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Russian Supply Still Off

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The long-awaited deal to restart limited supplies of Russian natural gas through Ukraine to Europe proved short-lived, as shipping disagreements resulted in flows halting less than three hours after they restarted Tuesday morning under supervision, with both sides blaming the other. Several Eastern European countries hovered on the brink of widespread power outages and communal heating systems in many Balkan cities stayed shut off (p7). Gazprom supplies via Belarus to Poland and Germany continued. But it is Ukraine that normally provides the route for 70%-80% of Gazprom's exports to Europe. Gazprom Deputy Chief Executive Alexander Medvedev said Tuesday that Ukraine had unexpectedly blocked Russian flows, forcing Gazprom to declare force majeure on its supply contracts with European consumers. "We believed that the door for Russian gas would be opened, but again it is closed by the Ukrainians," Medvedev said. According to Gazprom, Ukraine notified the Russian company on Tuesday that it would take roughly 36 hours for Russian gas to reach European consumers once shipments resumed, a fact that Gazprom interprets as proof that Ukraine had been siphoning volumes out of the system for its own use. Gazprom cut off supplies to Ukraine at the start of the year and then cut off all flows through the country on Jan. 7, claiming that Ukraine was illegally stealing transit gas. Officials with state Naftogaz Ukrainy said it was unable to continue pumping gas to Europe because pressure in the pipeline system was too low and that the terms they were being forced to ship gas under were "unacceptable." Ukraine said the shipping plan that Gazprom had presented late Monday night, to deliver some 76.6 million cubic meters (2.7 billion cubic feet) to consumers in the Balkans and Slovakia on Tuesday, was impossible because it would provide too little pressure for the pipelines. The latest stumbling block centers on the terms for transit of gas through the Ukrainian pipeline system to Europe. Ukraine, which is the corridor for roughly 80% of Russia's gas supplies to Europe, is taking natural gas out of the pipeline system in order to supply the pumping stations along the pipeline, claiming that Gazprom is not paying the agreed rate for transit. Ukraine had previously purchased the volumes from Russia, but without a supply agreement they could not buy gas to power the line. According to Gazprom's Medvedev, the volume that Ukraine is demanding is massive, amounting to some 140 million cubic meters (4.9 billion cubic feet) per day, including 76.6 MMcm/d to power systems that are not part of the export route. The costs of the standoff are immense, both financially and politically. Russian Prime Minister Vladimir Putin said Sunday that Gazprom had lost an astounding $800 million because of the crisis. Analysts suggest the actual figure could be significantly higher, as Gazprom is losing some $100 million per day in sales to European consumers. With gas prices set to drop considerably in the coming months as the sharp fall in crude oil factors into Gazprom's time-delayed contracts, the Russian firm will not be able to make up the losses with later sales. The long-term damage to the Gazprom brand could be even larger, hindering the company's planned expansion into Europe and its massive supply projects, including the Nord Stream and South Stream pipelines. Bulgaria, hitherto a strong ally of Moscow, has begun making plans for a pipe that in the future could carry regasified LNG north from Greece (p2). Politically, the reputations of both Russia and Ukraine are suffering from the incident. With parts of Slovakia and Bulgaria already reporting power outages because of the supply shortfalls, Czech Prime Minister Mirek Topolanek, whose nation currently holds the European Union presidency, on Tuesday called Ukrainian Prime Minister Yulia Tymoshenko to demand an explanation for the shutoff and suggested that Ukraine consult with EU industry specialists to help resolve technical issues preventing the resumption of shipments (WGI Jan.7,p1). Russia's relations with Europe and the West have similarly suffered. Gazprom's Medvedev on Tuesday effectively accused the US of orchestrating the standoff through a Dec. 19 strategic agreement with Ukraine that pushed Kiev to establish energy independence. Moscow's relations with the West, and Washington in particular, are already at a low following Russia's much-maligned August conflict with Georgia (WGI Aug.13,p3). Impact On National Gas Supplies Of Halted Russian Supplies Via Ukraine† Country Cut Bulgaria 100% Slovakia 97% Greece 80%* Austria 66% Czech Republic 71% Slovenia 50% Hungary 45% Romania 34% Poland 33% Italy 25% France 15% Germany 10%*** Croatia** 40% Serbia** 100% v Bosnia-Herzegovina** 100% v Macedonia (Fyrom)** 100% Moldova** 100% † as reported by EU Gas Coordination Group on Jan. 9, 2009; ** non-EU states; * via Bulgaria and via Turkey;

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