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Energy 2 January, 2018 10:00 am   
Editorial staff

Polish Eastern gas policy depends on the outcome in Ukraine

On Friday, December 22nd, Ukrainian Naftogaz announced a victory in an arbitration dispute with Russian Gazprom. The Russians proclaimed the same thing. This is the first of two decisions made by the court in Stockholm regarding the conditions of gas supplies through Ukraine – writes Wojciech Jakóbik, editor-in-chief of BiznesAlert.pl.

Different interpretations of the secret judgement

The Court does not publish its judgements, so analysts must rely on data obtained from both companies. These, however, differ in the interpretation of the facts.

The Ukrainian company boasts that it won “in all contentious matters.” According to it, the court rejected Russia’s claim for a refund of USD 56 billion for contracted but uncollected gas, despite the take or pay clause in the 2009 contract. – This is not a knock-out. These are three knock-outs with an obvious advantage – wrote Pavlo Klimkin, Minister of Foreign Affairs on Twitter. Even the first analyses praising the Ukrainians have been made based upon these scarce data.

Naftogaz points out that the contract liabilities were reduced to a minimum of 4 billion cubic metres per year. The price was reduced by 27 percent from USD 485 to USD 352 per 1,000 cubic metres. The price is to be indexed not to oil prices, but to values on European stock exchanges. The clause on reception points has also been abolished, which will allow Ukrainians to re-export gas outside their territory. The company does not have to pay for gas supplied to eastern Ukraine outside Kiev’s control, that is to Donbass. Gazprom demanded a fee of USD 1.3 billion in that regard.

However, Gazprom reacted with its own information on the outcome of the first arbitration case. It reported that the court accepted most of the 2009 contract provisions, which were contested by Naftogaz, and maintained the Russian company’s claims for approximately USD 2 billion in gas charges.

The Russians point out that the Court’s decision of 31 May rejected Naftogaz’s request for a retroactive price change from May 2011-April 2014, ordered it to pay USD 14 billion for supplies during that period and maintained the take or pay clause for that period. Therefore, according to Gazprom, the Ukrainian company should pay USD 2.18 billion plus 0.03 percent interest for each day of late payment, and in 2018 pay for 5 billion cubic metres of deliveries.

It should be taken into account that both parties conceal the less favourable decisions of the judgement.

No resolution

Last Friday’s judgement follows the preliminary decision of May this year, after which the parties have been given time to settle the dispute outside the court. However, these efforts failed. The present decision is not final either. Despite the announcement of a victory in a dispatch, Naftogaz admits that the final outcome of the dispute will not be known before February. – The final clarity about who owes something to whom and what, how and when to pay, and when and how to enforce it, will not be obtained earlier than in February – said Yuriy Vitrenko, Director of Business Development.

The judgement of arbitration cannot be regarded as an undisputed victory for Naftogaz, but it shows that the Ukrainians managed to score a few points in the dispute with Gazprom. It is known that if Ukrainians obey the resolution, supplies from the Russian company will return to Ukraine, despite being abandoned in November 2015. However, they will be carried out on new principles similar to the European ones. Russians are already calling into question the ability of Ukrainians to pay USD 2 billion of debt for supplies since 2009. It is not clear whether the Ukrainian side will deal with this without foreign loans and these are subject to difficult conditions, leading with reforms in the gas sector.

Poland is waiting for the result

The Poland’s Eastern policy in the gas sector will depend on the final resolution of the dispute between Naftogaz and Gazprom. The state-owned company PGNiG is signalling its readiness to develop gas supplies to Ukraine.

If Ukrainians win in arbitration, they will have Russian gas on their territory, which may be competitive in relation to the offer on the Polish market. The victory of the Ukrainians may mean that Naftogaz will launch re-export from Dnieper through existing and planned gas pipelines, creating competition for PGNiG. However, supplies via Ukraine would be stable and the Russian side would have fewer arguments in favour of promoting an alternative route, Nord Stream 2, which has been criticised in Poland.

If the Ukrainian side loses its battle with Gazprom, it will be forced to pay multi-billion liabilities, which could potentially end up in Naftogaz going bankrupt and destabilising the gas sector in Ukraine. Depending on the scale of the Ukrainian company’s failure, PGNiG could become a key supplier of gas to the Dnieper territory and Gaz-System could become a shareholder in gas infrastructure management companies in Ukraine. If Ukraine’s stability of supply were to be called into question, Gazprom would gain an argument for Nord Stream 2, which, according to its declaration, would replace the Ukrainian route in its supplies to Europe by the end of 2019.

We have to wait until at least February for the final resolution of the dispute, as declared by Naftogaz. It will determine the fate of Poland’s eastern policy in the gas sector. This, in turn, provides an opportunity to regulate relations between our countries on the basis of mutual commercial interests and not just a political alliance, which would provide a more stable basis for the development of good relations.

The judgement in the Gazprom-Naftogaz dispute may also be relevant to the resolution of a similar dispute between PGNiG and the Russians, which is to be judged by summer this year. Poles demand similar concessions, and the possible success of Ukrainians in this respect may be a prerequisite for optimism in Polish-Russian arbitration.