May 7, 2014 / 1:24 PM / 3 years ago

Time ticking for Ukraine, Russia to avoid new gas war

KIEV (Reuters) - A gas price dispute with Russia must be resolved by June so Ukraine can guarantee stable flows to Europe and avoid a new gas war, Ukrainian Energy Minister Yuri Prodan said.

Ukraine, dependent for more than half of its gas needs on Russia, has balked at demands by Russia's state-controlled Gazprom to pay an almost 80 percent price increase, accusing Moscow of using energy supplies "politically" to punish the country for trying to break free from Kremlin influence.

Kiev has instead set its sights on Poland, Hungary and Slovakia sending some of their gas deliveries, including from Russia, back along the pipeline to Ukraine, known as a reverse-flow delivery, to try to break its dependence on a country it accuses of fomenting unrest in its east.

"It is very important to find answers to questions that have not been found to date," Prodan told Reuters in an interview.

"It is a question of gas deliveries into underground storage, because if there is not enough gas at the beginning of the cold period, Russia will not be able to fulfill its obligations on transit (to Europe)."

Prodan said Ukraine needed 17-20 billion cubic meters (bcm) of gas in storage by mid-October to ensure Russian transit to Europe. At the moment, there in only 8.3 bcm.

"We have some time. We will need to start seriously pumping gas no later than June," said Prodan.

"Ukraine's and Europe's energy security are linked and we want to resolve this problem. Could we resolve this issue by June? I hope we can. We are all interested in this," he said.

Prodan said Ukraine's state-run energy firm Naftogaz submitted several proposals to Gazprom last month, including fixing the price at $268.5 per 1,000 cubic meters until the end of the contract, removing the condition of 'take or pay' and a revision of the current level of Ukrainian gas debts to Russia.

Tensions between Kiev and Moscow have reached new highs since Russia annexed Ukraine's Crimea peninsula two months ago after protesters wanting closer relations with the European Union toppled the pro-Russian president.

Ukraine fears secession referendums to be held this Sunday in Donetsk and Luhansk will be the first step to Moscow annexing the two eastern regions that are inhabited by Russian speakers.

Russia denies any such ambition but says it reserves the right to send in troops if it deems ethnic Russians and Russian-speakers are in danger from what it calls Ukrainian extremists and fascists.

The Kremlin has often used its energy dominance as a tool of foreign policy, cutting off supplies to Ukraine and Europe in 2005 and 2009 after gas price disputes with an earlier pro-Western government in what became known as the "gas wars".

"FAIR PRICE"

Ukraine desperately wants to change the conditions of a 2009 contract, negotiated by an earlier pro-Western government, which locked Kiev into buying a set volume whether it needed it or not at $485 per 1,000 cubic meters - the highest level in Europe.

Moscow made this level more acceptable in later years by offering reductions for cooperation, meaning that in 2013 Ukraine paid around $400 per 1,000 cubic meters.

It then dropped the price to $268.5 when ousted President Viktor Yanukovich turned his back on a trade and association agreement with the European Union.

Now Russia wants the old contract and the old price to hold.

"Ukraine is able to pay for gas, but it will only pay a market and a fair price," said Prodan.

Russia has variously said that Kiev owes $2.2 billion for gas deliveries, then $3.5 billion when it included April supplies, running all the way up to more than $11 billion accounting for its total debt and lost profits.

It has threatened to cut off supplies if Ukraine fails to pay, repeating the earlier "gas wars" when Europe suffered from shortages in the middle of winter.

Prodan said Kiev would take Gazprom to arbitrage court in Stockholm if the two sides failed to agree on price by May 28.

"We submitted a 'message on the negotiations' and Gazprom gets 30 days to respond. If there is no response and no agreement by May 28, the Ukrainian side will refer to the (international) arbitration court in Stockholm," he said.

Ukraine will argue that Gazprom has abused its monopoly position on the market, he added.

Russia has offered no official response, refusing to talk to a new government it says is illegitimate. Gazprom warned Kiev on Wednesday it had just over a week before Moscow will demand prepayment for its gas supplies, which would deepen the worst East-West rift since the end of the Cold War.

Prodan said Ukraine knew that Russia could cut supplies and was actively looking for alternative energy sources.

He said Ukraine had received gas from Poland and this month it had launched a new gas route from Hungary. A third way from Slovakia could be opened in September and Kiev could receive from Europe a total of 6.5 bcm of gas by the end of the year.

Ukraine, which produces around 20 bcm of gas per year, consumed around 50 bcm of gas last year. In 2013 Ukraine imported about 2 bcm of gas from the European Union.

Editing by Anna Willard

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