EU, Ukraine hold talks on gas as tension with Moscow climbs

Tue Apr 8, 2014 9:16am EDT

* Deadline for Ukraine gas payment expired at midnight

* EU officials say gas storage around half-full

* Ukraine major gas transit nation for EU supplies

By Barbara Lewis

BRUSSELS, April 8 (Reuters) - Ukraine's energy minister, EU officials and industry representatives held talks on Tuesday on cutting reliance on Russian gas as tension with Moscow drove home the urgency of finding alternative energy sources and supply routes.

Concerns reached a new pitch after pro-Moscow protesters seized buildings in eastern Ukraine's mainly Russian-speaking industrial heartland, which Kiev said is a replay of events in Crimea, the peninsula Moscow annexed last month.

At the same time, Kiev missed a midnight deadline to reduce its $2.2 billion debt owed to Russia for natural gas supplies.

That adds to concerns Russia could cut off Ukraine's gas supplies, with possible knock-on effects for the European Union.

The European Commission, the EU executive, said Energy Commissioner Guenther Oettinger was chairing two meetings in Brussels.

One was of the EU "gas coordination group", at which experts debate storage levels, and one brought together industry and Ukraine's energy minister to discuss security of supply.

A copy of an invitation to industry, seen by Reuters, says Oettinger invites "relevant gas companies for a frank and open discussion" to contribute to EU energy security for the next winter and over the mid-term.

In particular, it cites the importance of including liquefied natural gas operators. Super-cooled LNG, which can be brought by ship from sources around the world, is one way to cut reliance on pipeline gas from Russia.

Ukraine's Energy Minister Yuri Prodan was quoted by Interfax news agency as saying Russia's decision to nearly double gas prices to Ukraine was unjustified and Kiev could not pay.

"If the situation is not resolved, there will be a threat not only for the supply of gas to Ukraine, but also for the transit of gas to Europe," Prodan said.

Following previous crises in 2006 and 2009 over Kiev's unpaid gas bills, which led to the disruption of exports to western Europe, the European Union has already introduced some measures to improve its energy security, including increased gas storage and more renewable energy.

Although analysts say nowhere near enough has been done, EU officials say there is renewed determination to act, alongside a recognition that changing Europe's energy system will take time.

Denmark put forward the idea, adopted by an EU summit last month, that the Commission should draw up by June a detailed plan on increasing energy security and says this time around the mood is completely different.

"There is no doubt that this is a game-changer," Danish Foreign Minister Martin Lidegaard told Reuters by telephone late last week, ahead of the Brussels talks. "The whole Ukraine crisis has definitely changed the atmosphere during our discussions."

Russia provides Ukraine with around half of its gas and the European Union with roughly one third of its demand, some 40 percent of which currently flows via Ukraine.

WELL STOCKED

Europe hopes to secure extra imports of LNG and is working on increasing capacity to reverse the flow through some pipelines so that gas, including some imported from Russia, can be sent back eastward to Ukraine from EU countries.

Oettinger has been trying for months to broker a deal with Slovakia to allow Ukraine to receive up to 8 billion cubic metres a year in a reverse flow of gas.

Ukraine, however, says progress on this has not been fast enough while Russia says it would be illegal.

Europe's increased storage levels, currently around half full, mean it can cope with a short-term disruption.

The EU's gas coordination group, with energy experts from all 28 EU member states, was set up in response to the previous pricing rows between Russia and Ukraine.

It last met in March, when officials from some EU countries, such as Poland and Greece, said they feared gas shortages and economic damage if Russia stopped pumping gas to Ukraine.

Moscow also has a great deal at stake. Its gas exports to the European Union provide state-controlled exporter Gazprom with an average of $5 billion per month in revenues. (Additional reporting by Henning Gloystein in London and Robin Emmott and Adrian Croft in Brussels and Pavel Polityuk in Kiev; Editing by Anthony Barker)

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