The Stockholm Arbitration Institute extended the dates for final awards in cases between Naftogaz and Gazprom until end of December 2017 and end of February 2018

15.11.2017, 13:29:35

On 7 November, Gazprom challenged the separate award of the arbitration tribunal of 31 May 2017 regarding the gas supply contract with Naftogaz.

On 9 November, the Arbitration Institute of the Stockholm Chamber of Commerce has extended the dates for rendering the final awards in cases between Naftogaz and Gazprom regarding gas supply and gas transit contracts until 30 December 2017 and 28 February 2018, respectively.

Currently there are two contracts between Naftogaz and Gazprom: one for gas supply and the other for gas transit through Ukraine. Two separate proceedings regarding the contracts were initiated in 2014 in Stockholm.

Positions of the parties in proceedings regarding the gas supply contract

А. “Take-or-pay” clause

According to the contract, Naftogaz should pay for at least 41.6 bcm of gas each year regardless of the actually supplied volumes. Gazprom’s claim under this clause, including 2017 volumes, would exceed USD 56 billion by the end of this year, including interest. In its separate award of 31 May 2017, the tribunal rejected this claim of Gazprom.

“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 as well as the Gazprom’s claims to pay USD 56 billion, including 2017 volumes, for gas that the company neither needed nor received,” Naftogaz Group Chief Commercial Officer Yuriy Vitrenko explains.

Naftogaz is claiming this 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 52 bcm per annum to the level that would not exceed 50% of Naftogaz’ actual need for imported gas. This would release Naftogaz from paying approximately USD 28 billion in 2018-2019 for the expected gap between Naftogaz’ actual need and the cost of gas volumes initially stipulated in the contract.

B. Gas price

In the arbitration proceedings, Naftogaz is 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 USD 485 per tcm, 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.

Positions of the parties in proceedings regarding the gas transit contract

Unlike the gas supply case, where Naftogaz is in a defending position, in the transit case, Naftogaz is the offensive side.

Naftogaz may receive up to USD 16 billion, including interest, for 2009-2017 and expected additional revenue of USD 7.9 billion 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 a consent by Gazprom.

Corporate Communications Department
NJSC Naftogaz of Ukraine