Jan. 19 (Bloomberg) -- Russian natural-gas flows through Ukraine to the European Union are poised to resume for the first time in almost two weeks as both sides prepare to sign contracts to resolve a dispute over prices and transit fees.

Ukrainian Prime Minister Yulia Timoshenko returned to Moscow today after hammering out the broad outlines of a deal during weekend talks with her Russian counterpart, Vladimir Putin. The contracts will be signed by OAO Gazprom, Russia’s gas exporter, and NAK Naftogaz Ukrainy, the state energy supplier.

“Clearly there was a breakthrough over the weekend,” Roland Nash, chief strategist at Renaissance Capital in Moscow, said today in a Bloomberg Television interview. “It’s a little enthusiastic to say we’ve left the trouble behind.”

Gas prices in the U.K., Europe’s biggest market, slid the most in two years on expectations that supply shortages in many parts of central Europe and the Balkans will shortly be eased. Ukraine will pay higher European prices for Russian gas from 2010, after a 20 percent discount this year. In return, 2009 transit fees for Russia will remain at last year’s level.

The EU said it would reserve judgement on a deal until the gas actually begins to flow again. There’s no certainty that the two nations will sign an accord as planned, Johannes Laitenberger, a spokesman for the European Commission, said.

OMV AG, Austria’s largest oil and gas company, expects Russian gas to begin arriving at its Baumgarten hub two to three days after Gazprom turns on the taps. Once flows restart, it will take 36 hours for Russian gas to arrive at Ukraine’s western borders, Naftogaz spokesman Dmytro Marunych said by telephone from Kiev yesterday.

Without Fuel

Russian gas flows via Ukraine were halted Jan. 7 after Gazprom accused Ukraine of siphoning off transit flows for its own needs, a charge the country denies. The crisis has left parts of eastern Europe without fuel during freezing temperatures. Europe relies on Russia for a quarter of its gas, 80 percent of which is carried through Ukraine.

“This crisis is off the scale of anything that has ever happened before,” Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, said yesterday.

U.K. gas for delivery this summer, the six months through September, slumped 3.75 pence, or 8.1 percent, to 42.65 pence a therm, according to data compiled by Bloomberg. Week-ahead prices rose 10 percent in the past two weeks.

Mandate

The Ukrainian delegation, led by Naftogaz Chief Executive Officer Oleh Dubina, has a mandate to sign the gas accord, Bohdan Sokolovskyi, President Viktor Yushchenko’s energy aide, said earlier today.

“There has been no information to indicate that all the sides have not agreed on any of the positions,” Ukrainian government spokeswoman Natalia Lysova said before Timoshenko left for Moscow.

Gazprom Deputy Chief Executive Officer Alexander Medvedev said the price Ukraine will pay for gas under a new deal may be less than $250 per 1,000 cubic meters, the UNIAN news service reported.

Ukraine’s Parliamentary Speaker Volodymyr Lytvyn said earlier that Russia would probably charge Naftogaz between $240 and $250 per thousand cubic meters of gas for 2009.

Ukraine has agreed to pay Gazprom $360 per 1,000 cubic meters of gas, the Vedomosti newspaper reported today, citing unidentified people familiar with the matter. The price is for the first quarter and the two sides will have to agree on long- term prices by April, it said.

Naftogaz said yesterday it’s not clear what price Ukraine will be paying for Russian gas. The company is “working on preparing the contract,” Marunych said.

Direct Contracts

Gazprom and Naftogaz will use direct contracts in future, a Russian government official said yesterday. In the past, they’ve employed RosUkrEnergo AG, the Swiss-based trader half-owned by Gazprom, as an intermediary.

The agreement “is a major step forward,” Bernhard Jeggle, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, said yesterday. The 20 percent discount for Ukraine “makes it easier to transfer to world market price levels.”

Czech Industry Minister Martin Riman, whose nation holds the rotating presidency of the EU, said he remained “realistic” in light of previous attempts to break the deadlock between the two sides.

“The only thing that counts for the EU is the resumption of gas supplies,” Riman said in a statement yesterday. “For the time being, it is not clear when this resumption takes place.”

Legal Warning

The weekend deal followed a warning from the EU that it might urge European companies to seek legal redress if fuel supplies remain halted. A previous attempt by the EU to break the deadlock failed a week ago.

The EU had labeled the talks a “test case” for the reliability of Russia and Ukraine as energy providers. The supply cutoff has already prompted renewed calls for the region to diversify energy supply away from Russia.

European alternatives to supplies from Gazprom are limited and no final decision has been made on financing the planned Nabucco pipeline, a rival route intended to carry central Asian gas to Europe by 2013.

Earlier this month, Gazprom cited a possible price of $450 per 1,000 cubic meters for deliveries to Ukraine in January, reflecting the average price in countries bordering Russia’s neighbor. It made the offer after saying Ukraine had rejected a gas price of $250. Ukraine had said $201 would be fair.

Crude Prices

Gazprom’s prices to European customers under long-term contracts typically lag prices for crude and oil products by about six to nine months. Crude has fallen by more than 70 percent since reaching a record in July. Ukraine paid Russia $179.50 per 1,000 cubic meters for gas last year.

Gazprom’s gas output will likely fall 2 percent this year because of lower fuel prices, weaker demand and a milder winter, according to a report today by JPMorgan Chase & Co.

A 20 percent discount to European prices will still weigh heavily on the Ukrainian economy, said Stern.

“This strikes me as a very high price for Ukraine,” he said in a phone interview. “The Ukrainian economy is in rather worse shape than Europe.”

Ukraine’s economy grew by 2.1 percent last year, the slowest annual pace since 1999. The country, shaken by the global financial crisis, has already been forced to seek a $16.4 billion International Monetary Fund bailout.

‘Technical Gas’

Putin had suggested that EU utilities, including GDF Suez SA, E.ON Ruhrgas AG and Eni SpA, pay for “technical gas” needed to operate Ukraine’s gas pipeline system, one of the main sticking points in the dispute.

Russian President Dmitry Medvedev put forward an alternative proposal, whereby a European bank would provide a “letter of credit” for as much as $1 billion for Ukraine, guaranteeing the country’s gas payments.

Relations between Ukraine and Russia have become strained over efforts by the former Soviet republic to join the EU and the NATO.

In 2006, Russia turned off all gas exports to Ukraine for three days, causing volumes to fall in the EU, and also cut shipments by 50 percent last March during a debt spat.

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Last Updated: January 19, 2009 10:22 EST