The third gas war: what is needed for Gazprom

Breaking the contract with Ukraine will enable the corporation to defeat the defeat in the Stockholm arbitration.
 "We are categorically opposed to Ukraine's economic problems being solved at our expense," Gazprom's presidency, Alexei Miller, said on March 2. The company will be forced to terminate both contracts with NJSC Naftogaz of Ukraine - both for transit of gas and for deliveries directly to the country, Miller said. A little earlier, on the morning of the same day, it became known that Gazprom had refused to Naftogaz in the resumption of direct supplies from March 1. The parties did not have time to sign an additional agreement to the Stockholm-based arbitration contract revised in December, the Russian company said, explaining the reason for the return of the prepayment for gas supplies to Naftohaz Ukrainy in March.

On Friday, Naftogaz reported that no documents "testifying to the intention of the Russian company to terminate the contracts" were received from Gazprom. A predpravleniya Ukrainian company Andrei Kobolev called the statement of Gazprom blackmail.

The gap will not be fast

On March 3, the deputy chairman of Gazprom's management board, Alexander Medvedev, announced the commencement of the termination of contracts. "And a new case in the Stockholm arbitration on this suit," Gazprom "will be absolutely sure to consider another composition of the arbitrators," - he promised. Speeches about the filing of lawsuits in Stockholm are not going.

Based on Medvedev's words, it can be assumed that in the near future, Naftogaz will receive an official notification from Gazprom about the intention to terminate the contracts, says Dmitri Marinchenko, Director of Fitch Corporation. However, there can be no talk of an immediate break. In both contracts it is stipulated that the parties will strive to resolve any disagreements independently, and to arbitrate only after the failure of negotiations. They take a lot of time - 45 days for the transit contract and 30 days for the supply contract.

If the parties do not agree, then the consideration of the conflict in arbitration can last for months, says senior director of S & P Global Ratings Elena Anankina. And it will be difficult for Gazprom to prove the fact of fundamental changes in circumstances that deprive the meaning of contracts with Naftogaz, Tertychny Agabalyan partner Ivan Tertychny says.

What the Arbitration Decided

To go to the break of the existing agreements with Ukraine, Gazprom made the verdict of the arbitrators on the transit contract, Miller made it clear. "The Stockholm arbitration, guided by double standards, has adopted an asymmetric decision on contracts for the supply and transit of gas," said Gazprom's predecessor. This significantly violated the balance of interests, Miller clarified, and makes the continuation of the contracts "economically inexpedient and unprofitable."

Stockholm arbitration actually obliged Gazprom to pump through Ukraine annually 110 billion cubic meters. m of gas. It was this amount that figured in the contract, but there are no penalties for violation.

At the same time, arbitrators reduced the volume of gas 10 times that Naftogaz, in its turn, was obliged to buy on a take or pay basis, from 40 billion to 4 billion cubic meters. m per year.

As a result, Gazprom should pay Naftogaz $ 2.56 billion for pumping a smaller volume of gas in 2009-2017. And in the next two years before the expiration of contracts, Gazprom will have to pay another $ 2.35 billion for transit, regardless of how much it pumps in reality.

A friend without a friend can not do without

"An attempt to terminate gas contracts unilaterally can make the situation uncontrollable and lead to aggravation of relations between Kiev and Moscow," Marinchenko said. "Obviously, Moscow is hurt by the decision of the Stockholm arbitration, and further actions can be emotional in nature," the expert continues. Negotiations in a calm regime now is hardly possible, but there are no alternatives, Marinchenko said: "Gazprom" continues to depend on Ukraine as a transit country, and for Ukraine, $ 2 billion of foreign exchange earnings is a significant amount. "

It will be very difficult for Gazprom to completely abandon transit through Ukraine. Last year, the company set a record for gas supplies to Europe - 194.4 billion cubic meters. m. But the existing gas pipelines - Nord Stream, Yamal - Europe and Blue Stream - are loaded above the design capacity. Given the possible growth in demand for Russian gas, which Gazprom expects to meet the consumption peaks, there may not be enough for two pipelines under construction - Nord Stream 2 and Turkish Stream. From this point of view, Ukraine needs transit to Gazprom, but whether it is planned to hold talks on its continuation after 2019, the Russian company does not specify.

Europe is still silent

A new round of conflict between Gazprom and Naftogaz causes concern among European regulators. On Saturday, Energy Minister Alexander Novak met with the Deputy Chairman of the European Commission on Energy Union Maros Shefovic. "Nowak assured [Shefchovich] that the transit of gas from Russia to Europe <...> remains as reliable as it was in the past," the ministry spokesman said. "Until the contract is canceled between Gazprom and Naftogaz, nothing threatens the transit of gas through Ukraine."

"Both Ukraine and Russia have confirmed their readiness to maintain close contacts with the commission," the representative of the European Commission said. "We will continue to do this and will closely monitor the situation to ensure that the transit of Russian gas through Ukraine to the EU - since it remains our priority - will always be preserved."

"Breaking the contract will strengthen Europe's distrust of the reliability of gas supplies from Russia," says Mikhail Korchemkin, director of East European Gas Analysis. The current situation may negatively affect the image of Gazprom, Marinchenko agrees: "Europe still has memories of interruptions in gas supplies in 2006 and 2009".

The reaction of Gazprom, in principle, is understandable - the decision of Stockholm does not look symmetrical, says Tatyana Mitrova, director of the Skolkovo business school energy center: "However, the form of the response regarding the contract termination seems very harsh, especially given the absence of preliminary consultations with European partners" . It is quite possible that this is really a way to start negotiations with an extremely tough statement in order to force counterparties to a more constructive dialogue, with a subsequent softening of the position and inclusion of additional conditions in the package agreement - both regarding transit through Ukraine and for the Nord Stream-2 ", Says Mitrov.