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Monday, January 02, 2006

Europe chases gas sources as Russian supplies falter

LONDON (Reuters) - Europe scrambled on Monday to secure back up supplies of gas after a dip in flows from its biggest provider Russia highlighted concerns about the bloc's heavy reliance on one source of energy.

Utilities primed emergency storage tanks and scoured the market for extra supplies from sources like the Netherlands and Algeria as flows from Russia to Germany, France and other major European economies fell because of a price dispute between Russia and Ukraine.

The European Union said Russia had pledged extra gas supplies and vowed not to leave customers short but EU Energy Commissioner Andris Piebalgs said he was still concerned.

"The (Russia/Ukraine standoff) is going to push the security of supply issue higher up the agenda and it re-emphasizes the importance of diverse energy supplies for Europe," said Chris Le Fevre at Gas Strategies Consulting in London.

Traders said recent events looked set to rattle energy trading markets as they re-open on Tuesday, with a potentially volatile day in store for oil, as well as gas and electricity.

"It's a serious situation," said Berlin-based gas expert Heiko Lohmann. "This is going to be a test for the continental energy market."

Russia halted deliveries to key transit market Ukraine on Sunday amid a bitter dispute over prices, crimping flows to western Europe.

Europe gets about a quarter of its gas from Russia and about 80 percent of this is pumped west via Ukraine.

This week's squeeze on supplies from Russia comes as pressure builds on Europe to spread its energy net wider and diversify supplies for the future.

Energy firms are spending billions of dollars on new terminals around Europe's coast to import liquefied natural gas from suppliers in the Middle East and North Africa but most projects are still being built.


Norway, Western Europe's biggest gas exporter, dashed early hopes of a quick fix, saying its pipelines were already pumping gas to mainland Europe and Britain at near record levels.

Analysts said the Netherlands, which has its own gas fields, may have some spare capacity available but local pipeline bottlenecks could be a problem.

"I would expect Ruhrgas (Germany's biggest gas firm) to try to buy available volumes on the Dutch spot market, but it's also a question of (pipeline) transit," Lohman said.

Reserve gas stocks looked set to play a crucial role. Germany insisted it had enough gas -- about three months' worth of demand -- to ride out the storm but warned Russia its move against Ukraine could harm Moscow's economic ties with the West.

"The problem with drawing down stocks is that they will have to rebuilt at some stage and the market impact of that could go on for a long time," a Dutch gas trader said.

Possibilities of getting Russian gas via alternative export routes were also under scrutiny but analysts said there was unlikely to be significant spare capacity on Russia's other main link to Europe -- the Yamal pipeline across Belarus.

Yamal has a capacity of about 30 billion cubic meters a year, compared with 120 bcm flowing west via Ukraine.
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