Gazprom must pay Ukraine's Naftogaz $2.5bn after arbitration decisions

Gazprom must pay Ukraine's Naftogaz $2.5bn after arbitration decisions
Naftogaz has not been importing any gas from Russia for about three years, but now it can resume imports.
By bne IntelliNews March 1, 2018

Russia’s Gazprom must pay Ukraine’s Naftogaz a total of $2.6bn, ending a four-year legal battle over gas supply contracts, according to a decision by Stockholm's arbitration court announced late on February 28.

The Arbitration Institute of the Stockholm Chamber of Commerce ordered Gazprom to pay $4.63bn to Naftogaz for the failure to meet gas transit obligations, the Ukrainian company's press service told Interfax-Ukraine. However, since the court previously ordered Naftogaz to pay Gazprom for gas supply arrears in January, Gazprom's net payment after two arbitration decisions will be $2.56bn.

“This is a real victory,” President Poroshenko said on learning the decision on Wednesday evening, reports Ukraine Business Journal (UBJ). "This is a historic decision to protect the national and financial interests of Ukraine." He said the money “will be credited immediately” to Naftogaz.

Andriy Kobolyev, Naftogaz board chairman, tweeted: "We are pleased to have won arbitration on key issues. This is an important day for the Ukrainian people and the future of the European gas markets.” Gazprom did not comment.

The decision brings an end to a long legal battle between the two companies over the cost of gas to Ukraine. Under a deal cut by then prime minister Yulia Tymoshenko in 2009 Ukraine ended up paying some of the highest prices for gas in Europe at a time the country could not afford it. The financial strain caused Ukraine to default on payments and led to a series of showdowns over gas payments and supplies. The terms of the deal included “take or pay” clauses but Ukraine began cutting its gas imports to reduce its bill.

The ruling follows on from the courts rejection of Gazprom’s claim for a payment of $56bn by Naftogaz for undelivered gas under the take-or-pay clauses handed down at the start of January. The court ruled to reduce the minimum amount to be purchased on take-or-pay rules to 4bcm since 2018, from 41.6bn as stipulated by the contract signed in 2009.

Ukraine has not been importing any gas from Russia for about three years, but now the legal arguments with Russia are settled it can resume imports. Ukraine has been sourcing gas from its Western European partners by reversing the flow in some gas pipelines. However, this gas is more expensive than gas sourced from Gazprom and so Naftogaz is likely to restart limited imports of Russian gas later this year.

In 2017, Ukraine increased imports of natural gas by 26.8% or 2.972bn cubic meters (bcm) to 14.05 bcm. Imports from Slovakia in 2017 amounted to 9.91 bcm, Hungary to 2.835 bcm, and Poland to 1.305 bcm.

Ukraine aims to be self-sufficient in natural gas by 2022, Ukrainian Prime Minister Volodymyr Groysman said on January 22.

The transit contract for Russian gas sent through Ukraine to customers in Western Europe between Naftogaz and Gazprom remains in effect and is covered by the existing deal for the period 2009-2019. According to the agreement, Gazprom must annually ship at least 110 billion cubic meters of gas via Ukraine to western Europe. Gazprom is hoping to reduce the volume of its gas transiting Ukriane once an extention to its Nord Stream pipeline running through the Baltic Sea comes online next year.