A summer gas war is brewing in Ukraine, threatening another cut-off of Russian gas supplies into Europe and a worsening of the cash squeeze on Gazprom, Russia’s biggest company.

Eleventh-hour talks are under way between the European Union, the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development to secure a stop-gap loan of $4 billion (£2.44 billion) to pay for Ukraine’s gas needs.

Naftogaz, Ukraine’s utility, has no cash to meet the payment for next month’s gas, which falls due on July 7, and European power companies fear that Gazprom will shut the taps on gas transit pipelines that traverse Ukraine, putting in jeopardy efforts to fill storage tanks for the coming winter.

José Manuel Barroso, the President of the European Commission, has told vulnerable EU states to make contingency plans and to prepare for the worst. He said: “We must not sleep-walk into another gas crisis. There is, indeed, the risk of another major crisis in weeks, not months, and we must protect European citizens.”

Ukraine needs to purchase 19 billion cubic metres of gas for storage to meet winter demand for fuel, but funds provided under an IMF rescue package have run out and the Government has admitted that it cannot pay the July gas bill.

A European Commission spokesman said: “We need stop-gap funds and we need a sustainable solution.”

Mr Barroso made clear that the EU would not provide funds: “We don’t have that money in the budget. We want to help our Ukrainian friends, but they have a structural problem . . . The basic problem is with Ukraine’s ability to pay for its gas supplies from Russia. But that is not our problem.” The Commission is convening a meeting at the end of this week between multilateral lenders, gas companies and the parties to the dispute in the hope of preventing a gas cut-off in July.

The global recession has worsened the confrontation between Ukraine and Russia, according to sources at a meeting of the Gas Co-ordination Group, a body set up by the European Commission this year amid the third confrontation since 2005 between the two countries over Ukraine’s failure to pay for gas. Russia is angry about the EU’s refusal to bankroll the insolvent Ukraine and concern is mounting in the Kremlin that Gazprom will suffer a significant loss of revenue if it is forced to cut off supplies in a showdown with Kiev over unpaid bills.

Gazprom is Russia’s biggest export earner and taxpayer but its business is held hostage by its troublesome neighbour as 80 per cent of Gazprom’s exports to Europe cross Ukraine. To make matters worse, Gazprom entered recession burdened with huge borrowings and its revenues have shrunk because of a sharp fall in demand for gas as European industrial activity weakened. The cash squeeze on Gazprom could worsen if Ukraine disrupts exports of gas to European utilities in the summer.

According to ICIS Heren, the gas market consultancy, European utilities have delayed filling up their storage tanks, hoping to profit from lower gas prices in the summer quarter. The filling of storage tanks is vital during the summer months if utilities are to cope with peak demand in January and February, but, according to Louise Boddy at ICIS Heren, companies need to catch up quickly. “Gas storage levels are way below where they were at this time last year. We will either get floods of Russian gas coming into Europe or no Russian gas,” she said.

In the latter case, Gazprom is likely to suffer heavy losses, gas industry insiders say, as Europe’s utilities will fill their tanks with Norwegian gas and liquefied natural gas [LNG]. Recession has left Norway with spare capacity and LNG prices have fallen amid weak demand in North America. Power stations in the Far East are also turning down LNG cargoes.

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