Naftogaz of Ukraine claims victory in Stockholm arbitration court

It was already the evening of February 28 the when the Stockholm arbitration court (The Arbitration Institute of the Stockholm Chamber of Commerce) announced its decision on the second dispute of Naftogaz of Ukraine and Gazprom on the gas transit contract. "We did it!!", Yuri Vitrenko, Commercial Director of Naftogaz of Ukraine, wrote in Facebook. Andriy Kobolyev, the head of the company, has even changed his photo in his account in a social network to a picture of a running ostrich from an American cartoon. According to the Ukrainian side, as a result of two litigations, Gazprom will have to pay $2.56 billion to Kiev.

"Naftogaz succeeded on its claim for damages for under-delivery in Transit Arbitration with Gazprom. Naftogaz was awarded damages of USD 4.63 billion for Gazprom's failure to deliver the agreed transit gas volumes. Gazprom will have to make a net payment of USD 2.56 to Naftogaz following the Awards in two gas Arbitrations. Tribunal rejects Gazprom's claim for penalties for transit volumes allegedly unlawfully off-taken by Naftogaz,” says the Naftogaz press office post in Facebook.

Gazprom, obviously, will challenge the arbitration award. As experts noted, the volumes of transit were included in the contract, however, there were no penalties in the documents and the Stockholm Arbitration established them independently.

Though, experts say Naftogaz of Ukraine provided incomplete information and it is necessary to hear the second side so that the verdict of the Stockholm Arbitration becomes clear. In the dispute over the gas transit contract, it is important not only the amount of compensation, but also the decision on the tariffs for the Russian gas transportation across Ukraine. Kiev demanded to change the transit tariffs, which it established independently. It is twice the contract price. Gazprom, however, refuses to recognize it and still is paying for transit at contract prices.

It should be reminded that Naftogaz of Ukraine filed a lawsuit at the Stockholm Arbitration court under the gas transit contract, stating that Gazprom violated the contract on transportation volumes and demanded the Russian company to pay at new tariffs double the contract rates. The total amount of Ukrainian company claims was $6-12 billion.

The arbitrators, according to the statement of Naftogaz, in fact, saved the Ukrainian company. The Ukrainian side has no funds for repayment of the $2-billion debt to Gazprom under the court decision on the first suit. Therefore, it was counting on the victory over the second dispute.

In the first trial - under the gas supply contract - the court took a compromise solution. The Stockholm arbitration refused to award damage to the Russian company for violation of the "take-or-pay" rule by the Ukrainian side, which requires the compulsory purchase or payment for a certain volume of gas; lowered contractual obligations in terms of volumes; tied Russian gas prices in 2014 to the gas price at the German NCG hub and agreed with the fact that Naftogaz of Ukraine is not obliged to pay for gas supplied to LDPR (Lugansk and Donetsk People’s Republics in the East of Ukraine). At the same time, however, the arbitrators retained the "take-or-pay" condition for 4 billion cubic meters of gas per year and obliged the Ukrainian company to pay $ 2-billion debt for gas and set a penalty for non-payment, which by now is more than $40 million.