By Aleksandar Vasovic, Associated Press (AP)

Kiev, Ukraine, Thursday, December 29, 2005

KIEV – Ukraine’s people won’t freeze and its factories won’t go dark if
Russia follows through on its threat to cut off crucial natural-gas
supplies, Ukraine’s state-run gas company said Thursday. The two countries
are in tense talks to resolve their dispute before a Jan. 1 deadline set by

Russia’s state-run natural gas monopoly OAO Gazprom(GSPBEX.RS), which
provides about a third of the gas used in Ukraine, plans to halt gas sales
to Ukraine on Jan. 1 unless the country agrees to a four-fold price

Gazprom also supplies about half the gas consumed by the European Union and
most of that goes through pipelines that cross Ukraine, raising concerns the
dispute could affect supplies to the West. Gazprom has pledged that
supplies to European customers won’t be affected, but a spokesman for
Ukraine’s state-run gas provider Naftogaz (NGAZ.YY) questioned that.

If Gazprom stops selling to Ukraine, “they can probably reduce gas pressure
in the pipelines. Nobody quite knows what happens then … it will probably
affect other European customers,” Dmytro Marunich told The Associated Press.

In a brief 2004 dispute with Belarus, Gazprom entirely shut down the supply
to that country’s pipelines, which also affected gas transiting to Poland
and Germany.

However, Gazprom would be unlikely to risk alienating European countries
with a full shutdown of the flow through Ukrainian pipelines, which handle
about 80% of the Russian gas going to the E.U. Marunich said he did not
believe Gazprom had the technical capacity to completely shut off the
Ukrainian pipelines. Gazprom officials in Moscow couldn’t immediately be
reached for comment.

Ukrainian Energy Minister Ivan Plachkov was in the Russian capital for talks
on the dispute. Russian Energy Minister Viktor Khristenko said Thursday that
no agreement had yet been reached. As the prospect of a Russian supply halt
loomed, Marunich said Ukraine wasn’t in immediate danger.

The country maintains gas storage facilities with a capacity of about 40% of
the country’s annual consumption. Marunich declined to say how much was
currently in storage, but said the country has enough “to keep us afloat
through the fall and winter under normal circumstances.”

Ukraine currently pays $50 per 1,000 cubic meters of gas. Gazprom is
demanding that the price in 2006 rise to$220-230, saying that is more in
line with world markets.

Russian President Vladimir Putin on Thursday offered Ukraine $3.6 billion in
credits to help meet the higher gas price. Ukrainian President Viktor
Yushchenko rejected the offer, the Interfax news agency reported, saying his
country was thankful for the proposal but that “Ukraine does not need these

“Ukraine will rely on its own resources under a clear, correctly and
objectively formed price,” the agency quoted him as saying.
Ukrainian officials say they want a price increase phased in over several
years and claim the sudden huge price hike would cripple industry;
energy-intensive steel and heavy industries are a key component of the
struggling country’s economy.

“This is a price that Ukraine will never accept,” Yushchenko said Thursday
according to the ITAR-Tass news agency. “This price is a provocation.”

The dispute has brought to a boiling point the tensions that have strained
relations between Moscow and its former imperial satellite since the
reformist Yushchenko came to power in Ukraine after last year’s Orange
Revolution, promising to move his nation of 48 million toward integration
with the West.

Along with Russia’s supplies, Ukraine gets about 45% of its gas from
Turkmenistan and the remainder is domestically produced.
Gazprom said Thursday it had agreed to buy from Turkmenistan 30 billion
cubic meters at $65 per 1,000 cubic meters. The company said that 15 billion
cubic meters would be delivered from Turkmenistan in the first quarter of
2006 and that terms for gas sales for 2007 would be decided in the second
half of 2006.

Analysts say Turkmenistan was expected to produce 65 billion cubic meters of
gas next year. Piping 30 billion to Russia and reserving another 20 billion
for internal use and exports to Iran, leaves about 15 billion for Ukraine –
far short of the 35 billion it wanted.

“The signing of this contract means that less gas will be left for Ukraine –
for their direct purchases,” said Valery Nesterov, oil and gas analyst with
Troika Dialogue brokerage. “In this gas dispute Russia gets another
instrument of pressure over Ukraine.” -30-

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