Russian gas reaches Europe again

MOSCOW/KIEV Wed Jan 21, 2009 11:35am GMT

1 of 9. A pressure gauge is pictured at a Ukrainian gas compressor station in the village of Boyarka near the capital Kiev January 20, 2009.

Credit: Reuters/Konstantin Chernichkin

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MOSCOW/KIEV (Reuters) - 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.

Austria, Slovakia and Hungary said they had started to receive 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 customers in mid-winter.

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

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

But Ukrainian President Viktor Yushchenko criticised as a "defeat" the deal clinched by his prime minister, his former ally turned rival, saying the price set for Russian gas was too high and offsetting transit rates for Ukraine too low.

The gas transmission arm of Hungarian oil and gas group MOL said it started receiving gas at 12:20 p.m. British time and Austria's Economy Ministry said gas flowed at the normal rate from 6 p.m. for the first time since Jan 7.

Slovak Economy Minister Lubomir Jahnatek said gas had arrived there too, while Romania's pipeline operator said flows would restart "within hours."

The dispute had reflected political tension between Moscow and Kiev on a range of issues. Russia strongly opposes a bid by its former Soviet neighbour to join the NATO military alliance.

Even when gas flows return to normal, the effects will linger. Russia's reliability as an energy source, as well as Ukraine's transit credentials, are under renewed scrutiny and Europe is anxious to diversify supply so it cannot become hostage again to local disputes.

"This bilateral dispute has harmed the confidence placed in the two countries," the Czech EU presidency said in a statement.

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 (258 pounds) per 1,000 cubic metres of gas (tcm) in the first quarter of this year, double the $179.50 Kiev was paying in 2008.

The 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 she expected the average price over this year to be around $230-250 per tcm, and that Ukraine would limit immediate purchases.

"In the first quarter, when the price is highest, there is no need to buy large quantities of gas because we have gas in reserves remaining from last year," she told a news briefing.

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 -- measures that could cripple the fragile Ukrainian economy.

Fears had long persisted that political infighting in Kiev could cause the deal to unravel.

Yushchenko said Tymoshenko had failed to uphold national interests in agreeing to a base price of $450 per 1,000 cubic metres of Russian gas, with a 20 percent discount.

"I would say that introducing a base price of $450 was a clear defeat," Yushchenko told a news conference in northern Ukraine after talks with the president of neighbouring Belarus.

Yushchenko said it was also a mistake to leave unchanged rates Ukraine charged for transit of gas to Europe. "It is clear that if the price of Russian gas is doubled, then the transit rate must also be doubled," he said.

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

Oil prices fell to just over $33 a barrel early 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. "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.

(Additional reporting by Oleg Shchedrov in Moscow, Sabina Zawadzki in Chernihiv, Boris Groendahl in Vienna, Thomas Grove in Istanbul, Anna Mudeva in Sofia, Jan Lopatka in Prague, Martin Santa in Bratislava, Pete Harrison in Brussels, Radu Marinas in Bucharest and Krisztina Than in Budapest)

(Writing by Christian Lowe; Editing by Ralph Boulton)

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