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Russia could impose sanctions against Ukraine's Naftogaz over arbitration: Gazprom


European gas prices surge on new Ukraine transit fears

Sanctions would mean ban on financial transactions

Naftogaz launched arbitration proceedings in early September

  • Author
  • Stuart Elliott
  • Editor
  • Bill Montgomery
  • Commodity
  • Natural Gas

Russia's state-controlled Gazprom said Sept. 27 that Moscow could impose sanctions on Ukraine's Naftogaz Ukrayiny in retaliation for a recent arbitration claim that -- if carried out -- would mean a ban on all financial transactions with the Ukrainian company.

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European gas prices surged after the announcement on fears that all Russian gas flows via Ukraine could be halted as a result, with the TTF month-ahead price up by 15% to Eur212/MWh in the space of 15 minutes.

Platts, part of S&P Global Commodity Insights, assessed the TTF month-ahead price on Sept. 26 at Eur172.75/MWh.

Naftogaz said Sept. 9 it had filed a request for a new arbitration case in a bid to force Gazprom to pay in full for gas transit services, but the Russian company said in a statement Sept. 27 it refuted all the claims.

"Gazprom considers the filing of Naftogaz's appeal to be an unfriendly step," the Russian company said.

"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 added.

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

Naftogaz and Gazprom signed in December 2019 a 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 Gazprom has been flowing less gas than agreed in the contract and paying less than the agreement provides.

Naftogaz could not be reached for immediate comment on Gazprom's statement Sept. 27.

Sokhranivka force majeure

Gazprom said it rejected all the claims given that Naftogaz failed to provide transit services via the Sokhranivka entry point since May.

"Services not provided by the Ukrainian side should not and will not be paid for," Gazprom said.

"Naftogaz, without proper grounds, refused to fulfill its transit obligations through Sokhranivka. Failure to fulfill obligations on its part means no payment even if Naftogaz claims a force majeure event," it said.

Ukraine's gas grid operator, GTSOU, declared force majeure on its ability to transit Russian gas entering at Sokhranivka on May 10, saying it no longer had operational control of infrastructure in parts of eastern Ukraine.

Gazprom is contracted to transit 110 million cu m/d of Russian gas to Europe via Ukraine in 2022 -- or a total of 40 Bcm.

Russian gas flows via Ukraine are now only entering Ukraine at the Sudzha border point at 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.

Gazprom also questioned the fact that the 2019 transit agreement was concluded under Swedish law and that the request from Naftogaz was to have the arbitration case heard in Zurich, Switzerland.

"Thanks to the huge number of anti-Russian sanctions imposed, Sweden and Switzerland have moved into the category of countries unfriendly to Russia," it said.

This, it said, deprived Gazprom of its right to a "fair and impartial" hearing.

Ukraine transit

In June, Russian gas flows via Ukraine totaled just 1.25 Bcm, according to GTSOU, or an average of around 41 million cu m/d.

Overall, Gazprom shipped just 12.27 Bcm of gas to Europe via Ukraine in January-June, GTSOU said.

The five-year contract was signed days after Naftogaz received a $2.9 billion payment from Gazprom awarded by a Stockholm arbitration court ruling in February 2018.

As part of the settlement, Naftogaz agreed to cancel some $20 billion in other legal claims against Gazprom.

Naftogaz said on Sept. 9 it would use its 2018 arbitration experience to again force Gazprom to pay. "We will use our experience of victories over Gazprom in arbitration," CEO Yuriy Vitrenko said.