Naftogaz agrees to discuss outstanding issues with Gazprom at March meeting

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.