March 1 (Reuters) - The European Union called for rapid progress on modernising the gas sector of Ukraine -- a key transit state for Russian gas -- when new President Victor Yanukovych visited Brussels on Mar. 1.
Yanukovych has said he wants to change a 10-year deal with Russia on gas supplies and has touted the possibility of creating a consortium to manage Ukraine’s pipelines.
The following are details about Ukraine’s position as a transit nation for Russian gas bound for Europe and what Yanukovych may do about his country’s energy policy.
WHY SHOULD EUROPE CARE?
About 20 percent of Europe’s gas comes from Russia via pipelines running across Ukraine. Some southern and eastern countries are almost entirely dependent on the gas.
In January 2009, Russia temporarily cut gas supplies to Ukraine, then those destined to flow further to Europe, in a gas pricing dispute with Kyiv.
As Ukraine ate into its vast reserves and felt little impact from the cuts, European leaders were shocked that a dispute between two non-EU members could affect its own citizens.
In Slovakia, hundreds of companies were forced to shut down or cut production, thousands of people were left without heating in the Balkans and Bulgaria characterised the supply cuts as "catastrophic", likening them to a "terrorist attack".
UKRAINIAN-RUSSIAN GAS DEAL
Prime Minister Yulia Tymoshenko, Yanukovych’s rival, brokered a 10-year deal with Russia to end last year’s dispute.
Under one contract, Ukraine, through its state energy firm Naftogaz, started paying market prices for Russian gas imports. Under another, Russia, through its gas export monopoly Gazprom, started paying market prices for gas transit.
The then president, Viktor Yushchenko, and Yanukovych attacked the deal as unfair. Yanukovych said he could have won a better import price for Ukraine, which depends on Russian gas.
GAS CONSORTIUM
Renegotiating a new gas deal may create another protracted dispute between the two former Soviet states.
Ukraine is traditionally Russia’s largest single country customer, buying about 50 billion cubic metres of gas, though its imports halved last year amid the global economic downturn.
Yanukovych may offset any demands for a lower gas price with a proposal for a gas consortium, with the participation of Russia and the EU, to manage the country’s pipeline system.
"We will propose … the creation of a consortium, which would allow Ukraine to raise the volumes of gas transit to about 200 billion cubic metres," Yanukovych has said. Ukraine usually transits 110-120 bcm of Russian gas a year.
But the idea may come too late — Russia has already begun the Nord and South Stream projects to build pipelines bypassing Ukraine. It would be controversial in Ukraine, where the constitution bans privatisation of the pipeline network.
Although Yanukovych has insisted the infrastructure would not be sold, merely managed by a consortium, for many Ukrainians the pipes that carry Russian gas to Europe are the only leverage Kyiv has in any energy row with Moscow.
EU PARTICIPATION?
The EU wants Ukraine’s creaky Soviet-era pipelines modernised, the gas sector made more transparent and relations between Kyiv and Moscow stabilised to ensure smooth flow of gas.
For that purpose it helped broker a $2 billion loan with the participation of international financial institutions last year but little has been provided due to unfulfilled commitments by Kyiv.
Analysts say European companies may be interested in a consortium running the pipeline system because it would help avoid further supply cuts should Moscow and Kyiv row again.
But reaching agreement with Ukraine and Russia on stakes in the consortium may be more difficult and time-consuming. (
