Power Struggle

Gazprom chief executive Alexei Miller proposed the measure while briefing Prime Minister Vladimir Putin on the standoff since the company shut off supplies to Ukraine on January 1 over non-payments and a pricing dispute.

"Good, I agree. Let's begin the cuts from today," Putin was reported to have responded.

Miller said Gazprom would instead increase gas deliveries to Europe through Belarus and its Blue-Stream pipeline under the Black Sea.

The news came after Russia accused Ukraine on Monday of refusal to ship additional volumes of Russian gas via its pipelines as the deepening dispute over gas transit tariffs and pricing began to threaten supplies to European customers.

Russian gas makes up one-quarter of the European Union's needs, 80 percent of which travels through Ukraine.

The new cuts would lower supplies transiting through Ukraine to some 250 million cubic meters per day.

In answer to Gazprom's claim that Ukraine stole over 25 million cubic metres of gas intended for European customers from Sunday to Monday, Ukraine's courts annulled its transit agreement with Gazprom.

It ruled the contracts lasting until 2010 invalid because they had been signed by an official from the state-controlled firm Naftogaz, who was not authorized by the government to agree to such deals.

Earlier, Gazprom said Ukraine had closed a way station providing gas to the Balkans.

"I can't predict how long we will be able to cope with the current volume received, but ... the situation is worrying," Dimitar Gogov, head of Bulgarian state gas monopoly Bulgargaz, was quoted by news agency Itar-tass as saying. Supplies to the country dropped by 15 percent, Bulgargaz said.

Following meetings in Paris on Monday, Gazprom's deputy chairman Alexander Medvedev reaffirmed pledges to meet commitments "by any means" to European customers.

The EU is heavily reliant on Russian gas, which passes through Ukrainian pipelines for its energy needs. In early 2006, a similar Russo-Ukrainian dispute caused disruptions and price spikes across much of Europe.

Feeding the stand-off are long-simmering political tensions between the two post-Soviet neighbors.

Moscow resents moves by Ukraine's pro-Western leadership to join NATO and its support for Georgia during that country's war with Russia in August.

By Monday evening, there was no sign of negotiations restarting in the deadlock and both parties threatened to bring their complaints to European courts.

EU president Czech Republic hit for second day

The Czech Republic's natural gas deliveries dropped for the second day, according to Martin Chalupsky, a spokesman for the country's leading gas importer, RWE Transgas, who said the firm received 9.5 per cent less gas than ordered for the day.

He said that the drop amounted to 1.7 million cubic meters of gas, or 2 percent of country's daily consumption. He said the reduction would have no impact on Czech consumers.

"As the drop it so small we are able to cover these shortfalls by raising supplies from underground storage tanks," Chalupsky told the DPA news agency.

He said the firm had enough gas for two months if daily delivery drops of 5 to 20 per cent would continue amid current freezing conditions.

"We are convinced that we will cover the whole winter season with storage supplies," he added.

The company, which commands a 71 percent share on the Czech market, recorded the first delivery drop of 5 per cent on Sunday, four days after Russia's gas export monopolist Gazprom turned off gas supplies to Ukraine.

The European Union's eastern members have issued conflicting reports on gas delivery rates since Friday.

The EU, which is chaired by the Czech Republic until June 30, has so far rejected calls to broker what it calls a "commercial dispute" between the two neighbors. The bloc has however strongly urged both countries to reach a deal and renew full gas supplies to the 27-member bloc.

Poland, Romania, Hungary and Slovakia also reported fluctuations and pressure drops of up to 30 percent in gas pumps, but all said they had enough gas to meet demand.

The Hungarian minister responsible for energy matters said late Monday that Ukraine had informed the Hungarian government of its intention to reduce gas flow to Hungary by almost a quarter.

Speaking to the press after meeting with the prime minister, Csaba Molnar said a large portion of that gas was earmarked for Serbia and Bosnia. He warned that deliveries to those countries might be affected if Ukraine goes ahead with the reduction.

EU sees no immediate threat to gas supplies

The EU Commission said Monday there was no immediate threat to natural gas supplies in Europe despite the drops in supply.

"There have been some irregularities but there is no substantial disruption of supply to member states at this point of time," a spokesman for the EU's executive arm said, making a similar assurance to industry.

Despite the reassurances, EU envoys were to hold a hastily-arranged meeting in Brussels on the dispute later Monday while an EU fact-finding delegation was heading to Kiev to discuss the problem with Ukrainian officials.

Although EU countries are heavily reliant on natural gas imports from Russia, the bloc has tried to avoid being sucked into the role of arbiter.

It has described the crisis -- sparked by charges that Ukraine has failed to pay bills owed to Russian gas monopoly Gazprom -- as a strictly bilateral commercial dispute.

Russia provides around 40 percent of the gas imported by the EU, accounting for about a quarter of the bloc's overall gas consumption, with most of this transiting pipelines through Ukraine.

