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Russia could still impose sanctions against Ukraine's Naftogaz: Gazprom CEO


Would make relations between Russian companies, Naftogaz 'impossible'

Gazprom issued previous warning over sanctions in September 2022

Naftogaz also seeking to enforce $5 billion arbitration award in US

  • Author
  • Stuart Elliott
  • Editor
  • Daniel Lalor
  • Commodity
  • Natural Gas
  • Tags
  • United States
  • Topic
  • Europe Energy Price Crisis War in Ukraine

Russia could still impose sanctions against Naftogaz Ukrayiny that would render relations between the Ukrainian company and Russian entities "impossible", Gazprom CEO Alexei Miller said July 6.

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Quoted by Russian news agency Tass, Miller said Naftogaz was not demonstrating a "constructive" attitude regarding the transit of Russian gas to Europe and criticized the Ukrainian company's recent lawsuit in the US against Russia.

"It cannot be ruled out that the Russian Federation will impose sanctions [against Naftogaz]," Miller said. "Then, any relations between Russian companies and Naftogaz will be simply impossible."

Such sanctions could mean Gazprom would be barred from making financial payments to Naftogaz for gas transit to Europe.

Naftogaz said last September it had filed a request for a new arbitration case in a bid to force Gazprom to pay in full for gas transit services.

It also said in June it had filed a petition with a US court as part of efforts to recover $5 billion in compensation from the Russian state following an arbitration court ruling in April.

The arbitration court in The Hague ruled that Russia should pay $5 billion compensation for losses caused by the seizure of Naftogaz assets in Crimea in 2014.

Miller accused Naftogaz of "unfair" actions, saying that, as a result, Russian state sanctions against Naftogaz were still a possibility.

He also repeated Gazprom's previous position that Naftogaz's arbitration claims against Gazprom itself over transit were invalid.

Naftogaz could not be reached for immediate comment on Miller's remarks.

Transit deal

Naftogaz, grid operator GTSOU and Gazprom signed in December 2019 a five-year gas transit agreement under ship-or-pay terms, meaning Gazprom is obliged to pay for transit whether it uses it or not.

However, Naftogaz has claimed that since May 2022, Gazprom has been flowing less gas than agreed in the contract and paying less than the agreement provides.

Following the launch of arbitration proceedings by Naftogaz in September last year, Gazprom immediately refuted all the claims.

"Further attempts by Naftogaz to seek consideration of the dispute may lead to the fact that the Russian state authorities will have every reason to impose sanctions against Naftogaz," it said at the time.

"In practice, this will mean a ban on Gazprom from fulfilling obligations to the sanctioned entity, including financial transactions."

Central to the dispute is Ukraine in May 2022 declaring force majeure on its ability to transit Russian gas entering at Sokhranivka, saying it no longer had operational control of infrastructure in parts of eastern Ukraine.

Gazprom said it would only pay for services rendered despite the ship-or-pay provision in the transit contract.

Naftogaz offered Gazprom the option of transferring transit to Sudzha -- the only operational entry for Russian gas into Ukraine at present -- but it was not taken up.

Gazprom is contracted to transit 110 million cu m/d of Russian gas to Europe via Ukraine in 2023 -- or a total of 40 Bcm.

Russian gas flows via Ukraine are now only entering at Sudzha at a rate of around 42 million cu m/d. Up to 33 million cu m/d Russian gas could flow into Ukraine at Sokhranivka before the force majeure.

Russian pipeline gas now accounts for around only 8% of EU imports, compared with around 45% before the invasion of Ukraine in February 2022.

The much lower Russian gas exports to Europe helped drive gas prices to record highs in 2022.

Platts, part of S&P Global Commodity Insights, assessed the benchmark Dutch TTF month-ahead price at an all-time high of Eur319.98/MWh ($348/MWh) on Aug. 26, 2022.

Prices have come down since thanks to healthy storage levels and demand curtailments but remain high, with Platts assessing the TTF month-ahead price at Eur34.28/MWh on July 5.