Canadian Help in Ukraine-Russia Gas Crisis Welcome

The Russia-Ukraine crisis over the transit of gas to European markets is still unresolved, and now the rest of Europe has been pulled into the dispute.

It has been Ukraine`s position since President Viktor Yushchenko came to power in 2005 that we want to be a reliable transit partner for both oil and natural gas between Europe and Russia. We also want to create a fair, transparent and modern international gas transit system based on Western models, with fixed, long-term agreements with Russia for our own gas as well as for the proper transit of gas to Europe. We want to cut out middlemen, such as RusUkrEnergo, who have been siphoning off billions of dollars from the gas transit system with no benefit or value added in return.

In 2008, Ukraine was finally able to achieve three interim agreements in the field of gas. These agreements envisage a gradual three-year transition to world market prices for gas and gas transit, as well as the elimination of all intermediaries such as RusUkrEnergo.

Whereas the Ukrainian side has strictly adhered to the above agreements, and used them as the basis of its negotiations with Russia, Gazprom, at the instruction of their prime minister, put forward conditions that contradict the above bilateral agreements, and also contradict current market conditions in Europe.

While almost all market gas-price formulas quite logically include an oil price reference constituent, and, as we know, recently oil prices have dropped significantly, surprisingly Russia proposed gas prices to Ukraine that were almost triple the 2008 prices—in contradiction to the agreements above, which called for the price increase to be phased in over three years. At the same time, Gazprom has proposed to keep the transit price for gas through Ukraine`s territory at the old level—less than half current market prices.

Russia also raised the issue of the current debt of Naftogaz to Gazprom for recently purchased gas, and as a precondition, demanded the immediate payment of the debt before any contract could be concluded for 2009. The Ukrainian side fully paid this debt on Dec. 23, despite the fact that it was entitled to defer the payment. But this fact did not stop further stories by the Russian side on this subject—suggesting that another $600 million was owing—nor did it resolve the negotiations for the price of gas for Ukraine for 2009. Instead the issue of privatization of the Ukrainian gas transmission infrastructure seemed to be of main interest for the Russian side, which is not acceptable for Ukraine.

As a result of Russia`s blackmail and bad faith negotiations, gas supplies have been jeopardized not only to Ukraine, but to many countries of the European Union. Russia unilaterally cut off gas to Ukraine on Jan. 1, 2009. Ukraine used its own domestic and stockpiled gas to continue to guarantee the regular transit of gas supply through Ukraine to the EU. But at 7:45 a.m. on Jan. 6, gas supplies to Ukraine were stopped by the Russian side, alleging that "Ukraine had illegally siphoned off Russian gas intended for transit."

This allegation was completely untrue, but the subsequent reduction of gas at the Russian border substantially decreased the gas pressure in the pipelines, making it technically impossible for Ukraine to provide transit to the EU.

Despite the events of the last two weeks, Ukraine has attempted to continue negotiations with the Russian side in order to resolve this political brinksmanship in a proper, businesslike manner.

Ukraine has met with representatives of Russia and the EU, including travelling to Brussels at various times over the last eight days, and on Friday in Moscow, trying to conclude an agreement with Gazprom. Moreover, Ukraine has invited the European Union to monitor both such negotiations and the subsequent fulfillment by the parties of their obligations. And Ukraine also proposed, as an immediate measure, that EU observers physically monitor the amount of gas coming into Ukraine across the Russian border, and the amount of gas exiting Ukraine on its Western borders in order to verify that it is not Ukraine that is at fault in delivering Europe`s gas supplies across its territory.

Ukraine would welcome Canada`s help in this matter, as a mediator, as an honest broker and a respected international actor.

Ukraine is also very interested in Canada`s expertise in the transportation of energy resources and gas pipeline maintenance. Canada has some of the largest oil and gas pipelines in the world, operating over great distances and across international borders, operated without interruption, with fair transit fees and transparent pricing structures.

It is our hope that this Canadian expertise could be useful in helping Ukraine to not only resolve its dispute with Russia, but also to establish a fair, transparent and modern international gas transit system in Ukraine based on Western best practice models.

By Ihor Ostash is Ukraine`s ambassador to Canada