Is a New Russia-Ukraine “Gas War” Coming?

On 29 January 2015 Gazprom released a report on its activities and financial indicators for the nine months up to the end of last September.  In this report Gazprom described the procedural details of the  forthcoming “gas price” arbitration between Gazprom and Ukrainian Naftogaz, launched by the parties in summer 2014.

This is not the first time that Naftogaz and Gazprom are opposing parties in a gas arbitration at the SCC. In 2006 after the so-called “gas war” Gazprom cut Ukraine off from Central Asian gas supplies and forced Naftogaz to receive supplies exclusively from Gazprom’s subsidiary RosUkrEnergo (with a prohibition against re-selling these supplies).

This time, however, the claims arose from a price dispute which started in April, when Gazprom cancelled discounts it had previously granted on gas exports to Ukraine. The Gazprom move almost doubled the price charged to Naftogaz.

The Russian gas giant claimed the collection from Naftogaz of unpaid debts for natural gas, while Naftogaz claimed the retroactive change of the price of gas and the revision of certain provisions of the agreement.

The 2014 arbitration arose under a contract dated 19 January 2009, a long-term gas sales agreement between Gazprom and Naftogaz for 2009-2019 (the “Contract“).  Generally, the terms of such agreements are strictly confidential.  However, the text of the Contract was leaked to the Ukrainian media as soon as the Contract was signed.

Among the most important and interesting provisions, the Contract contains:

• a clause linking gas price to oil prices (Article 4 defines the contractual price as set quarterly on the basis of the gas, oil and sulphur fuel oil prices published in Platt’s Oilgram Price Report);
• a so-called “take or pay” clause (which requires Naftogaz to pay for 80 percent of the “yearly contractual volume” of gas whether or not it actually needs that amount of gas); and
• a “price review” clause (which allows the request of revision of the contractual price if the contractual price no longer reflects market prices for gas as a result of a change of situation on the energy market).

After a series of failed negotiations, on 16 June 2014 Gazprom and Naftogaz each announced that they were commencing arbitration proceedings under the Stockholm Chamber of Commerce (“SCC”) Rules, seated in Stockholm, Sweden.

Gazprom filed a claim demanding the collection from Naftogaz of unpaid debts for natural gas and interest amounting to USD 4.5 billion. In turn, Naftogaz filed a claim for retroactive change of the price of gas, seeking a refund of all overpayments made since May 2011 in the amount of USD 6 billion. It also requested cancellation of the contract provisions prohibiting the supply of natural gas to Ukraine from other sources. On 21 July 2014 these cases were consolidated and oral hearings are to start no earlier than February-March 2016.

Later, on 13 October 2014 Naftogaz filed a claim with a request for arbitration against Gazprom with the following requirements:

• to declare that the rights and obligations of Naftogaz under the Contract on the scope and terms of natural gas transit through Ukraine in 2009-2019 shall be transferred to PJSC “Ukrtransgaz”;
• to declare that certain provisions of the Contract which are going to be subsequently revised are invalid and/or void and shall be supplemented or replaced by specified provisions in accordance with the energy and antitrust legislation of Ukraine and the European Union;
• to oblige Gazprom to pay Naftogaz compensation for non-supplied transit volumes of gas amounting to USD 3.2 billion, and interest on this amount; and
• to declare that the transit tariff in the Contract shall be amended by the further written statements of Naftogaz in accordance with the basic principles of Swedish contract law.

Thus, the preliminary amount of the requirements shall be USD 6.2 billion.  On 28 November 2014 Gazprom replied to the request for arbitration and on 11 December 2014 the arbitrators were selected and approved.

As reported by GAR, Gazprom has named DLA Piper as its counsel in this arbitration. It is well known that the firm’s head of international arbitration, London-based Matthew Saunders, led the RosUKrEnergo case with Swedish co-counsel Setterwalls in the prior SCC dispute.

Norwegian law firm Wikborg Rein has confirmed that it is going to represent Naftogas in these proceedings. Interfax-Ukraine reported that the firm won a tender to represent Naftogaz in arbitral proceedings in 2014 after submitting a bid of EUR 1.3 million. Partners Dag Mjaaland and Aadne Haga (from their Oslo office) have already defeated Gazprom once in an ICC gas price claim for the Czech arm of Germany’s RWE in 2013.

On 12 February 2015 Naftogaz published on its official website that the company had launched a tender for the legal representation of Naftogaz in arbitration against Gazprom in 2015. The official results will be published later.

As has become known, it will take more than a year before the oral hearings will start and even more for the arbitral tribunal to render a final decision.

While many experts argue that the final decision will be in favour of Naftogaz due to the established practice of the revision of gas price in the sales contracts, there is still room for doubts.

Meanwhile, in order to avoid the so-called “second gas war”, Ukraine and Russia, with the participation of the European Union as a guarantor, have successfully reached a temporary solution safeguarding the security of gas supply until 31 March 2015.

As a result Ukraine will be able to resume purchases of Russian gas in any amount, provided its debt of USD 3.1 billion is repaid. Ukraine has already paid off the full amount of the debt (USD 1.45 billion dollars as a first tranche in November 2014  and USD 1.65 billion dollars as a second tranche in December 2014).  The price of natural gas supplied by Gazprom to Naftogaz for the period November 2014 to 31 March 2015 is defined by a predetermined formula and amounts to approximately USD 378 per tcm.

These agreements are temporary and valid until 31 March 2015. The final terms of Russian gas supplies to Ukraine and the price of gas will be determined by the decision of the arbitral tribunal seated in Stockholm.