Russia and Ukraine sign 10-year gas supply deal

MOSCOW/KIEV Mon Jan 19, 2009 3:33pm EST

1 of 4. Russia's Prime Minister Vladimir Putin (R) and his Ukrainian counterpart Yulia Tymoshenko meet for talks in Moscow early January 18, 2009.

Credit: Reuters/Alexander Prokopenko/Pool

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MOSCOW/KIEV (Reuters) - Russia and Ukraine signed a 10-year gas supply deal Monday to clear the way for a prompt resumption of supplies to a freezing Europe, cut off for nearly two weeks by a dispute between the ex-Soviet states.

Officials at the signing ceremony in Moscow said gas would start flowing again soon across Ukraine to Europe, but the European Union said it would not consider the crisis over until its monitors register gas arriving at the bloc's borders.

Under the deal, Ukraine will buy Russian gas at a 20 percent discount to European market prices in 2009, while Kiev agreed to retain preferential transit fees for Russia this year before both sides switch to a market-based price formula from 2010.

"Gazprom received an order to start deliveries through all routes indicated by our Ukrainian partners and in full volumes," Russian Prime Minister Vladimir Putin told a joint news conference with his Ukrainian counterpart, Yulia Tymoshenko.

The deal was signed by the chief executive of Russian gas export monopoly Gazprom, Alexei Miller, and the head of Ukrainian state energy firm Naftogaz, Oleh Dubyna.

The exact price was not disclosed, though Russia's Interfax news agency quoted Tymoshenko as saying it will be less than $250 per 1,000 cubic meters -- more than the $179.5 Kiev paid last year but less than Russia's previous demand of $450.

"This agreement is a 10-year deal, as well as a second contract on transit that also assumes the use of a European formula for 10 years," Putin said.

The European Commission, which has expressed frustration that the row was hurting European consumers, said in a statement it needed to know precisely when supplies would resume and that its monitors would verify when gas starts to flow.

"For the EU, the decisive moment will come when renewed supplies are registered at its borders," said Martin Riman, industry minister for the Czech Republic, which holds the EU's rotating presidency.

The deal should also restore gas for Ukrainian consumption, severed since January 1, and relieve a shortage that forced output cuts at the steel and chemical plants which form the backbone of Ukraine's export-oriented economy.

"We have created an absolutely objective basis for gas prices and transit fees. This allows us to believe there will be no more debates, no more crises at the end of the year," Tymoshenko told the same news briefing.

Gazprom had previously said gas supplies would resume immediately after the signing. Once the taps are turned back on, it will take about 36 hours for the first Russian gas to cross Ukraine and enter Europe.

DIVERSIFYING SUPPLY

Fierce rivalry between Tymoshenko and Ukrainian President Viktor Yushchenko hampered previous attempts to reach a gas deal, and Yushchenko aide Bohdan Sokolovsky sounded a dissenting note, saying the new transit fee was too low.

Russia pays $1.7 per 1,000 cubic meters per 100 km to ship its gas across Ukraine, a level that will stay the same in 2009.

The gas dispute has enraged the European Union and, after a shorter supply disruption three years ago, has once again brought into question the credibility of Russia and Ukraine as gas suppliers to the EU.

Russia cut flows to Ukraine on New Year's Day because Kiev would not pay higher prices. Six days later, export flows to Europe through Ukraine ceased amid Russian accusations that Kiev was "stealing" gas intended for export.

Ukraine's pro-Western leaders -- who have clashed with the Kremlin over their ambition to join the NATO military alliance -- denied that, and countered that Moscow was trying to blackmail European customers by halting gas supplies.

Gazprom supplies about a quarter of Europe's gas requirements and ships 80 percent of this via Ukraine.

Putin told the news briefing the dispute underlined the need for new supply routes for Russian energy.

"From our point of view, we need to diversify this gas flow to Europe. This concerns both the Nord Stream and South Stream (pipelines) and creating infrastructure for producing and delivering liquefied natural gas," Putin said.

The signing of a 10-year contract is likely to reassure European customers who up to now have had to endure annual wrangles over contract renewal which carried with them the threat of supply disruptions.

Ukraine and Russia also agreed not to use intermediaries in their gas trade, Putin said. Previous deals were complicated by the use of Swiss-based intermediary Rosukrenergo, an opaque joint venture between Gazprom and two Ukrainian businessmen.

A higher gas price could cripple Ukraine's economy, already hit hard by the slowdown. But analysts and officials said a substantial drop in market prices expected this year would bring down the average 2009 price to levels more affordable for Kiev.

Tymoshenko, quoted by Interfax, said the deal would save Ukraine about $5 billion in 2009.

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