By Ewa Krukowska

Europe is less likely to suffer shortages in Russian natural gas supply this year after Ukraine signed an agreement with the European Commission and international financial institutions, the European Union said.

“This is an important step forward, reducing the risk of a gas crisis this year and helping the long-term viability of the gas sector,” Amadeu Altafaj Tardio, a commission spokesman, told a news conference in Brussels today.

The European Bank for Reconstruction and Development, the World Bank and the European Investment Bank will consider offering Ukraine as much as $1.7 billion in loans to support an overhaul of its natural-gas industry and increase the security of gas supplies from Russia to the European Union, the institutions said last week.

Price disputes between the two ex-Soviet neighbors have affected supplies to Europe twice since 2006. Russia provides about a quarter of the region’s gas, 80 percent of which flows via its eastern neighbor.

Ukraine, battered by the global economic crisis, is seeking funds to ensure it has sufficient gas to pump into underground storage before the European winter. State-run energy company NAK Naftogaz Ukrainy plans to buy about 3 billion cubic meters of the fuel a month from OAO Gazprom in the third quarter.

Underground Storage

“The deal should help Naftogaz pay for sufficient gas to pump into its underground storage facilities to prepare for the 2009-10 winter heating season, as well as meet its monthly deadline to pay Gazprom for Russian gas supplies,” Andrew Neff, an analyst at IHS Global Insight in Washington, wrote in a research note today.

The company needs to pay for Russian gas purchases in July before an Aug. 6 deadline or risk being forced to pay for deliveries in advance.

Naftogaz, which last week had its long-term foreign and local currency ratings cut four levels to CC by Fitch Ratings, is struggling with debt. Utility companies paid for 47.2 percent of gas consumed in the first half of 2009, according to the Fuel and Energy Ministry.

The EBRD said on July 31 that subject to Ukraine’s overhaul of its gas sector the bank could propose funding of up to $300 million for immediate Naftogaz working capital, and next year up to $450 million for investment.

The World Bank will consider providing budget support to the government through a loan of up to $500 million and the EIB may offer up to $450 million for long-term investment, the banks said.

“The agreement is a victory for the European Union in working proactively to avoid a repeat of the January 2009 Russia-Ukraine gas war, but the key to the success of the deal will be Ukraine’s commitment to follow through on reforms, particularly with a presidential election coming up in January 2010,” Neff said.

U.K. gas for delivery this winter, the six months through March, fell as much as 2.5 percent to 40.25 pence a therm. The U.K. is Europe’s biggest user of the fuel. 

URL: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSrMQESkd370#