Gas stocks high as Europe enters period of strong demand

EU Commission spokesman Ferran Tarradellas told reporters in Brussels that gas stocks were high in Europe, though they would come under strain because of the cold weather.

"The level of the stocks is quite high," he assured. "This is why we are confident that there is going to be no problem to supply in the coming weeks for consumers in Europe."

Natural gas supplies have been affected in Romania, Bulgaria, the Czech Republic -- which holds the EU's rotating presidency -- and Poland.

Warsaw says that its shortfall in gas transiting Ukraine is being compensated by a greater supply of Russian gas via another pipeline through Belarus.

Radek Honzak, spokesman for the Czech EU presidency, said it had been possible to compensate for any losses though other routes as well, through Norway and the Czech Republic.

Tarradellas repeated the European Commission's assertion that the problem is a bilateral one for Moscow and Kiev to sort out themselves, while stressing that Brussels was calling for a swift end to the dispute and insists on the contracted supply of gas to Europe.

"It is a commercial dispute and it has to be solved by the two parties," insisted Tarradellas, spokesman for EU Energy Commissioner Andris Piebalgs. "It is a bilateral issue between Ukraine and Russia and we are not going to come into evaluate who is responsible for what."

Other EU officials have said that while EU authorities do monitor the amount of gas entering at the bloc's borders, there is no independent monitoring system to check on the supply from Russia to Ukraine.

Russian authorities have accused Ukraine of "stealing" gas meant for Europe while Ukraine says that Gazprom is not providing enough for supplies to be assured.

Transit shipments blocked

Meanwhile, Ukraine has blocked transit shipment of Russian natural gas to Europe, escalating the acrimonious energy dispute between the two countries, Ukrainian media reported Monday.

Executives from Ukrainian natural gas monopolist Naftogaz Ukrainy refused late Sunday evening to receive 15 million cubic meters of Russian natural gas per day in the Ukrainian gas pipeline network, citing absence of a contract to do so, Korrespondent magazine reported.

The volume barred was small relative to the overall volume of Russian gas still transiting Ukraine en route to European consumers, currently some 310 million cubic meters per day, according to a Channel 5 television news report.

The 15 million cubic meters, had it gone through, would have been an increase over the standard winter volumes of gas shipped by the Russian natural gas monopolist Gazprom to Europe, aimed primarily at giving European energy companies more gas needed for heating as severe cold weather moves through Europe.

The Ukrainian refusal to sanction an increase in Russian gas shipped to Europe -- under normal circumstances a routine matter handled by Russian and Ukrainian energy technicians -- marked the first active refusal by Ukraine to sanction a Russian increase in natural gas exports to Europe since the onset of the latest natural gas crisis between the two countries.

The current Russo-Ukrainian energy conflict came to a head on the first day of 2009, when a gas shipment contract between the two countries became ineffective.

Naftogaz officials on Monday said the 15 million cubic meter shipment planned by Gazprom could not legally be received into Ukraine, as a Kiev court on Sunday banned the Ukrainian state-owned firm from moving Russian gas for the price of 1.6 dollars for 1,000 cubic meters of gas over 100 kilometers. That is the contract shipping price for 2008, according to an Interfax news agency reported.

Ukraine demanding more money in new deals

The Ukrainian reduction came after four days of threats by Ukraine to reduce shipments of Russian gas to Europe if a new gas trade contract is not signed soon.

Ukrainian President Viktor Yushchenko has said that the 2008 gas transit shipment price of 1.6 dollars is unacceptable, and must be increased in a new gas shipment contract.

Gazprom squarely opposes the Ukrainian position, with Russian company's managers saying the transit shipment price charged Russia by Ukraine is fixed by other contracts effective through 2010, and is not subject to negotiation.

Gas transit pricing is only one of several issues dividing Moscow and Kiev in the conflict. Other key disagreements include the price of Russian gas sold to Ukraine, possible payment of hundreds of millions of dollars of penalty fees by Ukraine to Russia, and possible siphoning of Russian gas by Ukraine during the first days of 2009.

The terms of natural gas transfers from Russia to and through Ukraine are critical to both countries' economies. Natural gas exports are Russia's single largest export earner. And cheap natural gas supplies are critical to the competitiveness of Ukraine's steel and chemical industries, sectors long considered by economists in the former Soviet republic to be the main engines of Ukraine's now-ailing economy.

Both countries currently are holding hard-line positions in the dispute, with Gazprom chairman Aleksei Miller demanding Ukraine agree to a natural gas price higher than those prevailing in Europe, and his Naftogaz counterpart Oleh Dubina declaring Ukraine has gas reserves of its own sufficient to outlast any Russian embargo, even if it meant halting all gas shipments to Europe.

A lengthy standoff between Ukraine and Russia over natural gas, with a potential total stop to Russian gas exports to Europe, could have a devastating effect on European energy markets. Roughly one quarter of Europe's natural gas imports come from Russia, and 80 per cent of Russian natural gas exported to Europe gets to market via Ukrainian pipelines.