EU, Ukraine pledge gas reform as Russia fumes (Roundup)

Mar 23, 2009, 11:54 GMT

Brussels - European Union and Ukrainian leaders on Monday pledged to work together on reforming Ukraine's gas transit system as Russia accused the two sides of working behind its back.

'It's our firm intention to modernize our gas transit system, to ensure it complies with all European standards. We want the consumer to know where the supplies are at all times and how (they) are being spread,' Ukraine's President Viktor Yushchenko told a conference on the modernization of his country's gas transit system in Brussels.

One fifth of all the natural gas consumed in the EU flows through Ukraine's 13,500-kilometre network of gas pipelines, but experts say that that network will need some 2.5 billion euros (3.4 billion dollars) in investment over the next six years just to keep pipes and pumping stations in running order.

Yushchenko's co-host, European Commission President Jose Manuel Barroso, said that the network 'is one of those vital energy arteries which keep the European body functioning (and) will remain of strategic importance for decades to come.'

Monday's conference brought together EU and Ukrainian leaders, industry figures and top international finance bodies to discuss how Ukraine should reform its system to encourage that investment.

Yushchenko was accompanied by his bitter political rival, Prime Minister Yulia Tymoshenko, who said that Ukraine would need some 5.5 billion euros to upgrade its transit network and boost its capacity.

That investment would require a guarantee from the EU and the two sides' mutual neighbour, Belarus, that the expanded Ukrainian system would be used at full capacity, she said.

The head of the European Investment Bank (EIB), Philippe Maystadt, said that his organization would have 'no objection in principle' to co-financing the modernization.

But he stressed that 'a condition for this is that this programme be carried out by an independent entity that has the autonomy, expertise and financial strength to carry out the investment and manage the system in a commercially sound and transparent way.'

Martin Raiser, head of the World Bank's Ukraine office, said that his organization would also be ready to invest once Ukraine's system became more transparent.

The conference culminated in the signature of a joint declaration calling on Ukraine to carry out a thorough-going reform of the gas sector by the end of 2011.

The declaration called on Ukraine to set up a fully independent company to manage the gas-transit system, funded by the income from the system and mandated to work on a commercial basis - including by setting 'transparent, objective and non-discriminatory' tariffs.

Analysts say that the pledge could sound the death knell for the monopoly of Ukrainian gas company Naftogaz, which currently both manages the system and provides Ukrainian consumers with gas.

In return, the commission - the EU's executive - 'may provide support' from its funds if need be to convince international lenders to back the project, the declaration said.

The question of the EU's reliance on Russian gas passing through Ukraine shot up the agenda in January when an ill-tempered spat between the former-Soviet states cut off supplies to much of Europe.

EU officials stressed that Monday's deal is not intended to reduce Russia's importance as the bloc's number one gas supplier.

But Russian Energy Minister Sergei Shmatko accused the EU and Ukraine of ignoring his country when they drew up the declaration.

'The unilateral nature of the declaration gives (us) cause for concern and puzzlement,' he warned.