Gas threat: why Gazprom decided to terminate contracts with Ukraine

After losing the process in Stockholm, the Russian concern announced the beginning of the termination of contracts with Naftogaz for the supply and transit of gas. This process will take at least a year, but the European Commission has already called on the parties to resolve the conflict.
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Why Gazprom decided to terminate contracts with Ukraine

"Gazprom" is forced to immediately begin the procedure for the termination of contracts with Naftogaz for the supply and transit of gas in the Stockholm Arbitration, said on Friday, March 2, the company's presidency, Alexei Miller. These are two contracts for the supply of gas to Ukrainian consumers and the transit of gas to Europe via Ukraine, which expire at the end of 2019.

Such a sudden step Miller explained by the "asymmetric decision" of the same Stockholm arbitration, which on February 28 ruled that Gazprom should pay Naftogaz $ 4.63 billion for the shortage of gas under the transit agreement (provides for an annual transit of at least 110 billion cubic meters of gas , in 2009-2014 the company supplied an average of 94 billion cubic meters per year). But in December 2017, when considering the first dispute between Naftogaz and Gazprom concerning the purchase of Russian gas, the arbitrators did not fine Kiev for gas shortage (for violation of the "take or pay" principle, Gazprom demanded $ 56 billion) because of the sharp the deterioration of its economy, deciding that it should pay Gazprom only for the already supplied gas of $ 2 billion. Thus, following the results of the two decisions, the Russian company should transfer about $ 2.6 billion to the Ukrainian one.

Thus, according to Miller, the arbitration decision significantly violated the balance of interests of the parties under two contracts. In such a situation, the continuation of contracts for Gazprom is economically inexpedient and unprofitable, he concluded.

The official representative of the company, Sergei Kupriyanov, explained to RBC that, despite the announcement of the termination of all contracts with Ukraine, Gazprom will not soon terminate the transit of gas through this country. "If it was so, we would have said so directly," he said.

"Naftogaz" has not yet received from Gazprom any documents evidencing the intention of the Russian company to terminate contracts for contracts for the supply and transit of natural gas, Interfax reported.

The court procedure for the termination of the contract for the supply of gas in Stockholm Arbitration can last 1.5-3 years, says the managing partner of Kulkov, Kolotilov and Partners Maxim Kulkov. "In this case, it becomes meaningless, since the contract and so terminate the operation at the end of 2019. However, under the terms of the contract, Gazprom has the right to halt gas supplies in the event that Naftogaz fails to fulfill its obligations under it, by giving appropriate notice, "the lawyer notes. In his opinion, the threat of Gazprom to start the procedure for breaking contracts is aimed at making Naftogaz go to an amicable agreement on the decision made in Stockholm on favorable terms for Gazprom. "We see now that Gazprom continues the glorious traditions of Russian legal nihilism -" if I do not like the decision of the court, I will not execute it, "Kulkov believes.

This is already at least the fourth conflict between Gazprom and Naftogaz since the beginning of the 2000s, and Europe, which suffered in these gas wars, has repeatedly turned out to be Europe, said Mikhail Krutikhin, partner of the consulting company RusEnergy. In the course of these disputes, Gazprom argued that Naftogaz compensated for the reduction in Russian gas supplies through reduced transit, and stopped deliveries to Europe via Ukraine, fearing unauthorized gas withdrawal.

Gas wars between Russia and Ukraine

The Conflict of 2005-2006

In the spring of 2005, Naftogaz proposed revising the terms of the contract for the transit of Russian gas to Europe through the territory of Ukraine, abandoning the barter in favor of cash payments, but the Russian side put forward a counter demand for an increase in gas prices for Ukraine. As a result, the contract for 2006 was not signed, and with its onset of natural gas supply to Ukraine ceased. A few days after the cessation of gas supplies to Ukraine, a new contract was signed, according to which both the price of Russian gas and the rate of transit through the territory of Ukraine increased, and the supplier was the Swiss company Rosukrenergo, a joint venture of Gazprom and businessmen Dmitry Firtash and Ivan Fursin. Contracts were only for a year.

Conflict of 2008-2009

In early March 2008, Gazprom, in the absence of contracts signed by Naftogaz, including those already supplied, cut supplies to Ukraine by 50%. At the same time, Kiev did not recognize the receipt of Russian gas in 2008, and the reduction in supplies was compensated for by reducing transit supplies of gas to Europe. By the end of the year, the debt of the Ukrainian side was estimated at $ 2.1 billion. It was not possible to agree on the terms of the contract for 2009, and from January 1 the supplies stopped again, and a week later the transit supplies of fuel were suspended. On January 19, 2009, after the talks between the Prime Ministers of the two countries, Vladimir Putin and Yulia Tymoshenko, new contracts for the transit and supply of gas were signed, which are still in effect (until the end of 2019). The parties refused the services of intermediaries, including services of RosUkrEnergo.

Conflict of 2014

By April 2014, the price of natural gas for Ukraine rose sharply - to $ 485 per 1 thousand cubic meters. m, when "Naftogaz" did not transfer payment for the gas supplied, and Gazprom canceled the previous discount in the conditions of aggravation of interstate relations after the accession of the Crimea to Russia. In June of the same year, the Russian side stopped supplying gas to Ukraine and introduced a prepayment regime. October 30, 2014, after lengthy negotiations with the participation of EU representatives, the parties reached an agreement for the period from November 2014 to March 31, 2015. Moscow agreed to return the canceled rebate in the spring, and in the fourth quarter of 2014 the price of gas for Ukraine was to be $ 378 per 1,000 cubic meters. m, and in the first quarter of 2015 - $ 365 per 1 thousand cubic meters. In November 2015, Kiev stopped buying Russian gas.

