By Daryna Krasnolutska and Halia Pavliva

Ukrainian Prime Minister Yulia Timoshenko said her country is seeking $5.5 billion to upgrade Soviet-era pipelines to help Europe secure supply routes that carry about a fifth of its natural gas needs from Russia.

The eastern European nation is aiming to increase capacity by 60 billion cubic meters of gas a year, Timoshenko told reporters today in Brussels at a conference before signing a declaration on improving the network with the European Union.

Ukraine’s 1,100 kilometers (680 miles) of pipes transport an average of 120 billion cubic meters of gas a year from Russia to the EU, which consumed 517 billion cubic meters of the fuel last year. Today’s conference comes two months after Ukraine and Russia ended a spat that disrupted gas shipments to the 27- member bloc and renewed calls for alternative supply routes.

“There is currently much talk about new pipelines bypassing Ukraine, but given the global economic crisis there is no reason to invest billions and billions of dollars in new pipelines,” Timoshenko said. “Ukraine’s gas system is very powerful and doesn’t need much money for upgrading.”

OAO Gazprom, Russia’s gas exporter, resumed supplies to the EU via Ukraine after the sides signed 10-year contracts on Jan. 19. The state-run company is promoting the South Stream and Nord Stream pipeline projects, via the Black and Baltic seas respectively, to help supply Europe bypassing Ukraine.

Optimal Route

Timoshenko signed the declaration with Benita Ferrero- Waldner, the European commissioner for external relations, and Energy Commissioner Andris Piebalgs. The European Bank for Reconstruction and Development, the World Bank and European Investment Bank said they were ready to provide financing under certain conditions.

Ukraine represents the best route for gas from Russia, which may be able to participate in talks on upgrading the Ukrainian system, Piebalgs told reporters. “We want to stabilize the situation, not jeopardize” it, he said.

Russia should be involved in the modernization of Ukraine’s pipelines as the system is very closely linked to Russia and it was built in the Soviet era, Russian Energy Minister Sergei Shmatko said in the Belgian capital. The declaration between Ukraine and the EU on the upgrading process should include Russia, he told reporters today before it was signed.

Russian Criticism

“A bilateral approach may lead to a review of all gas contracts and so threatens the EU’s energy stability,” Shmatko said. “Only a three-party agreement will benefit everyone.”

About 2.5 billion euros ($3.41 billion) through 2015 will probably be needed to renovate the system to keep it operating at current levels, the EU said in a statement March 20.

Ukraine, a country of 46 million people sandwiched between the EU and Russia, secured a $16.4 billion standby loan from the International Monetary Fund in November as Timoshenko’s government sought to cover a current-account deficit and support the financial system. The first $4.5 billion was disbursed in the same month.

The former Soviet republic should make some legal changes and improve decision making to get investment from the European Investment Bank, EIB President Philippe Maystadt said today.

Timoshenko, who returned to the premiership in 2007, swapped barbs with President Viktor Yushchenko after the January gas deal, which she negotiated with Russian Prime Minister Vladimir Putin. Yushchenko called the agreement a “capitulation” amid wrangling with this premier, who he fired once already in his term of office, over the economy.

Yushchenko called on his country to spend $2 billion on pipelines and $455 million on doubling storage capacity by adding as much as 30 billion cubic meters of facilities near its western borders. Ukraine can now store 31 billion cubic meters of gas, he said.

Today’s declaration is about Ukraine’s integration into the EU, Yushchenko said, adding that his country remains “open” to talks with Russia.

URL: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aryk4AKGcbRQ