Gazprom To Cancel both Ukraine Contracts

Gazprom will start the process of immediately terminating contracts for the supply and transit of gas with Naftogaz of Ukraine, the Russian state-owned export monopoly said March 2 on its official Twitter page.

The day before it surprised Ukraine by not fulfilling its side of the gas supply contract, now reduced to 5bn m³, despite having received pre-payment for March deliveries.

CEO Alexei Miller said: "The Stockholm arbitration, guided by double standards, adopted an asymmetric decision on contracts for the supply and transit of gas with Naftogaz of Ukraine. Thus, the arbitration decision significantly violated the balance of interests of the parties under these contracts."

He said the judges argued the Ukrainian economy had worsened significantly since the contracts were signed but Gazprom was categorically opposed to resolving the Ukrainian economic problems at its own expense. "In such a situation, it is not economically profitable for Gazprom to continue with the contracts," he said.

The Stockholm Arbitral Tribunal found in favour of Naftogaz of Ukraine on most of the major issues in the dispute with Gazprom, saying the latter had defaulted on its obligations regarding volumes to be transited and awarded damages of $4.63bn. The award means that Gazprom will have to pay Naftogaz about $2.56bn after residual payments for gas delivered in 2014 and 2015 have been settled.

The tribunal rejected Gazprom's claim for more than $56bn based on take-or-pay provisions. For 2018 and 2019, Naftogaz’s minimum annual offtake obligation was reduced from 41.6bn m³ to 4bn m³, saving Naftogaz $21.2bn.

The tribunal in the gas sales arbitration also allowed Naftogaz to pay $1.8bn less for gas supplied at provisional prices in 2014 and 2015, compared with the amount based on the initial contract prices. Naftogaz estimates that based on current prices, the price revision will reduce gas supply costs for 2018 and 2019 by over $500mn.