KYIV – Ukraine averted another full-blown natural gas war with Russia after a Stockholm arbitration court ruled in favor of energy conglomerate Naftogaz Group over its three-year dispute with Gazprom.
After the Russian government majority-owned company was ordered to pay Ukraine’s state-run Naftogaz $2.56 billion on February 28, Moscow refused on the next day to supply Kyiv with gas for which it had prepaid.
Gazprom also reduced pressure by at least 20 percent from what is required by transit contracts at the point connecting to the Ukrainian pipeline system, said Ihor Kravchyshyn, spokesperson for Ukrtransgaz, the state-owned company that manages the pipeline system.
He said the firm faced “a critical situation.”
To ensure Russian gas supplies to Europe, Kyiv was forced to maintain pressure at its own expense. It also cut gas domestic usage by 14 percent overnight amid subzero temperatures, while securing emergency supplies from Poland.
“Thanks to our Polish partners, yet another attempt by Moscow to use gas as a political weapon against Ukraine has failed, Naftogaz CEO Andriy Kobolyev said on March 2.
Naftogaz also stated that it is charging Gazprom $500 million for each day it doesn’t pay the billions in debt.
The U.S. urged Russia to provide Ukraine with gas.
“Gas supply and transit must never be a political weapon,” State Department spokesperson Heather Nauert tweeted. “We expect Gazprom to supply gas to Ukraine’s transit pipeline as per the Stockholm arbitration decision. Russia should prove it is a reliable gas supplier.”
The Stockholm award stems from two separate disputes: for gas supply and transit.
Naftogaz was ordered to pay Gazprom $2 billion for gas supplies through the end of 2019, but was awarded $4.6 for its gas transit contract.
Gazprom CEO Alexey Miller wasn’t happy with the latest ruling and said the company is applying to the Stockholm arbitration court to terminate its gas contracts with Naftogaz.
His deputy CEO, Alexander Medvedev, told journalists on March 6 that Gazprom has appealed the gas supply ruling in Stockholm as well, backtracking on a previous statement on January 15 that said the company saw no reason to appeal it.
“What annoys Gazprom the most is that the Stockholm court obliged the Russian company to fully obey the ‘ship-or-pay’ clause of the gas transit contract (at least 110 billion cubic meters through Ukraine annually, to the benefit of Naftogaz),” said Alexander Paraschiy, head of research at Kyiv-based Concorde Capital, “while it [the Stockholm court] earlier declared as inadequate the ‘take-or-pay’ clause of their gas supply contract” obliging Ukraine to purchase no less than 42 billion cubic meters annually.
Under the same contract, Kyiv was prohibited from exporting any gas it didn’t use.
Kyiv stopped importing Russian gas as of November 2015 and opted for “reverse flows” from the EU – essentially re-importing Russian gas. It still transited 93.5 billion cubic meters (bcm) of gas last year, of which 91 bcm went to the EU, other European countries and Turkey, Naftogaz’s press service wrote in an e-mailed note.
However, Moscow has pursued alternative pipeline projects to bypass Ukraine and diversify supplies to EU consumers. Nord Stream I, a gas pipeline system through the Baltic Sea, services northern European countries, namely Germany. Blue Stream delivers gas to Turkey across the Black Sea and bypasses the gas transmission corridor that runs from Russia to Turkey via Ukraine, Moldova, Romania and Bulgaria.
Russia is also pursuing Nord Stream 2 for central and northern Europe and TurkStream for southeastern Europe.
Naftogaz told The Ukrainian Weekly that it “believes” gas transit through Ukraine “will stop” should the two pipeline projects go online.
Several European countries that have suffered from previous gas wars between Russia and Ukraine – Latvia, Lithuania, Estonia, Poland and Slovakia – oppose Nord Stream 2. They have argued that the pipeline could reduce Europe’s energy security and would make the continent more reliant on Russian gas.
“We hope that now it is more clear to the EU that it is a bad idea to build Nord Stream 2 or any other new ‘streams’ with Gazprom,” Yuriy Vitrenko, chief commercial officer of Naftogaz, said on March 3.
The existing 10-year contract with Gazprom was brokered by ex-Prime Minister Yulia Tymoshenko in the winter of 2009 amid the previous energy war that saw gas shutoffs. Another energy crisis took place in the winter of 2005-2006.
“Moscow frequently offered discounts – or withdrew them – based on Ukraine’s political decisions, as occurred before and during the Euro-Maidan protests,” Strategic Foresight, a geopolitical intelligence platform based in Texas, wrote in an analysis on February 12. “In December 2013, then-Ukrainian President Viktor Yanukovych secured a 33 percent discount on the price of natural gas from Russia, along with a $15 billion loan in exchange for a pledge not to sign an association agreement with the EU.”
Naftogaz used to be a drain on Ukraine’s budget because of household gas subsidies and corruption. Before the 2014 Euro-Maidan revolution, the conglomerate ran a deficit as high as 5.7 percent of Ukraine’s gross domestic product.
But a team of Western-educated managers was installed and turned the company around. By 2016, the company had a profit of nearly $1 billion and was the biggest taxpayer in the country.
Overall, corruption still plagues the energy sector.
A Reuters investigation published on November 26, 2014, found that Ukrainian oligarch Dmytro Firtash could have earned up to $3 billion in 2014 by selling Russian gas to Naftogaz that it bought at “well below market prices.”
He is currently fighting an extradition request to the U.S. in Austrian courts. Mr. Firtash still “allegedly controls a majority of Ukraine’s regional [gas] distribution companies, which act as intermediaries” between Naftogaz and end-consumers, BNE Intellinews wrote on March 6.
These regional companies often accumulate debts to Naftogaz subsidiaries because of the murky system in which they operate.
For example, in 2017 Naftogaz discovered a scheme at a regional gas company in Kirovohrad Oblast that “allegedly sold 9.8 million cubic meters of gas to more than 300 fictional addresses, while pocketing the subsidies,” the same BNE article said.