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Ukraine Ready to Sign Slovakia Gas Deal

04/28/2014 | 06:15am US/Eastern

BRATISLAVA, Slovakia--Ukraine's state-owned oil and gas company Naftogaz signed a pipeline access deal with Slovakia's Eustream on Monday, bringing Kiev's energy independence from Moscow a step closer and paving the way for talks on a wider-ranging deal to wean Ukraine off Russian natural gas sales completely.

Eustream and its Ukrainian counterpart Ukrtransgaz, owned by Naftogaz, agreed to allow Ukraine to use a 20-year-olld but never used pipeline on Slovakia's eastern border with Uzhhorod in western Ukraine. The deal would provide Ukraine with an initial 3 billion cubic meters of gas annually before being increased to 10 billion cubic meters some time next year.

Eustream's Chief Executive Tomas Marecek said eastbound gas deliveries to Ukraine can start this autumn, following tests to determine maximum pressure levels and updates to machinery.

Maximum gas flows from Eustream, together with supplies from Poland and Hungary, could total up to 17 billion cubic meters next year, Slovak Prime Minister Robert Fico said--which is about one-third of Ukraine's total annual demand of some 50 billion cubic meters.

Ukraine produces about 20 billion cubic meters of natural gas annually. Even with supplies from the west of Europe, it will see a shortfall of roughly 13 billion cubic meters. The former Soviet state will therefore probably need to continue buying gas from Russia's OAO Gazprom. The energy firm has increased the price it charges Ukraine by 81% this month, to $485 per 1,000 cubic meters, well above the $387 average price for Gazprom customers in the EU.

Ukraine's Minister of Energy Yuriy Prodan Monday said Ukraine is willing to pay the "market price" for gas.

Monday's agreement calls for the European Commission to start talks with Gazprom sometime this year over Ukraine gaining access to one of Slovakia's main pipelines, which could cover the remaining Ukrainian demand.

There is no firm timeline on those talks, however, and final approval for Ukraine's access to a major Slovak pipeline rests with the Russian company which has the legal equivalent of a veto on proposals to allow reverse, or west-to-east flows in key pipelines crossing the European continent.

Ukraine and its European partners have been considering reversing the direction in which natural gas flows in bigger pipelines across Slovakia, which would allow supplies to Ukraine. But last week European Commissioner for Energy Günther Oettinger said European Union analysis of contracts between Eustream and Russia's OAO Gazprom showed that Slovakia would be exposed to legal troubles if it halted westbound gas flows in any of its major pipelines.

Write to Sean Carney at sean.carney@wsj.com

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