Ukraine draws on gas reserves in prolonged row

By Robin Paxton and Sabina Zawadzki - Analysis

KIEV (Reuters) - Ukraine, starved of Russian gas, is playing a high-risk waiting game, trying to eke out its fuel reserves until later this year when falling energy prices should mean it can cut a cheaper gas deal with Moscow.

What it cannot do is throw in the towel now and pay the $450 per 1,000 cubic meters of gas that Russia is demanding. Analysts say its economy, saddled with debt and ravaged by the global slowdown, can ill afford that price.

But how long can it hold out for a better deal?

"Ukraine is supplied with enough gas to last somewhere between 100 and 110 days," Viachaslau Herasimovich, energy analyst at independent think tank CASE Ukraine, told Reuters.

He said current reserves in underground storage were enough to last about 80 days, while the extra days were calculated from the amount of gas Ukraine itself would produce between now and the exhaustion of existing reserves.

Ukraine's crisis-hit economy, forecast to shrink by up to 5 percent this year, will struggle with a sudden switch to market prices demanded by Russian gas supplier Gazprom, which are currently more than double the discounted rate paid in 2008.

Ukraine must repay $30 billion of its debt this year, just as its chemical and steel sectors, which rake in more than half the national export revenues, scale back production in line with the global economic slowdown.

There is, however, one blessing to the downturn. "Ukrainian industry, at this point of time, does not require as much gas as it did last year," said Herasimovich.

He estimated consumption this year would drop to 60 billion cubic meters from 70 billion in each of the last five years.

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Ukrainian state energy firm Naftogaz says reserves in underground storage total 16.5 billion cubic meters. Average consumption rates suggest these alone can last over two months.

"That should be enough to last until the end of the heating season (in March)," said Volodymyr Saprykin, analyst at the Kiev-based Razumkov think tank.

"But one must take into account the technical complexities of supplying the entire country with our own gas alone. Some businesses, hospitals and schools will be closed as it's not permissible to carry on the gas war to the end of all reserves."

The "war" appears to be escalating. An EU-backed deal cleared Russia to start pumping to Europe via Ukraine, but within hours Gazprom accused Kiev of stealing gas for itself, with support from the United States.

This threatens the transit deal before the ex-Soviet rivals have even managed to renew their own talks on 2009 supplies.