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Ukraine Ties Guard EU From Gas Cut as Siphoning Unlikely

Ukraine seeking closer ties to the European Union means natural gas flows from Russia to the 28-nation bloc are unlikely to be disrupted, according to Maplecroft Ltd. and Energy Aspects Ltd.

UkrTransGas is shipping full volumes from Russia to Europe, the Ukrainian pipeline operator said yesterday, the day after its own supply was cut by Russia amid a two-month long pricing dispute. All imports needed to meet domestic needs can be replaced with gas from Europe for now, NAK Naftogaz Ukrainy’s Chief Executive Officer Andriy Kobolyev said yesterday.

Russia’s OAO Gazprom (GAZP) cut supplies after a payment deadline expired, echoing disputes that disrupted flows in 2006 and 2009, when the state-run company accused Ukraine of siphoning off transit gas, a charge it denied. Ukraine, which carries Russian gas meeting about 15 percent of the EU’s needs, is seeking closer relations with the bloc after former President Viktor Yanukovych was ousted after refusing to sign a deal to strengthen ties and Russia annexed the Crimean peninsula.

“What happened on previous occasions with Ukraine is just that it said, well that’s our gas and it’s just taken it,” Daragh McDowell, a senior Russia analyst at risk consultants Maplecroft in Bath, England, said by phone on June 16. “At this point, Ukraine doesn’t want to alienate its European partners, so it won’t be like the 2005-2006 gas crisis.”

Gas in the U.K., Europe’s biggest market, extended losses after tumbling the most in more than three months on the ICE Futures Europe exchange yesterday, erasing gains from the Russian cut. Futures rallied as much as 8.8 percent June 16. That was the most since March 3, the first trading day after Russia got approval from lawmakers to send troops into Crimea.

Pipeline Fire

Front-month U.K. gas fell 1.3 percent to 40.5 pence a therm ($6.87 a million British thermal units) at 2:47 p.m. in London. Prices, which tumbled as much as 5.8 percent yesterday, closed 3.7 percent lower after a fire on a transit pipeline. Ukraine said shipments weren’t disrupted and the fire, probably caused by a terror attack, was extinguished.

Gazprom said June 16 Ukraine failed to pay a debt of more than $4.4 billion for gas deliveries in November, December, April and May. The Moscow-based company is providing full volumes to European partners and has alerted the EU about possible gas transit risks, it said.

Russia raised prices for Ukraine by 81 percent to $485 per 1,000 cubic meters by canceling discounts in April. While Gazprom offered to lower prices by $100, Ukraine said it would only be prepared to pay $326, a compromise proposed by the EU. The bloc has tried to broker a deal between the two nations since May 2 and said June 16 it was convinced a solution was still possible.

Ukrainian Deputy Energy Minister Vadym Ulyda said today that his country hopes for further gas talks with Russia’s Gazprom and the EU as “it is in the interest of three sides.”

Transit Flows

“If you look at it, Russia holds all the cards, Ukraine is not that big a market for them,” Trevor Sikorski, head of gas, coal and carbon at consultants Energy Aspects Ltd., said by phone from London June 16. “When we see gas supplies significantly disrupted to western Europe, there will certainly be political pressure on the Ukrainians.”

Gas flows from Ukraine to Poland were normal today, the country’s gas pipeline operator Gaz-System said by e-mail. Slovakia hasn’t yet seen a dip in gas pressure or volumes, grid company Eustream said on its website today.

Ukraine, which yesterday got a 500 million euro ($677 million) loan from the bloc, probably doesn’t have to tap into transit gas for now, said Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen.

‘Too Risky’

It’s “too risky” for Ukraine to take gas and “they don’t have to, at least not for a considerable time,” he said by e-mail yesterday. “This means that Russia has been able to make a statement but at the same time they can still come to an agreement before it gets critical later this year.”

Petro Poroshenko, sworn in as Ukraine’s president on June 7, vowed to complete a trade agreement with the EU “soonest” as he battles pro-Russian rebels in the country’s easternmost regions. Poroshenko and Russian President Vladimir Putin talked yesterday about a possible cease-fire for southeastern Ukraine.

“It’s really difficult to see where a compromise comes here because the gas talks, as much as they try to keep them separate from the peace talks, the two can’t really be differentiated that much,” Maplecroft’s McDowell said. “They have a warm summer so they can afford to cut down the gas a bit, so it’s a question of who blinks first and in that case I think it’s likely to be Ukraine.”

Reverse Flows

Ukraine uses 1.6 billion to 1.8 billion cubic meters (64 billion cubic feet) of gas a month in the non-heating season, Alexey Grivach, deputy director of National Energy Security Fund, said in a June 16 interview in Moscow. Demand jumps to as much as 7 billion a month in the winter, he said.

The EU can supply Ukraine with 15 billion cubic meters of gas, Prime Minister Arseniy Yatsenyuk said in Kiev yesterday. RWE AG, Germany’s second-biggest utility, started delivering gas to Ukraine from Poland in April and volumes are flowing between the two nations, said spokesman Michael Murphy. Gas can also go from countries including Hungary and from Slovakia.

“It will be quite a complicated job if we do not find sufficient supplies in Europe, that’s why it’s crucial for us to resolve this situation” Nafotgaz’s Kobolyev said yesterday on Bloomberg Television. “If we do not resolve the issue right now, the Russians will do the same in December.”

Winter Time

While Ukraine’s own gas output and supplies from Europe can meet summer demand, it will not be enough in the winter, Laszlo Varro head of gas, coal and power at the International Energy Agency, said yesterday in an interview in Paris.

Ukraine’s gas consumption has fallen as the conflict reduces output in the industrial areas in the east of the country, which are under rebel control, McDowell said.

“Now that we are in summer, it’s not a freeze to death or take the gas kind of issue,” Sikorski said. “It becomes a much bigger issue for Ukraine mostly because of the storage, what very low storage means for them during the winter time when it does get bitterly cold.”

To contact the reporters on this story: Isis Almeida in London at ialmeida3@bloomberg.net; Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Rob Verdonck, Torrey Clark

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