Ukraine reviews domestic gas options

KIEV, Ukraine, July 8 (UPI) -- Ukraine's prime minister said the country must wean itself off foreign natural gas within 10 years, offering tax breaks as an incentive to private companies.

"Ukraine has to provide itself with domestic gas production within 10 years by reducing the consumption and increasing the domestic production," Ukrainian Prime Minister Arseniy Yatsenyuk said.

Trilateral talks between European, Russian and Ukrainian negotiators collapsed last week in Vienna.

The energy relationship between Ukraine and Russia has been strained at least since 2006, when Ukrainian debt issues prompted Russian energy company Gazprom to cut gas supplies through the country.

The Kremlin during last week's debate opted to keep prices for Ukraine unchanged from the second quarter, which included a $40 discount per 1,000 cubic meters purchased. Russian Energy Minister Alexander Novak said anything more in terms of discount expectations from Ukraine was "completely groundless."

Ukrainian energy company Naftogaz said it would stop purchasing gas from Russia until a new arrangement is brokered, though supplies to the European market would continue. Gas purchases from Russia are already down by more than 50 percent.

Yatsenyuk said companies working in Ukraine without a production-sharing contract could face hefty tax penalties. For private companies, "if they give us the guarantee to increase production, then the state will move to a more progressive and efficient tax system in the energy sector," he said.

Junior shale explorer JXK Oil & Gas in May said it was granted more areas for work in Ukraine, though the cost of business was still prohibitive to drilling. Ukraine is among the Eastern European countries thought to be rich in shale natural gas reserves.

The European economy gets about a quarter of its natural gas from Russia, though most of that runs through the Soviet-era pipeline network in Ukraine. While Ukraine's prime minister was calling for more independence, Russian energy company Gazprom was mulling its options for alternate gas routes for Europe.

Gazprom officials met Tuesday in Moscow with representatives from German manufacturing company BASF to discuss expansions planned for the twin Nord Stream gas pipeline running through the Baltic Sea to the German coast.

Nord Stream is among Gazprom's options to avoid conventional transit arteries in Ukraine. The existing network can carry as much as 1.9 trillion cubic feet of gas per year. A second set of pipelines could be commissioned by 2019.