With Gas Cut Off, Ukraine Looks West

UZHGOROD, Ukraine - Keeping Ukraine warm keeps Andriy Kobolev up at night.

Mr. Kobolev, the head of Ukraine's state energy company, Naftogaz, is scrambling to keep gas flowing into his country as winter looms. Russia's energy giant, Gazprom, had provided a little more than half of Ukraine's total gas supply, but suspended its shipments in June in the face of fighting in eastern Ukraine between Russian separatists and the Ukrainian military, citing a price dispute. Europe - itself dependent on Russia but also expanding sanctions on the country - has not been able to fill the gap.

That means Ukraine will have to cut its energy use sharply or risk running dry, which could lead to more civilian deaths when the weather turns cold, and could further batter the country's economy.

'The situation is very difficult,' Mr. Kobolev said in a recent interview. 'Since we have no choice, no other solution, we'll find a solution and have to live with the amount of gas we will have.'

He spoke at a hotel in this city near Slovakia, just a few hours after he took part in a news conference on the other side of the border. The Slovak and Ukrainian prime ministers had held a ceremonial 'switching on' of a gas pipeline that will allow the Slovaks to provide some capacity to Ukraine, but far less than the Ukrainians wanted.

Afterward, Mr. Kobolev and other company officials got in a line of three black cars - a BMW and two Hyundais - and drove a winding path through tiny border villages, zipping past a field with brown spotted cows, a shirtless man in red shorts holding a hedge trimmer, a group of boys hanging from a tree, an elderly woman wearing a kerchief.

While it was hard for an outsider to tell the two sides of the border apart, they are hardly in lock step. Mr. Kobolev and other Ukrainian officials had hoped for the so-called big reverse. In that situation, Slovakia would have been able to reverse the flow of 30 billion cubic meters or 1.06 trillion cubic feet of Russian gas annually and solve Ukraine's looming energy crisis.

Russia supplied Ukraine with half of the 49 billion cubic meters of gas it consumed last year.

Ukraine might need to get more of its gas from other neighbors, in particular Slovakia, Poland and Hungary.

But many saw the big reverse as, no pun intended, a pipe dream. While European Union rules bar territorial restrictions when gas is resold, and Ukraine has signed an association agreement, Gazprom objects to having its gas redirected without its approval. European regulators are in the midst of an antitrust investigation of Gazprom that is examining this issue.

Slovakia, a major thoroughfare for Russian gas heading to Italy and other points west, balked at the idea of a big reverse. Like Ukraine and much of Europe, Slovakia depends on Russia's natural gas, so the Slovaks have been treading carefully, seeking to appease both the Russians and fellow members of the European Union.

What happens if Russia's gas stays off?

That is the challenge facing Mr. Kobolev. At 36, he looks like a boyish junior executive, and he has been on the job only a few months, but he is resolved not to be rolled over by Gazprom.

Like many Ukrainians, his mind is preoccupied with the toll of his country's war and anger at how it has come about. Books are one of his refuges.

'I just finished García Márquez, 'One Hundred Years of Loneliness,' ' he said, referring to 'One Hundred Years of Solitude' by Gabriel García Márquez. 'Crazy book, rocked my mind.'

He was once a lower-level executive at Naftogaz, but quit in 2010 in disgust at the government of the Ukrainian president Viktor Yanukovych. After the revolution in February that ousted Mr. Yanukovych, Mr. Kobolev returned to the company in the top role.

'I couldn't work with the Yanukovych team, because they are corrupt guys,' he said, adding that the Naftogaz of that era never seemed to push back on the price demands of Gazprom. 'Maybe they were just altruists, I don't know.'

Now negotiations between the two companies are less cordial, and they no longer take place in Moscow, as they once always did, or in Ukraine for that matter.

'We don't want to go to Moscow. They don't want to go to Kiev,' Mr. Kobolev said.

European officials are trying to schedule talks between the sides for later this month.

Barring an end to the dispute with Gazprom, the winter is likely to be bitter. Last year Ukraine consumed about 49 billion cubic meters of gas, or 1.73 trillion cubic feet, a little more than half of which came from Gazprom.

How much gas Ukraine will use this year remains to be seen. Last year, about two billion cubic meters were consumed by Crimea, which has since been annexed by Russia, so that can be subtracted from Ukraine's demand. The rebel-occupied Donetsk and Luhansk regions account for roughly eight billion cubic meters.

Over all, the Ukrainians believe they can get about 15 billion cubic meters from Europe annually - though about 10 billion of that would come from the Slovak pipeline, and the rest from Hungary and Poland.

'Is that enough? Probably not,' said Laurent Ruseckas, senior adviser for global gas with IHS Energy, a research and consulting firm. 'By the beginning of 2015, you could start running into trouble.'

The Ukrainians had hoped to have the gas come from larger pipelines, but instead the Vojany-Uzhgorod pipeline, which was not being used, was retrofitted to send gas east. When the pipeline was opened last week, Klaus-Dieter Borchardt, the European Commission's director of internal energy markets, acknowledged, 'It is not a highway we are opening today, but it is more than a bike lane.'

Since gas is still flowing through Ukraine bound for Europe, Russia has already warned about the potential for siphoning. Russia, of course, can simply send less gas to Europe.

In a troubling portent on Wednesday, Poland halted its supply of reverse gas to Ukraine, citing a reduction in supply from Gazprom. P.G.N.I.G., the state-owned Polish oil and gas company, said in a statement that its supplies from the east had been reduced by 45 percent. Gazprom, however, denied there had been a reduction.

Robert Fico, the Slovak prime minister, has opposed sanctions on Russia, putting him at odds with many other European leaders. But Mr. Fico suggested the Slovaks struck a deal that the Russians can live with. Mr. Fico, in remarks at the news conference, called the Vojany-Uzhgorod pipeline 'the only possible solution.'

Even with the new Slovak capacity, Mr. Kobolev says he believes Ukraine will have to cut its gas use by about a fifth, no small amount. That will require a 30 percent cut from industry, which he said would come from reduction of business activity in the east, switching fuels and energy savings programs. Households will have to cut their use by about 10 percent. It is another blow for a country whose gross domestic product fell 4.7 percent in the second quarter from the same period in 2013.

Part of Ukraine's problem has been that people and businesses have been paying artificially low prices, a vestige of Soviet-era policies.

Mr. Kobolev wants to change that, and so does the International Monetary Fund, which pressured Ukrainian officials into raising gas prices as part of the aid package the country received this year. Those increases, however, do not fully phase in until 2018. The market price for gas now is still six times as high as what consumers pay, Naftogaz said.

Mr. Kobolev wants to make his country less dependent on Russia in the future.

'As long as there's no competition, there's guys who will squeeze all the juice from you. When there's competition, they are very likely to come with fair market proposals,' he said. 'Until there's competition, you will never make them do that, and that's true for Gazprom.'

That sounds good in theory, but it's not clear how Ukraine will replace Russian gas, and Mr. Kobolev did not show his cards. Ukraine could perhaps switch some of its energy use from gas to coal, encourage more investment to increase domestic production or look to liquid natural gas. But all of that takes time.

'I have many friends who are currently out east, they are currently in military operations,' he said. 'I tell myself that I'm not having the most difficult job in the world, and you should stop whining and get yourself to work.'

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