Ukraine makes City nervous

THE City is watching the political crisis in Ukraine with bated breath as the fallout over the Presidential election draws attention to the pivotal role the country plays in the European energy market.

More than 100bn cubic metres of gas - enough to supply the whole of Britain - criss-crosses Ukraine every year, as well as 1m barrels of oil a day. The majority comes from Russia and heads to the West.

The outcome of the struggle between the rival political camps could have a huge outcome on the expansion plans of Russian energy giant Gazprom, which wants a stake in Ukraine's pipeline system.

Observers claim a ruling party hostile towards the Kremlin could choose to ramp up transit fees for Russian exports or switch to running oil and gas from the Caspian and such countries as Azerbaijan.

Erik Mielke, analyst at Dresdner Kleinwort Wasserstein, said: 'If there was to be a regime change, the challenge for Gazprom would be to re-establish connections with a new ruling class.'

The political element to the energy sector has already emerged, with reports that State-owned energy firm Naftogaz Ukrainy bussed staff around the country to vote for disputed winner Viktor Yanukovich on election day.

More worryingly for investors in London, the crisis may also have far-reaching repercussions for quoted oil minnows Regal Petroleum and JKX Oil & Gas. Regal is sheltered, to an extent, by the size of its operations in Greece this year, but JKX is centred almost exclusively on Ukraine.

Shares in JKX have rocketed this year, but wobbled last week after the announcement of a new licence deal sparked fears among investors about the company's exposure to the crisis.

JKX has suffered a series of spats over late payments and three years ago had to fight off an attempt by a State agency to expropriate its assets. Its main operation is Poltava Petroleum, 350 kilometres to the south of Kiev, which has reserves of more than 260bn cubic feet of gas.

A spokesman for chief executive Paul Davies insisted the economy was 'ticking over' despite the political row, but analysts are more concerned, given outgoing President Leonid Kuchma's warning that Ukraine's financial system may collapse 'like a house of cards' within days.

One analyst said: 'All the risks are currently on the downside.'