Russia-Ukraine gas dispute: Consequences of the Stockholm Arbitration decision

Author : Olena Holubeva

Source : 112 Ukraine

Russian gas monopolist claimed almost 47 billion dollars, which, in case of satisfaction, would have a devastating blow to the economy of Ukraine
12:48, 26 December 2017

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December 22nd, the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) ruled on a three-year dispute between Russian gas monopoly Gazprom and Ukraine's Naftogaz regarding payments under a contract for the supply of Russian gas to Ukraine since 2009. It was expected that the decision would be made on December 30th, but under pressure from the Ukrainian side, Stockholm was forced to speed up.

"The contract for the supply of Russian gas to Ukraine was signed, when Yulia Tymoshenko was the Prime Minister, and Oleg Dubina was the head of Naftogaz. Initially, there were a lot of questions for him about the signing of this treaty. The price was tied to the oil basket, the price changed each quarter upwards, if at the beginning of the contract it was even less than 200 dollars per thousand cubic meters, then by 2014 it had grown to 485 dollars. This is very expensive. The take or pay principle worked for the entire volume of the contract - 52 billion cubic meters in a year," said ExPro Consulting director Hennady Kobal.

Related: Main task of Naftogaz for 2018 is to stop Nord Stream 2, - Kobolev

European countries use this principle only when the seller would like to ensure itself that a buyer will buy the necessary gas for his needs from another company. In the case of 2009 contract, Ukraine was obliged to buy a fixed volume of gas, regardless of its actual needs. At the same time, the country could not re-export it. When the price of gas reached a sky-high $ 485 per thousand cubic meters, Ukraine stopped paying it, and then switched to gas purchases from Europe.

In 2014, Gazprom applied to the Arbitration Institute of SCC and demanded that Naftogaz pay debts for gas and interest. The aggregate amount of claims was about $ 47 billion. It included the requirements for repayment of debts for gas delivered in May-June 2014, obligations on the principle of "take or pay" for 2012-2016, as well as penalties. In response, the Ukrainian company filed a counterclaim on a retroactive change in the terms of the contract for the supply and recovery of all overpayments from May 2011 (about $ 6 billion). The cases were combined. Also, Naftogaz demanded from Gazprom compensation for reducing transit volumes and for a low transit rate.

Related: Naftogaz refuses to pay Gazprom for gas supply to occupied Donbas

the Arbitration Institute of SCC made an interim decision on the gas supply lawsuit on May 31, 2017. Naftogaz said that the court quashed the "take or pay" requirement, and also lifted the ban on gas re-export. It was also reported that the arbitration has revised the gas price formula from 2014, tying it to the quotations of the European gas hub (NCG). Then Gazprom refuted information about the abolition of the "take or pay" principle, and the head of the Russian company Alexei Miller said that according to preliminary estimates, based on the preliminary decision of the Arbitration Institute of SCC, the levies from Naftogaz in favor of the Russian monopoly would exceed $ 1.7 billion.

December 22nd, the press service of Naftogaz announced its victory in the Arbitration Institute of SCC against the Russian Gazprom. The company said that the price of gas for the second quarter of 2014 was reduced from $ 485 to $ 352 per thousand cubic meters (deliveries were paid in late 2014 at a compromise price of $ 268 per thousand cubic meters). Gazprom's claims were also completely canceled on demand "take or pay" for 2009-2017, and this amount is equivalent to $ 56 billion. It was established that the annual volume of gas purchases, according to the current contract, should correspond to actual volumes instead of fixed 52 billion m3/year. It was also established that Naftogaz should not pay for gas supplied by Gazprom to the occupied territories.

Related: Naftogaz claims its win in arbitration against Russian Gazprom

At the same time, Naftogaz did not specify how much the arbitrage ordered the company to pay to Gazprom. The Russian gas monopolist said that, according to the arbitration decision, Naftogaz should pay it $ 2.02 billion of "overdue debt", as well as interest for each day of delay, starting from December 22nd at a rate of 0.3% of the amount.

It is also important that the "take and pay" principle is not completely canceled and will be applied to the volumes of gas that Naftogaz should buy from Gazprom for at least two more years. According to the decision of the arbitration, Ukraine must buy gas from Russia on the principle "take or pay" for two years (5 billion cubic meters each year). For comparison, the country now imports 17 billion cubic meters of gas per year. At the same time, the arbitration formula specifies a formula linked to the NCG hub, therefore, if such purchases take place, it is likely that the price will be even lower than that bought in Europe. At the same time, Gazprom might completely refuse to sell gas to Ukraine, or our country will not buy it from the aggressor country for political reasons.

The import of Russian gas to Ukraine has been completely stopped since November 25, 2015.

Related: Gas owned by Naftogaz arrested in Slovakia

We cannot talk about Ukraine's unconditional victory in the dispute, the solution has both advantages and disadvantages, experts said. "Gazprom's demand for the payment of $ 47 billion was rejected," said Naftogazbudinformatika general director Leonid Unihovsky. Kobal agrees to that according to him. If Naftogaz is recognized as the winner of at least one item of the dispute on the transit contract (the decision is expected on February 28, 2018), the number of claims may be blocked, Kobal said.

As reported, the amount of claims of the Ukrainian side on this dispute is about 16 billion dollars.

Ukraine will need to buy 10 billion cubic meters from 2018 on the principle of "take or pay" (5 billion a year). This situation can be mitigated by the fact that the price will be tied to the hub, not to the oil.

Related: Naftogaz investigates Ukrtransgaz board member over Paradise Papers

Another controversial issue is payments for gas supplied to Donbas. Ukraine has not supplied gas to the occupied territories since 2014. Gazprom has already billed $ 1.4 billion for this gas till November, and the amount continues to increase. Although the Arbitration Institute of SCC indicated that Naftogaz should not pay for the gas delivered to the temporarily occupied territories of Luhansk and Donetsk regions, the final decision on the issue is not clear.

So, even if the new formula makes the price of Russian gas profitable, arbitrage for supplly for companies may not be the last one.

Related: Omitting "Naftogaz:" Why is it profitable for foreigners to sell gas in Ukraine?

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