Ukraine’s proposal before the next round of the trilateral negotiations between Ukraine, Russia and the EU is based ...
Governing Criteria for a Practical Solution
Ukraine’s proposal before the next round of the trilateral negotiations between Ukraine, Russia and the EU is based on the following three criteria of an effective solution of the gas issue:
Principles. It is important that negotiations are based on principles of fairness, market approach as well as other key governing principles of the European gas market.
Regulatory framework. The solutions should comply with relevant legislative acts and agreements that regulate the subject matter. The provisions of the regulatory framework should be applied in the following order of legal seniority:
1. Ukraine’s and Russia’s obligations under international agreements
2. Relevant legislation of Ukraine and Russia
3. Conditions of agreements between Naftogaz and Gazprom
Precedents. The latest state of affairs in the European gas market should be taken into account.
Based on the criteria listed above, the Ukrainian side has developed and discussed with the European Commission the following proposals to be offered at the trilateral negotiations.
Key Issues Between Gazprom and Naftogaz
Gas price for Ukraine. For the period prior to the decision of arbitration tribunal, the price should be set equal to the current price at European gas hubs less the transportation cost from the Russian border to these hubs.
This solution corresponds to the three key criteria. Firstly, it will considerably streamline the calculation of a fair market price for Ukraine, and it obviously corresponds to the principles of a fair market approach. Secondly, it is in line with our gas supply contract with Gazprom, which contains provisions for price adjustments based on changes of market conditions. Finally, basing contract gas prices on spot market prices is a dominant trend in Gazprom’s contracts with its European clients.
The Ukrainian side is ready to discuss the technical steps to implement this solution in accordance with European practices.
Unpaid gas volumes. Prior to the award of the arbitration tribunal, any amounts can be paid by Ukraine only based on the provisional price, which is to be determined as described above. Such an approach is fair given that the Ukrainian side has submitted a claim regarding repayment of the overpaid amounts (estimated at nearly $6bn) by Gazprom to the arbitration tribunal.
This solution fits the above mentioned criteria as well: it reflects the principles of fairness and market approach, completely corresponds to the regulatory framework as well as the common practices of settlement disputed invoices.
Gas transit contract should be aligned with relevant legislation to ensure stable supplies to the EU
The current gas transit contract with Gazprom should urgently be aligned with the Protocol concerning the accession of Ukraine to the treaty establishing the Energy Community, on the one hand, and Ukraine’s legislation on the other.
In particular, Ukraine’s international obligations as an Energy Community member stipulate that the transit contract counterparty should be Ukrtransgaz, not Naftogaz. Also, Gazprom cannot be a virtual operator between the TSOs of Ukraine on the one hand and Slovakia, Poland, Hungary and Romania on the other. There should be standard balancing and interconnection agreements between Ukrtransgaz and Gazprom. Tariff policy should be adjusted to reflect European regulatory requirements. Technical, legal and commercial transit conditions should be undiscriminating for all market participants.
These changes correspond to the principles of a fair and market approach, are directly in line with Ukraine’s international obligations and its national legislation, as well as fully reflect the established practices of European TSO functioning.
Proposed changes are driven by Ukraine’s Energy Community obligations, not Ukraine-EU Association Agreement
It is important to note that the necessity to apply European regulatory framework to the transit contract between Naftogaz and Gazprom has been on the agenda since 2010 when Ukraine signed and ratified its accession to the Energy Community. During these years, the concerned parties had the opportunity to implement all preparatory steps and hold necessary discussions. Naftogaz’ call to streamline the transit agreement is not related to the ratification of the Association Agreement between Ukraine and the EU.
Gazprom should either implement changes or admit it uses gas as a political weapon
Implementing such changes is not a privilege but a responsibility of Gazprom. According to the existing contract, the company is obliged to act in good faith when the other party suggests justified contract changes.
The only reason why Gazprom would reject to implement the changes which align the transit agreement with Ukraine’s formal international obligations and national legislation, would be a desire to limit Ukraine’s access to the European gas market. That would prevent Ukraine from diversification of gas supplies and reinforce Gazprom’s position as a monopoly gas supplier in Ukraine. Such course of action compels Ukraine to incur either economic or political losses.
The European Commission and, in particular, Mr. Oettinger, have made numerous statements asserting that attempts to use gas as a political weapon are inadmissible. Keeping this in mind, we are certain that jointly with the European Commission we will be able to provide Gazprom with all necessary arguments in support of implementing all the necessary changes to the transit contract.
Updating the transit agreement will be a clear sign of the fact that all parties are striving to ensure stable transit to the EU in practice, not just verbally.
Gazprom’s recent actions might indicate its intention to halt gas supply to exert pressure on the EU: balancing agreement terminated since June, no moves on transit contract and supply for Ukraine
If the Russian side does not agree to implement the changes, this will be another sign pointing at a possible desire to pressure the EC to twist the European legislation in order to promote Gazprom’s discriminating projects. As we have repeatedly demonstrated to the EC, the true motive behind the current gas dispute between Ukraine and Russia is Gazprom’s plan to achieve an exemption of its South Stream project and to secure monopoly access to the OPAL gas line. Another possible goal is to force Ukraine to abide to unfair and discriminatory conditions of gas supply once again.
The refusal to implement the changes to the transit contract comes on top of Gazprom’s unilateral termination of the balancing agreement with the Ukrainian side in June. This agreement was necessary to cover inevitable minor technical deviations between the volumes supplied for transit and actually transited. In July and August such deviations amounted to 0.03% and 0.06% of the transited volume, correspondingly. Accordingly, Naftogaz has suggested to Gazprom to settle these technical deviations in a standard legal manner. However, we cannot exclude that these normal imbalances will be used to accuse Ukraine of “steeling” transit gas, and, potentially, as a cause for cutting supply of gas for the EU via Ukraine.
Public Relations Department
National Joint-Stock Company «Naftogaz of Ukraine»
National Joint-Stock Company «Naftogaz of Ukraine»