Foggy Resolution for Russia-Ukraine Gas Spat from Arbitration Court

Beyond the bitter disputes that have recently cropped up between Ukraine and Russia concerning Russia’s 2014 annexation of Crimea and the subsequent separatist violence in Ukraine’s Donbass region, tensions have been simmering between the two countries’ state-owned energy conglomerates for nearly a decade. The reason: natural gas supplies.

This May, an arbitration tribunal appeared to have handed Ukraine a victory in a case that has high stakes for both Russia’s giant gas firm Gazprom, and Ukraine’s gas production, and import and transit company Naftogaz Ukrayiny.

For years, Ukraine protested what it considers Gazprom’s inflated gas price hikes and unfair fines; meanwhile, it too has raised tariffs for gas shipped across its territory. Russia has accused Ukraine of not paying its gas-incurred debt and of illegally siphoning off supplies destined for Europe. Erupting disputes over the years have left parts of Europe in the cold, with countries such as Bulgaria, Germany, Greece, Hungary, Romania, and Slovakia enduring a total natural gas shutoff from pipelines running from Russia through Ukraine. In 2006, Russia turned off all gas exports to Ukraine for three days; in 2008, it cut shipments by 50%; in 2009, a renewed debt spat led to a total disruption of supply, which lasted more than 13 days; and in 2014, gas supplies were temporarily halted owing to the Crimea dispute.

The two gas companies reached somewhat of a resolution after the 2009 event, signing a 10-year price and transit contract. But in 2010, after a political firestorm that ensued in Kiev, former Ukraine Prime Minister Yulia Tymoshenko was sentenced to seven years in jail for abusing her power by agreeing to Russia’s terms on that contract.

Naftogaz has since moved to wean itself of Russian gas imports until the case is settled, and in November 2015, it began fully importing gas from European Union member states instead. Meanwhile, in June 2014, Gazprom filed the first arbitration claim against Naftogaz for the gas debt incurred under the 2009 take-or-pay terms of the contract. Under the contract, Ukraine must buy 41.6 billion cubic meters (bcm) of Russian gas, but the amount can be lowered to 33.3 bcm with Gazprom’s approval.

Naftogaz responded by filing its own arbitration claim for having overpaid for gas between 2010 and 2014. It also filed a separate complaint accusing Russia of not utilizing booked transit capacity for gas supplies intended for Europe, calling for Gazprom to provide compensation. Ultimately, Gazprom claimed $44 billion from Ukraine, and Naftogaz claimed about $28 billion from Gazprom.

The final ruling issued on May 31 from the Arbitration Institute of the Stockholm Chamber of Commerce was highly watched because it has major implications for Europe’s future natural gas supplies. Ukrainian officials told reporters that the tribunal rejected Gazprom’s “take-or-pay” demands, which required it to pay for volumes of gas not imported. But on June 6, the Russian News Agency quoted Gazprom Deputy CEO Alexander Medvedev as saying “They say that the arbitration court revoked take-or-pay, it’s not so. They did not cancel ‘take-or-pay’ (principle).”

The case concerning Ukraine’s elevated transit fee for supplies to Europe is still ongoing. For now, Ukraine is pairing with Poland to develop a regional gas hub, which will have prices aligned with European standards, as one way to end Central and Eastern Europe’s dependence on Russian gas. Meanwhile, Russia is banking on Nord Stream 2, a pipeline it anticipates will come into service at the end of 2019 to siphon gas from the Russian coast along the Baltic Sea to the German shore, bypassing Ukraine.

This April, Gazprom and five European companies—France’s Engie, Austria’s OMV, British-Dutch Royal Dutch Shell, and Germany’s Uniper and Wintershall—signed an agreement on a new financing model for the Nord Stream 2 gas pipeline project. If built, the pipeline would pose severe revenue hurdles for Naftogaz, as it would slash transit flow through Ukraine.

Sonal Patel is a POWER associate editor