Russia's natural gas dispute with Ukraine worsened, shutting off fuel shipments to Europe for the first time in three years and driving energy prices higher.
Russia and Ukraine blamed each other for cuts as supplies from OAO Gazprom through Ukraine plummeted, deliveries to the Balkans halted and Slovakia declared an emergency. The spat over prices, transit tariffs and debt caused UK gas to jump as much as 27% and came amid freezing temperatures across Europe.
The dispute, the second in three years, shows how Russian President Dmitry Medvedev and Prime Minister Vladimir Putin are willing to use natural resources as a weapon to achieve political goals. European nations are burning more gas, the source of 24% of the world's energy consumption last year, to reduce emissions linked to global warming.
``If Russia does not ensure gas supplies, other alternatives will be considered,'' said Alexander Rahr, director of Russian programs at the German Council on Foreign Relations. ``Both Russia and Ukraine will lose trust in eastern Europe. There won't be winners.''
NAK Naftogaz Ukrainy Chief Executive Officer Oleh Dubina said he would return to Moscow Jan. 8 to resume talks. In 2006, Russia turned off all Ukrainian gas exports for three days, causing volumes to fall in the European Union, and also cut shipments by 50% last March during related debt claims.
Gazprom Deputy Chief Executive Officer Alexander Medvedev told Bloomberg Television that Ukraine shut three export pipelines and said ``unilateral action of the Ukrainians'' caused the shortfall. Naftogaz spokesman Valentyn Zemlyanskyi said Gazprom cut shipments to Europe through Ukraine to 74 million cubic meters a day, compared with about 300 million normally.
As the dispute intensified, arctic air from Siberia pushed into Central Europe, northern France, Italy and parts of the U.K., bringing snow and temperatures below minus 25 degrees Celsius (minus 13 degrees Fahrenheit).
The moves came after Russia and Ukraine agreed yesterday to resume talks on their dispute and as Gazprom warned that Ukraine risks amassing a debt of ``billions of dollars'' if the conflict continues. Russia, which supplies a quarter of Europe's gas, cut shipments to Ukraine on Jan. 1.
Russian gas flows to Bulgaria, Turkey, Greece and Macedonia were halted at the Ukrainian-Romanian border, Bulgaria's Energy and Economy Ministry said. Gazprom pumps 17.8 billion cubic meters of gas a year through Bulgaria to the four countries under a 30-year contract signed in 2006. Bulgaria consumes about 3.5 billion cubic meters of that volume.
Bulgaria raised supplies from its only gas storage facility at Chiren today to 4.3 million cubic meters and called for emergency measures, the ministry said. Russian gas flows through Ukraine and then Romania to the southern Balkan states.
U.K natural gas for immediate delivery gained 13% to 67 pence a therm, a two-month high, in London trading, according to broker ICAP Plc. That's equal to $US9.91 a million British thermal units. A therm is 100,000 Btus. Gas for tomorrow climbed 14% to 69 pence.
Temperatures plunged in Europe overnight, boosting demand for gas to heat homes and businesses. Ukrainian temperatures sank as low as minus 16 degrees Celsius today, according to forecaster CustomWeather Inc. That compares with a seasonal norm of minus 5 degrees.
E.ON Ruhrgas AG, the natural gas unit of Germany's biggest utility, said it would experience ``significant'' cuts in gas deliveries, with Russian supplies piped through Ukraine forecast to fall to zero at the Waidhaus gas transit point on the German- Czech border in the course of the day.
The utility said it would still be able to supply clients as it sourced the fuel from and through other countries. Germany's BDEW energy industry group said today that the same is true of its rivals.
``Our options will also reach their limits if these drastic supply cuts continue and temperatures stay at their very low level,'' Bernhard Reutersberg, Chief Executive Officer of E.ON Ruhrgas, said in a statement.
OMV AG, central Europe's biggest oil company, reported a ``significant'' cut in Russian gas supplies today. It said Russia warned overnight of a 30% to 40% reduction in supplies to the Baumgarten hub today, and further cuts in the early hours of this morning meant 10% of Russian gas was being delivered. It said supplies to Austrian customers were unaffected for now.
Czech Prime Minister Mirek Topolanek said the dispute between Russia and Ukraine on gas prices is becoming ``more serious'' and the effects are spreading across Europe.
Other countries can't be ``held hostage'' by Russia over gas supplies, Topolanek told reporters in Prague today. Ukraine may have to compromise on gas fees in the disagreement, he added. The Czech Republic holds the EU's rotating presidency for the first six months of the year.
Slovakia declared emergency measures after gas supplies from Russia dropped 70%, allowing Slovensky Plynarensky Priemysel AS, the country's dominant gas company, to restrict deliveries to some customers.
``Ukraine is trying to raise stakes as highly and as quickly as possible to force the EU to the negotiating table,'' Chris Weafer, chief strategist at UralSib Financial Corp., said by phone from London. ``It would suit both Ukraine and Russia to have the EU as a mediator.''
Russian gas deliveries to Romania fell 65%, with supplies through the Isaccea 2 entry point cut entirely at 3:05 a.m. today, Romanian Economy Minister Adriean Videanu said. The country also gets gas from a second entry point. Croatia's supply of gas from Russia via Ukraine was halted early this morning, its Economy Ministry said.
Polskie Gornictwo Naftowe I Gazownictwo SA, Poland's largest gas company, said supplies from Russia via Ukraine fell to 15% of planned volumes. The Warsaw-based company was using stored gas to meet demand and would ask its largest industry clients to limit usage of the fuel, Gornictwo said.
Italy's supplies of Russian natural gas have dropped to about 10% of normal levels following OAO Gazprom's cut in shipments through Ukraine, according to Gianni Di Giovanni, a spokesman for oil company Eni SpA.
Gazprom raised its demands on Jan. 4 as Chief Executive Officer Alexei Miller cited a possible price of $US450 per 1,000 cubic meters for deliveries to Ukraine this month, reflecting the average price in countries bordering Russia's neighbor. Ukraine paid $US179.50 for its Russian gas last year and says $US201 would be fair in 2009.
The EU sought to help defuse the conflict, sending a delegation headed by Czech Industry Minister Martin Riman for talks with Ukrainian officials.
Ukraine's political leaders, President Viktor Yushchenko and Prime Minister Yulia Timoshenko, are grappling with a financial crisis that has forced it to seek a $US16.4 billion ($23 billion) International Monetary Fund bailout.
``Neither of them wants to be seen to give in to Gazprom,'' said Igor Kurinnyy, an oil and gas analyst with ING Groep NV.
The former Soviet state got the first tranche of $US4.5 billion last month. An IMF mission will visit Kiev this month to check how the country implements the program and will decide on the second tranche, expected in February.
There were ``no warnings'' from the Russian side on cutting gas shipments, Naftogaz's Dubina said in Kiev. ``They probably decided to stop deliveries to Europe via Ukraine completely.'' He said Ukraine urged the EU to mediate in talks.
Gazprom's Medvedev traveled to Berlin to meet German Economy Minister Michael Glos today. Earlier in London Medvedev said Gazprom is working to diversify its export routes to Europe which bypass Ukraine, including two planned pipeline projects.
``Nord Stream and South Stream will be executed as soon as possible,'' Medvedev said. The Nord Stream link, in which Gazprom owns 51%, is planned to run from Russia via the Baltic Sea to Germany. South Stream, where Eni is a partner, will run from the Black Sea to Bulgaria, where it will split into a southern route to Italy and a northern route to Austria.
Bloomberg News