Gazprom starts suspending gas contracts with Ukraine as Brussels fears limited transit to Europe

Sudzha gas metering station at Russian-Ukrainian border (Copyright: Gazprom, 2015 / Gazprom’s website, Media)

Russian gas giant Gazprom announced on Saturday it has officially started the procedure of terminating contracts on gas supplies and transit with Ukraine. The move came after a Stockholm arbitration court ordered Gazprom last week to pay more than $2.5 billion to Ukrainian energy firm Naftogaz.

The Stockholm ruling, which represents the last act of a long legal battle that has run alongside Ukraine–Russia political crisis, forced Kiev to increase its gas supply from non-Russian origins, and caused concerns in the EU that a new crisis with Moscow could also affect transit to the bloc.

Background

Last Wednesday, an international arbitration court in Stockholm ruled that Russian natural gas giant Gazprom has to pay $2.56 billion to Ukraine’s national oil and gas company Naftogaz, after weighing mutual claims and counter-claims related to shortfall of gas deliveries and transit.

Gazprom on the same day openly disagreed with the ruling and voiced its intention “to protect the rights which are available to it under the applicable law”. Ukrainian President Petro Poroshenko said that Kiev will “seek to seize Gazprom’s assets if the Russian party does not comply with the decision of the Stockholm Arbitration”, as reported by Russian agency TASS.

But after the court’s decision, Gazprom did not resume gas supplies to Ukraine, forcing Kiev to take emergency measures to make up for the shortfall, like suspending lessons at schools and university. The day after the ruling, on February 29, Gazprom returned the money Naftogaz paid for gas supplies in March and said that would not start them “due to the lack of the approved supplementary agreement to the current contract”. TASS reported that Naftogaz’ CEO Andrey Kobolev took Gazprom’s move as a formal refusal by the Russian company to comply with the court’s decisions.

Contracts termination

Last Friday it became evident that the situation was nowhere near to improve, as Gazprom said it intended to terminate its gas contracts with Ukraine, calling Stockholm’s court decision “asymmetric”, as it was “seriously violating the balance of interests of the parties under these contracts”. “The Stockholm arbitration, guided by double standards, adopted an asymmetric decision on our contracts with Naftogaz of Ukraine regarding supply and transit of gas”, Alexey Miller, CEO of the Russian gas giant, told reporters last Friday.

“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”, Russia’s TASS quoted Mr. Miller as saying. “In this situation, the continuation of the contracts’ validity is not economically feasible and unprofitable for Gazprom”, Miller said.

Last Saturday the announcement finally came. Gazprom’s Deputy Chairman of the Board Alexander Medvedev told reporters Gazprom had officially begun the procedure of terminating contracts on gas supplies and transit with Naftogaz. “We have begun the procedure to terminate contracts with Naftogaz Ukrainy”, he said, although he also said he was sure the new case would be handled by different arbitrators.

Ukraine’s situation

After the first, confused hours, where Gazprom’s refusal to deliver its fuel resulted in conservation measures across Ukraine, it now looks like the situation has anyhow improved. Ukrainian President Petro Poroshenko said on Saturday afternoon that, thanks to increased supplies from other countries gas deliveries to Ukraine have “stabilized”. “The difficult situation that arose due to the actions of Gazprom has been resolved thanks to the united actions of Ukrainians and the authorities”.

As of Saturday morning, we have a steep increase in gas supplies from Poland, Slovakia, and Hungary”, Mr. Poroshenko was quoted as saying by Ukrainian media. “Today, we have a stable gas supply. We have enough gas in storage facilities from our own production and imports,” the Ukrainian leader added. Ukraine’s state-owned gas pipeline operator Ukrtransgaz also said it had to take additional measures to ensure gas transit to European customers.

Long-standing disputes

The quick measures taken by Ukrainian government to cope with Gazprom’s decision show that the former Soviet republic was somehow ready for a new stand-off with the Russian mammoth supplier. Indeed Ukraine and Gazprom have a history of clashing over prices and other obligations. Ukrtransgaz on its website says that since months Gazprom “consistently violates” technical conditions of the contract with the Naftogaz Ukraine. According to Ukrtransgaz, the pressure at the entry point in the gas transmission system at the Russian-Ukrainian border has never reached the contractual level agreed and signed with Gazprom.

“According to the contractual obligations the pressure in the Russian gas transmission system at Sudzha gas metering station have to be kept in a range between the 60-65 atm”, Ukrtransgaz says. “However, the actual pressure throughout the year delivered by the Russian side was 51-59 atm, as have been reported by the Ukrtransgaz dispatcher department for the period from January 2018 until the end of February 2018”.

Gazprom’s way

Gazprom, for its part, claims that since 2012 Naftogaz failed to fully intake the contracted volume, both for financial issues and because of the Ukrainian company replacing Russian gas with reverse gas from Europe. That was basically what led the two companies to file lawsuits against each other in the Stockholm Arbitration in 2015.

Europe’s concerns

Last Friday, the day before Gazprom officially announced its resolution, the EU had already expressed its concerns for this potential new Russia-Ukraine stand-off. The European Commission said in an official statement it had been informed by Ukraine about “a possible emergency situation in the Ukrainian Gas Transmission System”, mainly due to low pressure, a lack of direct supplies from Russia’s Gazprom and the difficulty in increasing reverse flows from the EU. “It is the Commission’s view that this situation raises concerns not only for the direct supply of natural gas to Ukraine but possibly also for the transit of gas to the EU,” European Commission Vice President Maros Sefcovic said last Friday.

The Commission also said it is currently further clarifying the facts with the European Network of Transmission System Operators for Gas, and also that it formally calls on all parties concerned, companies and respective Ministries of Ukraine and Russia, “to find immediate solutions in line with the decisions of the Stockholm Arbitration Tribunal”. The European Commission says it stands “ready to steer a trilateral process” to help find an effective solution to the current situation.

Gazprom is Russia’s largest producer and exporter of natural gas, and it is majority owned by the Government of Russia, though technically private. It holds the world’s largest natural gas reserves. Last year, Gazprom supplied a record high 194 billion cubic meters of gas to Europe, excluding former Soviet states and Turkey. Transit of Russian gas jumped by almost 14 percent to 93.5 bcm via Ukraine.