What does this mean for Europe, Russia and Ukraine?

The European Commission called on all involved parties, companies and specialized ministers of Russia and Ukraine "to immediately resolve the conflict in accordance with the decisions of the Stockholm Arbitration Court," said Deputy Minister of Energy of the European Union Maros Shefovich. "The European Commission is ready to lead the tripartite talks, which in the past have already proved effective in situations where there are disagreements," he said.

Russian Energy Minister Alexander Novak promised in the near future to meet with Shefovich and discuss all the details. "We proceed from the fact that the contracts must be executed," he added (quoting on Interfax.) The Ukrainian Ministry of Foreign Affairs officially addressed the European Commission with a proposal for tripartite negotiations, RBC's Alena Osmolovskaya, head of the communications department of Naftogaz, said.

Gazprom, the largest consumer of gas from Germany, Uniper, believes that the termination by Gazprom of all contracts with Ukraine will not affect the supply situation. This was announced by RBC press secretary Uniper Nicole Karchmaryk. She refused further comment. "No negotiations were conducted with us, no one informed us of plans to refuse gas transit through Ukraine," the top manager of Uniper said.

"Gazprom" has nothing to replace the route of gas transit through Ukraine, says deputy head of the National Energy Security Fund Alexei Grivach. In addition to Ukraine, the company supplies gas to Europe via Belarus and Poland (Yamal-Europe, with a capacity of 32.9 billion cubic meters per year), through the Nord Stream under the Baltic Sea (55 billion cubic meters), through the Blue Stream "On the bottom of the Black Sea (16 billion cubic meters). But in conditions of increased demand, due to low temperatures in Europe, all these transport capacities are loaded higher than contract volumes, Grivach adds.

"Last year, Gazprom pumped through Ukraine to Europe, 91 billion cubic meters. m out of 194 billion cubic meters. m of exports. This means that Gazprom's direct losses in the event of the termination of transit through Ukraine could amount to about half of its revenue (for the nine months of 2017, the company's total revenue was RR 4.64 trillion). In addition, we need to add penalties for non-fulfillment of contracts, "said Mikhail Korchemkin, director of East European Gas Analysis.

In the event of the termination of the transit of Gazprom's gas through Ukraine, the greatest risk is for the economies of the Balkan countries, Bulgaria and Hungary, since there are no interconnectors and there will not deliver liquefied natural gas (LNG) from the United States, Krutikhin of RusEnergy believes. In Western Europe there is own extraction, and they are able to diversify gas supplies, but this will take time.

On March 1, Gazprom also refused to resume gas supplies to Ukraine, despite the fact that it received an advance payment. The company explained this by the absence of an approved additional agreement with Kiev. Due to the lack of gas, the Ukrainian government adopted a five-day crisis plan, including a restriction of gas supply in schools and residential buildings. According to Naftogaz, a decrease in temperature by several degrees will help to save up to 9% of gas. The Ukrainian company also entered into a fixed-term contract with the Polish PGNiG for the supply of more than 60 million cubic meters. m of gas until the end of March 2018.

"Unfortunately, Russia and RAO Gazprom once again demonstrated that once the cold comes, the attempts to apply gas supplies as a mechanism of political pressure they once again do. It will not work. Ukraine is a reliable partner, and these events have been confirmed once again, "Ukrainian President Petro Poroshenko said, assuring that the transit of Russian gas through the territory of Ukraine to the EU countries is not threatened.

How to resolve the conflict

Having announced the beginning of the procedure for the termination of contracts with Ukraine, Gazprom invited the Europe to settle the dispute, said Alexei Gromov, Director for Energy at the Institute of Energy and Finance. Monopoly only expressed its intention to break contracts, and not blocked the valve, that is, signaled to European partners that there is still an opportunity to agree.

Despite the fact that the final decision of the neutral Stockholm arbitration against the mutual claims of Naftogaz and Gazprom, announced on February 28, was clearly in favor of Ukraine, the European Commission could have acted as an arbiter to settle this dispute, to which listen to both sides, since none of the EU countries, no matter what its political preferences, is unlikely to want to freeze this winter because of the next Russian-Ukrainian gas conflicts, the expert concludes. In addition, there is already a positive experience of EU participation in gas disputes between Russia and Ukraine, for example, in September 2015 there were tripartite agreements that determined acceptable terms for all participants of Russian gas supplies to Ukraine in the autumn-winter period 2015-2016 without damage for the transit of Russian gas to Europe, Gromov notes.

"And now, without European consumers, the issue will not be solved, it is possible to reach a compromise only through joint actions," agrees Aleksey Grivach. According to him, it could be a new contract with Ukraine on mutually beneficial terms, as well as Ukraine's refusal from the current requirements for Gazprom or the acceleration of construction of new facilities bypassing the republic (Gazprom is building two new gas pipelines - Nord Stream-2 the bottom of the Baltic Sea and the Turkish Stream in the Black Sea) or a combination of these factors.

The head of the National Energy Security Fund, Konstantin Simonov, saw the link between Gazprom's threat to dissolve contracts with the military rhetoric addressed to the West on March 1 in the message of President Vladimir Putin. "This can be interpreted as follows: if you act tough on Russia, then Russia has something to answer in the same hard way. And it is not known who will benefit from this, "the expert notes. Gazprom is trying to gain time not to pay not only the $ 2.6 billion that the arbitration has appointed (this decision was already promised by Gazprom), but also possible fines for failure to fulfill obligations on transit volumes in 2018-2019. But this whole situation can be used by the company's opponents in Europe to fight the implementation of the Nord Stream-2 project, which already has enough opponents in the West, the expert warns.