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“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.

 

Naftogaz vs. Gazprom: What Comes Along

26.05.2014

Dmytro Shemelin, attorney at law, Ilyashev & Partners Law Firm
Source: The Kapital

Ukraine’s national energy supplier NAK Naftogaz will obviously face a two-front attack from its Russian counterpart, Gazprom, both in terms of gas price and the take-or-pay fines. If Gazprom succeeds, the issue of Ukraine’s debt can be settled just by itself.

Let’s start with the prices. Indeed, over the last 2 or 3 years, many Gazprom customers, one way or another, got the Russians to untie the gas price from the price on oil and focus on the European spot market instead. Something like that, obviously, will try to do and Naftogaz.

The first problem here is that there are numerous addenda to Gazprom contract, in which the parties proceed from anything but the spot price on gas. Gazprom may try to present them as another, repeated, confirmation that Naftogaz has agreed with the current price formula.

Assume Naftogaz has stood in this fight and the tribunal has awarded a certain “fair” gas price. It is likely that it will be close to the average European price less transportation costs. Given that EU member states buy gas for over $ 400, Ukraine can count on a “fair” price at something $ 350-370 per thousand cubic meters. This is, by the way, exactly what has been recently articulated by EU Energy Commissioner Guenther Oettinger.

Well, this is significantly less than the $ 485 requested by Gazprom, and even less than Ukraine’s average rate in 2013 (ca. $ 412). But does it really make a great difference for industries that rely on gas?

There are a number of estimates addressing economically acceptable levels of gas prices for Ukraine. I will hazard a guess that the most appropriate price is close to the notorious $ 268.5 bargained by ousted president Yanukovych. And some of those estimates state that, facing the need for modernization in the industrial sector, the most beneficial price would be $ 200-210. Unfortunately, given the average European price of over $ 400, it is very unlikely that even the most sympathetic arbitrators would award $ 200 for Ukraine.

The renewal of the Kharkiv treaties that had been unilaterally denounced by Russia is what could save Naftogaz. Once deducted by a $ 100 discount, the “fair price” could eventually resemble the $ 268.5 Ukraine so much hopes for. To that end, however, Ukraine will need to obtain a positive award in the most complicated and politically affected matter of Russia denouncing the Kharkiv treaties with Ukraine and its impact on the relevant gas price discount addendum signed by Naftogaz and Gazprom. The challenge is truly Herculean.

And even in case of a favorable award, there is still the take-or-pay clause that safeguards Russia’s interests and could easily beat any positive dynamics in gas price.

The outlook here is less optimistic. Until now, there has been no case of a take-or-pay clause recognized fully invalid. So, for example, in RWE Transgas (Czech Republic) v Gazprom, the tribunal only awarded lower take volumes for RWE Transgas, reduced by the amount supplied by Gazprom directly to consumers in the Czech Republic. A similar outcome will hardly leave Naftogaz satisfied.

Finally, Gazprom has another card up its sleeve as it still can “turn off the taps”. There has been some time since Naftogaz, unlike its European counterparts, had seized any payments at all. As strange as it may seem, the request for pre-arbitration settlement concurred with Gazprom’s decision to introduce full prepayment for Naftogaz. Thus, if Naftogaz continues to act in the same manner, Gazprom will have a good reason to turn off the taps in June, a harsh pressure both on Naftogaz and the EU. In this case, the arbitration tribunal will not even be able to impose security – indeed, it cannot just demand Gazprom to supply gas for free.

Noting all the above and the unlikelihood that the arbitration, once started, will complete before the launch of the heating season, I tend to believe that some form of amicable settlement in this case is inevitable, and will follow quite soon.

 
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