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Ukraine in emergency talks with EU neighbors on gas imports

By Pavel Polityuk and Henning Gloystein

KIEV/LONDON (Reuters) - Ukraine is in emergency talks with European Union neighbors on the possibility of importing natural gas from the West, following a leap in the price it pays for Russian supplies, Prime Minister Arseny Yatseniuk said on Friday.

The urgency of securing affordable supplies has grown since Moscow - which annexed Crimea from Ukraine last month - raised its discounted gas tariff for Kiev twice this week, almost doubling it in three days.

Yatseniuk told reporters that one possibility was "reverse flows", in which EU countries would send gas back down pipelines normally used in the transit of Russian supplies through Ukraine to the West.

"We are carrying out emergency talks with our European partners. One way to solve the problem is reverse gas from EU countries," he said, adding that the main candidates for imports were Slovakia, Hungary and Poland.

Ukraine, which is in an economic crisis, covers half its needs with Russian gas. However, relations between the countries became hostile after protesters ousted pro-Moscow president Viktor Yanukovich in February and Russia seized Crimea, leading to the worst East-West crisis since the Cold War.

Yatseniuk said it was possible to send gas down the pipelines in the opposite direction to the normal east-west flow. "On a technical level, the idea of reverse gas raises no problems, and we hope our European partners make the right decision. If it will be to reverse, then it means the price for gas will be $150 dollars lower than Russian gas."

Russia has raised the price to $485 per 1,000 cubic meters, meaning Gazprom, Russia's monopoly gas exporter, charges Kiev about the same as other customers in central Europe. Ukraine will soon get money from the International Monetary Fund under a new loan package but faces large debts and its economy is in chaos.

The discounted price had been part of Moscow's strategy of keeping Ukraine, a fellow former Soviet republic, under its political influence and discouraging Kiev from building closer ties with the EU. Yanukovich's rejection of an EU trade and cooperation deal set off the protests that brought him down.

Yatseniuk has called the price increases unacceptable and warned that he also expects Moscow to increase pressure on Kiev by limiting supplies. Russia has frequently used energy as a political weapon in dealing with its neighbors, and European customers are concerned it might again cut off deliveries.

In Washington, the White House said that U.S. Vice President Joe Biden spoke to Yatseniuk by telephone on Friday. The White House said in a statement that Biden "emphasized the importance of improving Ukraine's energy security and pledged to work closely with Ukraine and other countries across Europe to ensure that no country can use energy as a political weapon."

Independent energy analyst Valentin Zemlyansky said: "At this price for gas, Ukraine will most likely continue to import and ratchet up its debt. It will happen until either side decides to go to arbitration or Russia decides to cut off deliveries of gas to Ukraine."

"If it goes to the court, we could expect a very long ordeal, but if Gazprom cuts supplies, Ukraine will take gas from volumes intended for European consumers," he said.

One source who advises on gas contracts noted that Russia offered the discount in 2010 in return for continuing use of its Black Sea naval base in the Crimean port of Sevastopol.

"With the seizure of Crimea, Moscow now could argue the rebate is no longer valid, hence raising the gas tariff to levels more normal in the region," said the source. "This is, I would imagine, something Kiev may contest in arbitration as it didn't hand over Crimea voluntarily."

LIMITED REVERSE CAPACITY

Russian gas meets around a third of EU demand. About 40 percent flows through Ukraine, with the rest sent to Germany via the Nord Stream pipeline under the Baltic Sea or in the Yamal Europe pipeline through Belarus and Poland.

Poland opened its first West-East gas link on Tuesday as part of an EU drive to ensure greater supply.

Valery Nesterov of Moscow-based Sberbank CIB said reverse gas flows could not go beyond 5 billion cubic meters (bcm) this year, or only about 8 percent of Ukrainian demand.

Poland has a reverse capacity of 1.5 bcm to Ukraine, while Hungary is able to send 3.5 bcm. Romania has the potential for 1.8 bcm, but there has been no firm agreement on its use.

Energy consultancy Wood Mackenzie said regulatory obstacles also had to be overcome.

Ukraine's energy minister Yuri Prodan said Kiev wanted to buy gas from neighboring Slovakia, but the Slovak gas company had declined to let Ukrainians examine its transit facilities.

Slovakia's Eustream, which operates the gas network, denied this. "Eustream is prepared for cooperation with its Ukrainian partners on reverse flows," a Eustream spokesman said. The company added that "meetings scheduled for the next few days should provide answers to questions of technical, financial and time nature".

Slovakia has the potential to reverse flow more than 20 bcm into Ukraine, meeting over a third of the country's gas demand, but not in a hurry. Analysts said it could take another six months for gas to start flowing and the flow would be unlikely to reach maximum reverse capacity.

(Additional reporting by Will Dunham in Washington, Michael Kahn in Prague, Denis Pinchuk in Moscow and Alexander Winning in London; Writing by Thomas Grove; Editing by David Stamp and Mohammad Zargham)

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