Naftogaz agrees to discuss outstanding issues with Gazprom at March meeting

15 March 2018

Russian gas monopoly Gazprom (GAZP RX) received on March 14 a response from its Ukrainian counterpart to its request to meet and discuss the termination of its ten-year gas supply and transit contracts signed in 2009, Gazprom's deputy CEO told journalists the same day. The meeting can take place by the end of March, a Naftogaz spokesperson reported on social media, stressing that it is going to inform Gazprom that it has no intention to terminate the contracts. Besides that, Naftogaz will discuss its proposal to revise (increase) transit rates for Russian gas, as well as discuss the implementation of the Stockholm court ruling, the statement said.

 

Recall, the Stockholm arbitration court ruled last winter that Gazprom owes Naftogaz net USD 2.57 bln in litigation on gas supply and transit contracts. In particular, the court ruled that Gazprom should obey the ship-or-pay clause of its gas transit contract with Naftogaz with minimum paid annual gas transit volumes through Ukraine of 110 bcm (during the life of contract, Gazprom pumped though Ukraine 62-104 bcm annually). Gazprom said it considers the ruling unbeneficial (intending to supply less than 110 bcm though Ukraine annually by the end of the contract, in 2018 and 2019) and initiated the contract’s termination. Gazprom CEO estimated that the termination procedure by the court (in case Naftogaz doesn't support its proposal) will take up to two years.

 

Alexander Paraschiy: Naftogaz and Gazprom certainly have a lot to discuss. For Naftogaz, it is important to agree on the means and timing for Gazprom to pay the USD 2.6 bln awarded by the Stockholm court. On this issue, our expectations remain unchanged: Gazprom will try to pay the bill with Ukrainian Eurobonds (USD 3 bln outstanding), which are currently in the hands of the Russian state fund, and which Ukraine does not intend to repay due to a moratorium imposed by parliament. To make such “payment” happen, Gazprom needs to wait for a ruling in the next few months from a U.K. appeals court, which will most likely conclude that Ukraine has to repay the USD 3 bln in bonds. Therefore, it is important for Gazprom to buy some more time, which involves scheduling talks with Naftogaz like these.

 

We view it as unlikely that the companies will reach any compromise on other issues, like Naftogaz’s request to increase transit rates for Russian gas or Gazprom’s request to terminate all the contracts altogether.