EU To Upgrade Ukraine's Outdated Gas Pipelines

BRUSSELS, Belgium -- The EU vowed Monday to help upgrade Ukraine's network of gas pipelines in exchange for reforms in the country's energy management to avoid a repeat of the January dispute which resulted in the cutoff of Russian gas deliveries to Europe.

The two sides signed an agreement to improve both the management and capacity of Ukraine's 40-year-old grid of gas pipelines. In return for embracing market economy practices, Kiev can expect billions of euros (dollars) in funding and western expertise on how to run a profitable -- and reliable -- energy sector.

The EU did not say how much it would commit for the work. Ukrainian Prime Minister Yulia Tymoshenko said the project would need euro 5.5 billion, while the EU has costed it at euro 2.5 billion, without setting a figure on the final bill.

Ukrainian gas pipelines carry domestic supplies but also Russian gas to Western Europe. A fifth of gas consumed in the EU comes from Russia through the Ukraine.

Ukrainian President Viktor Yushchenko said "we are determined to improve the functioning of the gas market and root out all kinds of corruption and make sure that the system works to the benefit of all."

A key priority, he said, was building gas metering stations to improve the monitoring of gas passing through Ukrainian pipelines.

Yushchenko signed the gas agreement with European Commission President Jose Manuel Barroso.

It aims to improve both the safety and capacity of Ukraine's pipeline network and revamp its management so western investors can put up money without fear of losing any of it to endless red tape or corruption.

This year, Ukraine plans to join the European Energy Community, which sets common trade rules for producer and consumer nations. It means that by 2012, Ukraine's energy laws must comply with market economy standards.

That -- plus cuts in excessive domestic consumption -- will boost exports, especially from the Black Sea region, and make "Ukraine a predictable market" for Western Europe, said Ukrainian Energy Minister Yuriy Prodan.

Energy supply is a sensitive political issue in the region, and the EU-Ukraine deal quickly triggered Russian misgivings about being sidelined in its own backyard.

Ukraine's gas pipeline network "has an organic link with Russia," Russian Energy Minister Sergei Shmatko told a conference at which the EU-Ukrainian gas declaration was signed.

The EU-Ukraine agreement is part of a web of cooperative deals the EU is seeking with Russia's immediate neighbors for fear that Moscow's enduring sway in ex-Soviet republics hampers across-the-board reforms.

"We are working for safe and attractive conditions for the transit of Russian gas," said EU Energy Commissioner Andris Piebalgs. "There is no intention to exclude Russia."

EU officials were pleased both Yushchenko and Ukrainian Prime Minister Yulia Tymoshenko -- his political rival -- showed up for Monday's signing ceremony.

Yushchenko has accused Tymoshenko of delaying repayment of debt to Russia worth $2.4 billion ($3.3 billion) for gas imports, saying that leaving it unpaid makes Ukraine a colony of Moscow. The state gas company Naftogaz, which answers to Tymoshenko, disputes the size of the debt.

"Today's participation of the prime minister and the president shows that in some issues they are united," said Piebalgs.

Tymoshenko told the EU that modernizing her country's outdated gas pipelines -- which span 37,600 kilometers and comprise 73 compressor stations and 13 underground storage facilities -- will cost euro 5.5 billion ($7.5 billion). She said that was cheap compared to building alternative pipelines, as the EU is contemplating.

The European Commission has provisionally costed Ukraine's modernization program at euro 2.5 billion ($3.4 billion).

Source: AP