Stockholm arbitration


HISTRORICAL VICTORY FOR UKRAINE: STOCKHOLM ARBITRATION

After four years of arbitration proceedings between Naftogaz and Gazprom, the Stockholm Arbitration has delivered two fateful awards: the first one came on 22 December 2017 concerning a gas supply contract based on the "take or pay" principle, and the second one on 28 February 2018 with respect to a transit contract.

Initiated in 2014, the arbitration proceedings have become the largest commercial arbitration ever. Mutual claims amounted to about USD 125 billion, which threatened to bankrupt both Gazprom and Naftogaz. The Stockholm arbitration also satisfied Naftogaz's claim for compensation of USD 4.63 billion for Gazprom's failure to deliver the agreed volumes of gas for transit. Following the results of the two proceedings, Gazprom shall pay Naftogaz USD 2.56 billion adjusted to a USD 2.1 billion set-off for gas delivered in 2014.




Key results of the Arbitration on gas supply contract



On 22 December 2017, the Arbitral Tribunal ruled in favor of Naftogaz on all contentious issues concerning contracts for the supply of gas with Gazprom: pricing, the "take or pay" provision, and invalidating other provisions that are ungrounded and contrary to the principles of competition, namely:

• The arbitration court completely dismissed Gazprom’s retrospective claims for USD 56 billion in accordance with the "take or pay" provision (which sets up the obligation to pay for undisbursed gas volumes) for 2009-2017. Naftogaz has succeeded in reducing the future mandatory annual volumes of gas purchases from Gazprom tenfold from 42-52 bcm to 4-5 bcm, which corresponds to actual needs for gas imports.

• Naftogaz has successfully revised the contract towards the reduction of gas prices according to market conditions, as well as compensation for overpayment in the periods after April 2014 when Naftogaz initiated a revision of the price. In particular, the price of gas received by Naftogaz in the Q2 2014 is reduced by 27% – from USD 485 tcm to USD 352 tcm. Due to revision of the contract price, Naftogaz saved USD 1.8 billion on gas purchased in 2014-2015.

The arbitrators also indicated that Naftogaz should not pay for the volumes of gas supplied to the temporarily occupied territories of Luhansk and Donetsk regions, as the volume of these supplies cannot be determined. In addition, the arbitration has declared invalid some other provisions of the contract, including the prohibition on re-export. So Naftogaz may resell gas abroad.

Key results of arbitration process on gas transit

On 28 February 2018, the Stockholm Arbitration Tribunal ruled in favor of Naftogaz on most of the important issues in the dispute with Gazprom regarding the existing gas transit contract.

• The Tribunal confirmed the violation by Gazprom of its obligations for transit volumes, which according to the contract amount to 110 bcm per year, and awarded compensation of USD 4.63 billion. The arbitration award confirmed the legal obligations of Gazprom concerning deliveries under the transit contract.

• The volume of transit remains unchanged (in 2017, Gazprom pumped 95 bcm of gas through Ukraine).

• The Tribunal did not support Naftogaz's request for revision of the transit tariff, since the review application filed by Naftogaz in 2009 did not meet the procedural requirements. The Tribunal also rejected Naftogaz's demand to review the transit contract in accordance with European and Ukrainian energy and competition legislation, noting that the implementation of regulatory reform in Ukraine is a matter for the Ukrainian authorities and is not within the competence of the tribunal in this case.

Naftogaz secured a financial victory and is now entitled to purchase natural gas for a better price that fully complies with the European market, and Gazprom must fulfill its obligations under the transit contract, however with the same transit tariff. Naftogaz also has to buy a certain amount of gas directly from Gazprom on a pre-paid basis.