Russia Resumes Gas Supply through Ukraine Ending Fuel Scarcity in the European Union

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Researched by Industrial Info Resources (Sugar Land, Texas)--Russia's state-owned OAO Gazprom (OTC:OGZPY) (Moscow) resumed the supply of gas through Ukraine to the European Union, ending weeks of fuel shortages that hampered industrial and civilian life in more than 20 countries. The gas supply, which was suspended after the contract between Ukraine and Russia expired on January 1, 2009, commenced after a fresh contract with new tariffs, was signed by both nations. Around 80% of the European Union's gas imports pass through the Sudzha gas station in Ukraine, which pumps more than 76.6 million cubic meters per day. This has made Ukraine a very vital and key link in Russia's gas route to Europe. Ukraine has been buying gas at rates which were much lower than the European market prices, and Russia has been demanding that Ukraine pay the same rates as other buying countries.

According to the new agreement, Russia will sell gas to Ukraine at a discount of 20% on the market price. Ukraine will now import gas at $360 per 1,000 cubic meters, which is much higher than the earlier rate of $179.50 per 1,000 cubic meters. Russia presently sells to markets in the European Union at $450 per 1,000 cubic meters. Both Gazprom and Ukraine's JSC Naftogaz (Kiev, Ukraine) have accepted the 10-year pact to carry gas through Ukraine to Slovenia in the European Union.

Experts indicate that with fuel prices dropping, Ukraine may pay only about $150 per 1,000 cubic meters by the middle of summer this year. The agreement also states that Russia will demand advance payment from Ukraine if the country misses even one payment. Ukraine has defaulted on payments in the past and presently owes Russia more than $600 million. The non-payment of dues also contributed to strained relations between both countries. There has been no increase in the transit tariffs paid by Russia to Ukraine. The rates will be the same as last year. In 2010, the transit tariffs and gas prices paid by Ukraine will be reviewed and set according to the prevailing market rates. No indication has been given on exactly how the price will be calculated or which European country's market rate will be considered for the computation. Both countries have also decided against carrying out gas trade through mediators. Earlier, trade dealings between both countries faced obstacles when Rosukrenergo (Zurich, Switzerland), a 50:50 joint venture between Gazprom and a consortium of Ukrainian businessmen, acted as an intermediary.

Relations between Ukraine and Russia have been tense since mid-2008. In October 2008, an agreement was signed between the premiers of both countries that allowed Ukraine a three-year transition period before it could start buying gas from Russia at market rates. Russia, however, did not adhere to this agreement. On January 1, 2009, Russia ceased gas supply on the pretext that Ukraine was paying much lower than other countries and had large payments outstanding. Exports to Europe through Ukraine were also stopped after Russia accused Ukraine of pilfering gas for domestic use.

The European Union imports more than 25% of its fuel from Russia and is therefore focusing attention on risk management strategies in the event of such incidents occurring again in the future. It has become imperative for countries in Europe to reduce their energy dependence on Russia and look at other viable options. One of the alternatives being considered is the 3,300-kilometer Nabucco pipeline that will connect Azerbaijan and Austria, circumventing Russia, carrying gas from the Caspian region to Europe. Negotiations are in progress with Turkey, which has been holding out its participation in the pipeline project since its bid to join the European Union is on hold. Turkey's cooperation is crucial as a major section of the pipeline passes through this country.

While deliveries commenced last week with both Ukraine and Russia assuring that the dispute was resolved, the incident has raised concerns in Europe over Russia's credibility as a long-term sustainable gas supplier. The incident has also thwarted Ukraine's efforts of joining the European Union in the near future.

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