Ukraine consumes about 76 billion cu m of gas annually, but is expected to produce domestically 21 billion cu m in 2007, suggesting that imports of 55 billion cu m will cover only domestic needs.

Ukraine hopes to start re-exports of gas in a bid to improve the financial situation at Naftogaz Ukrayiny, the national oil and gas company, which has been struggling over the past year with excessive debts.

Naftogaz has been exporting about 7 billion cu m/year of gas, mostly to Germany, until July 2005, when the government of then-Prime Minister Yulia Tymoshenko ordered a suspension of the exports amid fears of gas shortages domestically.

Meanwhile, the reduced supply volumes may be a sign that the exports of gas will be handled by RosUkrEnergo as compensation for keeping the prices unchanged in Q4, analysts said.

Exports of gas to European countries are extremely profitable due to the much higher gas prices that can be charged on those markets, analysts said.

Russia is selling gas at $230/1,000 cu m to most Central European countries, compared with $95/1,000 cu m that it charges Ukraine, showing the level of profits that may be obtained by RosUkrEnergo.

The deal suggests that RosUkrEnergo, or Gazprom directly, may be able to increase exports of gas via Ukraine to Europe by at least 7 billion cu m annually starting in 2007.

The latest deal suggests that similar ways of compensation may be used next year to allow for more acceptable prices of natural gas for Ukraine next year.

Ukraine and Russia have failed to reach a compromise yet on prices to be charged for gas supplies next year, and plan to continue the talks through the end of the year, Boyko said.

Ukraine has been seeking to agree with Russia that gas price will not increase to more than $135/1,000 cu m, but Gazprom hag been suggesting the price could increase further depending on future deals with Turkmenistan, a major gas supplier.

The continued uncertainty over gas prices in 2007 come as Ukraine has been increasing imports of gas during high demand season that starts on Oct. 15, making Ukraine??™s position vulnerable, analysts said.

In January Russia briefly suspended supplies of gas to Ukraine to pressure the country to accept a 95% hike in gas prices. The move led to disruptions of gas supplies throughout Europe. (sb/ez)