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ukerinKIEV: Ukraine's parliament approved a law allowing state energy firm Naftogaz to be broken up, a prerequisite for receiving funding from the European Union to upgrade the ageing Ukrainian gas transit network.

The European Union has offered Ukraine help in upgrading its gas pipeline network but wants the Kiev government to split Naftogaz into separate entities handling the production, shipping and distribution of gas.

The European Bank for Reconstruction and Development said last month it was preparing a $308 million loan for emergency repairs to a segment of the Ukrainian export pipeline, which were "urgently required for safe and uninterrupted gas transit to Europe" but it was conditional on the restructuring.

Ukraine's gas transit pipelines were built in the Soviet era to tranship gas from Russia to Europe and still account for a bulk of such shipments.

However, seeking to diversify shipping routes and boost exports, Moscow has launched the Nord Stream pipeline through the Baltic Sea and is planning to build another one, South Stream, across the Black Sea.

To remain competitive and accommodate growing Russian exports, the Ukrainian pipeline network needs $5 billion-$7 billion investment, Ukrainian officials say.

The law approved by Ukraine on Tuesday lifts an earlier ban on re-organising Naftogaz and will allow the government to meet the EU's requirements for funding. However, the law also requires the newly-formed energy companies emerging from Naftogaz to be fully state-owned, preventing Kiev from selling a stake in the transit pipelines to Russia's Gazprom which has long sought to buy into the asset.

Russia has said such a deal is the only way Ukraine could secure a lower price for its domestic gas imports, on which it depends heavily.

Ukraine, which is paying $416 per thousand cubic metres of Russian gas, says the current price is unfair as it $200 more than the price per thousand cubic metres that Germany pays. Gazprom disputes that claim, saying the price is the same for both and talks on reviewing it have produced no results in more than a year.

Ukrainian president Viktor Yanukovich met Russian Prime Minister and president elect Vladimir Putin in Moscow on Tuesday to discuss the gas issue, among others. But the sides made no announcements on the gas issues after the meeting.

Copyright Reuters, 2012

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