November 13, 2009
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Gazprom Has ‘Everything’ in Place to Avoid European Gas Cuts

Gazprom Has ‘Everything’ in Place to Avoid European Gas Cuts

OAO Gazprom, the world’s biggest natural-gas producer, expects to maintain contracted supplies to Europe this winter, avoiding a repeat of a dispute with Ukraine that disrupted shipments in January.

 “We have everything” in place to ensure there will be no renewed conflict, as long as Ukraine remains “in compliance with the transit and offtake obligations,” Deputy Chief Executive Officer Alexander Medvedev said yesterday in a Bloomberg Television interview in Washington.

Russian Prime Minister Vladimir Putin has questioned Ukraine’s ability to pay for gas. On Nov. 2 he called on the European Union to lend the country at least $1 billion to ensure secure fuel transit. Ukraine, which paid for October supplies on time, has asked to use International Monetary Fund financing to pay for November imports, Deputy Prime Minister Hryhoriy Nemyria said yesterday.

 Russia supplies a quarter of Europe’s gas, most of which is sent via Ukraine. The two countries signed a 10-year supply and transit contract in January after Gazprom cut shipments to its neighbor for almost two weeks amid a pricing dispute. Under the new contract, Ukraine must pay for gas on a monthly basis.

“Ukraine is paying in due time all the outstanding amounts and what we are looking for is that they will continue to do so,” Medvedev said. “We would hope that political ambitions will not allow such things to repeat.” January Election Ukraine’s leaders, including the president, prime minister and parliamentary speaker, are competing in elections scheduled for Jan. 17.

The nation may delay payments for Russian gas imports that month if the IMF is late with funding, Nemyria said. Russia halted shipments to Ukraine on Jan. 1 as the two countries bickered over pricing and outstanding debt. The cutoff disrupted deliveries to more than 20 European nations, prompting calls for diversified gas supplies.

 As part of the accord that ended the dispute, Ukraine agreed to pay for gas within the first seven days of each month. Ukraine, which relies on Russia for about 70 percent of its energy needs, hasn’t been charged penalties by Gazprom after taking less gas than contracted under long-term supply accords, Medvedev said.

Gazprom “took into account the very difficult economic situation in Ukraine,” he said, adding that “the amount applicable in fines is calculated in billions and billions of dollars.” Consumption Drops Ukraine, whose industries have been forced to shutter factories to survive the economic crisis, used “significantly” less than 3 billion cubic meters of Russian gas last month, President Viktor Yushchenko’s energy aide said Nov. 3.

Gazprom had the right to fine the country as much as $7 billion because it has taken 12 billion cubic meters less than contracted this year, Bohdan Sokolovskyi said. Regardless of transit problems, Gazprom’s sales volumes to Europe and other export markets fell 24 percent in the first half from a year earlier as the economic slowdown eroded demand, the company said Nov. 9. European consumption of Russian gas has now recovered to pre-crisis levels, boosting sales, it said.

 “Nowadays we see that demand is high not only compared with last year but also with 2007, which was the last year of economic prosperity,” Medvedev said yesterday. “The winter will be cooler than average and that will also influence demand.” Gas use will rise further in the next two to three years, narrowing the oversupply caused by the recession and new production projects, Medvedev said.

 Asian, U.S. Markets Gazprom exports most of its gas by pipeline. This year it started shipping liquefied natural gas by tanker from Russia’s Far East, targeting primarily Japanese customers, and has plans to send LNG from its Arctic Shtokman field to the U.S. starting in 2014. The company, which opened its U.S. trading unit this year, will ship as much as 90 percent of Shtokman’s LNG to North America by 2018, John Hattenberger, head of the unit in Houston, said last month. Gazprom targets as much as 10 percent of the U.S. gas market by 2020, Medvedev said in June.

 The company may face competition from domestic producers, some of whom have boosted output by extracting gas from so- called unconventional deposits such as shale rock and coal seams. “There is a silent revolution taking place in the U.S.,” International Energy Agency Chief Economist Fatih Birol said yesterday at a press conference in London. Birol was speaking after the IEA said the world may have an “acute glut” of gas in the next few years because global production of unconventional fuel is set to rise 71 percent between 2007 and 2030. BP, Shell Companies including Chesapeake Energy Corp., BP Plc, Royal Dutch Shell Plc and Statoil ASA are investing in such gas resources, which were inaccessible until producers developed new drilling techniques in the 1990s.

 “We are not afraid of competition, we are used to it,” Medvedev said. The U.S. needs LNG as well as other sources of gas, he said, adding that Gazprom is “carefully analyzing” the development of shale gas extraction in the country. “The question is not who will replace whom, but how it will be combined.” U.S. LNG imports may rise 33 percent this year to about 470 billion cubic feet, the Energy Department said yesterday in its Short-Term Energy Outlook.

Last month the government estimated 2009 imports would climb 34 percent. Gazprom said Oct. 20 that it may consider acquiring a U.S. shale-gas producer to gain the know-how to exploit similar fuel deposits at home. Shale rock is fractured and injected with substances such as water and sand to make gas flow. “An acquisition of a shale-producing company could make a lot of sense,” Hattenberger said. “Russia has huge shale reserves.”

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