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Fears grow that Russia will turn off gas supply through Ukraine ‘at any time’

The Times

June 30, 2009

Carl Mortished, World Business Editor

The flow of Russian gas through Ukraine may be disrupted at any time, the International Energy Agency (IEA) said yesterday, as it warned about the impact of weak demand and falling prices on the global gas market.

Weak prices will undermine future investments, the IEA said in its Natural Gas Market Report 2009, published yesterday, which reported a fall in gas consumption worldwide — the first decline for 50 years.

The IEA, which monitors energy markets on behalf of consumer nations, is worried about the continuing row between Gazprom, the Russian utility, and Naftogaz, its Ukrainian counterpart, over unpaid gas bills.

Nobuo Tanaka, the IEA’s executive director, said that there were “many concerns about the security of Russian gas supplies”.

One such concern is the difficult economic situation in Ukraine. Naftogaz has admitted that it cannot afford to meet its next payment, due on July 7, and the European Union is trying to broker emergency funds from the International Monetary Fund and the European Bank for Reconstruction and Development.

Mr Tanaka said: “The difficult economic situation in Ukraine makes every monthly payment a challenge . . . The IEA is, therefore, seriously concerned that the flow of Russian gas through Ukraine may be subject to disruption at almost any time.” Ukrainian pipelines are the export route for 80 per cent of Gazprom’s gas shipments to Europe, where it meets a quarter of the Continent’s demand for gas. In January 2006, Gazprom turned off the tap in a confrontation with Ukraine over unpaid bills that left utilities across Europe scrambling for supplies. Fears are growing that a summer cut-off will interrupt replenishment of gas storage needed for the winter.

The depth of the recession has exacerbated Ukraine’s financial troubles and poses problems for Gazprom, which has been forced to cut back its investment by almost a third because of declining revenues. The Russian company earns most of its profits from the export of gas to Europe and Alexander Medvedev, Gazprom’s deputy chief executive, said last week that export revenues would fall by 40 per cent this year because of falling demand and weak prices.

The cash crunch is pushing Gazprom to do deals with foreign investors, notably Royal Dutch Shell and Total, the French multinational. Last week, Total and Novatek, a gas company owned by Gazprom and Gennady Timchenko, agreed to develop together Termokastovoye, a giant gasfield in Yamal, a remote peninsula in the Russian Arctic.

Days later, Vladimir Putin, the Russian Prime Minister, gave his blessing to an offer to Shell to take part in the development of Sakhalin 3 and 4, further phases of the liquefied natural gas project in which Shell found itself embroiled in a row with the Kremlin two years ago. Shell was forced to divest half its Sakhalin stake to Gazprom, losing overall control of its flagship Russian project. The Russian Government introduced tough restrictions on foreign ownership of natural resources. The tide in Russia appears to have turned and a cash-constrained Gazprom appears to be welcoming foreign participation in the gas sector.

The depth of the recession has led the IEA to revisit its December forecast for oil demand. Growth in consumption will be half its previous prediction of an annual one million barrels per day over the next five years.

Azerbaijan deal

Gazprom has signed a big new natural gas deal with Azerbaijan, striking a blow to European efforts to reduce energy reliance on Russia. Moscow will buy 500 million cubic metres of gas annually from next year.

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