RUSSIAN GAS FOR EUROPE
PLATTS - Relations between Russia and Ukraine in the gas sector have been infamously strained for more than a decade, with the memory of the cut in supplies to Europe in both 2006 and 2009 still fresh in people's minds.
There was a brief period of relative stability in the past two years while the Stockholm arbitration court considered its verdict in the dispute over the 2009 Gazprom/Naftogaz supply and transit deal.
But the dispute erupted again last week after the court ruled in Naftogaz's favor on the transit element of the case, awarding Naftogaz $4.6 billion in compensation for Gazprom's underuse of its transit network.
The net award to Naftogaz was $2.6 billion across the entire case after the court previously awarded Gazprom a little over $2 billion in the supply ruling.
Gazprom CEO Alexei Miller accused the court of "double standards" in its arguments and vowed to both appeal against the court's rulings and to cancel the contract altogether, saying it wasn't Gazprom's responsibility to solve Ukraine's economic problems.
Ukraine hit back, its President Petro Poroshenko saying Gazprom was clearly "unwilling" to fulfill its contractual obligations and accusing the Russian company of blackmail.
The tit-for-tats at times made for pretty ugly reading.
What is important now, though, is to navigate through the political noise coming from both sides. The critical question is: what is likely to happen next?
In a nutshell, the answer is: a lot of noise but probably nothing to impact European gas markets.
The European Commission last week said it was again ready to broker talks between Russia and Ukraine to resolve any disputes that could potentially impact Russian gas flows to the EU, as it has several times in the past.
But Russia's energy minister Alexander Novak bluntly refused the offer: "There are no trilateral talks planned," he said in Moscow this week. "All the issues are based on contracts and the relationship between commercial organizations, between Gazprom and Naftogaz. All these issues should be dealt with by these companies."
The legal process is also far from over — in fact in some ways it is just beginning.
Gazprom said it formally notified Naftogaz of its intention to terminate the 2009 contract on Monday, March 5.
If the parties are unable to reach a resolution within a certain timeframe, the issue is referred to — guess where — the Stockholm court of arbitration.
Ukraine claims the contract does not provide for unilateral cancellation, but if — as seems likely — the dispute goes back to Stockholm it will probably take years before a ruling is made.
With the contract set to expire at the end of 2019 anyway, it is likely that any decision from the court will not have any practical impact.
The same is true for the financial settlement from the dispute.
According to the final Stockholm ruling, Naftogaz is owed $2.6 billion by Gazprom. Will it see the money any time soon? Almost certainly not.
Gazprom — which had been seeking more than $56 billion from Naftogaz for not buying the contractually agreed volumes of gas — has already appealed against the court ruling from December awarding it just $2 billion, and also plans to appeal against the transit ruling by the end of March.
These appeal processes could also drag on for years, so Naftogaz is unlikely to see any cash in the near term.
This is an issue for the Ukrainian company — Naftogaz has said it may struggle to pay for European gas imports in 2018 after losing crucial lending from the European Bank for Reconstruction and Development (EBRD).
Naftogaz CEO Andriy Kobolev said the company would seek to initiate negotiations with the EBRD over new lending, but he said it would depend on the government moving forward with energy sector transparency and reform.
Naftogaz — which over the past few years has heralded Ukraine's success in weaning itself off Russian gas — was also ordered by the court to resume imports of Gazprom gas.
It must buy at least 4 Bcm in both 2018 and 2019, which it seems happy to do, not least because under the terms of the ruling, the Russian gas will turn out to be cheaper than gas it imports from Europe as it would not include transportation costs from Germany to Ukraine.
But the two sides first need to agree on the technical terms of the supply — specifically how the new pricing mechanism would work exactly (it is now indexed to a German hub, not oil).
Talks between the two companies on the issue have stalled, with Gazprom's deputy CEO Alexander Medvedev going to some pains to stress that Naftogaz too agreed the new framework needed to be put in place before supplies could resume.
That didn't stop Naftogaz from crying foul, though, saying it needed the Russian gas to meet a sudden spike in demand caused by the Arctic weather front that engulfed most of Europe last week.
With Gazprom now wanting to terminate the contract with Naftogaz, it is questionable whether the 8 Bcm will ever reach Ukraine.
Which brings us back to transit. Under the contract Gazprom is meant to send as much as 120 Bcm/year of Russian gas via Ukraine, but actual volumes since 2009 have been considerably lower.
Will this latest dispute impact Russian gas transit via Ukraine to Europe? Almost certainly not. Both sides have too much to lose — Russia as a "reliable" supplier of gas and Ukraine as a European "ally" keen to make sure the EU gets its gas.
But Europe is also a loser in the whole messy business, with its gas supply security again under theoretical threat.
And as Gazprom and Naftogaz continue to trade barbed accusations, their reputations are also looking increasingly dented.
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