UPDATE 1-EU, Ukraine hold talks on gas as tension with Moscow climbs

Tue Apr 8, 2014 1:20pm EDT

Related Topics

* Deadline for Ukraine gas payment expired at midnight

* EU officials say gas storage around half-full

* Questions raised over legality of reverse flow

* Ukraine major gas transit nation for EU supplies (Updates throughout with detail, end of talks)

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.

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 would 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.

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 revenue.

An invitation to gas industry officials to Tuesday's talks, seen by Reuters, said Europe's gas storage levels were comfortable after a mild winter, but it was already time to prepare for the next heating season.

One source close to the talks, speaking on condition of anonymity, said the Commission had asked member states to report back with full details of infrastructure and storage, saying efforts must be made to fill storage well ahead of next winter.

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 taken steps to bolster its energy security, including increased gas storage.

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

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 flows via Ukraine.

DETAILED PLAN

Denmark put forward the idea, adopted by an EU summit in March, 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 last month. "The whole Ukraine crisis has definitely changed the atmosphere during our (energy) discussions."

The European Commission, the EU executive, said Energy Commissioner Guenther Oettinger chaired the two meetings on Tuesday as a follow up to the March summit on energy security.

One meeting brought together industry and Ukraine's energy minister to discuss supply security over the coming months and beyond and the other was of the EU "gas coordination group", at which experts from all 28 members periodically debate storage levels.

"The role of storage and alternative domestic production sources need to be carefully explored," the Commission said in a statement following Tuesday's talks.

Domestic sources of gas refer largely to shale gas, whose development in Europe has been limited by environmental opposition and more challenging geology than in the United States.

In addition the European Union 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.

The source close to the talks said industry was also worried that reversing flows to Ukraine was in breach of gas contracts. (Additional reporting by Henning Gloystein in London, Francesco Guarascio and Robin Emmott in Brussels and Pavel Polityuk in Kiev; Editing by Anthony Barker and David Evans)

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