Another trump card for Naftogaz in dispute with Gazprom

15:10, 05.12.2019
4 min.

Ukraine continues to defend its position in the gas transit dispute with Gazprom. Billions in revenue for the Ukrainian budget are at stake. So far, in international courts, the Ukrainian position looks more confident than the Russian one.

Key hearings in the case of the forced recovery of $3 billion from Gazprom in favor of Naftogaz according to the Stockholm arbitration award were held in Amsterdam on December 4.

"Our assessment is that the hearings were successful for us, and therefore we expect a positive court ruling that will allow us to proceed with the sale of Gazprom's assets, which we previously successfully arrested. The court determined the expected date of the decision, February 25, 2020," wrote Yuriy Vitrenko, who is an Executive Director of Naftogaz.

On the eve of the hearing, he predicted that, in the event of a positive court ruling, the recovery process would last from the second quarter to the end of next year, that is, 2020. This whole story began at the end of February 2018, when the Stockholm arbitration in two disputes between Naftogaz and Gazprom regarding gas supply and transit, obliged the Russian company to pay Naftogaz $2.56 billion, plus a fine for failing to paying the assigned amount. Gazprom called the decision "political" and challenged it, but this does not stop the implementation of the arbitration award.

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Following the rules, Naftogaz began the process of forced debt recovery from Gazprom, launched at the end of May 2018. To date, Naftogaz has filed lawsuits with the courts of Switzerland, the UK, the Netherlands, and Luxembourg. We have already seized the assets of the Russian company in the UK. This is 51% of Nord Stream AG, as well as a 50% + 1 share of Blue Stream Pipeline Company BV and the operator of the Blue Stream gas pipeline in the Netherlands. Debt obligations to Gazprom totaling about $2.5 billion were also arrested in the Netherlands.

Vitrenko believes that the process in the Netherlands now "looks like the fastest way" to solve the problem. Successful December hearings in Amsterdam were preceded by another victory over Gazprom. On November 27, Naftogaz won the appeal on the first complaint of the Russian monopolist against the Stockholm arbitration award. Gazprom challenged the decision of the Swedish arbitrator in a court of Svea County (Sweden). However, anticipating the loss, the monopolist in its financial reporting, in accordance with Russian law, indicated that they had reserved the total amount of the $4.7 billion fine under the transit contract with the Ukrainian side. That is, they "hedged" it.

Following the appeal, Vitrenko wrote on Facebook: "Complete victory! Ukraine is winning again! We won the appeal on the first complaint of Gazprom against the decision of the Stockholm arbitration!"

The Naftogaz press service then clarified that "Gazprom's appeal against a separate decision in Stockholm on May 31, 2017 has been rejected. It completely abolished the requirements of Gazprom regarding the provision of the take-or-pay contract, which frees Ukraine from the obligation to pay Gazprom $80 billion."

The Tribunal also ruled that Naftogaz has the right to market adjustment of the gas price formula. It also lifted the ban on gas re-export, which was part of the contract. According to the decision of the Court of Appeal, Gazprom must compensate Naftogaz for litigation expenses in the amount of more than one million euros and more than UAH 1.6 million, of which UAH 1 million is legal expenses and interest in accordance with the section of the Interest Act for these two above amounts from the moment the court decision is made until the moment of payment.

Another clause of the Court of Appeal dismissed Gazprom's appeal for secrecy. "The court decision cannot be appealed on the merits," Vitrenko quoted the court decision as saying.

This is all a trump card for Naftogaz in negotiations on a transit agreement with Gazprom.

Gas negotiations

Photo from UNIAN

So far, all rounds of gas negotiations regarding the conclusion of a new agreement, due to the expiration of the current one on December 31, 2019, which are initially held in the trilateral format Ukraine-EU-Russia, have yielded no results. Our side insists on a long-term contract based on European principles. To this end, everything has already been practically done. On December 3, the Verkhovna Rada adopted a law that separates the powers of operators to distribute gas and produce fuel. This makes it possible to complete the Naftogaz unbundling procedure in accordance with the requirements of the Third EU Energy Package.

The European Commission praised this step by Ukraine and emphasizes that when signing a transit agreement with the Russian Federation, all Stockholm obligations must be fulfilled by the parties. But Vladimir Putin called Ukraine's conditions for Russian gas transit to Europe unacceptable.

"I constantly repeat that we are ready to maintain Ukrainian transit, we are currently negotiating about this in Vienna. This is no secret. However, the possible conditions that Ukrainian transit companies offer us are economically unacceptable. So far. But I hope that these are offer positions, and it will be possible to coordinate the positions," Putin said.

Russia insists that the new gas contract can be long-term only with the "settlement" of the Stockholm arbitration dispute. As a result, Ukraine will receive a 25% discount on gas prices.

Vitrenko believes that the price of gas proposed by Russia is no "goodwill" because Gazprom does not pay for its direct deliveries.

"Gas from Russia should be 20-25 percent cheaper than gas from Europe anyway, since Gazprom does not pay for direct deliveries to Europe. 20-25 percent is not a discount, this is a normal price, and the consequence of this may be a decrease in Ukraine's income from transit," Vitrenko said.

According to him, since gas goes to Europe through our country, in direct deliveries to Ukraine, the Russian monopolist delivers less gas for transit to Europe, respectively, they pay Ukraine less for gas transit.

He also noted that Ukraine has the opportunity to have such a "normal" price if, for example, the European antimonopoly authority makes sure that Gazprom does not abuse its dominant position in the European market. That is, if the opportunity for other companies to receive gas on the Russian border is unlocked.

In addition, Naftogaz is ready to consider the possibility of repayment by the Russian Gazprom of its debt in the form of gas supplies. But at the same time, the company emphasized that the settlement of disputes and the withdrawal of a complaint to the antimonopoly authority of the European Union, as well as the settlement of the situation with the fine of the Antimonopoly Committee of Ukraine, are unacceptable.

According to Minister of Energy and Environmental Protection of Ukraine Oleksiy Orzhel, the next round of gas negotiations between Ukraine and Russia with the participation of representatives of the European Commission will be held today, December 5.

Experts agree that they will not lead to anything. Since everything depends on the negotiations on December 9 in Paris in the Normandy format. It was then that a meeting between President of Ukraine Volodymyr Zelensky and President of Russia Vladimir Putin can take place. And this will be the sharpest moment regarding the multitude of issues, including of gas transit.

Nana Chornaya

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