Stockholm Postpones Russia-Ukraine Decisions Again

The Arbitration Institute of the Stockholm Chamber of Commerce has again delayed the date for its ship-or-pay and take-or-pay rulings, thus postponing the end to a long-running argument between Russian Gazprom and Ukraine's Naftogaz.

The decisions had been expected this summer but now the take-or-pay award, which Gazprom challenged November 7, will now be decided December 30 and the transport agreement will be decided February 28 next year, Naftogaz said November 15. The dispute started in 2014 following Russia's annexation of Crimea.

Still also to be resolved, NGW understands, but not referred to in Naftogaz' statement, is the payment for gas delivered in that year, the volume of which was disputed.

According to the take-or-pay clause, Naftogaz is to pay for at least 41.6bn m³/yr of gas regardless of how much it takes each year. Gazprom’s claim under this clause, including 2017 volumes, would exceed $56bn by the end of this year, including interest. In its separate award of May 31, the tribunal rejected this claim by Gazprom.

Naftogaz chief commercial officer Yuriy Vitrenko said November 15: “Despite the public rhetoric of Gazprom and some commentators who called the separate award 'preliminary', the very fact that Gazprom is challenging this award proves that it is final with respect to certain issues, which is an obvious reason for Gazprom’s dissatisfaction. Naftogaz has succeeded in proving that take-or-pay obligations as they existed in the contract were invalid.” 

Naftogaz wants the clause to be amended according to European practice and competition law rules for the period of 2018-2019, until the contract expires. This would result in a dramatic decrease in contract volumes from 52bn m³/yr to the level that would not exceed 50% of Naftogaz’ actual need for imported gas. This would release Naftogaz from paying about $28bn in 2018-2019 for the expected gap between Naftogaz’ actual need and the cost of gas volumes initially stipulated in the contract.

The earlier decision however ruled that Naftogaz owed Gazprom nothing.

Naftogaz is also demanding a revision of the contract price, while Gazprom is insisting on leaving the price without changes. The separate award of the arbitration tribunal stipulates the price review starting from a specific date in Q2 2014. The second quarter of 2014, when the price was $485/'000 m³, is the most important in terms of the price revision, based on the share of purchases in this period in the total imported gas volume, said Naftogaz. 

In the transit case, Naftogaz is the one making the claim. It says it may receive up to $16bn, including interest, for 2009-2017 and expected additional revenue of $7.9bn from transit in 2018-2019 if the arbitration tribunal decides to apply Ukrainian energy law to the contract.

It will be possible only if the tribunal agrees with Naftogaz’ position that Ukrainian energy law is compliant with European energy law and should be applicable to the contract regardless of the fact that the contract is governed by Swedish law. It also implies that the tribunal should reject the opponent’s position that Ukraine has failed to duly implement the EU Third Energy Package in the Ukrainian natural gas market.

Another important process that depends on the application of Ukrainian law by the tribunal is the unbundling of the Ukrainian gas transmission system operator (TSO), since according to the transit contract Naftogaz provides transit services to Gazprom, and Naftogaz’ rights and obligations under the contract cannot be assigned to the unbundled TSO without Gazprom's consent.

Energy Community boss supports Ukrainian TSO plan

Creating a transmission system operator (TSO) within state transporter Ukrtransgaz will protect it from claims by Ukraine's oligarchs, according to the director of the Energy Community secretariat Janez Kopac.

Speaking at a meeting with the parliament's energy committee November 9, he said these functions could then be transferred to Mahistralni Gazoprovody Ukrainy (MGU), which will be the European Union-compliant TSO.

Kopac said that he urged the management of Naftogaz to create a TSO within Ukrtransgaz over a year ago as the existing Ukrtransgaz had "all those claims from Firtash, from Kolomoiskiy and others," and it was not possible to say what the outcome of those claims would be. The new entity, MGU, will have all TSO activities transferred to it. Now that Naftogaz has decided to establish a business unit with some TSO functions, this is a positive step because it can be simply transferred to MGU.

Kopac also said Ukrtransgaz could not be the TSO: “Don’t think of this subsidiary as a future transmission operator, it can only be transferred to MGU," he said.

Kopac also said Ukraine had successfully transposed the EU's Third Energy Package into law, but its implementation was still an issue. The other stumbling block is the liberalisation of the household segment.

“In the wholesale market, there is almost perfect competition. There are more than 20 traders active in Ukraine and Naftogaz is among them as well. But in the retail market, there is a monopoly." He said this was caused by the "so-called public service obligations (PSO) act adopted by the government." Intended to protect customers from price hikes when the market liberalised, it had the unwanted effect of delaying liberalisation, he said.

The Energy Community Secretariat and the World Bank want to amend the PSO, so that it is outside government control. As a first stage, at least one third of the gas produced by Naftogaz' upstream subsidiary Ukrgazvydobuvannya shall be sold on the free market, while the other two thirds can be reserved for households and district heating companies. Ukrgazvydobuvannya then progressively increases the share of its gas sold on the free market. At the same time, all potential competitors need access to data about consumers in the retail market. Otherwise there will be no competition, Kopac said. “There were some attempts of some individuals to change the supplier, but they couldn’t do it, because the competitive supplier could not approach that customer directly,” Kopac said.

Dmitry Firtash, the very wealthy Ukrainian businessman, controls the companies to which Naftogaz sells discounted gas for household use. Ihor Kolomoisky, another billionaire, also has a string of investments in Ukraine's energy sector. Kopac did not elaborate on the claims made against the government by either party but NGW reported in July 2015 a $5bn claim by Kolomoisky against the government relating to Ukrnafta.

Still to be finally resolved is the ship-or-pay contract between Gazprom and Ukraine for the amount of gas that the Russian monopoly must pay to be transported each year. Ukraine says this is a precondition for unbundling transmission from production and supply.

William Powell