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Ukraine faces big gas bill rise even with oil drop

Russia's insistence Ukraine should pay market prices for gas means an increase of at least 22% in Kiev's gas bill this year, forecasts by energy consultants Poyry imply.

Russia told Ukraine on Wednesday gas supplies to Kiev, cut since Jan. 1, would resume when both sides signed a new contract at European market prices. Until now Ukraine has paid much less than western European consumers.

After weeks of fierce rowing with Russian gas export monopoly Gazprom, the head of Ukraine's gas company Naftogaz said on Thursday he believed the only remained differences with Gazprom were economic ones.

Naftogaz has argued against any big increases in its gas bills this year, pointing to falling prices for European buyers on oil-indexed supply contracts.

Poyry forecasts the price of Russian gas delivered to Germany should fall by 50% in the first six months of 2009 from $440 at the end of last year.

Even if Gazprom were to agree to sell Ukraine gas now at the price Germany might get it for by summer, it would still mean Ukraine's gas bill swelling more than a fifth when the country is facing severe economic crisis.

“Purely economically, Gazprom has got a very strong case to get the Ukrainians onto market prices,” David Cox, chief consultant at Poyry Energy Consulting in London said.

“The problem is that Ukraine can't afford to pay fully western prices.”

Poyry estimates that the price of gas arriving under long-term oil indexed contracts in Germany, Russia's biggest customer, was around the $440 per 1,000 cubic meters level, compared with the $179.50 Ukraine paid for its gas last year.

Poyry expects western European gas contract prices to fall to around $320 per 1,000 cubic meters by the end of March as a slump in oil prices feeds into gas. Oil hit a high of $147.27 a barrel on July 11, 2008 and was around $42 on Thursday.

Because of the six- to nine-month time lag between oil and gas price movements, European gas prices will fall further to $219 per 1,000 cubic meters in the second quarter.

Noel Tomnay, Principal Analyst, Global Gas Research for Wood Mackenzie, agreed that it was too early to expect a sharp drop in gas prices in Europe.

“You are talking about spring time before contract prices going to start to fall,”

“If you just look at what has happened to the oil price, that will show you how it will go down, not exactly but that's a good indication,” he said, adding that most Russian gas consumers in Europe, with the exception of key transit countries, were on similar contracts.

“That's what the rest of Eastern Europe's contracts are linked to as well,” he said.

During the dispute that has led to widespread gas supply cuts in Europe over the last week, Russia's price demands have varied widely, ranging from $250 to $450 per 1,000 cubic meters of gas this year. (Reuters)