Russia-Ukraine gas row highlights EU's dependency

By Daniel Fineren - Analysis

LONDON (Reuters) - Russia's decision to cut off gas supplies again to Ukraine underlines the urgent need for Europe to reduce its dependency on Russian supply, because the annual row over payments seems unlikely to end soon.

Russian gas export monopoly Gazprom cut off Ukraine in the middle of winter for the second time in three years on Thursday over a contract dispute.

Although both sides said they would not jeopardize supplies to the rest of Europe, and Gazprom increased the flow to other European countries, the continent remains vulnerable. The European Union receives a fifth of its gas from pipelines crossing Ukraine, and a similar dispute in 2006 caused a brief fall in deliveries to the bloc.

The EU has urged a quick resolution and called for the two sides to reach a long-term agreement which ends the regular rows for good. The International Energy Agency said commercial disputes should not be allowed to affect Europe's gas supplies, but analysts warn that payments are only part of the problem.

"They have had three years to come up with an arrangement with Ukraine and of course they could have at any time in the summer not supplied the gas. They choose January 1 to sharpen up the issue," said Dieter Helm, professor of energy policy at the University of Oxford.

"What this tells you is that politics are to the fore in Russian gas supply ... (Prime Minister Vladimir) Putin will be seeing how far the European Union will let him play his policy out regarding Ukraine ... And Europeans will be reinforced in their desire to diversify away from their increasing dependency on Russian gas."

Analysts agree that Russia sees its position as the world's largest gas exporter as a powerful political tool. But some blame Ukraine's reluctance to pay for energy on time and at a price comparable to what western European buyers pay.

"Ukraine simply has to pay what it has agreed to pay when the contract says it should pay. This then avoids any repercussions," said Jonathan Stern, director of gas research at the Oxford Institute of Energy Studies.

"If Ukraine refuses to act in a correct commercial manner, then we shall return to this situation every year."

Stern warned that while Kiev has assured the EU it will not divert any of the Russian gas flowing across its territory to the rest of Europe, it is technically able to.

"Ukraine has the ability, although not the contractual right to take gas destined for Europe and nobody can stop them."

Ukraine has already begun drawing down its gas stocks to meet domestic demand for the key winter heating fuel. It says it has stored 17 billion cubic meters -- 22 percent of its annual consumption. But if it failed to reach agreement with Moscow before those stocks ran out it could be faced with the choice of letting its own people freeze or diverting Europe-bound transit gas -- despite its promises not to.

MILD WINTER

By chance, a relatively mild start to winter and falling industrial energy use in Europe because of recession means there is plenty of gas in storage to meet demand for at least a week if the halt in Russian exports to Ukraine has the knock-on effect of reducing flows further west.

Three years after the last such dispute, European energy security still depends largely on the safe passage of gas pumped across Ukraine.