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Experts are positive about the chances of “Naftogaz” to defend its interests in the dispute with “Gazprom” in the Stockholm arbitration


Kyiv, May, 8th, 2014 – A group of experts told about the likely outcome of the arbitration on the gas supply agreement between the National Joint Stock Company “Naftogaz of Ukraine” and Russian gas corporation “Gazprom” during the briefing at Ukrainian Crisis Media Center.

A partner of International consulting company Grand Thornton Alexander Malinovsky recalled that “Naftogaz” began formal procedures required for reference to the Stockholm arbitration to resolve a number of contentious issues in relations with “Gazprom”. He commended the seriousness of “Naftogaz” relationship building with “Gazpom” namely in the legal field, as these relations are necessary to deprive of the excessive politicization. “This step is correct and timely”, said the expert. He noted that the issues of adequacy and of the price market formula for natural gas for Ukraine since 2010 have been the subject of negotiations between the parties, the subject of a political settlement.

The partner of International consulting company Grand Thornton noted that different discounts for gas, provided to the Ukrainian side for five years, first of all pursued to achieve political goals, but even with these discounts the price of gas was an average of $ 100-150 higher than for the countries of Western Europe. In the event that the dispute shall be referred to the Stockholm arbitration, “Naftogaz” will be able not only to demand a price reduction on future gas supplies, but also a compensation for overpayment pursued by “Naftogaz” from the moment when the Ukrainian company spoke about the price change.

Another claim of “Naftogaz” is about the principle of “take or pay”. Alexander Malinovsky told that this principle has no practical application, is not prescribed in detail in the contract and does not reflect the existing market practice. He emphasized that the situation the way it is fixed in the contract undermines the gas market in Ukraine, reduces competition level and impedes obtaining gas from alternative sources on more favorable terms.

Talking about the intention of the Russian side to use an advance form of payment for gas starting from June, the expert said that there is reason to doubt the legitimacy of such claims from “Gazprom”. At first, the amount of the debt must be agreed by the parties and fixed, but today there is still an existing dispute over the price for gas. The price for the already delivered gas might be recalculated and there might be a situation when “Naftogaz” might turn out to be the debtor, not “Gazprom”.

Alexander Malinovskyy also said that the contract for the transit of Russian gas through Ukraine states that Russia is obliged to transport a certain amount of gas, but this requirement is not fulfilled each year, thus “Naftogaz” has the right to seek compensation for lost profits.
The President of the Ukrainian Bar Association for Foreign Affairs Danylo Kurdelchuk spoke about the process of arbitrage regarding the gas procurement contract. The agreement signed in 2009 says that whenever disputes occur, the parties resolve them through negotiations. If the negotiations do not lead to a successful resolution, the parties transfer the issue to the Arbitration Institute of Stockholm Chamber of Commerce. “Currently, we don’t have a feeling that the agreement will be reached, although the parties are trying to find common ground to ease the resolution of the argument”, said the expert. If the parties don’t come to an agreement after May 28, the Ukrainian party will formally appeal to Stockholm.

Michael Gonchar, Director of the energy programmes, Nomos Center, said that today we are seeing the turning point when the first time in the history of Ukrainian-Russian gas relations there is an attempt to transfer the issues from political into legal frameworks. He said that the price of gas for Ukraine is inadequate in terms of market realities as the base price was set overstated and this always has the effect of overstating the contract price. According to experts, this abnormally high price does not allow Naftogaz to fulfill its obligations and select the volumes of gas written in the contract. He said that the amount of overpayment for gas is estimated at 14-15 billion US dollars. Naftogaz has the prospect to get a positive outcome of the proceedings, though the process can be long-lasting”, – said Mykhailo Gonchar. He said that it is important for Naftogaz to keep one more position – Naftogaz has lost his property because of alienation of Crimea. «This is quite serious money,» – said the expert.
In addition, the Director of the energy programmes, Nomos Center, said that if to turn to arbitration procedures, which European companies, who are Gazprom clients have turned to, there are no positive cases in favor of the Russian company. “So, what is now being done by the Naftogaz, when respective letters have been sent and quite determined measures have been declared to bring matters to an end, gives grounds for optimism,” – he said.

Michael Gonchar – Director of the energy programmes, Nomos Center; Danylo Kurdelchuk – President of Ukrainian foreign board; Olexander Malynovsky – partner of an international consulting company Grand Thornton.

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