Europe faces potential gas crisis

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By Stuart Penson
Sun Jan 1, 2006 10:15 AM GMT

LONDON (Reuters) - Europe faced a potential energy crisis on Sunday after Russia started cutting gas flows to Ukraine amid a bitter dispute over prices.

Europe gets about a quarter of its gas from Russia, most of it pumped west via Ukraine. Sunday's move by Russia, which wants Ukraine to pay much more for its gas, comes as European demand hovers near peak levels because of freezing weather.

Analysts say Ukraine could defy Russia and continue drawing gas from transit pipelines, reducing the volumes bound for European customers.

Industry sources said utilities across the continent were on standby to open the taps on back-up storage depots and to ask for more gas from other suppliers like Norway and the Netherlands to safeguard flows to industrial consumers.

This despite reassurances from Russian state-controlled energy giant Gazprom that flows to Europe would not be hit by the move against Ukraine.

"Our members hope that there is enough gas in storage for the next two to three months," said Wulf Binde, senior gas specialist at the VIK industrial energy consumers' association in Germany, the biggest buyer of Russian gas.

"There could be some questions over pipeline capacity within Germany if we have to get gas from other suppliers," he said. "Gas will have to be moved within Germany and that could be a problem."

Germany's biggest supplier, E.ON Ruhrgas, which gets about a third of its gas from Russia, has said it could cope with disruptions as its storage tanks are full.

Italian utility Eni said on Saturday that Gazprom had advised it that gas supplies could be put at risk by the dispute with Ukraine.

European Union officials are due to meet for emergency talks on January 4 to discuss the situation.

Aside from Germany, Russian gas goes to Italy, France and Austria, as well as central European markets including Poland and Hungary, which say they have been preparing for supply disruptions.

Britain, which relies on imports from Belgium to meet winter demand, could also feel the squeeze if Russian flows to mainland Europe start to drop, traders said.

If continental Europe feels uncomfortable about its own supply situation then exporting gas to Britain will not be their top priority, traders said.

Britain's gas supply is already tight as output from its ageing North Sea fields drops.

A squeeze on gas supplies could also force up prices across Europe, which are already close to record highs after rallying in line with oil prices.

Sunday's events will stoke underlying concerns in Europe about future security of supply and reliance on Russia and will put EU energy policy under fresh scrutiny.

"The EU hasn't made any effort to intervene (in the Russia/Ukraine row)," said Jonathan Stern, Russian gas expert at the Oxford Institute of Energy Studies.

"For years we've been telling Russia to move towards market prices and now what are we are going to say -- market prices (for Ukraine) are not such a good idea?"