Vladimir Putin said. “We believe that this is an absolutely improper position both from the economic and from the legal point of view,” he said, adding that if transit agreements were breached, there would be “serious consequences” for Ukraine and “consumers in European Union countries.”

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