Ukraine Standoff Sends Gas Price to 3-Year High

APThe Sudzha pumping station in the Kursk region where gas was shut off to Ukraine. Two pipes carry gas for Ukraine's use and three for transit to Europe.��
Russia's efforts to extract more money from Ukraine by cutting off natural gas supplies sent the fuel to a three-year high in Europe and set up prices for a steeper decline.

Gazprom and Naftogaz Ukrainy, Ukraine's state energy company, signed an accord Monday to renew shipments to Europe through Ukraine.

The global recession is reducing demand just as new liquefied natural gas terminals open, increasing the capacity for imports. The post-winter thaw usually drives spot prices lower, and the cost of most European gas is tied to months-old oil prices, which have plunged 72 percent since July.

Natural gas "will drop like a stone," said Thierry Bros, an analyst at Societe Generale.

Patrick Heather, British-based BG Group's former gas-trading chief, said prices probably will weaken to 47 pence a therm ($7.13 per million British thermal units) after the dispute between Ukraine and Russia ends. Gas for immediate delivery in Britain dropped as much as 16 percent to 56.50 pence a therm Monday, according to prices from ICAP.

Deutsche Bank, Merrill Lynch and McKinnon & Clarke forecast, on average, 47.9 pence a therm during the second quarter in Britain, Europe's biggest market. Futures on the ICE exchange show prices dropping to 46 pence a therm by June.

A drop would sting Gazprom, while reducing costs for consumers and power companies, including E.ON Ruhrgas, the largest buyer in Germany, and France's GDF Suez.

Only a prolonged cold spell across the continent, field shutdowns in the North Sea or a failure by Gazprom to restore gas flows to Europe would likely prevent a slump in prices.

Russia halted shipments through Ukraine last week, cutting off deliveries to at least 19 other European countries, in a dispute over prices and gas transit costs.

Czech Prime Minister Mirek Topolanek, acting for the European Union, brokered a three-way agreement for international monitors to partly resolve the conflict by checking flows into Ukraine's pipelines.

"With the monitors, it will be very clear what's going on," said Ronald Smith, head of research at Alfa Bank. With its economy slowing and gas prices peaking, Russia has an incentive to make sure shipments continue, he said.

Gazprom plans as much as 10 trillion rubles ($320 billion) for projects to bring gas to market over the next 11 years, including developing deposits in Siberia and the Arctic.

"Gazprom is now struggling for cash," said Karen Sund, founder of Oslo-based consulting firm Sund Energy. "They need large funds for new investments in both fields and infrastructure, and they are testing the limits of goodwill with several of their buyers."

Warmer-than-normal weather in October and November allowed Italy, Germany and neighboring countries to pump record amounts of gas into underground storage. Halfway through the heating season, Europe's natural gas stockpiles are about the same as a year ago, according to Gas Storage Europe, an association of pipeline and terminal operators.

Inventories at Europe's seven biggest trading hubs were 38.6 million cubic meters on Jan. 5, or 74 percent full, compared with 73 percent a year ago. Five of those were 99 percent full by early November.

Sergei Chuzavkov / AP
European Union monitors touring the Sudzha station, located 8 kilometers from the Ukrainian border, on Sunday.
Once confined to regional markets by pipelines, natural gas is becoming a global commodity similar to crude oil. Supplies are emerging from the Middle East, Africa, Russia and Indonesia in the form of liquefied natural gas, where molecules are cooled to a liquid so they can be transported by ship and stored in tanks.

Exxon Mobil, the world's biggest oil company, and others are investing in Qatar, home of the world's third-largest gas reserves, to raise exports. Worldwide sales grew 7 percent in 2007 to 226.4 billion cubic meters, according to Paris-based trade association Cedigaz. Wood Mackenzie Consultants, in Edinburgh, expects about 20 million tons of new LNG supply this year, the equivalent of 12 percent of 2007 exports or 0.9 percent of world gas demand.

"European prices are going to come down significantly over the next two or three years" and approach U.S. levels, said Frank Harris, head of global LNG at Wood Mackenzie.

February gas at the TTF hub in the Netherlands, Europe's second-most-active market, is trading at the equivalent of about $8.60 per million British thermal units, compared with $5.52 for Henry Hub gas in Louisiana, the U.S. benchmark.

The slowing global economy will have a "significant impact on industrial gas demand across Europe," said Ian Cronshaw, head of energy diversification at the International Energy Agency. About 20 percent of Europe's steelmaking has been closed, Cronshaw said.

The IEA has no estimate for 2009 gas demand, although it expects European oil consumption to fall 1.3 percent this year. Deutsche Bank expects U.S. gas demand to decline 1.5 percent this year.

European spot gas prices rise during colder months, when heating demand is highest, and typically decline in the spring. British prices have fallen in nine of the past 11 years during this period, ICE Futures data show. The biggest seasonal drop since the British market was liberalized in 1990 was between November 2005 and May 2006, when gas tumbled 73 percent.

Temperatures across Europe are also forecast to rise this week, with Britain likely to average 9 degrees Celsius on Monday, up from 1 degree on Jan. 8, according to CustomWeather.

With "a double whammy of a Russia-Ukraine resolution and a 5 degree improvement in the weather, you're going to see it tumble," said Heather, the former BG Group gas trader, of the European natural gas market.