Court Ruling in Favor of Ukraine Triggers New Gas Conflict With Russia

Ukraine’s national oil and natural gas company, Naftogaz Ukrainy, claimed a final victory in a four-year dispute over gas supply and transit with Russia’s Gazprom. The Stockholm arbitration court, where Naftogaz and Gazprom sued each other in 2014, last December obliged Naftogaz to pay much less in arrears than claimed by Gazprom on the supply contract. On February 28, the same court awarded damages to Naftogaz over the transit contract (see EDM, March 1). This outcome infuriated Moscow. Gazprom refused to resume gas deliveries to Naftogaz, leaving Ukraine short of gas in cold weather, and threatened to cancel the supply and transit contracts that were signed for ten years in 2009. This has again put to the test Ukraine’s reliability as a gas transit route as well as raised questions about Gazprom’s trustworthiness, and it prompted the European Union to intervene.

Last December, the judges in Stockholm decided that Naftogaz would not pay $56 billion to Gazprom according to the take-or-pay clause in the supply contract, as claimed by Gazprom. Also, the court rejected Gazprom’s request for Naftogaz to pay for gas delivered to Moscow’s proxies in Ukraine’s Donbas region. At the same time, the court obliged Naftogaz to pay $2 billion in arrears to Gazprom and to buy at least four billion cubic meters (bcm) of gas from the Russian gas giant this year. Both sides accepted that verdict (see EDM, January 11).

On February 28, in a new ruling, this time on the transit contract, the Stockholm arbitration court punished Gazprom with $4.7 billion in damages for failing to pump the agreed volume of gas, 110 bcm a year, through Ukraine’s transit pipelines. At the same time, the judges rejected Naftogaz’s claims that Gazprom’s transit fees be increased. Taking into account the arrears from 2014, Gazprom now owes Naftogaz a total of $2.6 billion (Naftogaz.com, RBC, February 28).

This time around, Gazprom vocally disagreed. Naftogaz has not been buying gas from Gazprom since 2015, awaiting verdicts from Stockholm and relying on imports from the EU and domestic production in the meantime. It wanted to resume imports from Russia, which are cheaper than from the EU, immediately on obtaining the ruling on the transit contract. But Gazprom’s deputy head, Alexander Medvedev, announced, on March 1, that Gazprom was not going to resume gas deliveries to Ukraine and that an advance payment from Naftogaz had been returned to the sender. Gazprom and Naftogaz have yet to agree upon addenda to the original contracts in order for gas supply to Ukraine to be resumed, taking into account the Stockholm rulings, said Medvedev (RBC, March 1). Gazprom CEO Alexei Miller was more outspoken, claiming that the Stockholm court was guided by double standards. Miller also threatened to withdraw from the 2009 Russian-Ukrainian contracts (Vedomosti, March 2).

Ukraine turned to the EU, warning of a possible state of emergency. Naftogaz cautioned that Ukraine was short of gas in cold weather because Gazprom not only refused to sell gas, but also cut pressure in Ukraine’s pipelines below the agreed level, apparently redirecting gas flow to pipelines bypassing Ukraine (Pravda.com.ua, March 1). Kyiv had to order power companies to replace gas with alternative fuels where possible, temporarily close all schools, and ask industrial enterprises to revise their plans in order to save energy (Lb.ua, March 2). In different circumstances, this could have triggered a repetition of the situation from January 2009, when Gazprom cut the gas flow and Ukraine had to take gas destined for consumers in the EU from the pipelines so as not to freeze. But now the weather is warmer, and Ukraine no longer relies on Gazprom and is able to buy more gas from the EU.

On March 2, Naftogaz contracted over 60 million cubic meters (mcm) of additional natural gas from Poland until the end of the month (Naftogaz.com, March 2). According to the Ukrainian pipeline operator Ukrtransgaz, gas imports from the EU were boosted to 26.4 mcm on March 3, from 2.8 mcm on March 1 (Utg.ua, Reform.energy, March 3). President Petro Poroshenko assured the EU that transit was not under threat and warned that if Gazprom did not abide by the contracts, Ukraine would again sue for damages (Zn.ua, March 2). European Commission Vice President Maroš Šefčovič said, after contacting officials both in Moscow and Kyiv, that the existing commitments to supply and transit gas to the EU were being honored, and he was ready to mediate in trilateral talks. Moscow confirmed to Šefčovič that it was determined to terminate contracts with Naftogaz Ukrainy, but this, said Šefčovič, will take time, not affecting gas flows for the time being (Interfax, March 5; Europa.eu, March 4).

Ukraine remains with gas, but the new dispute again raises questions about its dependence on Russian energy, which it buys from transit pipelines, paying EU-based intermediaries, and about the future of those pipelines. Russia made it clear earlier that following the expiration of the transit contract with Naftogaz after 2019, it will strive to redirect gas flows from Ukrainian pipelines to pipelines bypassing Ukraine, which Gazprom is building in Northern Europe and Turkey. At the same time, Moscow’s reaction to the Stockholm verdict demonstrates once again that it is prone to use gas as a weapon and that Gazprom is unpredictable. This may affect the Russian energy giant’s standing on the international gas market and its new pipeline projects.