Naftogaz will soon start buying gas for storage with advance payment received from Russian giant Gazprom (GAZP.MM: Quote, Profile, Research) for the use of Ukraine`s pipelines to transit gas to Europe, the national oil and gas company said on Friday, Reuters reported.

Gazprom pays $1.70 per 1,000 cubic metres transported across 100 km through Ukraine to transit its gas to Europe. Russian gas accounts for a quarter of Europe`s gas consumption and almost all of it goes through Ukraine.

Ukraine normally stores billions of cubic metres (bcm) of gas for the winter months. In January a record 17 bcm of gas stored allowed the country to survive a three-week gas cut-off from Russia during a dispute over prices and arrears.

Naftogaz, whose finances have been shaky for several years and needs constant government support, has said repeatedly that it has no money to buy gas for storage.

"We plan to sign the agreement (with Gazprom) soon -- at the moment the details are being worked out," Naftogaz spokesman Valentyn Zemlyansky told Reuters.

The company said it expected a budget deficit of $4.5 billion by the end of this year, an amount that corresponds to the 20 bcm of gas it wants to have in storage for this winter.

The details of the deal remain unclear. It is difficult to calculate how much Ukraine will earn from transit fees because gas consumption has dropped as the global financial crisis takes its tolls on European countries.

Russian gas transit to Europe via Ukraine sank in the first quarter of this year to less than half of 2008 levels - 16.4 bcm against 34.7 bcm.