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. Last Updated: 07/27/2016

Gazprom Cuts Flow of Gas to Ukraine

ReutersValves and gauges at a Ukrainian pipeline near Kiev. Gazprom and Naftogaz disagreed on the size of a cutoff Monday.
Ukraine said it had more than one-third of its gas imports cut off Monday after Gazprom reduced deliveries by a larger amount than it had threatened in a debt dispute.

The partial cutoff, which came just hours after Gazprom chairman Dmitry Medvedev's landslide victory in Sunday's presidential election, evoked memories of Russia's damaging gas dispute with Ukraine in January 2006.

Unlike at that time, European supplies are not thought to be under serious threat, but Monday's cutoff highlighted the bitter wrangling between Gazprom and the government of Ukrainian Prime Minister Yulia Tymoshenko over control of the Ukrainian gas market.

Gazprom was carrying out a threat to cut off the gas it supplies to Ukraine for its own domestic use, after Ukrainian state energy firm Naftogaz Ukrainy rejected a package of Gazprom proposals to renegotiate the gas trade between the two countries.

Ukrainian President Viktor Yushchenko on Monday urged Tymoshenko to avert a "gas war" with Russia by reaching a deal with Gazprom in talks this week.

Gazprom and Naftogaz remained divided Monday over how big the cut actually was, with Naftogaz saying Gazprom had cut supplies by 35 percent.

Inna Koval, a spokeswoman for UkrTransGaz, the firm that operates Ukraine's gas pipelines, said it received two separate notifications from Gazprom about supply cuts of 25 percent and a further 10 percent.

But a Gazprom spokesman insisted on Monday afternoon that the gas export monopoly had cut 25 percent off the usual shipments, as it had warned it would.

But in terms of actual volumes, the two companies' assessments were closer. Gazprom said the cut was 40 million cubic meters, while Naftogaz recorded a drop of 46 million.

In the most serious previous gas dispute between the two countries, Gazprom cut all supplies to Ukraine on Jan. 1, 2006, squeezing a new contract out of Kiev in the space of three days.

This time around, Naftogaz could hold out much longer.

By raising its own production and tapping reserves, it could cover one-third of its imports for three weeks, as long as a current spell of warm weather continued, company spokesman Ilya Savvin said Monday.

Gazprom wants to be paid for 1.9 billion cubic meters of Russian gas that it sent to Ukraine so far this year and set 10 a.m. Monday as the deadline for Naftogaz to agree to pay $600 million for the shipments.

"Gazprom is a reliable supplier of energy resources, but we cannot and do not have to deliver gas without payment," company spokesman Sergei Kupriyanov said in an e-mailed statement Monday.

Savvin agreed that Ukraine owed Gazprom for the deliveries but reiterated that two intermediaries in the gas trade -- RosUkrEnergo and UkrGazEnergo -- were to blame. The gas traders have not supplied the proper contracts for the gas they are selling, thus preventing payment, he said.

"Give us the contracts and we'll pay. We have the money," he said.

Both RosUkrEnergo and UkrGazEnergo have denied acting improperly.

Russian gas has accounted for one-quarter of Ukraine's gas imports so far this year, a source familiar with the market has said. The remaining, cheaper imports came from Central Asia and were also unpaid for since the start of this year, he said.

In its Monday statement, Gazprom did not mention the Central Asian gas deliveries. A Gazprom spokesman declined to discuss the issue Monday.

Mikhail Korchemkin, executive director at Pennsylvania-based consultancy East European Gas Analysis, said that as of January, Naftogaz and gas trader UkrGazEnergo had about 10 billion cubic meters of gas in Ukrainian storage facilities.

"There was no need to import Russian gas," Korchemkin said in an e-mailed comment.

Kupriyanov said last month that Naftogaz had accepted Gazprom's offer in January to use more-expensive Russian gas to cover a shortfall in Central Asian supplies caused by a cold weather snap.

In its statement Monday, Gazprom said the reduction of supplies would not affect its export commitments to Europe, which gets more than one-quarter of its gas from Russia. Of that amount, 80 percent is sent via Ukraine.

Naftogaz said Monday that it would not siphon off gas from the supplies destined for Europe, something it was accused of doing during the 2006 dispute. "We are an honest company," Savvin said.

European Commission spokesman Michele Cerone urged Russia and Ukraine "to find a quick and definitive solution." Another spokesman, Ferran Tarradelas Espuny, said the commission was closely watching the situation but was following a policy of not interfering in commercial disputes between non-European Union members, Interfax reported.

Gazprom and Ukraine are seeking to renegotiate their gas trade after President Vladimir Putin and Yushchenko agreed on Feb. 12 to exclude Ukrainian businessmen Dmytro Firtash and Ivan Fursin, who together currently own 50 percent of RosUkrEnergo, from the trade. Gazprom owns the other half of RosUkrEnergo, while RosUkrEnergo and Naftogaz each own 50 percent of UkrGazEnergo.

Under the tentative deal reached by the presidents, Naftogaz will replace the two businessmen in two new joint ventures to handle the trade. Naftogaz on Monday received the latest proposals from Gazprom about how the new intermediaries will work, Savvin said. A delegation from Kiev will fly to Moscow later this week to discuss the intermediaries and the debts, he said.

Naftogaz has said it rejected the previous proposals that Gazprom sent in mid-February.

Kupriyanov said in Gazprom's statement Monday that the company was ready to continue talks.

Korchemkin, the U.S.-based gas consultant, said the dispute boiled down to who should control the gas in Ukrainian storage facilities.

"There is no politics in this conflict," Korchemkin. "It is strictly business."