On March 1, Russia’s Gazprom announced its decision to “immediately” stop gas suppleis to and through Ukraine and to terminate of gas contracts with the country’s Naftogaz.
“The Stockholm arbitration, guided by double standards, adopted an asymmetric decision on our contracts with Naftogaz of Ukraine regarding supply and transit of gas. The decision seriously violates the balance of interests of the parties under these contracts. The arbitrators ground their decision by the fact that the situation with the Ukrainian economy has drastically worsened. We are totally against the situation when Ukraine’s economic problems are solved at our expense. In this situation, the continuation of the contracts’ validity is not economically feasible and unprofitable for Gazprom,” CEO of the Russian gas giant Alexey Miller told media, according to the Russian state-run news agency TASS.
On February 28, the Arbitration Institute of the Stockholm Chamber of Commerce imposed a $2.56-billion penalty on Gazprom over its gas transit dispute with Ukraine’s national oil and gas company Naftogaz. The Russian company disagreed with the ruling and voiced its intention “to protect the rights which are available to it under the applicable law.”
The decision of the Stockholm arbitration grounded by political and economic problems of one of the sides directly undermines foundations of the international private law and the system of arbitrations. The Stockholm arbitration’s decision became a cause used by Gazprom to cut off its ties with Naftogaz. Recently, Gazprom had used only about 55% of a full capacity of the Ukrainian gas transport system. Considering a rapid development of the Russian pipeline projects, the Ukrainian pipeline just becomes useless.
TASS recalls “Gazprom vs Naftogaz dispute ” (source):
Gazprom and Naftogaz signed the current contract for the supply of gas to Ukraine in January 2009 and it is valid until December 31, 2019. Under the contract, the volume of supplies was to be 40 billion cubic meters of gas in 2009, and starting from 2010 – 52 billion cubic meters annually. However, since 2012, Naftogaz failed to fully intake the contracted volume. Since November 2015, Kiev has not bought Russian gas, replacing it with reverse gas from Europe.
In 2014, Gazprom and Naftogaz filed lawsuits against each other in the Stockholm Arbitration.
Ukraine sought a retroactive price change, recovery of overpayment for gas and cancellation of the “take or pay” principle.
Gazprom demanded that Naftogaz should pay arrears for gas that had been supplied earlier. Gazprom’s demands for Naftogaz amounted to more than $37 bln.
The Stockholm Arbitration satisfied the requirements of the companies only partially.
In December 2017, the court ordered Naftogaz to pay Gazprom $2 bln for the deliveries, but reduced the annual contractual volume of purchases to 5 billion cubic meters.At the same time, the “take or pay” condition was preserved for 80% of this volume. This condition will be effective only in 2018.
The court also rejected most of Naftohaz’s claims to Gazprom which concerned overpayment for gas. Only the price of gas received by the Ukrainian company in the second quarter of 2014 was lowered (from $485 to $352 per 1,000 cubic meters). Naftogaz wanted a retroactive price change starting from May 2011.
In the gas transit contract, Naftogaz and Gazprom agreed that the Russian holding will pump 110 billion cubic meters of gas through Ukraine annually. However, the contract notes that the annual volume is specified in additional agreements to the contract, depending on the obligations of Gazprom to European consumers.
Naftogaz demanded that Gazprom should pay $17 bln for the failure to supply the agreed volumes for transit. It also sought the revision of tariffs and conditions for the transit of Russian gas through Ukraine.
The Stockholm court ruled that Gazprom should pay about $ 4.7 bln to Naftogaz (taking into account the satisfied counter claims, Gazprom has to pay $ 2.56 bln). At the same time, Gazprom said that the arbitration court rejected Naftogaz’s demands to increase the tariff for gas transit and change the contract in accordance with Ukrainian legislation.