Oil and Gas

Tough Talks Ahead to Seal Russia-Ukraine Gas Accord


Tough talks lie ahead to underpin the latest deal to ensure uninterrupted gas supplies from Russia to Ukraine and onward to West European customers, with no guarantees against a new row between the two ex-Soviet states.

A deal on Wednesday restored shipments after Russian gas export monopoly Gazprom cut flows to the country, ultimately by 50 percent, in response to Ukrainian arrears and the failure to sign a 2008 contract.

Ukrainian state gas company Naftogaz said the flows were returning to normal and stood at mid-morning at 110 million cubic meters in daily terms against normal levels of 152 million.

The two sides resume discussion of long-running problems from scratch next week, notably demands by Ukrainian Prime Minister Yulia Tymoshenko to do away with intermediary companies supplying and distributing gas from Russia.

"Ukrainian and Russian officials will have to revisit questions about control over natural gas distribution at a later day, which will likely revive the tensions between the two sides," said Alex Brideau of the Eurasia group think tank.

"That could easily lead to another row, which would threaten the kind of actions seen in the past week. Tymoshenko is unlikely to deviate from her strong stand on the issue."

The only issue clearly solved was that Naftogaz would make payments as quickly as possible for January and February supplies of 6 billion cubic meters, worth about $1 billion. But even that figure could be subject to challenge.

The two sides agreed last year to supply gas for $179.50 for 1,000 cubic meters in 2008. But that applied to gas brought by Gazprom from Central Asia, with the price of Russian gas much higher.

The European Union expressed concern over the latest dispute between Moscow and Kiev, mindful that supplies to Western Europe were briefly disrupted two years ago in a similar row. A quarter of Europe's gas comes from Russia, most of it through pipelines across Ukraine.

Ukraine denied it had siphoned off Europe-bound supplies to meet its own needs this week, as Moscow alleged.

President Viktor Yushchenko and Premier Tymoshenko said Ukraine would be a reliable partner.

President, PM at Odds

But Tymoshenko and Yushchenko, allies from the 2004 "Orange Revolution," have been increasingly at odds, particularly over gas, since the prime minister returned to office in December.

The president appeared to have struck a deal in the Kremlin last month only to have it unravel when Tymoshenko, viewed less favorably by the Russians, held subsequent talks in Moscow.

In a letter released on Thursday, Tymoshenko disowned the essence of that deal, which phases out the intermediaries she reviles -- RosUkrEnergo, which supplies gas to Ukraine and UkrGazEnergo, which distributes gas to Ukrainian consumers.

Both these companies involved private businessmen.

Under last month's deal the two countries agreed to set up two 50/50 ventures between Gazprom and Ukraine's state energy firm Naftogaz, to import gas to Ukraine and sell it inside the country.

"The cabinet cannot agree with parts of the accord, notably the replacement of one intermediary by another...," the letter said. Naftogaz had been instructed to conclude an agreement directly with Gazpromexport, the Russian giant's export arm.

Analysts said the prime minister's position dimmed prospects for next week's negotiations.

"Most discussion will focus on whether to replace the old joint ventures with new ones. Naftogaz is in a tough position as the premier has said the old structures will no longer operate," said Kostyantyn Borodin of Kiev's Centre for Energy Research.

"Don't expect any quick results here. It could take weeks. I would not be surprised if Gazprom again resorts to cuts if Ukraine proves unable to pay arrears from January-February."

But at the very least, analysts said both Russian and Ukrainian officials had put an end to this week's dispute without seriously upsetting consumers and politicians in western Europe.

"The potential for renewed tension remains, but it always will," said Geoffrey Smith of Renaissance Capital. "For now, it is more important that both sides have again shown they understand the risks of letting their disputes affect relations with the EU, which is more important for both than either is for the other."