The European Union, Ukraine and international lenders reached a deal Friday on gas sector reforms that would pave the way for $1.7 billion in loans to support gas deliveries to Western Europe.

“I’m extremely pleased that political agreement has been reached with Ukraine on reform of its gas sector, which opens the way for a financial assistance package to be provided by the International Financial Institutions to Ukraine,” European Commission President Jose Manuel Barroso said in a statement.

The European Bank for Reconstruction and Development, the World Bank and the European Investment Bank may give loans to the Ukrainian government and Naftogaz Ukrainy, the lenders said in a joint statement with the European Commission and the International Monetary Fund.

Sources close to the talks have said Ukraine, which is already supported by a $16.4 billion bailout from the IMF, is seeking as much as $4 billion in a loan partly to buy Russian gas for storage ahead of the winter so that it can keep pace with soaring European demand.

But international banks had refused to lend money until Naftogaz ends years of subsidizing household gas supplies and finds ways to force domestic companies to pay their bills.

The EU and the international lenders will “work together in the development of a support package to the Ukrainian authorities designed to assist in developing a sustainable solution to Ukraine’s medium-term gas transit and gas payment obligations,” they said in the statement.

Subject to the implementation of the reforms, the EBRD is ready to consider extending a sovereign-guaranteed loan to Naftogaz, which will provide the company “with working capital for immediate gas-storage requirements and longer-term finance to support an investment program,” it said.

The EBRD could propose funding of up to $300 million for immediate working capital and next year up to $450 million for investment. No more than $450 million could be committed at any one time, it said.

Naftogaz, which earlier this week saw its long-term foreign and local currency ratings cut four levels to CC by Fitch Ratings, is struggling with debt.

Utility companies paid for 47.2 percent of gas consumed in the first half of 2009, according to the Fuel and Energy Ministry.

Naftogaz plans to purchase about 3 billion cubic meters of the fuel a month from Gazprom in the third quarter.

It is paying the company $198.34 per 1,000 cubic meters of the fuel, Valentyn Zemlyanskyi, a spokesman for Naftogaz, said on July 28.

The World Bank will consider providing budget support to the government through a loan of up to $500 million, and the EIB may offer up to $450 million for long-term investment, the banks said. 

(Bloomberg, Reuters)